<PAGE>

EXHIBIT (10)(C)

================================================================================



                    TRANSITION PROPERTY SERVICING AGREEMENT

                                    between

                               SPPC FUNDING LLC

                                  Note Issuer

                                      and

                         SIERRA PACIFIC POWER COMPANY

                                   Servicer

                           Dated as of April 9, 1999


================================================================================

                                       1
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
     ARTICLE I                      Definitions

SECTION 1.01.       Definitions....................................................     1
SECTION 1.02.       Other Definitional Provisions..................................    13

     ARTICLE II             Appointment and Authorization

SECTION 2.01.       Appointment of Servicer; Acceptance of Appointment.............    14
SECTION 2.02.       Authorization..................................................    14
SECTION 2.03.       Dominion and Control Over the Transition Property..............    15

     ARTICLE III                  Billing Services

SECTION 3.01.       Duties of Servicer.............................................    16
SECTION 3.02.       Servicing and Maintenance Standards............................    18
SECTION 3.03.       Certificate of Compliance......................................    18
SECTION 3.04.       Annual Report by Independent Public Accountants................    19

     ARTICLE IV           Services Related to True-Up Adjustments

SECTION 4.01.       Periodic True-Up Adjustments...................................    20
SECTION 4.02.       Limitation of Liability........................................    26

     ARTICLE V                    The Transition Property

SECTION 5.01.       Custody of Transition Property Records.........................    27
SECTION 5.02.       Duties of Servicer as Custodian................................    28
SECTION 5.03.       Instructions; Authority to Act.................................    30
SECTION 5.04.       Custodian's Indemnification....................................    30
SECTION 5.05.       Effective Period and Termination...............................    31
SECTION 5.06.       General Indemnification of Note Trustee, Certificate Trustee
                       and the Delaware Trustee....................................    31

     ARTICLE VI                      The Servicer

SECTION 6.01.       Representations and Warranties of Servicer.....................    32
SECTION 6.02.       Indemnities of Servicer; Release of Claims.....................    36
SECTION 6.03.       Merger or Consolidation of, or Assumption of the
                      Obligations of, Servicer.....................................    37
SECTION 6.04.       Limitation on Liability of Servicer and Others.................    38
</TABLE>

                                       2
<PAGE>

<TABLE>
<S>                                                                                    <C>
SECTION 6.05.       Sierra Pacific Power Company Not to Resign as Servicer.........    39
SECTION 6.06.       Servicing Compensation.........................................    40
SECTION 6.07.       Compliance with Applicable Law.................................    41
SECTION 6.08.       Access to Certain Records and Information Regarding
                    Transition Property............................................    41
SECTION 6.09.       Appointments...................................................    42
SECTION 6.10.       No Servicer Advances...........................................    42
SECTION 6.11.       Remittances....................................................    42

     ARTICLE VII                        Default

SECTION 7.01.       Servicer Default...............................................    45
SECTION 7.02.       Appointment of Successor.......................................    48
SECTION 7.03.       Waiver of Past Defaults........................................    49
SECTION 7.04.       Notice of Servicer Default.....................................    49

     ARTICLE VIII                 Miscellaneous Provisions

SECTION 8.01.       Amendment......................................................    50
SECTION 8.02.       Protection of Title to Trust...................................    52
SECTION 8.03.       Notices........................................................    52
SECTION 8.04.       Assignment.....................................................    53
SECTION 8.05.       Limitations on Rights of Others................................    53
SECTION 8.06.       Severability...................................................    54
SECTION 8.07.       Separate Counterparts..........................................    54
SECTION 8.08.       Headings.......................................................    54
SECTION 8.09.       Governing Law..................................................    54
SECTION 8.10.       Assignment to Note Trustee.....................................    54
SECTION 8.11.       Nonpetition Covenants..........................................    54
SECTION 8.12.       Limitation of Liability........................................    55
</TABLE>

                                    Annexes
                                    -------

Annex I                Servicing Procedures
Schedule 6 to Annex I  Calculation of Aggregate Remittance Amount
Annex II               Routine Quarterly True-Up Adjustments

                            Exhibits and Schedules
                            ----------------------

Exhibit A              Form of Monthly Servicer's Certificate
Exhibit B              Form of Certificate of Compliance
Exhibit C              Form of Routine Annual True-Up Mechanism Advice Letter
Exhibit D              Form of Anniversary True-Up Mechanism Advice Letter
Exhibit E              Form of Quarterly Servicer's Certificate
Schedule 4.01(a)             Expected Amortization Schedule

                                       3
<PAGE>

                    TRANSITION PROPERTY SERVICING AGREEMENT

     TRANSITION PROPERTY SERVICING AGREEMENT, dated as of April 9, 1999, between
SPPC FUNDING LLC, a Delaware limited liability company (the "Note Issuer"), and
                                                             -----------
SIERRA PACIFIC POWER COMPANY, a Nevada corporation, as Servicer (the
"Servicer").
 --------

                                   RECITALS

     A.   Pursuant to the Statute and the Financing Order, the Seller and the
Note Issuer are concurrently entering into the Sale Agreement pursuant to which
the Seller is selling to the Note Issuer the Transition Property created
pursuant to the PU Code, the Financing Order and the Issuance Advice Letter
described in such agreement, and the Seller may sell other Transition Property
to the Note Issuer pursuant to Subsequent Sale Agreements.

     B.   In connection with its ownership of the Transition Property and in
order to collect the associated FTA Charges, the Note Issuer desires to engage
the Servicer to carry out the functions described herein.  The Servicer
currently performs similar functions for itself with respect to its own charges
to its customers and may in the future perform for others.  In addition, the
Note Issuer desires to engage the Servicer to act on its behalf in obtaining
True-Up Adjustments from the CPUC.  The Servicer desires to perform all of these
activities on behalf of the Note Issuer.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:

                                       4
<PAGE>

                                   ARTICLE I
                                  Definitions
                                  -----------

     SECTION 1.01.  Definitions.  Whenever used in this Agreement, the following
     ------------   -----------
words and phrases shall have the following meanings:

     "Actual FTA Payments" means the actual FTA Payments received by the
      -------------------
Servicer attributable to a particular Billing Period.

     "Advice Letter" means any filing made to the CPUC by the Servicer on behalf
      -------------
of the Note Issuer with respect to the FTA Charges or any True-Up Adjustment in
the form of an advice letter, including an Issuance Advice Letter, a Routine
Annual True-Up Mechanism Advice Letter, an Anniversary True-Up Mechanism Advice
Letter or a Non-Routine True-Up Mechanism Advice Letter.

     "Aggregate Remittance Amount" has the meaning set forth in Annex I hereto.
      ---------------------------

     "Agreement" means this Transition Property Servicing Agreement, together
      ---------
with all Exhibits, Schedules, Annexes and Attachments hereto, as the same may be
amended and supplemented from time to time.

     "Anniversary True-Up Mechanism Advice Letter" means an Advice Letter filed
      -------------------------------------------
with the CPUC at least fifteen days prior to the Financing Order Anniversary
Date in respect of a True-Up Adjustment, substantially in the form of Exhibit D
hereto.  Any True-Up Adjustment required as a result of the Anniversary True-Up
Mechanism Advice Letter will become effective on the date specified by the CPUC
in accordance with the Financing Order.

                                       5
<PAGE>

     "Annual Accountant's Report" has the meaning set forth in Section 3.04.
      --------------------------

     "Annual Adjustment Filing Date" means each December 15, from and including
      -----------------------------
December 15, 1999 to and including the last December 15 preceding the Retirement
of the Notes; provided, however, that if any such day is not a Servicer Business
Day, "Annual Adjustment Filing Date" shall mean the Servicer Business Day
immediately preceding such day.

     "Applicable ESP" means, with respect to each California Customer, the ESP,
      --------------
if any, providing "direct access" service to that California Customer.

     "Basic Documents" has the meaning set forth in the Indenture.
      ---------------

     "Billing Period" means a calendar month.
      --------------

     "Bills" means each of the regular monthly bills, the summary bills, the
      -----
opening bills and the closing bills issued to California Customers or ESPs by
Sierra Pacific Power Company on its own behalf and in its capacity as Servicer.

     "Business Day" has the meaning assigned to that term in the Indenture.
      ------------

     "California Customers" means existing and future California Residential
      --------------------
Customers and California Small Commercial Customers.

     "California Residential Customers" means the existing and future
      --------------------------------
residential consumers of electricity, as identified in the Financing Order,
located in the service territory  in California in which the Seller provided
electricity services as of December 20, 1995.

     "California Small Commercial Customers" means the existing and future small
      -------------------------------------
commercial consumers of electricity, as identified in the Financing Order,
located in the

                                       6
<PAGE>

service territory in California in which the Seller provided electricity
services as of December 20, 1995.

     "Capital Subaccount" has the meaning set forth in the Indenture.
      ------------------

     "Certificate of Compliance" has the meaning set forth in Section 3.03.
      -------------------------

     "Certificate Trustee" means the Person acting as certificate trustee under
      -------------------
the Trust Agreement.

     "Certificateholder" has the meaning set forth in the Trust Agreement.
      -----------------

     "Certificates" has the meaning set forth in the Trust Agreement.
      ------------

     "Closing Date" has the meaning set forth in the Indenture.
      ------------

     "Collection Account" has the meaning set forth in the Indenture.
      ------------------

     "Collection Period" means the calendar month immediately preceding the
      -----------------
respective Remittance Date.

     "Collections Curves" means the Daily Collections Curve together with the
      ------------------
Monthly Collections Curve.

     "Consolidated ESP Billing" has the meaning set forth in Annex I hereto.
      ------------------------

     "Corporate Trust Office" has the meaning set forth in the Indenture.
      ----------------------

     "CPUC" means the California Public Utilities Commission or any successor
      ----
governmental agency that has regulatory authority over the True-Up Adjustments
contemplated by the Statute.

     "CPUC Regulations" means all regulations, rules, tariffs and laws
      ----------------
applicable to public utilities or ESPs, as the case may be, and promulgated by,
enforced by or otherwise within the jurisdiction of the CPUC.

                                       7
<PAGE>

     "Current Billing Period" has the meaning set forth in Annex I hereto.
      ----------------------

     "Daily Collections Curve" has the meaning set forth in Annex I hereto.
      -----------------------

     "Daily Remittance" has the meaning set forth in Section 6.11(b).
      ----------------

     "Delaware Trustee" means the Person acting as Delaware trustee under the
      ----------------
Trust Agreement.

     "ESP" means an alternative energy service provider who has entered into an
      ---
ESP Service Agreement with the Seller.

     "ESP Service Agreement" means an agreement between an ESP and the Seller
      ---------------------
for the provision of "direct access" service to customers in accordance with
CPUC decisions.

     "Estimated FTA Collection" has the meaning set forth in Annex I hereto.
      ------------------------

     "Estimated FTA Payments" means the sum of the amounts remitted with respect
      ----------------------
to a Billing Period during the six months following such Billing Period based on
the Collections Curves.

     "Excess Remittance" means the amount, if any, calculated for a particular
      -----------------
Remittance Date, by which (i) all Estimated FTA Payments remitted to the
Collection Account on and prior to such Remittance Date with respect to the FTA
Charges billed to California Customers during the sixth preceding Billing Period
exceed (ii) Actual FTA Payments received by the Servicer attributable to such
Billing Period.

     "Expected Amortization Schedule" means Schedule 4.01(a) hereto, as the same
      ------------------------------
may be amended from time to time pursuant to Section 4.01(a).

     "Final Maturity Date" has the meaning set forth in the Indenture.
      -------------------

                                       8
<PAGE>

     "Financing Order" means the order of the CPUC, Decision 98-10-021, issued
      ---------------
as of October 8, 1998, the terms and conditions of which were consented to by
Sierra Pacific Company on November 12, 1998.

     "Financing Order Anniversary Date" means October 8, 1998 of each year.
      --------------------------------

     "FTA Charges" means the charges permitted to be levied upon the California
      -----------
Customers pursuant to the Financing Order.

     "FTA Collections" means FTA Payments received by the Servicer which are
      ---------------
remitted to the Collection Account.

     "FTA Effective Date" means the date on which the initial FTA Charges go
      ------------------
into effect pursuant to the terms of the Financing Order and the first Issuance
Advice Letter.

     "FTA End Date" means, depending on the context in which used, either (i)
      ------------
the date on which specific FTA Charges end because such FTA Charges have been
replaced with revised FTA Charges or (ii) the FTA Termination Date.

     "FTA Payments" means the payments made by California Customers based on the
      ------------
FTA Charges.

     "FTA Start Date" means, depending on the context in which used, either  (i)
      --------------
the FTA Effective Date or (ii) the date on which specific revised FTA Charges go
into effect to replace previously existing FTA Charges.

     "FTA Termination Date" means the date on which the FTA Charges will cease
      --------------------
to be billed pursuant to the terms of the Financing Order, provided that the
Notes and the Certificates shall have been paid in full.

     "General Subaccount" has the meaning set forth in the Indenture.
      ------------------

                                       9
<PAGE>

     "Infrastructure Bank" means the California Infrastructure and Economic
      -------------------
Development Bank or any successor in interest.

     "Indenture" means the Indenture dated as of April 9, 1999, between the Note
      ---------
Issuer and the Note Trustee, as the same may be amended and supplemented from
time to time.

     "Initial Transition Property" means the Transition Property described in
      ---------------------------
the Sale Agreement.

     "Insolvency Event" means, with respect to a specified Person, (a) the
      ----------------
filing of a decree or order for relief by a court having jurisdiction in the
premises in respect of such Person or any substantial part of its property in an
involuntary case under any applicable Federal or state bankruptcy, insolvency or
other similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official for
such Person or for any substantial part of its property, or ordering the
winding-up or liquidation of such Person's affairs, and such decree or order
shall remain unstayed and in effect for a period of 60 consecutive days or (b)
the commencement by such Person of a voluntary case under any applicable Federal
or state bankruptcy, insolvency or other similar law now or hereafter in effect,
or the consent by such Person to the entry of an order for relief in an
involuntary case under any such law, or the consent by such Person to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official for such Person or for any
substantial part of its property, or the making by such Person of any general
assignment for the benefit of creditors, or the failure by such Person generally
to pay its debts as such debts become due, or the taking of action by such
Person in furtherance of any of the foregoing.

                                       10
<PAGE>

     "Issuance Advice Letter" means an Advice Letter submitted to the CPUC in
      ----------------------
connection with and immediately prior to the issuance of a Series of Notes,
which Advice Letter becomes effective five Business Days after filing pursuant
to the terms of the Financing Order.  The first Issuance Advice Letter will
establish the initial FTA Charges, and subsequent Issuance Advice Letters will
modify the FTA Charges to support the issuance of additional Series of Notes.

     "Lien" means a security interest, lien, charge, pledge, equity or
      ----
encumbrance of any kind.

     "Losses" has the meaning set forth in Section 5.04.
      ------

     "Monthly Collections Curve" has the meaning set forth in Annex I hereto.
      -------------------------

     "Monthly Servicer's Certificate" means a certificate, substantially in the
      ------------------------------
form of Exhibit A hereto, completed and executed by a Responsible Officer of the
Servicer pursuant to Section 3.01(b)(i).

     "Moody's" has the meaning set forth in the Indenture.
      -------

     "Non-Routine True-Up Adjustment" has the meaning set forth in Section
      ------------------------------
4.01(c)(i).

     "Non-Routine True-Up Mechanism Advice Letter" means an Advice Letter filed
      -------------------------------------------
with the CPUC in accordance with the Financing Order with respect to any Non-
Routine True-Up Adjustment, pursuant to which the related Non-Routine True-Up
Adjustment generally will become effective at the beginning of the first Quarter
that is at least 90 days after filing.

     "Note Issuer" means SPPC Funding LLC, a Delaware limited liability company.
      -----------

                                       11
<PAGE>

     "Note Trustee" means the Person acting as trustee under the Indenture, its
      ------------
successors in interest and any successor trustee under the Indenture.

     "Noteholder" has the meaning set forth in the Indenture.
      ----------

     "Notes" has the meaning set forth in the Indenture.
      -----

     "Officer's Certificate" means a certificate signed by a Responsible
      ---------------------
Officer.

     "Operating Expense" shall have the meaning set forth in the Indenture.
      -----------------

     "Opinion of Counsel" means one or more written opinions of counsel who may
      ------------------
be employees of or counsel to the party providing such opinion(s) of counsel,
which counsel shall be acceptable to the party receiving such opinion(s) of
counsel.

     "Outstanding Amount" has the meaning set forth in the Indenture.
      ------------------

     "Overcollateralization Amount" means, with respect to any Series of Notes,
      ----------------------------
the additional amount specified in the Issuance Advice Letter relating to such
Series of Notes that the owner of the Transition Property is entitled to collect
pursuant to the Financing Order to enhance the likelihood that payments on the
Notes will be made in accordance with the Expected Amortization Schedule.

     "Overcollateralization Subaccount" has the meaning set forth in the
      --------------------------------
Indenture.

     "Payment Date" has the meaning set forth in the Indenture.
      ------------

     "Person" has the meaning set forth in the Indenture.
      ------

     "Principal Balance" means, as of any Payment Date, the sum of the
      -----------------
outstanding principal amount of each Series of Notes.

                                       12
<PAGE>

     "Projected Principal Balance" means, as of any Payment Date, the sum of the
      ---------------------------
projected outstanding principal amount of each Series of Notes for such Payment
Date set forth in the Expected Amortization Schedule.

     "PU Code" means the California Public Utilities Code, as amended from time
      -------
to time.

     "Quarter" means each calendar quarter, specifically:
      -------
     January 1 to and including March 31;
     April 1 to and including June 30;
     July 1 to and including September 30; and
     October 1 to and including December 31.

     "Quarterly Servicer's Certificate" means a certificate, substantially in
      --------------------------------
the form of Exhibit E hereto, completed and executed by a Responsible Officer of
the Servicer pursuant to Section 4.01(d)(ii).

     "Rating Agency Condition" has the meaning set forth in the Indenture.
      -----------------------

     "Released Parties" has the meaning set forth in Section 6.02.
      ----------------

     "Remittance Date" means the eighteenth day of each calendar month or, if
      ---------------
such day is not a Business Day, the next succeeding Business Day, commencing on
May 18, 1999.

     "Remittance Shortfall" means the amount, if any, calculated for a
      --------------------
particular Remittance Date, by which (i) Actual FTA Payments received by the
Servicer attributable to FTA Charges billed to California Customers during the
sixth preceding Billing Period exceed (ii) all Estimated FTA Payments remitted
to the Collection Account on and prior to such Remittance Date with respect to
such Billing Period.

                                       13
<PAGE>

     "Required Capital Level" means, as of any Payment Date, the sum of 0.5
      ----------------------
percent of the initial principal amount of each then-outstanding Series of Notes
issued pursuant to the Indenture prior to that Payment Date.

     "Required Overcollateralization Level" means, as of any Payment Date, the
      ------------------------------------
amount required to be on deposit in the Overcollateralization Subaccount as
specified in each Series Supplement.

     "Reserve Subaccount" has the meaning set forth in the Indenture.
      ------------------

     "Responsible Officer" means the chairman of the board, the chief executive
      -------------------
officer, the president, the vice chairman of the board, any vice president, the
treasurer, any assistant treasurer, the secretary, any assistant secretary or
the controller of the Servicer.

     "Retirement of the Notes" means the day on which the final distribution is
      -----------------------
made to the Note Trustee in respect of the last outstanding Note.

     "Routine Annual True-Up Mechanism Advice Letter" means an Advice Letter
      ----------------------------------------------
filed with the CPUC at least fifteen days prior to the end of each calendar year
in respect of an annual True-Up Adjustment, substantially in the form of Exhibit
C hereto.  The Routine Annual True-Up Mechanism Advice Letter will become
effective on the first calendar day of the next calendar year.

     "Sale Agreement" means the Transition Property Purchase and Sale Agreement,
      --------------
dated as of the date hereof, between Sierra Pacific Power Company and the Note
Issuer, as amended and supplemented from time to time.

     "Scheduled Maturity Date" has the meaning set forth in the Indenture.
      -----------------------

                                       14
<PAGE>

     "Seller" means Sierra Pacific Power Company and its successors in interest
      ------
to the extent permitted under the Sale Agreement.

     "Seller Mortgage" means the Indenture of Mortgage, dated as of December 1,
      ---------------
1940, executed by Sierra Pacific Power Company, as supplemented and amended to
the date hereof, in favor of The New England Trust Company and Leo W. Huegle
(State Street Bank and Trust Company and Gerald R. Wheeler, by succession), as
trustees, as the same may be further amended and supplemented from time to time.

     "Series" has the meaning set forth in the Indenture.
      ------

     "Series Issuance Date" has the meaning set forth in the Indenture.
      --------------------

     "Series Supplement" has the meaning set forth in the Indenture.
      -----------------

     "Servicer" means Sierra Pacific Power Company, as the servicer of the
      --------
Transition Property, and each successor to Sierra Pacific Power Company (in the
same capacity) pursuant to Section 6.03 or 7.02.

     "Servicer Business Day" means any Business Day on which the Servicer's
      ---------------------
offices in the State of Nevada are open for business.

     "Servicer Default" means an event specified in Section 7.01.
      ----------------

     "Servicing Fee" means the fee payable on each Payment Date to the Servicer
      -------------
for services rendered during the period from, but not including, the preceding
Payment Date to and including the current Payment Date, determined pursuant to
Section 6.06.

     "Statute" means Chapter 854, California Statutes of 1996 and Chapter 275,
      -------
California Statutes of 1997, as further amended from time to time.

                                       15
<PAGE>

     "STO" means the California State Treasurer's Office, as agent for sale of
      ---
the Certificates.

     "Subsequent Sale Agreement" has the meaning assigned to that term in the
      -------------------------
definition of Subsequent Transition Property.

     "Subsequent Sale Date" means any date on which Subsequent Transition
      --------------------
Property is to be sold to the Note Issuer pursuant to a Subsequent Sale
Agreement.

     "Subsequent Transition Property" means any transition property (as defined
      ------------------------------
in Section 840 of the PU Code) created under the PU Code and the Financing Order
and specifically described in the related Issuance Advice Letter and sold to the
Note Issuer by the Seller pursuant to an agreement substantially similar to the
Sale Agreement (a "Subsequent Sale Agreement").
                   -------------------------

     "Termination Notice" has the meaning assigned to that term in Section 7.01.
      ------------------

     "Transition Costs" has the meaning assigned to that term in Section 840(f)
      ----------------
of the PU Code.

     "Transition Property" means the Initial Transition Property and, from and
      -------------------
after the applicable Subsequent Sale Date therefor, any Subsequent Transition
Property.

     "Transition Property Records" has the meaning assigned to that term in
      ---------------------------
Section 5.01.

     "True-Up Adjustment" means each adjustment to the FTA Charges made pursuant
      ------------------
to the terms of the Financing Order and in accordance with Section 4.01 hereof
or in connection with the conveyance to the Note Issuer of Subsequent Transition
Property.

     "Trust" has the meaning set forth in the Trust Agreement.
      -----

                                       16
<PAGE>

     "Trust Agreement" means the Amended and Restated Declaration and Agreement
      ---------------
of Trust dated as of April 9, 1999, among the Infrastructure Bank, the Delaware
Trustee and the Certificate Trustee, as the same may be further amended and
supplemented from time to time.

     "Trust Officer" means any officer assigned to the Corporate Trust Office,
      -------------
including any managing director, vice president, assistant vice president,
assistant treasurer, assistant secretary or any other officer of the Note
Trustee customarily performing functions similar to those performed by any of
the above designated officers and having direct responsibility for the
administration of this Agreement, and also, with respect to a particular matter,
any other officer, to whom such matter is referred because of such officer's
knowledge of and familiarity with the particular subject.

     SECTION 1.02.  Other Definitional Provisions.
     ------------   -----------------------------

     (a)  Capitalized terms used herein and not otherwise defined herein have
the meanings assigned to them in the Indenture.

     (b)  All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.

     (c)  The words "hereof," "herein," "hereunder" and words of similar import,
when used in this Agreement, shall refer to this Agreement as a whole and not to
any particular provision of this Agreement; Section, Schedule, Exhibit, Annex
and Attachment references contained in this Agreement are references to
Sections, Schedules, Exhibits,

                                       17
<PAGE>

Annexes and Attachments in or to this Agreement unless otherwise specified; and
the term "including" shall mean "including without limitation."

     (d)  The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter forms of such terms.

                                   ARTICLE II
                                   ----------
                         Appointment and Authorization
                         -----------------------------

     SECTION 2.01.  Appointment of Servicer; Acceptance of Appointment.  Subject
     ------------   --------------------------------------------------
to Section 6.05 and Article 7, the Note Issuer hereby appoints the Servicer, and
the Servicer hereby accepts such appointment, to perform the Servicer's
obligations pursuant to this Agreement on behalf of and for the benefit of the
Note Issuer in accordance with the terms of this Agreement and applicable law.
This appointment and the Servicer's acceptance thereof may not be revoked except
in accordance with the express terms of this Agreement.

     SECTION 2.02.  Authorization.  With respect to all or any portion of the
     ------------   -------------
Transition Property, the Servicer shall be, and hereby is, authorized and
empowered by the Note Issuer  (a) to execute and deliver, on behalf of itself
and/or the Note Issuer, as the case may be, any and all instruments, documents
or notices, and (b) on behalf of itself and/or the Note Issuer, as the case may
be, to make any filing and participate in proceedings of any kind with any
governmental authorities, including with the CPUC.  The Note Issuer shall
furnish the Servicer with such documents as have been prepared by the Servicer
for execution by the Note Issuer and with such other documents as may be in the
Note Issuer's possession, in each case, as necessary or appropriate to enable
the Servicer to carry out its

                                       18
<PAGE>

servicing and administrative duties hereunder. Upon the written request of the
Servicer, the Note Issuer shall furnish the Servicer with any powers of attorney
or other documents necessary or appropriate to enable the Servicer to carry out
its duties hereunder.

     SECTION 2.03.  Dominion and Control Over the Transition Property.
     ------------   -------------------------------------------------
Notwithstanding any other provision herein, the Servicer and the Note Issuer
agree that the Note Issuer shall have dominion and control over the Transition
Property, and the Servicer, in accordance with the terms hereof, is acting
solely as the servicing agent and custodian for the Note Issuer with respect to
the Transition Property and the Transition Property Records.  The Servicer
hereby agrees that it shall not take any action that is not authorized by this
Agreement, that is not consistent with its customary procedures and practices,
or that shall impair the rights of the Note Issuer in the Transition Property,
in each case unless such action is required by law or court or regulatory order.

                                  ARTICLE III
                                  -----------

                               Billing Services
                               ----------------
     SECTION 3.01.  Duties of Servicer.  The Servicer, as agent for the Note
     ------------   ------------------
Issuer, shall have the following duties:

     (a) Duties of Servicer Generally.  The Servicer's duties in general shall
         ----------------------------
include management, servicing and administration of the Transition Property;
obtaining meter reads, calculating usage, billing, collections and posting of
all payments in respect of the Transition Property; responding to inquiries by
California Customers, the CPUC, or any federal, local or other state
governmental authorities with respect to the Transition Property; delivering
Bills to California Customers and ESPs, processing and depositing

                                       19
<PAGE>

collections and making periodic remittances; furnishing periodic reports to the
Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank
and Moody's; and taking action in connection with True-Up Adjustments as set
forth herein. Certain of the duties set forth above may be performed by ESPs
pursuant to ESP Service Agreements. Anything to the contrary notwithstanding,
the duties of the Servicer set forth in this Agreement shall be qualified in
their entirety by any CPUC Regulations as in effect at the time such duties are
to be performed. Without limiting the generality of this Section 3.01(a), in
furtherance of the foregoing, the Servicer hereby agrees that it shall also
have, and shall comply with, the duties and responsibilities relating to data
acquisition, usage and bill calculation, billing, customer service functions,
collections, payment processing and remittance set forth in Annex I hereto.

     (b)  Reporting Functions.
          -------------------

          (i)  Monthly Servicer's Certificate.  On or before each Remittance
               ------------------------------
Date, the Servicer shall prepare and deliver to the Note Issuer, the Note
Trustee, the Certificate Trustee, the Infrastructure Bank and Moody's a written
report substantially in the form of Exhibit A hereto (a "Monthly Servicer's
                                                         ------------------
Certificate") setting forth certain information relating to FTA Payments
-----------
received by the Servicer during the Collection Period preceding such Remittance
Date.

          (ii) Notification of Laws and Regulations.  The Servicer shall
               ------------------------------------
immediately notify the Note Issuer, the Note Trustee, the Certificate Trustee,
the Infrastructure Bank and Moody's in writing of any laws or CPUC Regulations
hereafter promulgated that have

                                       20
<PAGE>

a material adverse effect on the Servicer's ability to perform its duties under
this Agreement.

          (iii)  Other Information.  Upon the reasonable request of the Note
                 -----------------
Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank or
Moody's, the Servicer shall provide to such Note Issuer, Note Trustee,
Certificate Trustee, Infrastructure Bank or Moody's, as the case may be, any
public financial information in respect of the Servicer, or any material
information regarding the Transition Property to the extent it is reasonably
available to the Servicer, as may be reasonably necessary and permitted by law
for the Note Issuer, the Note Trustee, the Certificate Trustee, the
Infrastructure Bank or Moody's to monitor the performance by the Servicer
hereunder.  In addition, for so long as any of the Notes of any Series are
outstanding, the Servicer shall provide the Note Issuer, the Note Trustee and
the Certificate Trustee, within a reasonable time after written request
therefor, any information available to the Servicer or reasonably obtainable by
it that is necessary to calculate the FTA Charges applicable to each class of
California Customer.

          (iv)   Preparation of Reports of the Note Issuer.  The Servicer shall
                 -----------------------------------------
prepare any reports required to be filed by the Note Issuer as described in
Section 3.07 of the Indenture.

     SECTION 3.02.  Servicing and Maintenance Standards.  On behalf of the Note
     ------------   -----------------------------------
Issuer, the Servicer shall (a) manage, service, administer and make collections
in respect of the Transition Property with reasonable care and in accordance
with applicable law, including all applicable CPUC Regulations and guidelines,
using the same degree of care and diligence that the Servicer exercises with
respect to similar assets for its own account

                                       21
<PAGE>

and, if applicable, for others; (b) follow customary standards, policies and
procedures for the industry in performing its duties as Servicer; (c) use all
reasonable efforts, consistent with its customary servicing procedures, to
enforce, and maintain rights in respect of, the Transition Property; and (d)
comply with all laws and regulations applicable to and binding on it relating to
the Transition Property. The Servicer shall follow such customary and usual
practices and procedures as it shall deem necessary or advisable in its
servicing of all or any portion of the Transition Property, which, in the
Servicer's judgment, may include the taking of legal action.

     SECTION 3.03.  Certificate of Compliance.  The Servicer shall deliver to
     ------------   -------------------------
the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure
Bank and Moody's on or before September 30 of each year, commencing September
30, 1999 to and including the September 30 succeeding the Retirement of the
Notes, an Officer's Certificate substantially in the form of Exhibit B hereto (a
"Certificate of Compliance"), stating that (i) a review of the activities of the
 -------------------------
Servicer during the twelve months ended the preceding June 30 (or, in the case
of the first Certificate of Compliance to be delivered on or before September
30, 1999, the period of time from the date of this Agreement until June 30,
1999) and of its performance under this Agreement has been made under such
officer's supervision and (ii) to the best of such officer's knowledge, based on
such review, the Servicer has fulfilled all of its obligations in all material
respects under this Agreement throughout such twelve months (or, in the case of
the Certificate of Compliance to be delivered on or before September 30, 1999,
the period of time from the date of this Agreement until June 30, 1999), or, if
there has been a default in the fulfillment of any such

                                       22
<PAGE>

material obligation, specifying each such material default known to such officer
and the nature and status thereof.

     SECTION 3.04.  Annual Report by Independent Public Accountants.  (a) The
     ------------   -----------------------------------------------
Servicer shall cause a firm of independent certified public accountants (which
may provide other services to the Servicer or the Seller) to prepare, and the
Servicer shall deliver to the Note Issuer, the Note Trustee, the Certificate
Trustee, the Infrastructure Bank and Moody's, a report addressed to the Servicer
(the "Annual Accountant's Report"), which may be included as part of the
      --------------------------
Servicer's customary auditing activities, for the information and use of the
Note Issuer, the Note Trustee, the Certificate Trustee and the Infrastructure
Bank on or before September 30 of each year, beginning September 30, 1999 to and
including the September 30 succeeding the Retirement of the Notes, to the effect
that such firm has performed certain procedures in connection with the
Servicer's compliance with its obligations under this Agreement during the
preceding twelve months ended June 30 (or, in the case of the first Annual
Accountant's Report to be delivered on or before September 30, 1999, the period
of time from the date of this Agreement until June 30, 1999), identifying the
results of such procedures and including any exceptions noted.  In the event
that such accounting firm requires the Note Trustee or the Certificate Trustee
to agree or consent to the procedures performed by such firm, the Note Issuer
shall direct the Note Trustee or the Certificate Trustee in writing to so agree;
it being understood and agreed that the Note Trustee or the Certificate Trustee,
as the case may be, will deliver such letter of agreement or consent in
conclusive reliance upon the direction of the Note Issuer, and neither the Note
Trustee nor the Certificate Trustee will make any independent

                                       23
<PAGE>

inquiry or investigation as to, and shall have no obligation or liability in
respect of, the sufficiency, validity or correctness of such procedures.

     (b)  The Annual Accountant's Report shall also indicate that the accounting
firm providing such report is independent of the Servicer within the meaning of
the Code of Professional Ethics of the American Institute of Certified Public
Accountants.

                                  ARTICLE IV
                                  ----------

                    Services Related to True-Up Adjustments
                    ---------------------------------------

     SECTION 4.01.  Periodic True-Up Adjustments.  From time to time, until the
     ------------   ----------------------------
Retirement of the Notes, the Servicer shall identify the need for True-Up
Adjustments and shall take all reasonable action to obtain and implement such
True-Up Adjustments, all in accordance with the following:

     (a)  Expected Amortization Schedule.  The initial Expected Amortization
          ------------------------------
Schedule is attached hereto as Schedule 4.01(a).  In connection with the
issuance by the Note Issuer of any additional Series of Notes after the Closing
Date, the Servicer, on or prior to the Series Issuance Date therefor, shall
revise the Expected Amortization Schedule to add the requisite information for
each new Series of Notes and set forth, as of each Payment Date through the
scheduled Retirement of the Notes, the aggregate principal amounts of the Notes
of all Series, including such additional Series, expected to be outstanding on
such Payment Date. If the Expected Amortization Schedule is revised as set forth
above, the Servicer shall send a copy of such revised Expected Amortization
Schedule to the Note Issuer, the Note Trustee, the Certificate Trustee, the
Infrastructure Bank and Moody's promptly thereafter.

                                       24
<PAGE>

     (b)  Routine True-Up Adjustments and Yearly Filings.
          ----------------------------------------------

          (i)  Routine Yearly True-Up Adjustments and Filings.
               ----------------------------------------------

               (1)  Each year on or immediately before the Annual Adjustment
Filing Date, the Servicer shall: (A) estimate collections through the December
31 immediately following such Annual Adjustment Filing Date and through December
31 of the year following the year of such Annual Adjustment Filing Date; (B)
update the assumptions underlying the FTA Charges, including energy usage
volume, the rate of delinquencies and write-offs, estimated expenses and fees of
the Note Issuer, the Trust and the Infrastructure Bank to the extent not fixed,
and the Collections Curves; (C) determine the revised FTA Charges that, together
with the funds on deposit in the Reserve Subaccount, would restore: (1) the
Principal Balance to the Projected Principal Balance, (2) the balance in the
Overcollateralization Subaccount to the Required Overcollateralization Level and
(3) the balance in the Capital Subaccount to the Required Capital Level, in each
case within twelve months after such revised FTA Charges go into effect (and
with respect to any True-Up Adjustments occurring after the last Scheduled
Maturity Date for any Series, determine the revised FTA Charges that would be
sufficient to retire the unpaid Principal Balance within the earlier of (x) a
date which is not more than twelve months after the Scheduled Maturity Date and
(y) the last Final Maturity Date for such Series); (D) file a Routine Annual
True-Up Mechanism Advice Letter with the CPUC, substantially in the form
attached hereto as Exhibit C, to notify the CPUC of the FTA Charges for the
coming year; and (E) take all reasonable actions and make all reasonable efforts
to secure such True-Up Adjustment and to enforce the provisions of the

                                       25
<PAGE>

Statute that obligate the CPUC to approve rates at levels sufficient to recover
the FTA Payments in accordance with the Expected Amortization Schedule.

          (2)  Each year on or immediately before September 23, which is the
date that is fifteen days before the Financing Order Anniversary Date (or if
such date is not a Servicer Business Day, on the Servicer Business Day
immediately preceding such date), the Servicer shall: (A) if required by the
Servicer in its judgment or found to be necessary by the CPUC, estimate
collections through the end of the Quarter in which the Financing Order
Anniversary Date occurs; (B) if required by the Servicer in its judgment or
found to be necessary by the CPUC, update the assumptions underlying the FTA
Charges, including energy usage volume, the rate of delinquencies and write-
offs, and estimated expenses and fees of the Note Issuer, the Trust and the
Infrastructure Bank to the extent not fixed; (C) if required by the Servicer in
its judgment or found to be necessary by the CPUC, determine the revised FTA
Charges that, together with the funds on deposit in the Reserve Subaccount,
would restore: (1) the Principal Balance to the Projected Principal Balance, (2)
the balance in the Overcollateralization Subaccount to the Required
Overcollateralization Level and (3) the balance in the Capital Subaccount to the
Required Capital Level, in each case within twelve months after such revised FTA
Charges go into effect (and with respect to any True-Up Adjustments occurring
after the last Scheduled Maturity Date for any Series, determine the revised FTA
Charges that would be sufficient to retire the unpaid Principal Balance within
the earlier of (x) a date which is not more than twelve months after the
Scheduled Maturity Date and (y) the last Final Maturity Date for such Series);
(D) file an Anniversary True-Up Mechanism Advice Letter with the

                                       26
<PAGE>

CPUC, substantially in the form attached hereto as Exhibit D; and (E) take all
reasonable actions and make all reasonable efforts to secure the resulting True-
Up Adjustment (if such an adjustment is sought by the Servicer or found to be
necessary by the CPUC) and to enforce the provisions of the Statute that
obligate the CPUC to approve rates at levels sufficient to recover the FTA
Payments in accordance with the Expected Amortization Schedule.

               (3)  In the case of a True-Up Adjustment pursuant to a Routine
Annual True-Up Mechanism Advice Letter, the Servicer shall implement the revised
FTA Charges, if any, as of the first day of the following calendar year.

               (4)  In the case of a True-Up Adjustment required by the Servicer
in its judgment or found to be necessary by the CPUC pursuant to an Anniversary
True-Up Mechanism Advice Letter, the Servicer shall implement the revised FTA
Charges, if any, on the date specified by the CPUC in accordance with the
Financing Order.

          (ii) Routine Quarterly True-Up Adjustments. If the Issuance Advice
               -------------------------------------
Letter with respect to a Series of Notes provides that the Servicer will file
Routine Quarterly True-Up Mechanism Advice Letters, then the Servicer shall make
such filings in accordance with the procedures set forth in Annex II hereto. On
each Series Issuance Date, the Servicer and the Note Issuer shall amend Annex II
to specify in detail the Servicer's obligations to perform routine quarterly
True-Up Adjustments, if any, with respect to the new Series of Notes issued on
such Series Issuance Date.

     (c)  Non-Routine True-Up Adjustments.
          -------------------------------

                                       27
<PAGE>

          (i)   Whenever the Servicer determines that the existing model for
calculating the FTA Charges should be amended or revised, subject to the consent
of the Note Issuer under the conditions set forth in Section 3.17 of the
Indenture, the Servicer shall file a Non-Routine True-Up Mechanism Advice Letter
with the CPUC designating the adjustments to the model and any corresponding
adjustments to the FTA Charges (collectively, a "Non-Routine True-Up
                                                 -------------------
Adjustment").
----------

          (ii)  The Servicer shall take all reasonable actions and make all
reasonable efforts to secure any Non-Routine True-Up Adjustments.

          (iii) The Servicer shall implement any resulting adjustments to the
model and any resulting revised FTA Charges as of the first day of the Quarter
which begins at least 90 days after the Non-Routine True-Up Mechanism Advice
Letter is filed.

     (d)  Reports.
          -------

          (i)  Notification of Advice Letter Filings and True-Up Adjustments.
               -------------------------------------------------------------
Whenever the Servicer files an Advice Letter with the CPUC, the Servicer shall
send a copy of such filing (together with a copy of all notices and documents
that, in the Servicer's reasonable judgment, are material to the adjustments
effected by such Advice Letter) to the Note Issuer, the Note Trustee, the
Certificate Trustee, the Infrastructure Bank and Moody's concurrently therewith.
If any True-Up Adjustment requested in any such Advice Letter filing does not
become effective on the applicable date as provided by the Financing Order, the
Servicer shall notify the Note Issuer, the Note Trustee, the Certificate
Trustee, the Infrastructure Bank and Moody's by the end of the second Servicer
Business Day after such applicable date.

                                       28
<PAGE>

          (ii)  Quarterly Servicer's Certificate.  Not later than the Remittance
                --------------------------------
Date immediately prior to each Payment Date, the Servicer shall deliver a
written report substantially in the form of Exhibit E hereto (the "Quarterly
                                                                   ---------
Servicer's Certificate") to the Note Issuer, the Note Trustee, the Certificate
----------------------
Trustee, the Infrastructure Bank and Moody's.

          (iii) Reports to California Customers.
                -------------------------------

               (A)  After each revised FTA Charge has gone into effect pursuant
to a True-Up Adjustment, the Servicer shall, to the extent and in the manner and
time frame required by applicable CPUC Regulations, if any, cause to be prepared
and delivered to California Customers a notice announcing such revised FTA
Charges.

               (B)  In addition, at least once each year, to the extent
permitted by CPUC Regulations, the Servicer shall cause to be prepared and
delivered to California Customers a notice stating, in effect, that the
Transition Property and the FTA Charges are owned by the Note Issuer and not the
Seller. Such notice shall be included either as an insert to or in the text of
the Bills delivered to such California Customers or shall be delivered to
California Customers by electronic means or such other means as the Servicer or
the Applicable ESP may from time to time use to communicate with their
respective customers.

               (C)  Except to the extent that applicable CPUC Regulations make
the Applicable ESP responsible for such costs, the Servicer shall pay from its
own funds all costs of preparation and delivery incurred in connection with
clauses (A) and (B) above,

                                       29
<PAGE>

including but not limited to printing and postage costs as the same may increase
or decrease from time to time.

          (iv)  ESP Reports.  The Servicer shall provide to Moody's any publicly
                -----------
available reports filed by the Servicer with the CPUC (or otherwise made
publicly available by the Servicer) relating to ESPs and any other non-
confidential and non-proprietary information relating to ESPs reasonably
requested by Moody's.

     SECTION 4.02.  Limitation of Liability.  (a) The Note Issuer and the
     ------------   -----------------------
Servicer expressly agree and acknowledge that:

          (i)   In connection with any True-Up Adjustment, the Servicer is
acting solely in its capacity as the servicing agent hereunder.

          (ii)  Neither the Servicer nor the Note Issuer is responsible in any
manner for, and shall have no liability whatsoever as a result of any action,
decision, ruling or other determination made or not made, or any delay (other
than any delay resulting from the Servicer's failure to file the applications
required by Section 4.01 in a timely and correct manner or other breach by the
Servicer of its duties under this Agreement), by the CPUC in any way related to
the Transition Property or in connection with any True-Up Adjustment, the
subject of any filings under Section 4.01, any proposed True-Up Adjustment, or
the approval of any revised FTA Charges and the scheduled adjustments thereto.

          (iii) The Servicer shall have no liability whatsoever relating to the
calculation of any revised FTA Charges and the scheduled adjustments thereto,
including as a result of any inaccuracy of any of the assumptions made in such
calculation regarding

                                       30
<PAGE>

expected energy usage volume and the rate of delinquencies and write-offs, so
long as the Servicer has acted in good faith and has not acted in a grossly
negligent manner in connection therewith, and the Servicer have no liability
whatsoever as a result of any Person's, including the Noteholders' or the
Certificateholders', not receiving any payment, amount or return anticipated or
expected or in respect of any Note or Certificate generally, except only to the
extent that the same is caused by the Servicer's gross negligence, willful
misconduct or bad faith.

     (b)  Notwithstanding the foregoing, the Servicer hereby acknowledges that
the terms of this Section 4.02 are not intended to, and shall not, relieve the
Servicer of liability for any misrepresentation by the Servicer under Section
6.01 or for any breach by the Servicer of its other obligations under this
Agreement.

                                   ARTICLE V
                                   ---------

                            The Transition Property
                            -----------------------

     SECTION 5.01.  Custody of Transition Property Records.  To assure uniform
     ------------   --------------------------------------
quality in servicing the Transition Property and to reduce administrative costs,
the Note Issuer hereby revocably appoints the Servicer, and the Servicer hereby
accepts such appointment, to act, as the agent of the Note Issuer and the Note
Trustee, as custodian of any and all documents and records that the Seller shall
keep on file in accordance with its customary procedures and that relate to the
Transition Property, including copies of the Financing Order and Advice Letters
relating thereto and all documents filed with the CPUC in connection with any
True-Up Adjustment (collectively, the "Transition Property Records"), which are
                                       ---------------------------
hereby constructively delivered to the Note Trustee, as pledgee of the

                                       31
<PAGE>

Note Issuer (or, in the case of the Subsequent Transition Property, will as of
the applicable Subsequent Sale Date be constructively delivered to the Note
Trustee, as pledgee of the Note Issuer) with respect to all Transition Property.

     SECTION 5.02.  Duties of Servicer as Custodian.
     ------------   -------------------------------

     (a)  Safekeeping.  The Servicer shall hold the Transition Property Records
          -----------
on behalf of the Note Issuer and maintain such accurate and complete accounts,
records and computer systems pertaining to the Transition Property Records as
shall enable the Note Issuer to comply with this Agreement and the Indenture.
In performing its duties as custodian, the Servicer shall act with reasonable
care, using that degree of care and diligence that the Servicer exercises with
respect to comparable assets that the Servicer services for itself or, if
applicable, for others.  The Servicer shall promptly report to the Note Issuer
and the Note Trustee any failure on its part to hold the Transition Property
Records and maintain its accounts, records and computer systems as herein
provided and promptly take appropriate action to remedy any such failure.
Nothing herein shall be deemed to require an initial review or any periodic
review by the Note Issuer or the Note Trustee of the Transition Property
Records.  The Servicer's duties to hold the Transition Property Records on
behalf of the Note Issuer set forth in this Section 5.02, to the extent such
Transition Property Records have not been previously transferred to a successor
Servicer pursuant to Article VII, shall terminate three years after the earlier
of (i) the date on which the Servicer is succeeded by a successor Servicer in
accordance with Article VII hereof and (ii) the date on which no Notes of any
Series are outstanding.

                                       32
<PAGE>

     (b) Maintenance of and Access to Records.  The Servicer shall maintain the
         ------------------------------------
Transition Property Records at 6100 Neil Road, Reno, Nevada or at such other
office as shall be specified to the Note Issuer and the Note Trustee by written
notice at least 30 days prior to any change in location. The Servicer shall make
available for inspection to the Note Issuer and the Note Trustee or their
respective duly authorized representatives, attorneys or auditors the Transition
Property Records at such times during normal business hours that the Note Issuer
or the Note Trustee shall reasonably request and that do not unreasonably
interfere with the Servicer's normal operations.  Nothing in this Section
5.02(b) shall affect the obligation of the Servicer to observe any applicable
law (including any CPUC Regulations) prohibiting disclosure of information
regarding the California Customers, and the failure of the Servicer to provide
access to such information as a result of such obligation shall not constitute a
breach of this Section 5.02(b).

     (c) Release of Documents.  Upon instruction from the Note Trustee, the
         --------------------
Servicer shall release any Transition Property Records to the Note Trustee, the
Note Trustee's agent or the Note Trustee's designee, as the case may be, at such
place or places as the Note Trustee may designate, as soon as practicable.

     (d) Defending Transition Property Against Claims.  The Servicer shall
         --------------------------------------------
institute any action or proceeding necessary to compel performance by the CPUC
or the State of California of any of their obligations or duties under the PU
Code, the Financing Order or any Advice Letter, and the Servicer agrees to take
such legal or administrative actions, including defending against or instituting
and pursuing legal actions and appearing or testifying at hearings or similar
proceedings, as may be reasonably necessary to block or

                                       33
<PAGE>

overturn any attempts to cause a repeal of, modification of or supplement to the
Statute or the Financing Order or the rights of holders of Transition Property
by legislative enactment, voter initiative or constitutional amendment that
would be adverse to Certificateholders. The costs of any such action shall be
payable from FTA Collections as an Operating Expense in accordance with the
priorities set forth in Section 8.02(d) of the Indenture. The Servicer's
obligations pursuant to this Section 5.02 shall survive and continue
notwithstanding the fact that the payment of Operating Expenses pursuant to
Section 8.02(d) of the Indenture may be delayed (it being understood that the
Servicer may be required to advance its own funds to satisfy its obligations
hereunder).

     SECTION 5.03.  Instructions; Authority to Act.  For so long as any Notes
     ------------   ------------------------------
remain outstanding, the Servicer shall be deemed to have received proper
instructions with respect to the Transition Property Records upon its receipt of
written instructions signed by a Trust Officer of the Note Trustee.

     SECTION 5.04.  Custodian's Indemnification.  The Servicer as custodian
     ------------   ---------------------------
shall indemnify the Note Issuer, the Trust, the Certificate Trustee, the
Delaware Trustee, the Note Trustee, the Infrastructure Bank, the STO, the
Noteholders and the Certificateholders and each of their respective officers,
directors, employees and agents for, and defend and hold harmless each such
Person from and against, any and all liabilities, obligations, losses, damages,
payments, claims, costs or expenses of any kind whatsoever (collectively,
"Losses") that may be imposed on, incurred by or asserted against any such
 ------
Person as the result of any improper act or omission in any way relating to the
maintenance and custody by the Servicer, as custodian, of the Transition
Property

                                       34
<PAGE>

Records; provided, however, that the Servicer shall not be liable for any
         --------  -------
portion of any such amount resulting from the willful misconduct, bad faith
or gross negligence of the Note Issuer, the Trust, the Certificate Trustee, the
Delaware Trustee, the Note Trustee, the Infrastructure Bank, the STO, the
Noteholders or the Certificateholders, as the case may be.

     Indemnification under this Section shall survive resignation or removal of
the Note Trustee, the Delaware Trustee or the Certificate Trustee and shall
include reasonable fees and expenses of investigation and litigation.

     SECTION 5.05.  Effective Period and Termination.  The Servicer's
     ------------   --------------------------------
appointment as custodian shall become effective as of the Closing Date and shall
continue in full force and effect until terminated pursuant to this Section.
If any Servicer shall resign as Servicer in accordance with the provisions of
this Agreement or if all of the rights and obligations of any Servicer shall
have been terminated under Section 7.01, the appointment of such Servicer as
custodian shall be terminated by the Note Trustee or by the Holders of Notes
evidencing not less than 25 percent of the Outstanding Amount of the Notes of
all Series in the same manner as the Note Trustee or such Holders may terminate
the rights and obligations of the Servicer under Section 7.01.

     SECTION 5.06.  General Indemnification of Note Trustee, Certificate Trustee
     ------------   ------------------------------------------------------------
and the Delaware Trustee.  The Servicer hereby agrees to indemnify and hold
------------------------
harmless the Note Trustee, the Certificate Trustee and the Delaware Trustee and
their respective directors, officers, employees and agents from and against any
and all Losses incurred by or asserted against any such Person as a result of or
in connection with the transactions

                                       35
<PAGE>

contemplated by this Agreement or any Basic Document, other than any Loss
incurred by reason or result of the gross negligence or willful misconduct of
the Note Trustee, the Certificate Trustee or the Delaware Trustee, as the case
may be; provided, however, that the foregoing indemnity is extended to the Note
        --------  -------
Trustee, the Certificate Trustee and the Delaware Trustee solely in their
respective capacities as trustees and not for the benefit of the Noteholders or
the Certificateholders. The obligations of the Servicer set forth herein shall
survive the termination of this Agreement or the earlier resignation or removal
of the Note Trustee under the Indenture or the Certificate Trustee or the
Delaware Trustee under the Trust Agreement.

                                  ARTICLE VI
                                  ----------
                                 The Servicer
                                 ------------

     SECTION 6.01.  Representations and Warranties of Servicer.  The Servicer
     ------------   ------------------------------------------
makes the following representations and warranties, as of the Closing Date, as
of each Subsequent Sale Date relating to the sale of Subsequent Transition
Property pursuant to a Subsequent Sale Agreement, and as of such other dates as
expressly provided in this Section 6.01, on which the Note Issuer and the Note
Trustee are deemed to have relied in entering into this Agreement relating to
the servicing of the Transition Property.  The representations and warranties
shall survive the execution and delivery of this Agreement and the pledge
thereof to the Note Trustee pursuant to the Indenture.

     (a) Organization and Good Standing.  The Servicer is duly organized and
         ------------------------------
validly existing as a corporation in good standing under the laws of the state
of its incorporation, with the power and authority in all jurisdictions in which
it operates to own its properties

                                       36
<PAGE>

and to conduct its business as such properties are currently owned and such
business is currently conducted, and had at all relevant times, and has, the
requisite power, authority and legal right to service the Transition Property
and to hold the Transition Property Records as custodian.

     (b) Due Qualification.  The Servicer is duly qualified to do business as a
         -----------------
foreign corporation in good standing, and has obtained all necessary licenses
and approvals in, all jurisdictions in which the ownership or lease of property
or the conduct of its business (including the servicing of the Transition
Property as required by this Agreement) shall require such qualifications,
licenses or approvals (except where the failure so to qualify would not be
reasonably likely to have a material adverse effect on the Servicer's business,
operations, assets, revenues, properties or prospects or adversely affect the
servicing of the Transition Property).

     (c) Power and Authority.  The Servicer has the requisite power and
         -------------------
authority to execute and deliver this Agreement and to carry out its terms; and
the execution, delivery and performance of this Agreement have been duly
authorized by the Servicer by all necessary corporate action.

     (d) Binding Obligation.  This Agreement constitutes a legal, valid and
         ------------------
binding obligation of the Servicer enforceable in accordance with its terms,
subject to applicable insolvency, reorganization, moratorium, fraudulent
transfer and other similar laws relating to or affecting creditors' rights
generally from time to time in effect and to general principles of equity
(including, without limitation, concepts of materiality, reasonableness,

                                       37
<PAGE>

good faith and fair dealing), regardless of whether considered in a proceeding
in equity or at law.

     (e) No Violation.  After giving effect to the release of the lien of the
         ------------
Seller Mortgage, the consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof shall not conflict with,
result in any breach of any of the terms and provisions of, nor constitute (with
or without notice or lapse of time) a default under, the articles of
incorporation or bylaws of the Servicer, or any indenture, agreement or other
instrument to which the Servicer is a party or by which it shall be bound; nor
result in the creation or imposition of any Lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other instrument; nor
violate any law or any order, rule or regulation applicable to the Servicer of
any court or of any Federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over the Servicer or its
properties.

     (f) No Proceedings.  Except as set forth on Schedule 6.01(f), there are no
         --------------
proceedings or investigations pending or, to the Servicer's best knowledge,
threatened before any court, Federal or state regulatory body, administrative
agency or other governmental instrumentality having jurisdiction over the
Servicer or its properties involving or relating to the Servicer or the Note
Issuer or, to the Servicer's knowledge, any other Person (i) asserting (A) the
invalidity of this Agreement, or (B) the invalidity of the Indenture, the Trust
Agreement, any of the other Basic Documents or the Notes or the Certificates,
(ii) seeking to prevent the issuance of the Notes or the Certificates or the
consummation of any of the transactions contemplated by this Agreement, the
Indenture,

                                       38
<PAGE>

the Trust Agreement or any of the other Basic Documents, (iii) seeking any
determination or ruling that might materially and adversely affect the
performance by the Servicer of its obligations under, or the validity or
enforceability of, this Agreement, the Indenture, the Trust Agreement, any of
the other Basic Documents or the Notes or the Certificates or (iv) relating to
the Servicer and which might adversely affect the Federal or state income tax
attributes of the Notes or the Certificates.

     (g) Approvals.  No approval, authorization, consent, order or other action
         ---------
of, or filing with, any court, Federal or state regulatory body, administrative
agency or other governmental instrumentality is required in connection with the
execution and delivery by the Servicer of this Agreement, the performance by the
Servicer of the transactions contemplated hereby or the fulfillment by the
Servicer of the terms hereof, except those that have been obtained or made and
those that the Servicer is required to make in the future pursuant to Article IV
hereof.

     (h) Collections Curves.  Each Collections Curve used in connection with
         ------------------
Schedule 6 to Annex I hereto is accurate in all material respects, and the
future delivery of each revised Collections Curve shall constitute a
representation and warranty that each such revised Collections Curve is accurate
in all material respects.

     (i) Premises.  The premises set forth in Schedule 6 to Annex I hereto are
         --------
reasonable based upon historical performance and will be reasonable as they
change from time to time.

     (j) Reports and Certificates.  Each report and certificate delivered in
         ------------------------
connection with an Advice Letter will constitute a representation and warranty
by the Servicer that

                                       39
<PAGE>

each such report or certificate, as the case may be, is true and correct;
provided, however, that to the extent any such report or certificate is based in
--------  -------
part upon or contains assumptions, forecasts or other predictions of future
events, the representation and warranty of the Servicer with respect thereto
will be limited to the representation and warranty that such assumptions,
forecasts or other predictions of future events are reasonable based upon
historical performance.

     SECTION 6.02.  Indemnities of Servicer; Release of Claims.  (a) The
     ------------   ------------------------------------------
Servicer shall be liable in accordance herewith only to the extent of the
obligations specifically undertaken by the Servicer under this Agreement.

     (b) The Servicer shall indemnify the Note Issuer, the Trust, the Note
Trustee, the Certificate Trustee, the Delaware Trustee, the Infrastructure Bank,
the STO, the Seller, the Noteholders and the Certificateholders and each of
their respective officers, directors, employees and agents for, and defend and
hold harmless each such Person from and against, any and all Losses that may be
imposed on, incurred by or asserted against any such Person as a result of (i)
the Servicer's willful misconduct, bad faith or gross negligence in the
performance of its duties or observance of its covenants under this Agreement or
the Servicer's reckless disregard of its obligations and duties under this
Agreement or (ii) the Servicer's breach of any of its representations or
warranties in this Agreement.

     (c) For purposes of Section 6.02(b), in the event of the termination of the
rights and obligations of Sierra Pacific Power Company (or any successor thereto
pursuant to Section 6.03) as Servicer pursuant to Section 7.01, or a resignation
by such Servicer

                                       40
<PAGE>

pursuant to this Agreement, such Servicer shall be deemed to be the Servicer
pending appointment of a successor Servicer pursuant to Section 7.02.

     (d) Indemnification under Sections 6.02(b) and 6.02(c) shall survive the
resignation or removal of the Note Trustee, the Delaware Trustee or the
Certificate Trustee or the termination of this Agreement and shall include
reasonable fees and expenses of investigation and litigation (including
reasonable attorneys fees and expenses).

     (e) Except to the extent expressly provided for in this Agreement or the
other Basic Documents (including, without limitation, the Servicer's claims with
respect to the Servicing Fee, reimbursement for any Excess Remittance,
reimbursement for costs incurred pursuant to Section 5.02(d) and the payment of
the purchase price of Transition Property), the Servicer hereby releases and
discharges the Note Issuer and the Trust and each of their respective officers,
directors and agents (collectively, the "Released Parties") from any and all
                                         ----------------
actions, claims and demands whatsoever, whenever arising, that the Servicer, in
its capacity as Servicer or Seller, shall or may have against any such Person
relating to the Transition Property or the Servicer's activities with respect
thereto other than any actions, claims and demands arising out of the willful
misconduct, bad faith or gross negligence of the Released Parties.

     SECTION 6.03.  Merger or Consolidation of, or Assumption of the Obligations
     ------------   ------------------------------------------------------------
of, Servicer.  Any Person (a) into which the Servicer may be merged or
------------
consolidated, (b) which may result from any merger or consolidation to which the
Servicer shall be a party or (c) which may succeed to the properties and assets
of the Servicer substantially as a whole, which Person in any of the foregoing
cases executes an agreement of assumption to

                                       41
<PAGE>

perform every obligation of the Servicer hereunder, shall be the successor to
the Servicer under this Agreement without further act on the part of any of the
parties to this Agreement; provided, however, that (i) immediately after giving
                           --------  -------
effect to such transaction, no Servicer Default and no event that, after notice
or lapse of time, or both, would become a Servicer Default shall have occurred
and be continuing, (ii) the Servicer shall have delivered to the Note Issuer,
the Note Trustee and Moody's an Officers' Certificate and an Opinion of Counsel
each stating that such consolidation, merger or succession and such agreement of
assumption complies with this Section and that all conditions precedent provided
for in this Agreement relating to such transaction have been complied with and
(iii) the Servicer shall have delivered to the Note Issuer, the Note Trustee and
Moody's an Opinion of Counsel either (A) stating that, in the opinion of such
counsel, all filings to be made by the Servicer, including filings with the CPUC
pursuant to the PU Code, have been executed and filed that are necessary to
preserve and protect fully the interests of the Note Issuer in the Transition
Property and reciting the details of such filings or (B) stating that, in the
opinion of such counsel, no such action shall be necessary to preserve and
protect such interests. Notwithstanding anything herein to the contrary, the
execution of the foregoing agreement of assumption and compliance with clauses
(i), (ii) and (iii) above shall be conditions to the consummation of the
transactions referred to in clauses (a), (b) or (c) above.

     SECTION 6.04.  Limitation on Liability of Servicer and Others.  Neither the
     ------------   ----------------------------------------------
Servicer nor any of the directors or officers or employees or agents of the
Servicer shall be liable to the Note Issuer, the Note Trustee, the
Infrastructure Bank, the Noteholders, the

                                       42
<PAGE>

Trust, the Certificate Trustee, the Delaware Trustee, the Certificateholders or
any other Person, except as provided under this Agreement, for any action taken
or for refraining from the taking of any action pursuant to this Agreement or
for errors in judgment; provided, however, that this provision shall not protect
                        --------  -------
the Servicer or any such person against any liability that would otherwise be
imposed by reason of willful misconduct, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties under this Agreement. The Servicer and any director or officer or
employee or agent of the Servicer may rely in good faith on the advice of
counsel reasonably acceptable to the Note Trustee or on any document of any
kind, prima facie properly executed and submitted by any Person, respecting any
matters arising under this Agreement.

     Except as provided in this Agreement, the Servicer shall not be under any
obligation to appear in, prosecute or defend any legal action that shall not be
related to or incidental to its duties to service the Transition Property in
accordance with this Agreement and that in its opinion may involve it in any
expense or liability.

     SECTION 6.05.  Sierra Pacific Power Company Not to Resign as Servicer.
     ------------   ------------------------------------------------------
Subject to the provisions of Section 6.03, Sierra Pacific Power Company shall
not resign from the obligations and duties hereby imposed on it as Servicer
under this Agreement, except upon either (a) a determination that the
performance of its duties under this Agreement shall no longer be permissible
under applicable law or (b) satisfaction of the following: (i) the Rating Agency
Condition shall have been satisfied, (ii) the CPUC shall have approved such
resignation and (iii) notice of such resignation shall have been given to

                                       43
<PAGE>

the Infrastructure Bank. Notice of any such determination permitting the
resignation of Sierra Pacific Power Company shall be communicated to the Note
Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure Bank and
Moody's at the earliest practicable time (and, if such communication is not in
writing, shall be confirmed in writing at the earliest practicable time), and
any such determination shall be evidenced by an Opinion of Counsel to such
effect delivered to the Note Issuer, the Note Trustee and the Certificate
Trustee concurrently with or promptly after such notice. No such resignation
shall become effective until a successor Servicer shall have assumed the
responsibilities and obligations of Sierra Pacific Power Company in accordance
with Section 7.02.

     SECTION 6.06.  Servicing Compensation.  (a) In consideration for its
     ------------   ----------------------
services hereunder, until the Retirement of the Notes, the Servicer shall
receive a fee (the "Servicing Fee") quarterly on each Payment Date in an amount
                    -------------
equal to (i) one-fourth of 0.25 percent of the outstanding Principal Balance
(before giving effect to payments made on such date) for so long as FTA Charges
are included as a line item on Bills otherwise sent to California Customers or
(ii) one-fourth of 1.50 percent of the outstanding Principal Balance (before
giving effect to payments made on such date) if FTA Charges are not included as
a line item on Bills otherwise sent to California Customers but, instead, are
billed separately to California Customers.  The Servicer also shall be entitled
to retain as additional compensation (i) any interest earnings on FTA Payments
received by the Servicer and invested by the Servicer pursuant to Section 6(d)
of Annex I hereto during each Collection Period prior to remittance to the
Collection Account and (ii) all late payment charges, if any, collected from
California Customers or ESPs.

                                       44
<PAGE>

     (b) The Servicing Fee set forth in Section 6.06(a) above shall be paid to
the Servicer by the Note Trustee, on each Payment Date in accordance with the
priorities set forth in Section 8.02(d) of the Indenture, by wire transfer of
immediately available funds from the Collection Account to an account designated
by the Servicer.  Any portion of the Servicing Fee not paid on such date shall
be added to the Servicing Fee payable on the subsequent Payment Date.

     (c) Except as provided in Section 5.02(d), the Servicer shall be required
to pay from its own account all expenses incurred by it in connection with its
activities hereunder (including any fees to and disbursements by accountants,
counsel, or any other Person, any taxes imposed on the Servicer and any expenses
incurred in connection with reports to Noteholders and Certificateholders) out
of the compensation retained by or paid to it pursuant to this Section 6.06, and
shall not be entitled to any extra payment or reimbursement therefor.

     SECTION 6.07.  Compliance with Applicable Law.  The Servicer covenants and
     ------------   ------------------------------
agrees, in servicing the Transition Property, to comply with all laws applicable
to, and binding upon, the Servicer and relating to such Transition Property the
noncompliance with which would have a material adverse effect on the value of
the Transition Property; provided, however, that the foregoing is not intended
                         --------  -------
to, and shall not, impose any liability on the Servicer for noncompliance with
any law that the Servicer is contesting in good faith in accordance with its
customary standards and procedures.

     SECTION 6.08.  Access to Certain Records and Information Regarding
     ------------   ---------------------------------------------------
Transition Property.  The Servicer shall provide to the Noteholders, the Note
-------------------
Trustee, the

                                       45
<PAGE>

Certificate Trustee, the Infrastructure Bank and the STO access to the
Transition Property Records in such cases where the Noteholders, the Note
Trustee, the Certificate Trustee and the Infrastructure Bank shall be required
by applicable law to be provided access to such records. Access shall be
afforded without charge, but only upon reasonable request and during normal
business hours at the respective offices of the Servicer. Nothing in this
Section shall affect the obligation of the Servicer to observe any applicable
law (including any CPUC Regulation) prohibiting disclosure of information
regarding the California Customers, and the failure of the Servicer to provide
access to such information as a result of such obligation shall not constitute a
breach of this Section.

     SECTION 6.09.  Appointments.  The Servicer may at any time appoint any
     ------------   ------------
Person to perform all or any portion of its obligations as Servicer hereunder;
provided, however, that the Rating Agency Condition shall have been satisfied in
--------  -------
connection therewith; provided further that the Servicer shall remain obligated
                      ----------------
and be liable to the Note Issuer, the Note Trustee, the Certificate Trustee and
the Noteholders for the servicing and administering of the Transition Property
in accordance with the provisions hereof without diminution of such obligation
and liability by virtue of the appointment of such Person and to the same extent
and under the same terms and conditions as if the Servicer alone were servicing
and administering the Transition Property; and provided further, however, that
                                               -------- -------
nothing herein shall preclude the execution by the Servicer of an ESP Service
Agreement with ESPs.  The fees and expenses of such Person shall be as agreed
between the Servicer and such Person from time to time, and none of the Note
Issuer, the Note Trustee, the Noteholders or any other Person shall have any
responsibility therefor or

                                       46
<PAGE>

right or claim thereto. Any such appointment shall not constitute a Servicer
resignation under Section 6.05.

     SECTION 6.10.  No Servicer Advances.  The Servicer shall not make any
     ------------   --------------------
advances of interest or principal on the Notes or the Certificates.

     SECTION 6.11.  Remittances.  (a) Subject to clause (b) below, on each
     ------------   -----------
Remittance Date, the Servicer shall cause to be made a wire transfer of
immediately available funds equal to the Aggregate Remittance Amount for the
applicable Collection Period to the General Subaccount of the Collection
Account.  Prior to each remittance to the General Subaccount of the Collection
Account pursuant to this Section, the Servicer shall provide written notice to
the Note Trustee of each such remittance (including the exact dollar amount to
be remitted).

     (b) Notwithstanding the foregoing clause (a) and subject to the succeeding
clause (c),  during any period in which there exists the occurrence and
continuance of a Servicer Default, the failure to satisfy the Rating Agency
Condition, the failure of the Servicer to maintain a short-term rating of P-1 or
a long-term rating of A-2 or better by Moody's, or if there shall exist no
letter of credit in favor of the Note Trustee which shall have satisfied the
Rating Agency Condition, the Servicer shall remit to the General Subaccount of
the Collection Account the total FTA Payments estimated to have been received by
the Servicer from or on behalf of California Customers on a given Servicer
Business Day in respect of all previously Billed FTA Charges within two Servicer
Business Days of receipt thereof by the Servicer (the "Daily Remittance").  On
                                                       ----------------
or before each Remittance Date during any period described in this clause (b),
the Servicer shall calculate the amount of

                                       47
<PAGE>

any Remittance Shortfall or Excess Remittance attributable to the prior
Collection Period and (A) if a Remittance Shortfall exists, the Servicer shall
make a supplemental remittance to the General Subaccount of the Collection
Account on such Remittance Date in the amount of such Remittance Shortfall or
(B) if an Excess Remittance exists, the Servicer shall reduce the amount of each
Daily Remittance (beginning with the Daily Remittance occurring on the
Remittance Date) by the outstanding amount of such Excess Remittance until the
balance of the Excess Remittance has been reduced to zero.

     (c) Notwithstanding the foregoing clause (b), during a period in which the
Servicer fails to maintain a short-term rating of P-1 or a long-term rating A-2
or better by Moody's, the Servicer shall have the option of remitting funds
equal to the Aggregate Remittance Amount on the Remittance Date as provided in
Section 6.11(a); provided that (i) the Note Issuer shall have established and
                 --------
shall maintain the Letter of Credit for the benefit of the Note Issuer and the
Note Trustee as provided in Section 8.07 of the Indenture and (ii) the Aggregate
Remittance Amount for any Collection Period shall not exceed the amount
available to be drawn under the Letter of Credit.  In the event that the
Aggregate Remittance Amount for any Collection Period exceeds the amount
available to be drawn under the Letter of Credit the Servicer shall be subject
to the Daily Remittance of estimated FTA Payments as provided in Section
6.11(b).

     (d) The Servicer agrees and acknowledges that it holds all FTA Payments
collected by it for the benefit of the Note Issuer and that all such amounts
will be remitted by the Servicer in accordance with this Section without any
surcharge, fee, offset, charge or other deduction except (i) as set forth in
clause (b) above or clause (e) below and (ii) for late

                                       48
<PAGE>

fees permitted by Section 6.06. The Servicer further agrees not to make any
claim to reduce its obligation to remit all FTA Payments collected by it in
accordance with this Agreement, except (i) as set forth in clause (b) above or
clause (e) below and (ii) for late fees permitted by Section 6.06.

     (e) If there is an Excess Remittance, the Servicer shall be entitled either
(i) to reduce the amount which the Servicer remits to the General Subaccount of
the Collection Account on such Remittance Date by the amount of such Excess
Remittance, the amount of such reduction becoming the property of the Servicer
or (ii) to be paid immediately from the Collection Account or any subaccount
therein the amount of such Excess Remittance, such payment becoming the property
of the Servicer.  If there is a Remittance Shortfall, the amount that the
Servicer remits to the General Subaccount of the Collection Account on such
Remittance Date will be increased by the amount of such Remittance Shortfall,
such increase coming from the Servicer's own funds.

     (f) If the Note Trustee shall not have received either (i) the Aggregate
Remittance Amount pursuant to clause (a) above by 6:00 P.M. Eastern Standard
Time on such Remittance Date or (ii) notice from the Servicer that the Note
Issuer has drawn on the Letter of Credit pursuant to clause (g), the Note
Trustee on the following Business Day shall draw on the full amount of the
Letter of Credit.

     (g) If the Servicer has not wire transferred the aggregate Remittance
Amount pursuant to clause (a) by 1:00 p.m. (Eastern Standard Time) on any
Remittance Date, the Note Issuer shall, not later than 6:00 p.m. (Eastern
Standard Time) on such Remittance

                                       49
<PAGE>

Date, draw the entire amount of the Letter of Credit and simultaneously send, by
facsimile transmission, notice of the draw to the Note Trustee and the
Infrastructure Bank.

                                  ARTICLE VII
                                  -----------
                                    Default
                                    -------

     SECTION 7.01.  Servicer Default.  If any one of the following events (a
     ------------   ----------------
"Servicer Default") shall occur and be continuing:
 ----------------

     (a) any failure by the Servicer to deposit in the Collection Account on
behalf of the Note Issuer any required remittance that shall continue unremedied
for a period of three Business Days after written notice of such failure is
received by the Servicer from the Note Issuer or the Note Trustee or after
discovery of such failure by an officer of the Servicer; provided, however,
                                                                   -------
that, if the Servicer fails to deposit an Aggregate Remittance Amount on any
Remittance Date pursuant to Section 6.11, then such failure by the Note Issuer
shall be deemed to be a default by the Servicer under this Agreement; or

     (b) any failure on the part of the Servicer or the Seller, as the case may
be, duly to observe or to perform in any material respect any other covenants or
agreements of the Servicer or the Seller (as the case may be) set forth in this
Agreement (including Section 4.01) or any other Basic Document to which it is a
party, which failure shall (i) materially and adversely affect the rights of
Noteholders or Certificateholders and (ii) continue unremedied for a period of
30 days after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given (A) to the Servicer or the Seller (as
the case may be) by the Note Issuer or (B) to the Servicer or the Seller (as the
case may

                                       50
<PAGE>

be) by the Note Trustee or by the Noteholders of Notes evidencing not less than
25 percent of the Outstanding Amount of the Notes of all Series; or

     (c) any representation or warranty made by the Servicer in this Agreement
shall prove to have been incorrect when made, which has a material adverse
effect on the Note Issuer or the Certificateholders and which material adverse
effect continues unremedied for a period of 60 days after the date on which
written notice thereof, requiring the same to be remedied, shall have been
delivered to the Servicer by the Note Issuer or the Note Trustee; or

     (d) an Insolvency Event occurs with respect to the Servicer or the Seller;
then, and in each and every case, so long as the Servicer Default shall not
have been remedied, either the Note Trustee, or the Holders of Notes evidencing
not less than 25 percent of the Outstanding Amount of the Notes of all Series,
by notice then given in writing to the Servicer (and to the Note Trustee if
given by the Noteholders) (a "Termination Notice") may terminate all the rights
                              ------------------
and obligations (other than the obligations set forth in Section 6.02 hereof) of
the Servicer under this Agreement.  In addition, upon a Servicer Default
described in Section 7.01(a), each of the following shall be entitled to apply
to the CPUC for sequestration and payment of revenues arising with respect to
the Transition Property: (1) the Certificateholders and the Certificate Trustee
as beneficiary of any statutory lien permitted by the PU Code; (2) the Note
Issuer or its assignees; or (3) pledgees or transferees, including transferees
under Section 844 of the PU Code, of the Transition Property.  On or after the
receipt by the Servicer of a Termination

                                       51
<PAGE>

Notice, all authority and power of the Servicer under this Agreement, whether
with respect to the Notes, the Transition Property, the FTA Charges or
otherwise, shall, without further action, pass to and be vested in such
successor Servicer as may be appointed under Section 7.02; and, without
limitation, the Note Trustee is hereby authorized and empowered to execute and
deliver, on behalf of the predecessor Servicer, as attorney-in-fact or
otherwise, any and all documents and other instruments, and to do or accomplish
all other acts or things necessary or appropriate to effect the purposes of such
Termination Notice, whether to complete the transfer of the Transition Property
Records and related documents, or otherwise. The predecessor Servicer shall
cooperate with the successor Servicer, the Note Issuer and the Note Trustee in
effecting the termination of the responsibilities and rights of the predecessor
Servicer under this Agreement, including the transfer to the successor Servicer
for administration by it of all cash amounts that shall at the time be held by
the predecessor Servicer for remittance, or shall thereafter be received by it
with respect to the Transition Property or the FTA Charges. All reasonable costs
and expenses (including attorneys fees and expenses) incurred in connection with
transferring the Transition Poperty Records to the successor Servicer and
amending this Agreement to reflect such succession as Servicer pursuant to this
Section shall be paid by the predecessor Servicer upon presentation of
reasonable documentation of such costs and expenses.

     SECTION 7.02.  Appointment of Successor.  (a) Upon the Servicer's receipt
     ------------   ------------------------
of a Termination Notice pursuant to Section 7.01 or the Servicer's resignation
or removal in accordance with the terms of this Agreement, the predecessor
Servicer shall continue to perform its functions as Servicer under this
Agreement, and shall be entitled to receive the

                                       52
<PAGE>

requisite portion of the Servicing Fee, until a successor Servicer shall have
assumed in writing the obligations of the Servicer hereunder as described below.
In the event of the Servicer's termination hereunder, the Note Issuer shall
appoint a successor Servicer with the Note Trustee's prior written consent
thereto (which consent shall not be unreasonably withheld), and the successor
Servicer shall accept its appointment by a written assumption in form acceptable
to the Note Issuer and the Note Trustee. If within 30 days after the delivery of
the Termination Notice, the Note Issuer shall not have obtained such a new
Servicer, the Note Trustee may petition the CPUC or a court of competent
jurisdiction to appoint a successor Servicer under this Agreement. A Person
shall qualify as a successor Servicer only if (i) such Person is permitted under
CPUC Regulations to perform the duties of the Servicer, (ii) the Rating Agency
Condition shall have been satisfied and (iii) such Person enters into a
servicing agreement with the Note Issuer having substantially the same
provisions as this Agreement.


     (b) Upon appointment, the successor Servicer shall be the successor in all
respects to the predecessor Servicer and shall be subject to all the
responsibilities, duties and liabilities arising thereafter relating thereto
placed on the predecessor Servicer and shall be entitled to the Servicing Fee
and all the rights granted to the predecessor Servicer by the terms and
provisions of this Agreement.

     SECTION 7.03.  Waiver of Past Defaults.  The Noteholders of Notes
     ------------   -----------------------
evidencing not less than a majority of the Outstanding Amount of the Notes of
all Series may, on behalf of all Noteholders, waive in writing any default by
the Servicer in the performance of its obligations hereunder and its
consequences, except a default in making any required

                                       53
<PAGE>

deposits to the Collection Account in accordance with this Agreement. Upon any
such waiver of a past default, such default shall cease to exist, and any
Servicer Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any subsequent
or other default or impair any right consequent thereto.

     SECTION 7.04.  Notice of Servicer Default.  The Servicer shall deliver to
     ------------   --------------------------
the Note Issuer, the Note Trustee, the Certificate Trustee, the Infrastructure
Bank, the STO and Moody's, promptly after having obtained knowledge thereof, but
in no event later than five Business Days thereafter, written notice in an
Officers' Certificate of any event which with the giving of notice or lapse of
time, or both, would become a Servicer Default under Section 7.01(a) or (b).

                                  ARTICLE VIII
                                  ------------
                            Miscellaneous Provisions
                            ------------------------

     SECTION 8.01.  Amendment.  (a) This Agreement may be amended in writing by
     ------------   ---------
the Servicer and the Note Issuer with five Business Days' prior written notice
given to Moody's and the prior written consent of the Note Trustee, but without
the consent of any of the Noteholders or Certificateholders, to cure any
ambiguity, to correct or supplement any provisions in this Agreement or for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions in this Agreement or of modifying in any manner the rights of
the Noteholders or the Certificateholders; provided, however, that such action
                                           --------  -------
shall not, as evidenced by an Officer's Certificate delivered to the

                                       54
<PAGE>

Note Issuer and the Note Trustee, adversely affect in any material respect the
interests of any Noteholder or Certificateholder.

     This Agreement may also be amended in writing from time to time by the
Servicer and the Note Issuer with prior written notice given to Moody's and the
prior written consent of the Note Trustee and the prior written consent of the
Holders of Notes evidencing not less than a majority of the Outstanding Amount
of the Notes of all Series, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement or
of modifying in any manner the rights of the Noteholders or the
Certificateholders; provided, however, that no such amendment shall (a) increase
                    --------  -------
or reduce in any manner the amount of, or accelerate or delay the timing of, FTA
Collections or (b) reduce the aforesaid percentage of the Outstanding Amount of
the Notes, the Noteholders of which are required to consent to any such
amendment, without the consent of the Noteholders of all the outstanding Notes.

     Promptly after the execution of any such amendment and the requisite
consents, the Note Issuer shall furnish written notification of the substance of
such amendment to the Note Trustee and Moody's.

     It shall not be necessary for the consent of Noteholders pursuant to this
Section to approve the particular form of any proposed amendment or consent, but
it shall be sufficient if such consent shall approve the substance thereof.

     Prior to its consent to any amendment to this Agreement, the Note Trustee
shall be entitled to receive and conclusively rely upon an Opinion of Counsel
stating that such amendment is authorized or permitted by this Agreement. The
Note Trustee may, but shall

                                       55
<PAGE>

not be obligated to, enter into any such amendment which affects the Note
Trustee's own rights, duties or immunities under this Agreement or otherwise.

     (b) Notwithstanding Section 8.01(a) or anything to the contrary in this
Agreement, the Servicer and the Note Issuer may amend Annex I to this Agreement
in writing with prior written notice given to the Note Trustee and Moody's, but
without the consent of the Note Trustee, Moody's or any Noteholder or
Certificateholder, solely to address changes to the Servicer's method of
calculating FTA Payments received as a result of changes to the Servicer's
current computerized customer information system, as contemplated by Section
(e)(iii) of Annex I hereto; provided that any such amendment shall not have or
                            --------
cause a material adverse effect on the Certificateholders.

     SECTION 8.02.  Protection of Title to Trust.  (a) The Servicer shall
     ------------   ----------------------------
maintain accounts and records as to the Transition Property accurately and in
accordance with its standard accounting procedures and in sufficient detail to
permit reconciliation between FTA Payments received by the Servicer and FTA
Collections from time to time deposited in the Collection Account.

     (b) The Servicer shall permit the Note Trustee and its agents at any time
during normal business hours, upon reasonable notice to the Servicer and to the
extent it does not unreasonably interfere with the Servicer's normal operations,
to inspect, audit and make copies of and abstracts from the Servicer's records
regarding the Transition Property and the FTA Charges. Nothing in this Section
8.02(b) shall affect the obligation of the Servicer to observe any applicable
law (including any CPUC Regulation) prohibiting disclosure of information
regarding the California Customers, and the failure of the Servicer to provide

                                       56
<PAGE>

access to such information as a result of such obligation shall not constitute a
breach of this Section 8.02(b).

     SECTION 8.03.  Notices.  All demands, notices and communications upon or to
     ------------   -------
the Servicer, the Note Issuer, the Note Trustee, the Infrastructure Bank, the
STO, the Certificate Trustee or Moody's under this Agreement shall be in writing
and personally delivered, sent by overnight mail or sent by telecopy or other
similar form of rapid transmission, and shall be deemed to have been duly given
upon receipt (a) in the case of the Servicer, to Sierra Pacific Power Company,
at 6100 Neil Road, P.O. Box 10100, Reno, Nevada  89520-3150, Attention:
Treasurer, (b) in the case of the Note Issuer, to SPPC Funding LLC, at 6100 Neil
Road, P.O. Box 30150, Reno, Nevada  89520-3150, Attention: President, (c) in the
case of the Note Trustee, at the Corporate Trust Office, (d) in the case of the
Infrastructure Bank, to California Infrastructure and Economic Development Bank,
c/o California Trade and Commerce Agency, at 801 K Street, Suite 1700,
Sacramento, CA 95814, Attention:  Executive Director, (e) in the case of the
Certificate Trustee, to Bankers Trust Company of California, N.A., c/o Bankers
Trust Company, Corporate Trust and Agency Services, Four Albany Street, New
York, New York 10006, Attention: Structured Finance Group, (f) in the case of
the STO, to the California State Treasurer's Office, 915 Capitol Mall, Room 110,
Sacramento, CA 95814, Attention of Deputy Treasurer, (g) in the case of Moody's,
to Moody's Investors Service, Inc., ABS Monitoring Department, 99 Church Street,
New York, New York 10007 or (h) as to each of the foregoing, at such other
address as shall be designated by written notice to the other parties.

                                       57
<PAGE>

     SECTION 8.04.  Assignment.  Notwithstanding anything to the contrary
     ------------   ----------
contained herein, except as provided in Section 6.03 and as provided in the
provisions of this Agreement concerning the resignation of the Servicer, this
Agreement may not be assigned by the Servicer.

     SECTION 8.05.  Limitations on Rights of Others.  The provisions of this
     ------------   -------------------------------
Agreement are solely for the benefit of the Servicer and the Note Issuer and, to
the extent provided herein or in the Basic Documents, the Trust, the Note
Trustee, the Certificate Trustee, the Noteholders, the Certificateholders, the
Infrastructure Bank and the STO, and nothing in this Agreement, whether express
or implied, shall be construed to give to any other Person any legal or
equitable right, remedy or claim in the Transition Property or under or in
respect of this Agreement or any covenants, conditions or provisions contained
herein.

     SECTION 8.06.  Severability.  Any provision of this Agreement that is
     ------------   ------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

     SECTION 8.07.  Separate Counterparts.  This Agreement may be executed by
     ------------   ---------------------
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.

                                       58
<PAGE>

     SECTION 8.08.  Headings.  The headings of the various Articles and Sections
     ------------   --------
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.

     SECTION 8.09.  Governing Law.  This Agreement shall be construed in
     ------------   -------------
accordance with the laws of the State of California, without reference to its
conflict of law provisions, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.

     SECTION 8.10.  Assignment to Note Trustee.  The Servicer hereby
     ------------   --------------------------
acknowledges and consents to (i) the collateral assignment of any or all of the
Note Issuer's rights and obligations hereunder to the Note Trustee and (ii) the
further assignment of the Note Trustee's rights and obligations under the
Indenture to the Certificate Trustee.

     SECTION 8.11.  Nonpetition Covenants.  Notwithstanding any prior
     ------------   ---------------------
termination of this Agreement or the Indenture, but subject to the CPUC's right
to order the sequestration and payment of revenues arising with respect to the
Transition Property, notwithstanding any bankruptcy, reorganization or other
insolvency proceedings with respect to the debtor, pledgor or transferor of the
Transition Property pursuant to Section 843(e) and (g) of the PU Code, the
Servicer shall not, prior to the date that is one year and one day after the
termination of the Indenture with respect to the Note Issuer, acquiesce,
petition or otherwise invoke or cause the Note Issuer or the Trust to invoke the
process of any court or governmental authority for the purpose of commencing or
sustaining a case against the Note Issuer or the Trust under any Federal or
state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator

                                       59
<PAGE>

or other similar official of the Note Issuer or the Trust or any substantial
part of the property of the Note Issuer or the Trust, or ordering the winding up
or liquidation of the affairs of the Note Issuer or the Trust.

     SECTION 8.12.  Limitation of Liability.  It is expressly understood and
     ------------   -----------------------
agreed by the parties hereto that (a) this Agreement is executed and delivered
by Bankers Trust Company of California, N.A., not individually or personally but
solely as Note Trustee on behalf of the holders of the Notes, in the exercise of
the powers and authority conferred and vested in it, (b) the representations,
undertakings and agreements herein made by the Note Trustee on behalf of the
holders of the Notes are made and intended not as personal representations,
undertakings and agreements by Bankers Trust Company of California, N.A., but
are made and intended for the purpose of binding only the holders of the Notes,
(c) nothing herein contained shall be construed as creating any liability on
Bankers Trust Company of California, N.A., individually or personally, to
perform any covenant either expressed or implied contained herein, except in its
capacity as Note Trustee, all such liability, if any, being expressly waived by
the parties who are signatories to this Agreement and by any Person claiming by,
through or under such parties and (d) under no circumstances shall Bankers Trust
Company of California, N.A., be personally liable for the payment of any
indebtedness or expenses of the holders of the Notes or be personally liable for
the breach or failure of any obligation, representation, warranty or covenant
made or undertaken by the Note Trustee under this Agreement; provided, however,
                                                             --------  -------
that this provision shall not protect Bankers Trust Company of California, N.A.
against any liability that would otherwise be imposed by reason of willful
misconduct, bad faith or

                                       60
<PAGE>

gross negligence in the performance of duties or by reason of reckless disregard
of obligations and duties under this Agreement.

                                       61
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers as of the day and year first above
written.

                              SPPC FUNDING LLC,

                              By: ______________________________________
                                  Name:
                                  Title:

                              SIERRA PACIFIC POWER COMPANY,



                              By: ______________________________________
                                  Name:
                                  Title:

Acknowledged and Accepted:

BANKERS TRUST COMPANY OF

CALIFORNIA, N.A., not in its individual
capacity but solely as Note Trustee,



By: ______________________________________
    Name:
    Title:

                                       62
<PAGE>

                                  Annex I to
                              Servicing Agreement

                              SERVICING PROCEDURES

     The Servicer agrees to comply with the following servicing procedures:

                            SECTION 1.  DEFINITIONS.

     (a) Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Agreement.

     (b) Whenever used in this Annex I, the following words and phrases shall
have the following meanings:

     "Aggregate Remittance Amount" has the meaning set forth in Section 6(e)(i)
      ---------------------------
of this Annex I.

     "Balanced Payment Plan" means a level payment plan offered by the Seller,
      ---------------------
which, if elected by a California Residential Customer, provides for level
monthly Bill charges.

     "Billed FTA Revenues" means the amounts billed to California Customers
      -------------------
pursuant to the FTA Charges, whether billed directly to such California
Customers by the Servicer or indirectly through an ESP pursuant to Consolidated
ESP Billing.

     "Closing Bill" means the final bill issued to a California Customer at the
      ------------
time service is terminated.

     "Consolidated ESP Billing" means the billing option available to California
      ------------------------
Customers served by an ESP pursuant to which the Applicable ESP will be
responsible for billing and collecting all charges to California Customers
electing such billing option, including the FTA Charges, and will become
obligated to the Servicer for such Billed FTA Revenues, all in accordance with
applicable CPUC Regulations.  Unless the context

                                       63
<PAGE>

indicates otherwise, the term Consolidated ESP Billing includes the Full
Consolidated ESP Billing option.

     "Current Billing Period" means the calendar month immediately preceding the
      ----------------------
respective Remittance Date.

     "Daily Collections Curve" means the tally for the number of customer
      -----------------------
accounts specified in Schedule 6 to this Annex I, resulting from counting the
number of days between when a particular bill is generated and when payment is
received, as described in Schedule 6 to this Annex I.

     "Estimated FTA Collections" has the meaning set forth in Schedule 6 to this
      -------------------------
Annex I.

     "Estimation Template" means the template shown on Schedule 6 to this Annex
      -------------------
I, which template is used to calculate the FTA Payments estimated to have been
received by the Servicer during any Collection Period.

     "Full Consolidated ESP Billing" means the billing option available to
      -----------------------------
California Customers served by an ESP, if such option is approved by the utility
with respect to such ESP, pursuant to which such ESP performs the same tasks it
would perform under Consolidated ESP Billing and, in addition, calculates all
utility charges to California Customers, including the FTA Charges, from billing
factors provided by the utility and the Servicer.

     "Monthly Collections Curve" means the cumulative summation of the Daily
      -------------------------
Collections Curve to derive monthly percentages of revenue collected, as
described in Schedule 6 to this Annex I.

                                       64
<PAGE>

     "Net Write-Off Percent" means the number (expressed as a percent) allocable
      ---------------------
to a particular Billing Period equal to (i) the amount by which Write-Offs in
the Current Billing Period exceed Write-Off recoveries in the current Billing
Period, divided by (ii) the total billed revenue in the Current Billing Period.

     "Servicer Policies and Practices" means, with respect to the Servicer's
      -------------------------------
duties under this Annex I, the policies and practices of the Servicer applicable
to such duties that the Servicer follows with respect to comparable assets that
it services for itself or others.

     "Variables" means the following variables underlying the Daily Collections
      ---------
Curves:
          (i)    sample sizes for California Residential Customers and
California Small Commercial Customers;

          (ii)   tallied number of days recorded between when bills are
generated and when bill payments are received; and

          (iii)  the actual Write-Off percentage, calculated in the same manner
as Net Write-Off Percent except that it is calculated for the applicable
calendar year, for California Residential Customers and California Small
Commercial Customers for the most recent year.

     "Write-Offs" means net amounts written off (including amounts written off
      ----------
that are subsequently recovered) of Billed FTA Revenues that remain unpaid by
California Customers and ESPs as of 180 days after the issuance of the Closing
Bills containing such charges.

                         SECTION 2.  DATA ACQUISITION.

     (a)  Installation and Maintenance of Meters.  Except to the extent that an
          --------------------------------------
ESP is responsible for such services pursuant to an ESP Service Agreement, the
Servicer shall

                                       65
<PAGE>

cause to be installed, replaced and maintained meters in such places and in such
condition as will enable the Servicer to obtain usage measurements for each
California Customer every 27 to 33 days.

     (b)  Meter Reading.  At least once each 27 to 33 days, the Servicer shall
          -------------
obtain usage measurements for each California Customer; provided, however, that
                                                        --------  -------
the Servicer may determine any California Customer's usage on the basis of
estimates in accordance with applicable CPUC Regulations; and provided further
                                                              ----------------
that the Servicer may obtain usage measurements from the Applicable ESP for
California Customers receiving meter reading services from such ESP if the
respective ESP Service Agreement so provides.

     (c)  Cost of Metering.  The Note Issuer shall not be obligated to pay any
          ----------------
costs associated with the metering duties set forth in this Section 2,
including, but not limited to, the costs of installing, replacing and
maintaining meters, and the Note Issuer shall not be entitled to any credit
against the Servicing Fee for any cost savings realized by the Servicer or any
ESP as a result of new metering and/or billing technologies.

                    SECTION 3.  USAGE AND BILL CALCULATION.

     The Servicer shall obtain a calculation of each California Customer's usage
(which may be based on data obtained from such California Customer's meter read
or on usage estimates determined in accordance with applicable CPUC Regulations)
once every 27 to 33 days and shall determine therefrom each California
Customer's individual FTA Charge to be included on such California Customer's
Bill; provided, however, that in the case of California Customers served by an
      --------  -------
ESP under the Full Consolidated ESP Billing option, the Applicable ESP, rather
than the Servicer, shall determine such California Customers'

                                       66
<PAGE>

individual FTA Charges to be included on such California Customers' Bills based
on billing factors provided by the Servicer, and the Servicer shall deliver to
the Applicable ESPs such billing factors as are necessary for the Applicable
ESPs to calculate such California Customers' respective FTA Charges as such
charges may change from time to time pursuant to the True-Up Adjustments.

                             SECTION 4.  BILLING.
                                         -------

     The Servicer shall implement the FTA Charges as of the FTA Effective Date
and shall thereafter bill each California Customer or the Applicable ESP for the
respective California Customer's outstanding current and past due FTA Charges
accruing through the FTA Termination Date, all in accordance with the following:

     (a)  Frequency of Bills; Billing Practices.  In accordance with the
          -------------------------------------
Servicer's then-existing Servicer Policies and Practices for its own charges, as
such Servicer Policies and Practices may be modified from time to time, the
Servicer shall generate and issue a Bill to each California Customer, or, in the
case of a California Customer who has elected Consolidated ESP Billing, to the
Applicable ESP, with respect to such California Customer's respective FTA Charge
once every 27 to 33 days, at the same time, with the same frequency and on the
same Bill as that containing the Servicer's own charges to such California
Customer or ESP, as the case may be.  In the event that the Servicer makes any
material modification to its Servicer Policies and Practices for its own
charges, it shall notify the Note Issuer, the Note Trustee, the Certificate
Trustee, the Infrastructure Bank and Moody's as soon as practicable, and in no
event later than 60 Business Days after such

                                       67
<PAGE>

modification goes into effect; provided, however, that the Servicer may not make
                               --------  -------
any modification that will materially adversely affect the Certificateholders.

     (b)  Format.
          ------

          (i)    Each Bill to a California Customer shall contain the charge
corresponding to the respective FTA Charge owed by such California Customer for
the applicable Billing Period.  Unless it is not practicable for the Servicer's
billing system to do so, the FTA Charge shall appear as a separate line-item on
each Bill.

          (ii)   In the case of each California Customer that has elected
Consolidated ESP Billing, the Servicer shall deliver to the Applicable ESP
itemized charges for such California Customer setting forth such California
Customer's FTA Charge as a separate line-item.

          (iii)  The Servicer shall conform to such requirements in respect of
the format, structure and text of Bills delivered to California Customers and
ESPs as applicable CPUC Regulations shall from time to time prescribe.  To the
extent that Bill format, structure and text are not prescribed by the PU Code or
by applicable CPUC Regulations, the Servicer shall, subject to clauses (i) and
(ii) above, determine the format, structure and text of all Bills in accordance
with its reasonable business judgment, its Servicer Policies and Practices with
respect to its own charges and prevailing industry standards.

     (c)  Delivery. The Servicer shall deliver all Bills to California Customers
          --------
(i) by United States Mail in such class or classes as are consistent with the
Servicer Policies and Practices followed by the Servicer with respect to its own
charges to its customers or (ii) by

                                       68
<PAGE>

any other means, whether electronic or otherwise, that the Servicer may from
time to time use to present its own charges to its customers. In the case of
California Customers that have elected Consolidated ESP Billing, the Servicer
shall deliver all Bills or charges to the Applicable ESPs by such means as are
mutually agreed upon by the Servicer and the Applicable ESP and are consistent
with CPUC Regulations. The Servicer or an ESP, as applicable, shall pay from its
own funds all costs of issuance and delivery of all Bills, including but not
limited to printing and postage costs as the same may increase or decrease from
time to time.

                    SECTION 5.  CUSTOMER SERVICE FUNCTIONS.

     The Servicer shall handle all California Customer inquiries and other
California Customer service matters according to the same procedures it uses to
service California Customers with respect to its own charges.

           SECTION 6.  COLLECTIONS; PAYMENT PROCESSING; REMITTANCE.

     (a)  Collection Efforts, Policies, Procedures.

          (i)  The Servicer shall use reasonable efforts to collect all Billed
Revenues from California Customers and ESPs as and when the same become due
and shall follow such collection procedures as it follows with respect to
comparable assets that it services for itself or others, including with respect
to the following:

               (A)  The Servicer shall prepare and deliver overdue notices to
California Customers and ESPs in accordance with applicable CPUC Regulations and
Servicer Policies and Practices.

                                       69
<PAGE>

               (B)  The Servicer shall apply late payment charges, if any, to
outstanding ESP balances in accordance with applicable CPUC Regulations.  All
late payment charges and interest collected shall be payable to and retained by
the Servicer as a component of its compensation under the Agreement, and the
Note Issuer shall have no right to share in the same.

               (C)  The Servicer shall deliver oral and written past-due and
shut-off notices in accordance with applicable CPUC Regulations and Servicer
Policies and Practices.

               (D)  The Servicer shall adhere to and carry out disconnection
policies and termination of Consolidated ESP Billing in accordance with PU Code
(S) 779.2, CPUC Decision 97-10-087 and applicable CPUC Regulations and Servicer
Policies and Practices.

               (E)  The Servicer may employ the assistance of collection agents
in accordance with applicable CPUC Regulations and Servicer Policies and
Practices.

               (F)  The Servicer shall apply California Customer and ESP
deposits to the payment of delinquent accounts in accordance with applicable
CPUC Regulations and Servicer Polices and Practices and according to the
priorities set forth in Section 6(b)(ii), (iii) and (iv) of this Annex I.

          (ii)  The Servicer shall not waive any late payment charge or any
other fee or charge relating to delinquent payments, if any, or waive, vary or
modify any terms of payment of any amounts payable by a California Customer, in
each case unless such waiver or action (A) would be in accordance with the
Servicer's customary practices or

                                       70
<PAGE>

those of any successor Servicer with respect to comparable assets that it
services for itself and for others; (B) would not materially adversely affect
the rights of the Certificateholders; and (C) would comply with applicable law;
provided, however, that notwithstanding anything in the Agreement or this Annex
I to the contrary, the Servicer is authorized to write off any Billed FTA
Revenues, in accordance with its Servicer Policies and Practices, that remain
outstanding for 180 days after issuance of a Closing Bill.

          (iii) The Servicer shall accept payment from California Customers in
respect of Billed FTA Revenues in such forms and methods and at such times and
places as it accepts for payment of its own charges.  The Servicer shall accept
payment from ESPs in respect of Billed FTA Revenues in such forms and methods
and at such times and places as the Servicer and each ESP shall mutually agree
in accordance with applicable CPUC Regulations.

     (b)  Payment Processing; Allocation; Priority of Payments.

          (i)   The Servicer shall post all payments received to California
Customer or ESP accounts as promptly as practicable, and, in any event,
substantially all payments shall be posted no later than two Servicer Business
Days after receipt.

          (ii)  Subject to clause (iii) below, the Servicer shall apply payments
received to each California Customer's or ESP's account in proportion to the
charges contained on the outstanding Bill to such California Customer or ESP.

          (iii) Any amounts collected by the Servicer that represent partial
payments of the total Bill to a California Customer shall be allocated as
follows (A) first to amounts owed to the Note Issuer, the Seller and the
applicable ESP, regardless of age, in

                                       71
<PAGE>

proportion to their respective percentages of the total amount of their combined
outstanding charges on such Bill, and then (B) to all other outstanding amounts
owed to parties other than the Note Issuer, the Seller and the applicable ESP.

          (iv)  The Servicer shall hold all over-payments for the benefit of the
Note Issuer and the Seller and shall apply such funds to future Bill charges in
accordance with clauses (ii) and (iii) above as such charges become due.

     (c)  Accounts; Records. The Servicer shall maintain accounts and records as
to the Transition Property accurately and in accordance with its standard
accounting procedures and in sufficient detail to permit reconciliation between
payments or recoveries with respect to the Transition Property and the amounts
from time to time remitted to the Collection Account in respect of the
Transition Property.

     (d)  Investment of FTA Payments Received. Prior to remittance on the
applicable Remittance Date, the Servicer may invest FTA Payments received at its
own risk and for its own benefit, and such investments and funds shall not be
required to be segregated from the other investments and funds of the Servicer.

     (e)  Calculation of Collections; Determination of Aggregate Remittance
Amount.

          (i)  On or before each Remittance Date, the Servicer shall calculate,
in accordance with Schedule 6, the total FTA Payments estimated to have been
received by the Servicer from or on behalf of California Customers during the
prior Collection Period in respect of all previously Billed FTA Revenues
("Estimated FTA Collections"), increased or decreased, as applicable, by (A) the
amount of any Remittance Shortfall calculated for such Remittance Date or (B)
the amount of any Excess Remittance calculated for such

                                       72
<PAGE>

Remittance Date and (C) Billed FTA Revenues not accounted for or erroneously
accounted for in prior periods (collectively, the "Aggregate Remittance
Amount").

          (ii)   At the end of each year, on or before the Annual Adjustment
Date in accordance with Section 4.01(b)(i)(1) of the Agreement, the Servicer
shall update the Variables underlying the Daily Collections Curve in Schedule 6
and shall revise such curve to reflect the updated Variables. The Servicer shall
use the revised Daily Collections Curve to update the Monthly Collections Curve.

          (iii)  The Servicer and the Note Issuer acknowledge that the Servicer
has undertaken to make certain changes to its current computerized customer
information system, which changes, when functional, would affect the Servicer's
method of calculating the FTA Payments estimated to have been received by the
Servicer during each Collection Period as set forth in Schedule 6 hereto.

     Should these changes to the computerized customer information system become
functional during the term of the Agreement, the Servicer and the Note Issuer
agree that they shall review the procedures used to calculate the FTA Payments
estimated to have been received, as set forth on Schedule 6, in light of the
capabilities of such new system and shall make such modifications and/or
substitutions to such procedures and to clause (ii) above as may be appropriate
in the interests of efficiency, accuracy, cost and/or system capabilities;
provided, however, that the Servicer may not make any modification or
substitution that will materially adversely affect the Certificateholders.  As
soon as practicable, and in no event later than 60 Business Days after the date
on which all California Customer accounts have been converted for billing under
such new system, the

                                       73
<PAGE>

Servicer shall notify the Note Trustee, the Certificate Trustee, the
Infrastructure Bank and Moody's of the same.

          (iv)   All calculations of collections, each update of the Variables
and any changes in procedures used to calculate the FTA Payments pursuant to
this Section 6(e) shall be made in good faith and in the case of any update
pursuant to clause (ii) or any change in procedures pursuant to clause (iii) in
a manner reasonably intended to provide estimates and calculations that are at
least as accurate as those that would be provided on the Closing Date utilizing
the initial Variables and procedures.

     (f)  Remittances.

          (i)    The Note Issuer shall cause to be established the Collection
Account in the name of the Note Trustee in accordance with the Indenture.

          (ii)   The Servicer shall make or cause to be made remittances to the
Collection Account in accordance with Section 6.11 of the Agreement.

          (iii)  In the event of any change of account or change of institution
affecting the Collection Account, the Note Issuer shall provide written notice
thereof to the Servicer by the earlier of  (A) five Business Days from the
effective date of such change or (B) five Business Days prior to the next
Remittance Date.

                                       74
<PAGE>

                                 Schedule 6 to
                                   Annex I to
                              Servicing Agreement

                   CALCULATION OF AGGREGATE REMITTANCE AMOUNT

     Subject to the terms and conditions of this Agreement, the Servicer shall
calculate the Aggregate Remittance Amount to be remitted to the Collection
Account on a Remittance Date in accordance with this Schedule 6.

I.   Determination of Monthly Collections Curves
     -------------------------------------------

     The following model shall be used to determine the Monthly Collections
Curves for California Residential Customers and California Small Commercial
Customers for each Collection Period.  Such Monthly Collections Curves shall be
used in the Estimation Template described in Section II of this Schedule 6.

     Assumptions
     -----------
     1.   California Customer billing is conducted on a daily basis, and each
month contains 30 days.

     2.   The Monthly Collections Curve has not varied materially over the
course of the year.

     3.   The Monthly Collections Curve is composed of a summation of historical
daily collections receipts curves ("Daily Collections Curves").
                                    ------------------------

     4.   The historical daily collections receipts curve was derived from
California Customer accounts spanning from January 1997 to December 1998.


     5.   The California Customer accounts in 1998 include 38,087 residential
accounts (representing approximately 95% of all California Residential Customer

                                       75
<PAGE>

accounts) and 4,532 small commercial accounts (representing approximately 100%
of all California Small Commercial Customer accounts.)

     6.   The California Customer accounts in 1997 include 37,758 residential
accounts (representing approximately 95% of all California Residential Customer
accounts) and 4,633 small commercial accounts (representing approximately 100%
of all California Small Commercial Customer accounts.

     7.   Each billing month has an estimated collection percentage as shown
below:
                        Estimated Collection Percentages
                        --------------------------------



                       California Residential       California Small
                       ----------------------       ----------------
      Billing Month           Customers           Commercial Customers
      -------------           ---------           --------------------

                                 72%                      28%



Methodology
-----------

     Daily Collections Curves.  In order to determine the Monthly Collections
     ------------------------
Curves, the Servicer must first determine the Daily Collections Curves.  To
derive the Daily Collections Curves, the Servicer  recorded the number of days
between when a particular bill was generated and when full payment was received.
A tally was developed to record each payment experience for the sample.
California Residential Customer accounts and California Small Commercial
Customer accounts were tallied separately.  Once the tallies were complete, the
Servicer expressed each day's tally sum as a percentage of the total number of
bills generated in the sample (i.e., 72% for California Residential Customers
and 28% for California Small Commercial Customers).

                                       76
<PAGE>

     Monthly Collections Curves.  To derive the Monthly Collections Curves, the
     --------------------------
Servicer assumed that the daily collection payment pattern was the same for
bills sent on each day of the month and that the billed amounts for a given
month are spread evenly over each day of the month.  Thus, the daily payments
received as a percent of the monthly billed can be determined for each day's
billing.  Each daily percentage shown in Attachments A and B, was multiplied by
1/30 to simulate one day's worth of collections.  Then, the Servicer took the
cumulative sum for each day (Day 1, Day 1 + Day 2, Day 1 + Day 2 + Day 3, etc.)
to produce the Monthly Collections curves shown in Attachment A to this Schedule
6.

II.  Estimation Template for Calculation of Estimated FTA Collections
     ----------------------------------------------------------------

     The Servicer shall use the Estimation Template described below to calculate
the FTA Payments estimated to have been received during the Collection Period
relating to each Remittance Date (prior to any adjustment for any Remittance
Shortfall, any Excess Remittance or any FTA Revenues not accounted for in prior
periods) (the "Estimated FTA Collections").  The Servicer shall calculate the
               -------------------------
Estimated FTA Collections separately for California Residential Customers and
California Small Commercial Customers.  In such calculations, the Servicer shall
use the Monthly Collections Curves described in Section I of this Schedule 6 in
the Estimation Template.

Where:
      M      = [a calendar month]
      n      = [the calendar month immediately prior to the Remittance Date]
               M\\(n)\\ =  the Collection Period [for which Estimated
               Collections are calculated and remitted on the Remittance Date,
               as well as the Current Billing Period with respect to such
               Remittance Date]
               A        =  percentage collected of the total Billed FTA Revenues
               billed during the Current Billing Period

                                       77
<PAGE>

               B  = percentage collected of the total Billed FTA Revenues billed
                    during the Billing Period prior to the Current Billing
                    Period

               C  = percentage collected of the total Billed FTA Revenues billed
                    during the Billing Period two periods prior to the Current
                    Billing Period

               D  = percentage collected of the total Billed FTA Revenues billed
                    during the Billing Period three periods prior to the Current
                    Billing Period

               E  = percentage collected of the total Billed FTA Revenues billed
                    during the Billing Period four periods prior to the Current
                    Billing Period

               F  = percentage collected of the total Billed FTA Revenues billed
                    during the Billing Period five periods prior to the Current
                    Billing Period

               R  = Billed FTA Revenues for a Billing Period

               S  = Estimated FTA Collections for the Collection Period
Then:

     For the Collection Period, Estimated FTA Collections (prior to any
     adjustments) equal (S) as shown in the Estimation Template below.  For each
     Collection Period, (S) is calculated separately for California Residential
     Customers and California Small Commercial Customers.

------------------------------------------------------------------------------
                                        Collection Percent     Estimated FTA
                Billed FTA Revenues        from Monthly       Collections in
     Period    for Billing Period/1/    Collection Curve/2/  Collection Period
-------------------------------------------------------------------------------
M\\(n-5)\\          R\\(n-5)\\                   F            (F)(R\\(n-5)\\)
-------------------------------------------------------------------------------
M\\(n-4)\\          R\\(n-4)\\                   E            (E)(R\\(n-4)\\)
-------------------------------------------------------------------------------
M\\(n-3)\\          R\\(n-3)\\                   D            (D)(R\\(n-3)\\)
-------------------------------------------------------------------------------
M\\(n-2)\\          R\\(n-2)\\                   C            (C)(R\\(n-2)\\)
-------------------------------------------------------------------------------
M\\(n-1)\\          R\\(n-1)\\                   B            (B)(R\\(n-1)\\)
-------------------------------------------------------------------------------

M\\(n)  \\          R\\(n)  \\                   A             (A)(R\\(n)\\)
-------------------------------------------------------------------------------
Total                                                                S
-------------------------------------------------------------------------------

Notes:
/1/ The Billed FTA Revenues (R) for multiple prior Billing Periods will be zero
    during the phase-in of the FTA Charges following the FTA Effective Date.
    Similarly, the Billed FTA Revenues for multiple succeeding Billing Periods
    will be zero during the phase-out of the FTA Charges following the FTA
    Termination Date.

/2/ The Collection Percent (A, B, C, D, E, or F) is the collection percent in
    effect at the time the FTA Charges were billed based on the Monthly
    Collections Curve then in effect.

                                       78
<PAGE>

III.   Calculation of the Aggregate Remittance Amount
       ----------------------------------------------

       The Servicer shall use the Estimated FTA Collections calculated for
California Residential Customers and California Small Commercial Customers under
Estimation Template described in Section II of this Schedule 6 to calculate the
Aggregate Remittance Amount for the Collection Period.  Subject to the terms and
provisions of this Agreement, the Servicer shall determine the Aggregate
Remittance Amount (Z) to be remitted on a Remittance Date as follows:

Where:
        M\\(n+1)\\  =  a calendar month containing a Remittance Date
        M\\(n)\\    =  a Collection Period
        S\\(r)(n)\\ =  Estimated FTA Collections for California Residential
                       Customers during a Collection Period
        S\\(s)(n)\\ =  Estimated FTA Collections for California Small Commercial
                       Customers during a Collection Period
        X\\(r)\\    =  Remittance Shortfall (Excess Remittance) for California
                       Residential Customers for a Remittance Date, if any
        X\\(s)\\    =  Remittance Shortfall (Excess Remittance) for California
                       Small Commercial Customers for a Remittance Date, if any
        Y\\(n)\\    =  Billed FTA Revenues not accounted for or erroneously
                       accounted for in prior periods, if any
        Z\\(n+1)\\  =  Aggregate Remittance Amount to be remitted on a
                       Remittance Date

Then:
     the Aggregate Remittance Amount to be remitted on the Remittance Date
     (Z\\(n+1)\\) shall be determined as follows:

 Z\\(n+1)\\  =  S\\(r)(n)\\  + S\\(s)(n)\\  +  X\\(r)\\ + X\\(s)\\  + Y\\(n)\\

                                       79
<PAGE>

                                              Attachment A Schedule 6 to Annex I
                                                          to Servicing Agreement

<TABLE>
<CAPTION>
                                                                         Residential      Eligible
                                                                          Customers        Small
                                                                                         Commercial
                                                                                         Customers
<S>                                                                     <C>            <C>
Percent of billed amounts collected in current month                           56.60%          56.60%
Percent of billed amounts collected in second month after billing              37.30%          37.30%
Percent of billed amounts collected in third month after billing                5.00%           5.00%
Percent of billed amounts collected in fourth month after billing               0.45%           0.45%
Percent of billed amounts collected in fifth month after billing                0.45%           0.45%
Percent of billed amounts collected in sixth month after billing                  --              --
</TABLE>

                                       80
<PAGE>

                                  Annex II to
                              Servicing Agreement

                     ROUTINE QUARTERLY TRUE-UP ADJUSTMENTS


     SECTION 1.  Series 1999-1.  (a) The Servicer shall not perform Routine
                 -------------
Quarterly True-Up Adjustments for the SPPC Funding LLC Notes, Series 1999-1.

                                       81
<PAGE>

                                                                       Exhibit A


                    [FORM OF MONTHLY SERVICER'S CERTIFICATE]

                                       82
<PAGE>

                         Monthly Servicer's Certificate

 California Infrastructure and Economic Development Bank Special Purpose Trust
                                     SPPC-1
          $24,000,000 6.40% Rate Reduction Certificates, Series 1999-1



     Pursuant to Section 3.01(b)(i) of the Transition Property Servicing
Agreement dated as of April 9, 1999 (the "Agreement") between Sierra Pacific
Power Company, as Servicer, and SPPC Funding LLC, as Note Issuer, the Servicer
does hereby certify as follows:

     Capitalized terms used in the Monthly Servicer's Certificate (the "Monthly
Certificate") have their respective meanings as set forth in the Agreement.
References herein to certain sections and subsections are references to the
respective sections of the Agreement.

Collection Period:  XXX



     Line No.       BILLED REVENUE SUMMARY
     --------       ----------------------


          1         Current Monthly Billing Period


          2         Residential KWh Billed (Pre-True Up)


          3         Residential KWh Billed (Post-true Up)


          4         Residential FTA Charge (Pre-True Up)


          5         Residential FTA Charge (Post-True Up)


          6         Small Commercial KWh Billed (Pre-True Up)


          7         Small Commercial KWh Billed (Post-True Up)


          8         Small Commercial FTA Charge (Pre-True Up)


          9         Small Commercial FTA Charge (Post-True Up)


                    Current Period Billed FTA Revenues


         10         Residential


         11         Small Commercial


         12         Total


         13         FTA Revenues Not Accounted For in Prior Periods


         14         Residential G&E Net Write-Offs as % of G&E Billed Revenues

         15         CIA G&E Net Write-Offs as % of G&E Billed Revenues

                                       83
<PAGE>

                        Exhibit A of Servicing Agreement

                          SIERRA PACIFIC POWER COMPANY

<TABLE>
<CAPTION>
                                          FTA REVENUES REMITTED TO TRUSTEE
---------------------------------------------------------------------------------------------------------------------
                                     Monthly Residential Remittance Percentages
--------------------------------------------------------------------------------------------------------------------
<S>          <C>                    <C>         <C>         <C>          <C>         <C>         <C>         <C>
   Line No.                         30 Days     60 Days     90 Days     120 Days    150 Days    180 Days     Total
             1  Billed DTA Rev          0.00%       0.00%       0.00%        0.00%       0.00%       0.00%      0.00%

             2  [Mo.]

             3  [Mo.]

             4  [Mo.]

             5  [Mo.]

             6  [Mo.]

             7  [Mo.]

             8  Total

                Write-off Reconciliation
                ------------------------

             9  xxx Period Billed FTA Revenues

            10  xx FTA Residential Net Write-Offs

            11  xx Net Billed FTA Revenues

            12  Amount Previously Remitted to Trust

            13  Write-Off Adjustment

            14  Aggregate Residential Remittance Amount

                                  Monthly Small Commercial Remittance Percentages

                                    30 Days     60 Days     90 Days     120 Days    150 Days    180 Days     Total
            15  Billed DTA Rev          0.00%       0.00%       0.00%        0.00%       0.00%       0.00%      0.00%

            16  [Mo.]

            17  [Mo.]

            18  [Mo.]

            19  [Mo.]

            20  [Mo.]

            21  [Mo.]

            22  Total

                Write-off Reconciliation
                ------------------------

            23  xx Period Billed FTA Revenues

            24  xx FTA Small Commercial Net Write-Offs

            25  xx Net Billed FTA Revenues

            26  Amount Previously Remitted to Trust

            27  Write-off Adjustment

            28  Aggregate Small Commercial Remittance Amount

                AGGREGATE REMITTANCE AMOUNT
                ---------------------------

            29  Residential Remittance Amount

            30  Small Commercial Remittance Amount

            31  Total

            32  FTA Revenues Not Accounted For in Prior Period

            33  Aggregate FTA Remittances for xxx Billing Period

            34  Aggregate FTA Remittances for xxx Billing Period

            35  Aggregate FTA Remittance for xxx Billing Period

            36  Total FTA Remittances for xxx Payment Date
</TABLE>

                                       84
<PAGE>

                        Exhibit A of Servicing Agreement

                          SIERRA PACIFIC POWER COMPANY


     IN WITNESS HEREOF, the undersigned has duly executed and delivered this
Monthly Servicer's Certificate ________________ day of _____, _____.

                         SIERRA PACIFIC POWER COMPANY, as Servicer



                         By:  _______________________________
                              [SPPC Officer]
                              [Title of Officer]

                                       85
<PAGE>

                                   Exhibit B

                      [FORM OF CERTIFICATE OF COMPLIANCE]

     The undersigned hereby certifies that he/she is the duly elected and acting
___________ of Sierra Pacific Power Company, as servicer (the "Servicer") under
the Transition Property Servicing Agreement, dated as of April 9, 1999 (the
Servicing Agreement"), between the Servicer and SPPC Funding LLC (the "Note
Issuer") and further that:

     1.   A review of the activities of the Servicer and of its performance
under the Servicing Agreement during the twelve months ended June 30, ___ has
been made under the supervision of the undersigned pursuant to Section 3.03 of
the Servicing Agreement; and

     2.   To the best of the undersigned's knowledge, based on such review, the
Servicer has fulfilled all of its material obligations in all material respects
under the Servicing Agreement throughout the twelve months ended June 30, ___,
except for those material defaults in the fulfillment of material obligations
listed on Annex A hereto.

     Executed as of this ___ day of ______________.


                              SIERRA PACIFIC POWER COMPANY

                              ______________________________________
                              By:
                              Name:
                              Title:

                                       86
<PAGE>

                                  Annex A to
                                Certificate of
                                  Compliance
                           List of Servicer Defaults
                           -------------------------

     The following material defaults known to the undersigned occurred during
the year ended June 30, ___:


                Nature of Default                   Status
                -----------------                   ------


                                       87
<PAGE>

                                   Exhibit C

           [FORM OF ROUTINE ANNUAL TRUE-UP MECHANISM ADVICE LETTER]

                                    December ____, _____

                                ADVICE ______-E

            PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
                                ENERGY DIVISION


SUBJECT:  Annual FTA Charge True-Up Mechanism Advice Filing

     Pursuant to California Public Utilities Commission (CPUC) Decision No.
____________ (Decision), Ordering Paragraph No. __, Sierra Pacific Power Company
(SPPC) as servicer of the Rate Reduction Bonds and on behalf of  SPPC Funding
LLC is required to apply for adjustment to FTA charges at least [15] days before
the end of each calendar year.

PURPOSE
-------

     This filing establishes revised FTA charges for rate schedules for
residential and eligible small commercial customers.  During the rate-freeze
period, changes in the FTA charges will be offset by equal and offsetting
changes in the residual Competition Transition Charge (CTC) component of
customers' rates.

                                       88
<PAGE>

BACKGROUND
----------

     In Decision ____________, the Commission authorized SPPC to file routine
True-Up Mechanism Advice Letters on an annual basis, at least [15] days before
the end of the calendar year.  Routine Advice Letter filings are those in which
SPPC uses the methodology found reasonable by the Commission in Decision No.
____________ to revise existing FTA charges.

     Using the Methodology approved by the Commission in Decision No.
____________, this filing modifies the variables used in the FTA charge
calculation and provides the resulting modified FTA charges.  Table 1 shows the
revised assumptions for each of the variables used in calculating the FTA
charges for residential and small commercial customers.  The assumptions
underlying the current FTA charges were filed in Advice ____, as authorized by
Decision No.____________.  Attachment 1 shows the revised payment schedule.

                                       89
<PAGE>

                       Exhibit C of Servicing Agreement

                                    TABLE I
                     Input Values For Revised FTA Charges

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                                                Eligible
                                                                                                 Small
                                                                              Residential      Commercial
                                                                               Customers       Customers
<S>                                                                          <C>             <C>
-----------------------------------------------------------------------------------------------------------------
Monthly kWH sales:
-----------------------------------------------------------------------------------------------------------------
     January
-----------------------------------------------------------------------------------------------------------------
     February
-----------------------------------------------------------------------------------------------------------------
     March
-----------------------------------------------------------------------------------------------------------------
     April
-----------------------------------------------------------------------------------------------------------------
     May
-----------------------------------------------------------------------------------------------------------------
     June
-----------------------------------------------------------------------------------------------------------------
     July
-----------------------------------------------------------------------------------------------------------------
     August
-----------------------------------------------------------------------------------------------------------------
     September
-----------------------------------------------------------------------------------------------------------------
     October
-----------------------------------------------------------------------------------------------------------------
     November
-----------------------------------------------------------------------------------------------------------------
     December
-----------------------------------------------------------------------------------------------------------------
Residential and eligible small commercial bill
     [month, year]
-----------------------------------------------------------------------------------------------------------------
Percent of residential customers' and elibible small
     commercial customers' billed amounts expected to be uncollected
-----------------------------------------------------------------------------------------------------------------
Percent of billed amounts collected in current month
-----------------------------------------------------------------------------------------------------------------
Percent of billed amounts collected in second month after billing
-----------------------------------------------------------------------------------------------------------------
Percent of billed amounts collected in third month after billing
-----------------------------------------------------------------------------------------------------------------
Percent of billed amounts collected in fourth month after billing
-----------------------------------------------------------------------------------------------------------------
Percent of billed amounts collected in fifth month after billing
-----------------------------------------------------------------------------------------------------------------
Percent of billed amounts collected in sixth month after billing
-----------------------------------------------------------------------------------------------------------------
                                                                                               For Series
-----------------------------------------------------------------------------------------------------------------
Quarterly Overcollateralization amount
-----------------------------------------------------------------------------------------------------------------
Quarterly Servicing Fee as percent of outstanding balance
-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                       90
<PAGE>

<TABLE>
<S>                                                          <C>
-----------------------------------------------------------------------------------------------------------------
Quarterly ongoing transaction expenses
-----------------------------------------------------------------------------------------------------------------
Expected outstanding RRB principal balance as of 12/31/__
-----------------------------------------------------------------------------------------------------------------
Undercollection of principal to be reflected in the new FTA charges
-----------------------------------------------------------------------------------------------------------------
Reserve Subaccount balance to be reflected in the new FTA charges
-----------------------------------------------------------------------------------------------------------------
Difference between Overcollateralization Subaccount balance and Required
 Overcollaterization Level to be reflected in the new FTA charges
-----------------------------------------------------------------------------------------------------------------
Difference between Capital Subaccount balance and Required Capital
     Level to be reflected in the new FTA charges
-----------------------------------------------------------------------------------------------------------------
</TABLE>

Table II shows the revised FTA charges calculated for residential and eligible
small commercial customers.  The FTA calculations are shown in Attachment 2.

                                   Table II

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>
Residential Customer FTA Charge                                          c/kWh
-----------------------------------------------------------------------------------------------------------------
Eligible Small Commercial Customer FTA Charge                            c/kWH
-----------------------------------------------------------------------------------------------------------------
</TABLE>

     Attached are proposed changes to Part 1 of SPPC's Preliminary Statement to
show FTA charges to be effective January 1, _____.

EFFECTIVE DATE
--------------

     In accordance with Decisions ____________, Routine True-Up Mechanism Advice
Letters for required annual FTA charge adjustments shall be filed at least [15]
days before the end of each calendar year and these adjustments to FTA charges
shall be effective at the beginning of the next calendar year.  No Commission
resolution is required.  Therefore, these FTA charges shall be effective January
1, ____ through December 31, ____.

NOTICE
------

     Copies of this filing are being furnished to the parties on the attached
service list and to parties to ______________.  In accordance with Public
Utilities Code (S)491, notice to the public is hereby given by filing and
keeping this filing open for public inspection at the SPPC's corporate
headquarters.

Enclosures
cc:  CPUC, SF - Attn: Paul Clanon, Energy Division
     CPUC, SF - Attn: Elena Schmid, ORA
     CPUC, SF - Attn: Juanita Porter, Energy Division
     CPUC, SF - Attn: Wade McCartney, Energy Division

                                       91
<PAGE>

                       Exhibit D of Servicing Agreement


             [FORM OF ANNIVERSARY TRUE-UP MECHANISM ADVICE LETTER]


                               August ___, ____



ADVICE ______-E
(U39E)

            PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
                                ENERGY DIVISION


SUBJECT:  Anniversary FTA Charge True-Up Mechanism Advice Filing


     Pursuant to California Public Utilities Commission (CPUC) Decision No.
__________ (Financing Order), Ordering Paragraphs Nos. __ and __, Sierra Pacific
Power Company (SPPC) as servicer of the Rate Reduction Bonds (RRBs) and on
behalf of SPPC Funding LLC is required to file a True-Up Mechanism Advice Letter
at least 15 days before each anniversary of the issuance of the Financing Order.

PURPOSE
-------

     This filing establishes that the FTA charges currently in effect are
adequate to service the RRBs, that no event of default has occurred and is
continuing on the RRBs, and that no adjustments to the FTA charges are required
at this time.

BACKGROUND
----------

     In the Financing Order, the Commission ordered SPPC to file a True-Up
Mechanism Advice Letter at least 15 days before each anniversary of the issuance
of the Financing Order, stating whether an adjustment to the FTA charges is
necessary.

     Table 1 shows the RRB principal balance and the balances in the Collection
Account subaccounts immediately following distributions made on ______, ___,
_____.  The assumptions underlying the current FTA charges were filed in Advice
______-E, as authorized by the Financing Order.

                                       92
<PAGE>

                        Exhibit D of Service Agreement

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                  TABLE 1

RRB Principal Balance and Collection Account  Subaccount Balances
-----------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>
Scheduled RRB Principal Balance
-----------------------------------------------------------------------------------------------------------------
RRB Principal Balance
-----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
Reserve Subaccount Balance
-----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
Required Overcollateralization Level
-----------------------------------------------------------------------------------------------------------------
Overcollateralization Subaccount Balance
-----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
Required Capital Level
-----------------------------------------------------------------------------------------------------------------
Capital Subaccount Balance
-----------------------------------------------------------------------------------------------------------------
</TABLE>

EFFECTIVE DATE
--------------

     In accordance with the Financing Order, the Commission shall determine on
this Financing Order Issuance Anniversary, as required by PU Code Section
841(c), whether adjustments to the FTA charges are required, with the resulting
adjustments to the FTA charges, if necessary, to be implemented within 90 days
of this Financing Order Issuance Anniversary.

NOTICE
------

     Copies of this filing are being furnished to the parties on the attached
service list and to parties to ___________.  In accordance with Public Utilities
Code (S)491, notice to the public is hereby given by filing and keeping this
filing open for public inspection at the SPPC's corporate headquarters.



cc:  CPUC, SF - Attn:  Paul Clanon, Energy Division
     CPUC, SF - Attn:  Elena Schmid, ORA
     CPUC, SF - Attn:  Juanita Porter, Energy Division
     CPUC, SF - Attn:  Wade McCartney, Energy Division

                                       93
<PAGE>

                                   Exhibit E


                  [FORM OF QUARTERLY SERVICER'S CERTIFICATE]

                       Quarterly Servicer's Certificate
 California Infrastructure and Economic Development Bank Special Purpose Trust
                                    SPPC-1
         $24,000,000 6.40% Rate Reduction Certificates, Series 1999-1

     Pursuant to Section 4.01(d)(ii) of the Transition Property Servicing
Agreement dated as of April 9, 1999 (the "Agreement") between Sierra Pacific
Power Company, as Servicer, and SPPC Funding LLC, as Note Issuer, the Servicer
does hereby certify as follows:

Capitalized terms used in the Quarterly Servicer's Certificate (the "Quarterly
Certificate") have the respective meanings as set forth in the Agreement.
References herein to certain sections and subsections are references to the
respective sections of the Agreement.

                              Collection Periods:

                              Distribution Date:

     1.   Collections Allocable and Aggregate Amounts Available for the Current
Distribution Date:

          i.     Remittances for the xxx Collection Period

          ii.    Remittances for the xxx Collection Period

          iii.   Remittances for the xxx Collection Period

          iv.    Net Earnings on Collection Account

          v.     General Sub-Account Balance

          vi.    Reserve Sub-Account Balance

          vii.   Overcollateralization Sub-Account Balance

          viii.  Capital Sub-Account Balance

          ix.    Collection Account Balance

     2.   Outstanding Principal Balance and Collection Account Balance as of
Prior Distribution Date:

          i.     Rate Reduction Certificate Principal Balance

          ii.    Reserve Sub-Account Balance

          iii.   Overcollateralization Sub-Account Balance
          iv.    Capital Sub-Account Balance

     3.   Required Funding/Payments as of Current Distribution Date:

                                       94
<PAGE>

          i.     Projected Certificate Balance

          ii.    Required Overcollateralization Funding
          iii.   Required Capital Sub-Account Funding

     4.   Allocation of Remittances as of Current Distribution Date Pursuant to
8.02(d) of Indenture:

          i.     Note Trustee, Delaware Trustee, Certificate Trustee and Letter
of Credit Bank Fees

          ii.    Quarterly Servicing Fee

          iii.   Quarterly Administration Fee

          iv.    Operating Expenses (subject to $100,000 cap)

          v.     Quarterly Interest

          vi.    Quarterly Principal

          vii.   Operating Expenses (in excess of $100,000)

          viii.  Funding of Overcollateralization Sub-Account (to required
level)

          ix.    Funding of Capital Sub-Account (to required level)

          x.     Net Earnings Released to Note Issuer

          xi.    Deposits to Reserve Sub-Account

     5.   Outstanding Principal Balance and Collection Account Balance as of
Current Distribution Date (after giving effect to payments to be made on such
distribution date):

          i.     Rate Reduction Certificate Principal Balance

          ii.    Reserve Sub-Account Balance

          iii.   Overcollateralization Sub-Account Balance

          iv.    Capital Sub-Account Balance

     6.   Sub-Account Draws as of Current Distribution Date (if applicable,
pursuant to Section 8.02(e) of Indenture):

          i.     Reserve Sub-Account

          ii.    Overcollateralization Sub-Account

          iii.   Capital Sub-Account

          iv.    Total Draws

                                       95
<PAGE>

     7.   Shortfalls in Interest and Principal Payments as of Current
Distribution Date:

          i.   Quarterly Interest

          ii.  Quarterly Principal

8. Shortfalls in Required Sub-Account Levels as of Current Distribution Date:

          i.   Overcollateralization Sub-Account

          ii.  Capital Sub-Account

     IN WITNESS HEREOF, the undersigned has duly executed and delivered this
Quarterly Servicer's Certificate this _____ day of ______, ____.


                              SIERRA PACIFIC POWER COMPANY,
                              as Servicer


                              By:_____________________________________
                                                   [SPPC Officer]
                                 [Title of Officer]

                                       96
<PAGE>

                    Schedule 4.01(a) of Servicing Agreement

                        Expected Amortization Schedule
                        ------------------------------
                    Expected Outstanding Principal Balance
                    --------------------------------------

                                                        Principal
                                                        ---------
          Date                                            Balance
          ----                                            -------
          Series Issuance Date                         24,000,000
          June 1999                                    23,835,891
          September 1999                               23,041,136
          December 1999                                22,200,000
          March 2000                                   21,299,918
          June 2000                                    20,684,942
          September 2000                               20,250,699
          December 2000                                19,800,000
          March 2001                                   19,096,231
          June 2001                                    18,414,470
          September 2001                               17,916,149
          December 2001                                17,400,000
          March 2002                                   16,672,262
          June 2002                                    16,004,913
          September 2002                               15,511,075
          December 2002                                15,000,000
          March 2003                                   14,282,359
          June 2003                                    13,616,856
          September 2003                               13,116,903
          December 2003                                12,600,000
          March 2004                                   11,887,191
          June 2004                                    11,225,485
          September 2004                               10,721,050
          December 2004                                10,200,000
          March 2005                                    9,492,845
          June 2005                                     8,834,639
          September 2005                                8,325,463
          December 2005                                 7,800,000
          March 2006                                    7,098,379
          June 2006                                     6,443,724
          September 2006                                5,929,841
          December 2006                                 5,400,000
          March 2007                                    4,703,935
          June 2007                                     4,052,829
          September 2007                                3,534,229
          December 2007                                 3,000,000


                                       97
<PAGE>

          March 2008                                    2,309,493
          June 2008                                     1,661,939
          September 2008                                1,138,619
          December 2008                                   600,000
          March 2009                                            0
          Weighted Average                             5.06 years

                                       98