<PAGE>


                                                                 EXHIBIT (10)(B)


                TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT


                                    between


                               SPPC FUNDING LLC


                                  Note Issuer


                                      and


                         SIERRA PACIFIC POWER COMPANY


                                    Seller



                           Dated as of April 9, 1999

                                       1
<PAGE>

                TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT

TRANSITION PROPERTY PURCHASE AND SALE 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 Seller
------
(the "Seller").
      ------

     WHEREAS, the Note Issuer desires to purchase the Transition Property
created pursuant to the PU Code, the Financing Order and the Issuance Advice
Letter; and

     WHEREAS, the Seller is willing to sell such Transition Property to the Note
Issuer.

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

                                   ARTICLE I

                                  Definitions
                                  -----------

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

     "Agreement" means this Transition Property Purchase and Sale Agreement, as
      ---------
the same may be amended and supplemented from time to time.

     "Basic Documents" has the meaning assigned to that term in the Indenture.
      ---------------

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

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

     "Certificateholder" has the meaning assigned to that term in the Trust
      -----------------
Agreement.

                                       2
<PAGE>

     "Certificates" means the Series of Certificates issued under the Trust
      ------------
Agreement whose Series Issuance Date is the date of this Agreement.

     "Closing Date" has the meaning assigned to that term in the Indenture.
      ------------

     "Collection Account" has the meaning assigned to that term in the
      ------------------
Indenture.

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

     "CPUC" means the California Public Utilities Commission or any successor in
      ----
interest.

     "CPUC Regulations" has the meaning assigned to that term in the Servicing
      ----------------
Agreement.

     "Date of Breach" means, with respect to the repurchase obligation specified
      --------------
in Section 5.01(b), the date of breach of a representation and warranty that
triggers such repurchase obligation.

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

     "Expected Amortization Schedule" has the meaning assigned to that term in
      ------------------------------
the Servicing Agreement.

     "Financing Order" means the order of the CPUC, Decision 98-10-021, issued
      ---------------
as of October 8, 1998, which became effective on November 12, 1998.

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

     "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.

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

     "Infrastructure Bank Issuance Resolution" means Resolution No. B99-27
      ---------------------------------------
adopted by the Infrastructure Bank on March 9, 1999.

     "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

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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.

     "Issuance Advice Letter" means Advice No. 206-E (U-903-E), dated March 31,
      ----------------------
1999, filed with the CPUC by the Seller pursuant to the Financing Order.

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

     "Losses" has the meaning assigned to that term in Section 5.01(e).
      ------

     "Moody's" has the meaning assigned to that term in the Indenture.
      -------

     "Note Issuer" has the meaning assigned to that term in the heading of this
      -----------
Agreement.

     "Note Trustee" means the Person acting as trustee under the Indenture.
      ------------

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

     "Notes" means the Series of Notes issued under the Indenture whose Series
      -----
Issuance Date is the date of this Agreement.

     "Officer's Certificate" means a certificate signed by the chairman of the
      ---------------------
board, the president, the vice chairman of the board, any vice president, the
treasurer, any assistant treasurer, the secretary or any assistant secretary of
the Seller.

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

     "Outstanding Amount" has the meaning assigned to that term in the
      ------------------
Indenture.

     "Overcollateralization Amount" has the meaning assigned to that term in the
      ----------------------------
Servicing Agreement.

     "Person" means any individual, corporation, limited liability company,
      ------
estate, partnership, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or government
or any agency or political subdivision thereof.

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

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<PAGE>

     "Repurchase Date" means the date that is five Business Days after the date
      ---------------
that is (i) if the terms of Section 5.01(b)(i)(A) and Section 5.01(b)(i)(B)(ii)
are applicable, two Business Days after the Date of Breach if the Seller fails
to make the deposit required by such Section or 90 days after the Date of Breach
if the Seller makes the deposit required by such Section, (ii) if the terms of
Section 5.01(b)(ii) are applicable, 30 days after the Seller receives written
notice from the Note Trustee or the Certificate Trustee or otherwise becomes
aware of such breach and (iii) if the terms of Section 5.01(b)(i)(A) and Section
5.01(b)(i)(B)(i) are applicable, 90 days after the Date of Breach.

     "Repurchase Price" has the meaning assigned to that term in Section
      ----------------
5.01(b)(i).

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

     "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 Trust Agreement.
      ------

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

     "Servicer Default" means an event specified in Section 7.01 of the
      ----------------
Servicing Agreement.

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

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

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

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

     "Transition Property" means the "Transition Property" contemplated by the
      -------------------
Financing Order and specifically described in the Issuance Advice Letter.

     "Trust" has the meaning assigned to that term in the Trust Agreement.
      -----

                                       5
<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 Property" has the meaning assigned to that term in the Trust
      --------------
Agreement.

     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 and Exhibit
references contained in this Agreement are references to Sections, Schedules and
Exhibits 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

                       Conveyance of Transition Property
                       ---------------------------------

     SECTION 2.01.  Conveyance of Transition Property. In consideration of the
                    ---------------------------------
Note Issuer's delivery to or upon the order of the Seller of $22,322,405, the
Seller does hereby irrevocably sell, transfer, assign, set over and otherwise
convey to the Note Issuer, without recourse (subject to the obligations herein),
all right, title and interest of the Seller in and to the Transition Property
(such sale, transfer, assignment, set over and conveyance of the Transition
Property includes, to the fullest extent permitted by the Statute, the
assignment of all revenues, collections, claims, rights, payments, money or
proceeds of or arising from the FTA Charges pursuant to the Financing Order and
the Issuance Advice Letter). Such sale, transfer, assignment, set over and
conveyance is hereby expressly stated to be a sale and, pursuant to Section
844(a) of the PU Code, shall be treated as an absolute transfer of all of the
Seller's right, title and interest (as in a true sale), and not as a pledge or
other financing, of the Transition Property. This is the statement referred to
in Section 844(a) of the PU Code. If such sale, transfer, assignment, set over
and conveyance is held not to be a true sale as contemplated by Section 844(a)
of the PU Code, then such sale, transfer, assignment, set over and conveyance
shall be treated as a pledge of the Transition Property, and the Seller shall be
deemed to have granted a security interest to the Note Issuer in the Transition
Property. The Seller takes the position that it has no rights in the Transition
Property to which such a security interest could attach because it has sold all
rights in

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the Transition Property to the Note Issuer pursuant to Section 844(a) of the PU
Code.

                                  ARTICLE III

                   Representations and Warranties of Seller
                   ----------------------------------------

     The Seller makes the following representations and warranties, as of the
Closing Date, on which the Note Issuer has relied in acquiring the Transition
Property. The representations and warranties shall survive the sale of the
Transition Property to the Note Issuer and the pledge thereof to the Note
Trustee pursuant to the Indenture.

     SECTION 3.01.  Organization and Good Standing. The Seller is duly organized
                    ------------------------------
and validly existing as a corporation in good standing under the laws of the
State of Nevada, with the power and authority in all jurisdictions in which it
operates to own its properties and to conduct its business as such properties
are currently owned and such business is presently conducted, and had at all
relevant times, and has, the requisite power, authority and legal right to own
the Transition Property.

     SECTION 3.02.  Due Qualification.  The Seller 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 shall require such
qualifications, licenses or approvals (except where the failure to so qualify
would not be reasonably likely to have a material adverse effect on the Seller's
business, operations, assets, revenues, properties or prospects).

     SECTION 3.03.  Power and Authority.  The Seller has the requisite power and
                    -------------------
authority to execute and deliver this Agreement and to carry out its terms; the
Seller has full power and authority to sell and assign the Transition Property
to be sold and assigned to the Note Issuer and the Seller has duly authorized
such sale and assignment to the Note Issuer by all necessary corporate action;
and the execution, delivery and performance of this Agreement has been duly
authorized by the Seller by all necessary corporate action.

     SECTION 3.04.  Binding Obligation.  This Agreement constitutes a legal,
                    ------------------
valid and binding obligation of the Seller 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, good
faith and fair dealing), regardless of whether considered in a proceeding in
equity or at law.

     SECTION 3.05.  No Violation.  After giving effect to the release of the
                    ------------
lien of the Seller Mortgage on the Transition Property, the consummation of the
transactions contemplated by this Agreement and the fulfillment of the terms
hereof do 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 Seller, or any
indenture, agreement or

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<PAGE>

other instrument to which the Seller 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 Seller of any
court or of any Federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the Seller or its
properties.

     SECTION 3.06.  No Proceedings.  There are no proceedings or investigations
                    --------------
pending or, to the Seller's knowledge, threatened, before any court, Federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Seller or its properties involving
or relating to the Seller or the Note Issuer or, to the Seller's knowledge, any
other Person: (i) asserting the invalidity of this Agreement, the Indenture, the
Trust Agreement or 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, 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 Seller 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) which might adversely affect the Federal or state income tax attributes of
the Notes or the Certificates.

     SECTION 3.07.  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 Seller of this Agreement, the
performance by the Seller of the transactions contemplated hereby or the
fulfillment by the Seller of the terms hereof, except those that have been
obtained or made and those that the Seller, in its capacity as Servicer under
the Servicing Agreement, is required to make in the future pursuant to Article
IV of the Servicing Agreement.

     SECTION 3.08.  The Transition Property.
                    -----------------------

     (a)  Information. At the Closing Date, all information provided by the
          -----------
Seller to the Note Issuer with respect to the Transition Property (including the
Expected Amortization Schedule, the Financing Order and the Issuance Advice
Letter) is correct in all material respects.

     (b)  Title.  It is the intention of the parties hereto that the transfer
          -----
and assignment herein contemplated constitute a sale of the Transition Property
from the Seller to the Note Issuer and that the beneficial interest in and title
to the Transition Property not be part of the debtor's estate in the event of
the filing of a bankruptcy petition by or against the Seller under any
bankruptcy law.  No portion of the Transition Property has been sold,
transferred, assigned or pledged by the Seller to any Person other than the Note
Issuer.  At the Closing Date immediately prior to the sale hereunder and after
giving effect to the release of the lien of the Seller Mortgage, the Seller owns
the Transition Property, free and clear of all Liens and rights of others, no
offsets, defenses or counterclaims exist or have been asserted with respect
thereto, and Sierra Pacific Power

                                       8
<PAGE>

Company, in its capacity as Seller or Servicer, will not at any time assert any
Lien against or with respect to any of the Transition Property.

     (c)  Transfer Filings.  At the Closing Date, the Transition Property has
          ----------------
been validly transferred and sold to the Note Issuer, the Note Issuer shall own
all such Transition Property, free and clear of all Liens and rights of others,
except for any statutory lien in favor of the holders of the rate reduction
bonds issued pursuant to the Financing Order and the trustee or the
representative for such holders pursuant to Section 843(g) of the PU Code; and
all filings to be made by the Seller (including filings with the CPUC under the
PU Code) necessary in any jurisdiction to give the Note Issuer a first priority
perfected ownership or security interest in the Transition Property have been
made (subject to any statutory lien in favor of the holders of the rate
reduction bonds issued pursuant to the Financing Order and the trustee or the
representative for such holders pursuant to Section 843(g) of the PU Code).  No
further action, other than any filings required by Sections 9-403(2)-(3), 9-306,
9-402(7) and 9-103 of the Uniform Commercial Code and Sections 843 and 844 of
the PU Code, is required to maintain such first priority perfected ownership or
security interest (subject to any statutory lien in favor of the holders of the
rate reduction bonds issued pursuant to the Financing Order and the trustee or
the representative for such holders pursuant to Section 843(g) of the PU Code).

     (d)  Financing Order and Issuance Advice Letters; Other Approvals.  At the
          ------------------------------------------------------------
Closing Date, under the laws of the State of California and the United States in
effect on the Closing Date, (i) the Financing Order and the Issuance Advice
Letter pursuant to which the Transition Property has been created have been duly
authorized and adopted by the CPUC and are in full force and effect; (ii) as of
the issuance of the Certificates, the Certificates are entitled to the
protections provided in the first sentence and the penultimate sentence of
Section 841(c) and the first sentence of Section 842(d) of the PU Code and,
accordingly, the Financing Order and the Issuance Advice Letter are not
revocable by the CPUC; (iii) none of the State of California, the CPUC or the
Infrastructure Bank may revoke, limit, alter or modify the Transition Property,
the Financing Order or the Advice Letters relating thereto, and all rights
thereunder, in a manner adversely affecting the Noteholders or the
Certificateholders, other than a temporary impairment described in the following
sentence, until the Certificates, together with interest thereon, are fully
discharged, unless adequate provision shall be made by law for the protection of
the Note Issuer, the Trust and the Certificateholders; (iv) the process by which
the Financing Order and the Infrastructure Bank Issuance Resolution were adopted
and approved and the Issuance Advice Letter was filed, and the Financing Order,
the Issuance Advice Letter and the Infrastructure Bank Issuance Resolution
themselves, comply with all applicable laws, rules and regulations, and, prior
to the discharge in full of the Certificates unless adequate provision shall be
made by law for the protection of the Note Issuer, the Trust and the
Certificateholders, no court or other administrative body can order the
revocation, alteration, limitation or other impairment of the Financing Order,
the Issuance Advice Letter, the Infrastructure Bank Issuance Resolution, the
Transition Property or the FTA Charges or any rights arising under any of them
or enjoin the performance of any obligations thereunder; and (v) no other
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 creation of the

                                       9
<PAGE>

Transition Property, except those that have been obtained or made. For purposes
of clause (d)(iii) above, a "temporary impairment" shall mean a breach by the
                             --------------------
State of California of its pledge contained in Section 841(c) of the PU Code
effecting a temporary impairment of the Certificateholders' rights, which under
current law would be permitted if it can be shown to be necessary to advance an
important public interest; such a public interest may arise in connection with a
great public calamity, which might, for example, include economic upheaval or
natural disasters.

     (e)  Assumptions.  At the Closing Date, the assumptions used in calculating
          -----------
the FTA Charges related to the Transition Property are reasonable and made in
good faith.

     (f)  Creation of Transition Property.  Upon the effectiveness of the
          -------------------------------
Issuance Advice Letter: (i) all of the Transition Property constitutes a current
property right; (ii) the Transition Property includes, without limitation, (A)
the right, title and interest in and to the FTA Charges, as adjusted from time
to time, (B) the right to be paid the total amounts set forth in the Issuance
Advice Letter, (C) the right, title and interest in and to all revenues,
collections, claims, payments, money, or proceeds of or arising from the FTA
Charges set forth in the Issuance Advice Letter, and (D) all rights to obtain
adjustments to the FTA Charges pursuant to the Financing Order; and (iii) the
holders of the Transition Property are entitled to recover the Transition Costs
described in the Financing Order or the Issuance Advice Letter in the aggregate
amount equal to the principal amount of the Notes and the Certificates, all
interest thereon, the Overcollateralization Amount relating to the Notes and all
related fees, costs and expenses in respect of the Notes and the Certificates
until they have been paid in full.

     SECTION 3.09.  Outstanding Indenture.  On or prior to the Closing Date, the
                    ---------------------
Lien of the Seller Mortgage on the Transition Property shall have been released.

                                  ARTICLE IV

                            Covenants of the Seller
                            -----------------------

     SECTION 4.01.  Corporate Existence.  For so long as any of the Notes are
                    -------------------
outstanding, the Seller (a) will keep in full force and effect its existence,
rights and franchises as a corporation under the laws of the jurisdiction of its
incorporation and (b) will obtain and preserve its qualification to do business,
in each case, to the extent that in each such jurisdiction such existence or
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, the Basic Documents to which the Seller is a
party and each other instrument or agreement necessary or appropriate to the
proper administration of this Agreement and the transactions contemplated
hereby.

     SECTION 4.02.  No Liens.  Except for the conveyances hereunder or any
                    --------
statutory lien under Section 843(g) of the PU Code, the Seller will not sell,
pledge, assign or transfer to any other Person, or grant, create, incur, assume
or suffer to exist any Lien on, any of the Transition Property, or any interest
therein, and the Seller shall defend the right, title and interest of the

                                       10
<PAGE>

Note Issuer and the Note Trustee in, to and under the Transition Property,
against all claims of third parties claiming through or under the Seller.

     SECTION 4.03.  Delivery of Collections.  If the Seller receives collections
                    -----------------------
in respect of the FTA Charges or the proceeds thereof, the Seller agrees to pay
the Servicer all payments received by the Seller in respect thereof as soon as
practicable after receipt thereof by the Seller, but in no event later than two
Business Days after such receipt.

     SECTION 4.04.  Notice of Liens.  The Seller shall notify the Note Issuer
                    ---------------
and the Note Trustee promptly after becoming aware of any Lien on any of the
Transition Property other than the conveyances hereunder or under the Indenture
or any statutory lien under Section 843(g) of the PU Code.

     SECTION 4.05.  Compliance with Law.  The Seller hereby agrees to comply
                    -------------------
with its organizational or governing documents and all laws, treaties, rules,
regulations and determinations of any governmental instrumentality applicable to
the Seller, except to the extent that failure so to comply would not adversely
affect the Note Issuer's or the Note Trustee's interests in the Transition
Property or under any of the Basic Documents or the Seller's performance of its
obligations hereunder or under any of the other Basic Documents to which it is
party.

     SECTION 4.06.  Covenants Related to Transition Property.
                    ----------------------------------------

     (a)  For so long as any of the Notes are outstanding, the Seller shall
          treat the Notes as debt of the Note Issuer for all purposes, except
          for federal and state income and franchise tax purposes.

     (b)  For so long as any of the Notes are outstanding, the Seller shall
          indicate in its data systems and financial statements that it is not
          the owner of the Transition Property.

     (c)  For so long as any of the Notes are outstanding, the Seller shall not
          own or purchase any Notes or Certificates.

     (d)  The Seller agrees that upon the sale by the Seller of the Transition
          Property to the Note Issuer pursuant to this Agreement, (i) to the
          fullest extent permitted by law, including applicable CPUC
          Regulations, the Note Issuer shall have all of the rights originally
          held by the Seller with respect to such Transition Property, including
          the right to exercise any and all rights and remedies to collect any
          amounts payable by any California Customer in respect of such
          Transition Property, notwithstanding any objection or direction to the
          contrary by the Seller and (ii) any payment by any California Customer
          to the Note Issuer shall discharge such California Customer's
          obligations in respect of such Transition Property to the extent of
          such payment, notwithstanding any objection or direction to the
          contrary by the Seller.

                                       11
<PAGE>

     (e)  For so long as any of the Notes are outstanding, (i) the Seller shall
          not make any statement or reference in respect of the Transition
          Property that is inconsistent with the ownership interest of the Note
          Issuer, and (ii) the Seller shall not take any action in respect of
          the Transition Property except solely in its capacity as the Servicer
          thereof pursuant to the Servicing Agreement or as otherwise
          contemplated by the Basic Documents.

     SECTION 4.07.  Protection of Title.  The Seller shall execute and file such
                    -------------------
filings, including filings with the CPUC pursuant to the PU Code, and cause to
be executed and filed such filings, all in such manner and in such places as may
be required by law fully to preserve, maintain, and protect the interests of the
Note Issuer in the Transition Property, including all filings required under the
Statute relating to the transfer of the ownership or security interest in the
Transition Property by the Seller to the Note Issuer. The Seller shall deliver
(or cause to be delivered) to the Note Issuer file-stamped copies of, or filing
receipts for, any document filed as provided above, as soon as available
following such filing. The Seller 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 the
Issuance Advice Letter, and the Seller 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 protect the Note Issuer and the
Certificateholders from claims, state actions or other actions or proceedings of
third parties which, if successfully pursued, would result in a breach of any
representation set forth in Article III.  The costs of any such actions or
proceedings will be payable by the Seller.

     SECTION 4.08.  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
Seller shall not, prior to the date that is one year and one day after the
termination of the Indenture, acquiesce, petition or otherwise invoke or cause
the Note Issuer or the Trust to invoke the process of any court or government
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 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 4.09.  Taxes.  For so long as any of the Notes are outstanding, the
                    -----
Seller shall, and shall cause each of its subsidiaries to, pay all material
taxes, assessments and governmental charges imposed upon it or any of its
properties or assets or with respect to any of its franchises, business, income
or property before any penalty accrues thereon if the failure to pay any such
taxes, assessments and governmental charges would, after any applicable grace
periods, notices or other similar requirements, result in a lien on the
Transition Property; provided that no such

                                       12
<PAGE>

tax need be paid if the Seller or one of its subsidiaries is contesting the same
in good faith by appropriate proceedings promptly instituted and diligently
conducted and if the Seller or such subsidiary has established appropriate
reserves as shall be required in conformity with generally accepted accounting
principles.

                                   ARTICLE V

                                  The Seller
                                  ----------

     SECTION 5.01.  Liability of Seller; Indemnities.
                    --------------------------------

     (a)  The Seller shall be liable in accordance herewith only to the extent
          of the obligations specifically undertaken by the Seller under the
          Agreement.

     (b)  (i) In the event of a breach by the Seller of any representation and
          warranty specified in Sections 3.08(d) or 3.08(f) that has a material
          adverse effect on the Certificateholders, the Seller shall repurchase
          the Transition Property from the Note Issuer at a purchase price (the
          "Repurchase Price") equal to the then outstanding principal amount of
           ----------------
          the Notes and all accrued and unpaid interest thereon as of the
          Repurchase Date; provided, however, that the Seller shall not be
                                                              ------------
          obligated to repurchase the Transition Property if (A) within 90 days
          after the date of the occurrence thereof such breach is cured or the
          Seller takes remedial action such that there is not and will not be a
          material adverse effect on the Certificateholders as a result of such
          breach and (B) either (i) if the Seller had, immediately prior to the
          breach, a long term debt rating of at least "A3" or the equivalent by
          Moody's (or such other long term debt rating as shall be approved by
          Moody's), the Seller enters into a binding agreement with the Note
          Issuer to pay any amounts necessary so that all interest payments due
          on the Notes during such 90-day period will be paid in full, or (ii)
          if the Seller does not have such a long term debt rating, the Seller
          deposits, within two Business Days after such breach, an amount in
          escrow with the Note Trustee sufficient, taking into account amounts
          on deposit in the Collection Account which will be available for such
          purpose, to pay all interest payments that will become due on the
          Notes during such 90-day period. The Seller will not be in breach of
          any representation and warranty as a result of a change in law by
          means of a legislative enactment, constitutional amendment or voter
          initiative.

          (ii)  In the event of a breach by the Seller of any representation and
          warranty specified in Sections 3.01, 3.03, 3.04, 3.05, 3.08(b) or
          3.08(c) that has a material and adverse effect on the
          Certificateholders, if within 30 days after the Seller receives
          written notice from the Note Trustee or the Certificate Trustee or
          otherwise becomes aware of such breach, such breach has not been cured
          and the Seller has not taken remedial action such that there is not
          and will not be a material adverse effect on the Certificateholders as
          a result of such breach, then the Seller

                                       13
<PAGE>

          shall repurchase the Transition Property from the Note Issuer for the
          Repurchase Price on the Repurchase Date.

          (iii)  Upon the payment by the Seller of the Repurchase Price pursuant
          to this Section 5.01(b), neither the Note Issuer nor any other Person
          shall have any other claims, rights or remedies against the Seller for
          a breach of the foregoing representations and warranties.

     (c)  The Seller shall indemnify the Note Issuer, the Trust, the Note
          Trustee, the Certificate Trustee, the Delaware 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 taxes (other than any taxes
          imposed on Noteholders or Certificateholders solely as a result of
          their ownership of Notes or Certificates, respectively) that may at
          any time be imposed on or asserted against any such Person as a result
          of the sale of the Transition Property to the Note Issuer, including
          any sales, gross receipts, general corporation, tangible personal
          property, privilege or license taxes.

     (d)  The Seller shall indemnify the Note Issuer, the Trust, the Note
          Trustee, the Certificate Trustee, the Delaware 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 taxes (other than any taxes
          imposed on Noteholders or Certificateholders solely as a result of
          their ownership of Notes or Certificates, respectively) that may be
          imposed on or asserted against any such Person under existing law as
          of the Closing Date as a result of the issuance and sale by the Note
          Issuer of the Notes, the issuance and sale by the Trust of the
          Certificates or the other transactions contemplated herein, including
          any sales, gross receipts, general corporation, tangible personal
          property, privilege or license taxes.

     (e)  The Seller shall indemnify the Note Issuer, the Trust, the Note
          Trustee, the Certificate Trustee, the Delaware 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,
          claims, damages, payments, costs or expenses of any kind whatsoever
          (collectively, "Losses") that may be imposed on, incurred by or
                          ------
          asserted against any such Person as a result of (i) the Seller's
          willful misconduct, bad faith or gross negligence in the performance
          of its duties or observance of its covenants under this Agreement, or
          the Seller's reckless disregard of its obligations and duties under
          this Agreement or (ii) the Seller's breach of any of its
          representations or warranties contained in this Agreement (other than
          the representations and warranties specified in Sections

                                       14
<PAGE>

          3.01, 3.03, 3.04, 3.05, 3.08(b), 3.08(c), 3.08(d) or 3.08(f) the
          breach of which are subject to the repurchase obligation set forth in
          Section 5.01(b)).

     (f)  The Seller shall pay any and all taxes levied or assessed upon all or
          any part of the Trust Property based on existing law as of the Closing
          Date.

     (g)  Indemnification under Sections 5.01(c) through 5.01(f) shall survive
          the resignation or removal of the Note Trustee, the Certificate
          Trustee or the Delaware Trustee and the termination of this Agreement
          and shall include reasonable fees and expenses of investigation and
          litigation (including attorneys fees and expenses).

     SECTION 5.02.  Merger or Consolidation of, or Assumption of the Obligations
                    ------------------------------------------------------------
of, Seller.  Any Person (a) into which the Seller may be merged or consolidated,
----------
(b) which may result from any merger or consolidation to which the Seller shall
be a party or (c) which may succeed to the properties and assets of the Seller
substantially as a whole, which Person in any of the foregoing cases executes an
agreement of assumption to perform every obligation of the Seller hereunder,
shall be the successor to the Seller 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 representation or
-----------------
warranty made pursuant to Article III shall have been breached and (if the
Seller is the Servicer) no Servicer Default, and no event which, after notice or
lapse of time, or both, would become a Servicer Default shall have occurred and
be continuing, (ii) the Seller shall have delivered to the Note Issuer and the
Note Trustee an Officers' Certificate and an Opinion of Counsel each stating
that such consolidation, merger or succession and such agreement of assumption
comply with this Section and that all conditions precedent, if any, provided for
in this Agreement relating to such transaction have been complied with, (iii)
the Seller shall have delivered to the Note Issuer and the Note Trustee an
Opinion of Counsel either (A) stating that, in the opinion of such counsel, all
filings to be made by the Seller, including filings with the CPUC pursuant to
the PU Code, have been executed and filed that are necessary to fully preserve
and protect the interest 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, and (iv) Moody's shall have received prior written notice of such
transaction.  Notwithstanding anything herein to the contrary, the execution of
the foregoing agreement of assumption and compliance with clauses (i), (ii),
(iii) and (iv) above shall be conditions to the consummation of any transaction
referred to in clauses (a), (b) or (c) above.

     SECTION 5.03.  Limitation on Liability of Seller and Others.  The Seller
                    --------------------------------------------
and any director or officer or employee or agent of the Seller may rely in good
faith on the advice of counsel or on any document of any kind, prima facie
properly executed and submitted by any Person, respecting any matters arising
hereunder.  Subject to Section 4.07, the Seller shall not be under any
obligation to appear in, prosecute or defend any legal action that shall not be
incidental to its obligations under this Agreement, and that in its opinion may
involve it in any expense or liability.

                                       15
<PAGE>

                                  ARTICLE VI

                           Miscellaneous Provisions
                           ------------------------

     SECTION 6.01.  Amendment.  This Agreement may be amended by the Seller and
                    ---------
the Note Issuer, with 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 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 from time to time by the Seller 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 Noteholders of
Notes evidencing not less than a majority of the Outstanding Amount of the Notes
of all Series affected thereby, 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 or consent, the Note
Issuer shall furnish written notification of the substance of such amendment or
consent to the Note Trustee, the Infrastructure Bank, the STO and Moody's.

     Notwithstanding anything to the contrary contained herein, no such
amendment may amend or in any way modify the rights of the Infrastructure Bank
or the STO under this Agreement without their prior written consent.

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

                                       16
<PAGE>

     SECTION 6.02.  Notices.  All demands, notices and communications upon or to
                    -------
the Seller, the Note Issuer, the Note Trustee, the Certificate Trustee, the
Infrastructure Bank, the STO or Moody's under this Agreement shall be in
writing, personally delivered, mailed 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 Seller, to Sierra Pacific Power Company, at 6l00 Neil
Road, P.O. Box 10100, Reno, Nevada 89520-3150, Attention of Treasurer, (b) in
the case of the Note Issuer, to SPPC Funding LLC, 6l00 Neil Road, P.O. Box
30150, Reno, Nevada 89520-3150, Attention of President, (c) in the case of the
Note Trustee, at the Corporate Trust Office, (d) 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, (e) in the case of the
Infrastructure Bank, to California Infrastructure and Economic Development Bank,
c/o California Trade and Commerce Agency, 801 K Street, Suite 1700, Sacramento,
CA 95814, Attention of Executive Director, (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.

     SECTION 6.03.  Assignment.  Notwithstanding anything to the contrary
                    ----------
contained herein, except as provided in Section 5.02, this Agreement may not be
assigned by the Seller.

     SECTION 6.04.  Limitations on Rights of Others. The provisions of this
                    -------------------------------
Agreement are solely for the benefit of the Seller, the Note Issuer, the Note
Trustee, the Trust, the Certificate Trustee, the Delaware Trustee, the
Infrastructure Bank, the STO, the Noteholders and the Certificateholders 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 6.05.  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 6.06.  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.

     SECTION 6.07.  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.

                                       17
<PAGE>

     SECTION 6.08.  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 6.09.  Assignment to Note Trustee.  The Seller hereby acknowledges
                    --------------------------
and consents to any mortgage, pledge, assignment and grant of a security
interest by the Note Issuer to the Note Trustee pursuant to the Indenture for
the benefit of the Noteholders of all right, title and interest of the Note
Issuer in, to and under the Transition Property and the proceeds thereof and the
assignment of any or all of the Note Issuer's rights and obligations hereunder
to the Note Trustee.

     SECTION 6.10.  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 gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under this Agreement.

                                       18
<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, Note Issuer,


                                    By  MARK A. RUELLE
                                      ----------------------------
                                       Name:  Mark A. Ruelle
                                       Title: Treasurer


                                    SIERRA PACIFIC POWER COMPANY, Seller,


                                    By RICHARD K. ATKINSON
                                      -----------------------------
                                       Name:  Richard K. Atkinson
                                       Title: Assistant Treasurer

Acknowledged and Accepted:

BANKERS TRUST COMPANY OF
CALIFORNIA, N.A., not in its individual
    capacity but solely as Note Trustee,


By  PETER BECKER
   --------------
   Name:  Peter Becker
   Title: Assistant Vice President

                                       19