Document:

EXHIBIT
      10.2

     

    TABLE
      OF
      CONTENTS

    

     

    I. THE
      SETTLEMENT AGREEMENT

     

    A. Outstanding
      Procedural Matters

    B. Legal
      Basis for Adoption of the Proposed Settlement Agreement as a Resolution on
      the
      Merits

    C. Terms
      of the Settlement

    1. Distribution
      of the $100 Million Refund

    2. Accounting
      Proposals Adopted from the ALJPO

    3. Hardship
      Reconnection Program

    4. Gas
      Reconciliation

     

    II. THE
      PROCEDURAL HISTORY OF THIS DOCKET

     

    A. Disclosure
      of Pertinent Information During Discovery

    B. The
      Protective Order

    C. The
      Applicable Legal Standards

    1. The
      Duty Imposed on PGL by Statute

    2. The
      Burden of Proof

     

    III. ENTITIES
      INVOLVED

     

    A. Findings
      of Fact

    1. enovate,
      LLC

    B. Conclusions
      of Law - Scope of this Proceeding

    1. PGL’s
      Argument

    2. The
      Position of the GCI

    3. Commission
      Analysis and Conclusions

    C. Conclusions
      of Law - Enron Profits

     

    IV. THE
      GAS PURCHASE AGENCY AGREEMENT

     

    A. Findings
      of Fact

    1. Background

    2. The
      Terms of the GPAA

    3. Economic
      Analyses Made of the GPAA Just Before it was Executed

    4. The
      Reasons Articulated by PGL for Entering into the GPAA

    B. Conclusions
      of Law

    1. Proposed
      Disallowances

    2. Ignoring
      Internal Unfavorable Economic Analyses

    3. Enron’s
      Ability to Change the Price of Gas: the Baseload Price Adjustment Clause and
      Articles 4.2(b) and 4.2(c) of the GPAA

    4. Baseload,
      SIQ and DIQ Gas

    5. Foregone
      Demand Credits

    6. Penalties
      for Resales of Gas

    7. Released
      Pipeline Capacity

    8. Eroding
      Basis

    9. The
      CERA Report and Other Reasons for Possibly Higher
      Basis

    9. Differing
      Economic Theories

    10. Staff
      Witness Dr. Rearden’s Dollar Values

    11. PGL’s
      Previous Reconciliation

    12. Proxy
      for Historical Gas Purchase Practices

    13. Market-Based
      Pricing with No Demand or Reservation Charges

    14. Flexible
      Pricing

    15. Load
      Flexibility

    16. Unquantifiable
      Benefits

    17. Conclusions
      Regarding the GPAA, in Total

    
      
         

        

        
        

      

      
        1

        
          

        

      

      
        
        

        01-0707

      

    

    V. Manlove
      Field

    A. Findings
      of Fact

    1. Background

    2. The
      Decline Point for Manlove

    3. Maintenance
      Gas or “Cushion Gas”

    4. Displacement

    5. Large
      Withdrawals from Manlove for Third-Parties at the Onset of
      Winter

    A. Conclusions
      of Law

    1. Staff’s
      Position

    2. PGL’s
      Position

    3. GCI’s
      Position

    4. Commission
      Analysis and Conclusions

     

    VI. UNACCOUNTED
      FOR GAS- “GLU”

     

    A. Findings
      of Fact

    B. Conclusions
      of Law

    1. Staff’s
      Position

    2. GCI’s
      Position

    4. PGL’s
      Position

    5. Commission
      Analysis and Conclusions

     

    VII. OFF-SYSTEM
      TRANSACTIONS IN GENERAL

     

    A. Findings
      of Fact

    B. Conclusions
      of Law

    1. Staff’s
      Position

    2. PGL’s
      Position

    3. GCI’s
      Position

    4. Commission
      Analysis and Conclusions

     

    VIII. SPECIFIC
      OFF-SYSTEM TRANSACTIONS

     

    A. Transactions
      16/22

    1. Findings

    B. The
      Trunkline Deal

    1. Findings
      of Fact

    2. Conclusions
      of Law

    C. Transaction
      103

    1. Findings
      of Fact

    2. Conclusions
      of Law

    D. Transaction
      19

    1. Findings
      of Fact

    2. Conclusions
      of Law

    E. The
      Storage Optimization Contract (“SOC”)

    1. Findings
      of Fact

    2. Conclusions
      of Law

    F. The
      Citgo Contract

    1. Findings
      of Fact

    2. Conclusions
      of Law

    G. Hedging

    1. Findings
      of Fact

    2. Conclusions
      of Law

     

    IX. FURTHER
      OBSERVATIONS ON PGL’S CONDUCT

     

     

    X. Other
      Issues

     

    A. Audits

    1. Staff’s
      Position

    
      
         

        

        
        

      

      
        2

        
          

        

      

      
        
        

        01-0707

      

    

    2. The
      Position of the GCI

    3. PGL’s
      Position

    4. Commission
      Analysis and Conclusions

    B. Other
      Non-Monetary Issues

    1. Compliance
      with the USOA

    2. Uncontested
      non-Monetary Issues

     

    X. FINDING
      AND ORDERING PARAGRAPHS

     

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    STATE
      OF ILLINOIS

    

    ILLINOIS
      COMMERCE COMMISSION

    

    
      	
              Illinois
                Commerce Commission, 

              On
                Its Own Motion, 

              -vs-

              Peoples
                Gas Light and Coke Company, 

               

              Reconciliation
                of revenues collected under gas adjustment charges with actual costs
                prudently incurred. 

            	
               

              :

              :

              :

              :

              :

              :

              :

              :

              :

            	
               

               

               

               

               

              01-0707

            

    

    

    ORDER

    

    By
      the Commission:

    

    On
      November 7, 2001, the Commission commenced this docket requiring Peoples Gas
      Light and Coke Company (“PGL”) to reconcile the total revenue it collected from
      the ratepayers under its purchased gas adjustment clause (its “PGA”) with the
      total cost of gas it incurred. At that time, this Commission specifically
      required PGL to present evidence establishing what measures it took to insulate
      ratepayers from price volatility in the wholesale natural gas markets during
      the
      time period in question, which is October 1, 2000, through September 30, 2001.
      (See,
      Initiating Order, November 7, 2001). 

    

    Leave
      to
      Intervene was granted to the Citizens Utility Board, the Illinois Attorney
      General, the Cook County State’s Attorney and the City of Chicago. On
      March
      7, 2005, pursuant to a ruling made by the Administrative Law Judge, (the “ALJ”)
      the parties filed pre-hearing briefs stating their positions as to how 83 Ill.
      Adm. Code 525.40 applied to the facts at bar. Pursuant
      to proper notice, hearing in this matter convened before a duly authorized
      ALJ
      on April 18, 2005 and continued through April 21, 2005. Subsequently, the record
      was marked “Heard and Taken.” PGL and Commission Staff filed initial briefs on
      June 30, 2005. The City of Chicago, (the “City”) the Citizens Utility Board
      (“CUB”) and the Illinois Attorney General (the “AG”) filed one initial brief
      collectively on that same day.1
      Reply
      briefs were filed on August 19, 2005. These three parties filed Briefs on
      Exception on October 3, 2005 and Reply Briefs on Exceptions on October 11,
      2005.
      PGL requested oral argument, which the Commission granted on December 13,
      2005.2
      The
      Commission heard oral arguments on December 21, 2005.

    

    ____________________

    1   Reference
      is made herein to positions asserted in joint briefs filed by these three
      entities as the “GCI,” which is the Governmental and Consumer
      Intervenors.

    2   With
      its Brief on Exceptions, PGL also filed a document entitled “Exhibit 1 to Brief
      on Exceptions,” which is, essentially, the Administrative Law Judge’s Proposed
      Order (the “ALJPO”) rewritten. Many of the proposed changes therein were not
      substantiated by legal or factual argument, as is required by law. (83Ill.
      Adm.
      Code 200.830(b)-(e); (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 76, 621 N.E.2d 276 (2nd
      Dist.
      1993); In
      re
      Marriage of Thornquist,
      79 Ill.
      App. 3d 791, 798, 399 N.E.2d 176 (1st
      Dist.
      1979)). And, many of the proposed changes therein misstate the record. By
      failing to assert a legal or factual argument in support of changes PGL seeks,
      PGL has waived its right to have this Commission consider them. (Fraley,
      251 Ill.
      App. 3d at, 76). Except in on instance, we did not consider these contentions.
      (See,
      Section
      III(o) herein).

    
      
         

        

        
        

      

      
        4

        
          

        

      

      
        
        

        01-0707

      

    

    

    On
      January 17, 2006, PGL, North Shore Gas Company (“North Shore”) (collectively
“Peoples Companies”), the AG and the City of Chicago entered into a Settlement
      Agreement and Release (the “Settlement”). CUB formally signed on to the
      Settlement on February 27, 2006. A copy of the Settlement is attached hereto
      as
      Exhibit 1. In the Settlement, the Peoples Companies, the AG, the City, and
      CUB
      (collectively the “Settling Parties”) agreed to settle globally the outstanding
      reconciliation dockets pending for Fiscal Years 2001 through 2004 of both PGL
      (I.C.C. Docket Nos. 01-0707, 02-0727, 03-0705 and 04-0683) and North Shore
      (I.C.C. Docket Nos. 01-0706, 02-0726, 03-0704 and 04-0682) (collectively
“Reconciliation Dockets”).3
      Under
      the Settlement, the Settling Parties would settle the Reconciliation Dockets
      and
      the Peoples Companies would pay a $100 million refund, adopt certain
      forward-looking management and accounting measures proposed in the ALJPO, and
      meet other requirements defined in the agreement.

    

    On
      January 23, 2006, the Peoples Companies, the AG and the City filed a Joint
      Petition for Approval of the Settlement Agreement in each of the Reconciliation
      Dockets. At its February 8, 2006 Bench Session, after certain Commissioners
      raised concerns as to whether the terms of the Settlement were fair value in
      exchange for the settlement of all of the Reconciliation Dockets, the Commission
      asked that the Settling Parties meet with Staff and the Cook County State’s
      Attorney (“CCSAO”) to negotiate settlement terms that all parties could
      accept.

    

    During
      the next several weeks, Staff, the CCSAO and the Settling Parties met on several
      occasions. In addition, Staff issued several data requests to the Peoples
      Companies, which the Peoples Companies responded to on an expedited basis.
      Based
      on those responses, Staff developed an estimate of potential disallowances
      for
      reconciliation years other than 2001 that Staff asserted should be considered
      as
      part of the Settlement. Based on the above-mentioned discussions, the Settling
      Parties executed an Amendment and Addendum to the Settlement (the “Addendum”),
      which modified the terms of the Settlement to include these additional
      agreements and modifications that the Settling Parties would include if the
      Commission were to approve the Settlement. A copy of the Addendum is attached
      hereto as Exhibit 2. Staff and the CCSAO opposed both the Settlement and the
      Addendum.

    

    On
      February 28, 2006 and March 1, 2006, the Settling Parties filed statements
      advising the Commission of the revised settlement terms agreed to by the
      Settling Parties and requesting that the Commission approve the Settlement
      as
      revised by the Addendum. On March 2, 2006, the Commissioners issued data
      requests to the parties to obtain information about the Settlement and the
      Addendum. The parties filed verified responses to these Commission data requests
      on March 3, 2006. On March 6, 2006, the Commission held a special open meeting
      addressing the settlement during which Commissioners asked questions to, and
      received answers from, representatives of the parties and Staff. At that Special
      Open Meeting, the Commission generally approved the Settlement Agreement.

    

    

    

    ____________________

    3   The
      Settlement also addressed three circuit court cases.

    
      
         

        

        
        

      

      
        5

        
          

        

      

      
        
        

        01-0707

      

    

    

    Testifying
      on behalf of PGL were: Thomas Zack, Director of Gas Supply Services; David
      Wear,
      the Manager of Gas Supply Administration at PGL; William Morrow, the
      Vice-President of PGL, the Vice-President of Peoples Energy Corporation and
      the
      President of Peoples Energy Resource Company; Valerie Grace, PGL’s Director of
      Rates and Gas Transportation Services; Thomas Puracchio, PGL’s Gas Storage
      Manager: and Frank Graves, a Principal at the Consulting Firm of the Brattle
      Group. 

    

    Testifying
      on behalf of Commission Staff were Dr. David Rearden, a Senior Economist in
      the
      Commission’s Policy Division, Steven R. Knepler, a Supervisor in the Accounting
      Department of the Commission’s Financial Analysis Division, and Dianna Hathhorn,
      an accountant in the Accounting Department of the Commission’s Financial
      Analysis Division, Eric Lounsberry, the Supervisor of the Gas Section of the
      Engineering Department of the Commission’s Energy Division, and Dennis Anderson,
      a senior energy engineer in the Gas Section of the Engineering Department of
      the
      Commission’s Energy Division. 

    

    Testifying
      on behalf of CUB were Brian Ross, a Principal with CR Planning, Inc. and Jerome
      Mierzwa. Testifying on behalf of the City was John Herbert. Testifying on behalf
      of the AG was David Effron a regulatory consultant. Testifying on behalf both
      the City and CUB was Lindy Decker, an Audit Manager with Grant Thornton LLP.
      

    

     

    I. The
      Settlement Agreement 

     

    

     

    
      	 	
              A.

            	
              Outstanding
                Procedural Matters

            

    

     

    

    On
      October 7, 2005, PGL filed a Petition for Interlocutory Review of the Ruling
      on
      Staff’s Motion to Strike Reply Brief and Deny Other Relief. On January 17, 2006,
      the Peoples Companies, the AG, the City and CUB filed a Joint Motion to Stay
      Pending Presentation of and Decision on Petition to Approve Settlement. In
      light
      of the Commission’s approval of the Settlement, without addressing or ruling on
      the merits of these matters, the Commission denies the Petition for
      Interlocutory Review and the Joint Motion for Stay as being moot. On March
      16,
      2006, Staff filed a motion seeking leave to file Exceptions and a Brief on
      Exceptions. That motion is hereby granted.

    
      
         

        

        
        

      

      
        6

        
          

        

      

      
        
        

        01-0707

      

    

    

     

    
      	 	
              B.

            	
              Legal
                Basis for Adoption of the Proposed Settlement Agreement as a Resolution
                on
                the Merits

            

    

     

    

    The
      Illinois Supreme Court addressed the standard for the Commission’s approval of
      settlement agreements and for consideration and adoption of proposed settlement
      agreements in Business
      and Professional People for the Public Interest v. Illinois Commerce
      Commission
      (“BPI”),
      136
      Ill. 2d 192, 206-218 (1989). BPI
      holds
      that the Commission may approve a settlement agreement as a settlement agreement
      if there is unanimous support for it. Id.
      at
      217-218. However, if a settlement agreement lacks unanimous support, for the
      Commission to consider and adopt the proposed agreement as an appropriate
      resolution on the merits, three conditions must be met: 1) the provisions of
      the
      settlement agreement must be within the Commission’s authority to impose; 2) the
      provisions must not contravene the PUA; and 3) substantial evidence must exist
      in the record to independently support the provisions of the proposed
      settlement. Id.
      It may
      be observed that the requirements expressed by the Illinois Supreme Court in
      BPI
      concerning the Commission’s adoption of a non-unanimous settlement proposal as a
      resolution on the merits of a case are similar in substance to the standards
      found in section 10-201 of the PUA that apply generally to the judicial review
      of Commission orders and decisions.

    

    As
      noted
      above, the Settling Parties proposed to resolve eight open dockets with the
      Settlement and Addendum. The Settlement and Addendum received unanimous support
      from the parties in six of those dockets4,
      which
      the Commission will deal with in separate orders. For the remaining two dockets,
      01-0706 and the instant docket, CCSAO opposed the settlement. Given the lack
      of
      unanimous support for the proposed settlement agreement here, the Commission
      must analyze the proposed settlement as described in the above paragraph if
      the
      Commission is to adopt the proposal as a resolution on the merits.

    

    First,
      the Commission must determine if the provisions of the proposed Settlement
      and
      Addendum are within the Commission’s authority to impose. Several of the
      provisions—conservation program funding, debt forgiveness and hardship
      reconnection—do not require Commission approval to take effect. Because the
      Settling Parties constructed the proposed Settlement and Addendum so that these
      provisions will take effect even without Commission approval, the Commission
      need not analyze these provisions under BPI.
      However, only the Commission can issue an order imposing refunds in
      reconciliation proceedings (See
      PUA
      Section 9-220 and 83 Ill. Adm. Code 525). The refund provision will not take
      effect unless the Commission adopts the proposed Settlement and Addendum as
      a
      resolution on the merits. Since this provision rests solidly within the
      Commission’s authority, our adoption of this aspect of the proposed Settlement
      and Addendum meets the first condition of the BPI
      analysis.

    

    

    ____________________

    4   While
      Staff expressed opposition to the settlement agreement, Staff is not considered
      a party under the Commission’s Rules of Practice. 83 Ill. Adm. Code § 200.40
      (definition of a “Party”).

    

    
      
         

        

        
        

      

      
        7

        
          

        

      

      
        
        

        01-0707

      

    

    

    Second,
      the Commission must determine whether the provisions of the proposed Settlement
      and Addendum contravene the PUA. Upon review of these documents, the Commission
      discerns nothing that would violate any provision of the PUA. Therefore, the
      proposed Settlement and Addendum meet the second condition of the BPI
      analysis.

    

    Finally,
      the Commission must find that substantial record evidence exists to
      independently support the provisions of the proposed settlement. Substantial
      evidence is more than a scintilla, but less than a preponderance. (Citizens
      Utility Board v. Illinois Commerce Commission,
      291 Ill.
      App. 3d 300, 304 (Ill. App. Ct. 1997)).This requires the Commission to
      demonstrate that facts exist that, in turn, sustain the provisions of the
      findings and ordering paragraphs of an order that would adopt, as a resolution
      on the merits, the provisions of the proposed Settlement and Addendum. The
      Settlement and Addendum provide for a $100 million refund to be issued to PGL
      and North Shore customers. For the Commission to consider these documents,
      which
      lack the support of CCSAO, to be an adequate resolution on the merits of this
      docket, the Commission must evaluate the evidence and findings of imprudence
      in
      the ALJPO to ensure they support the $100 million refund. This evidence played
      a
      significant role in the proceedings and may not be ignored in a decision that
      considers and adopt the proposed settlement as a resolution on the merits,
      as we
      are required to do here. As set forth in the remainder of the order, the
      Commission finds substantial evidence in the record to support the provisions
      of
      this non-unanimous proposed Settlement and Addendum.

    

    The
      Commission hereby adopts the provisions of the proposed Settlement and Addendum
      as an appropriate resolution on the merits, finding that they meet the
BPI
      test.

    

     

    C. Terms
      of the Settlement

     

    

    The
      Commission finds that an appropriate settlement has been reached in this docket
      and in the other Peoples Reconciliation Dockets, the terms of the settlement
      areof which are set forth in the Settlement (Exhibit 1) and Addendum (Exhibit
      2). The Settlement Agreement and Addendum are hereby incorporated into and
      made
      a part of this Order and the similar orders entered for the other Peoples
      Reconciliation Dockets.

    

     

    1. Distribution
      of the $100 Million Refund

     

    

    The
      Settlement Agreement and Addendum provide the Commission with flexibility in
      determining how to refund the $100 million to customers in PGL's and North
      Shore’s service territories. The Commission finds that the $100 million refund
      should be apportioned to North Shore and PGL customers based on the substantial
      evidence in the records of Docket No. 01-0706 and Docket No. 01-0707. That
      evidence demonstrates that North Shore customers suffered significantly less
      harm than PGL customers. 

    
      
        

        
        

      

      
        8

        
          

        

      

      
        
        

        01-0707

      

    

    

    The
      Commission finds that the $100 million refund shall be allocated between North
      Shore and PGL customer accounts based on each utility’s approximate share of the
      total disallowances recommended by Staff in Docket Nos. 01-0706 and the instant
      docket. Staff recommended approximately $92 million in disallowances in the
      instant proceeding and approximately $4 million in disallowances in Docket
      No.
      01-0706. Using those numbers as indicators of the level of harm caused to
      consumers in each service territory, the Commission finds that $96,000,000
      of
      the $100,000,000 shall be refunded to customer accounts in PGL’s service
      territory.

    

    The
      Company shall distribute the $96,000,000 refund to customer accounts in PGL's
      service territory by refunding one hundred dollars ($100.00) to each customer
      account in Service Classification No. 1 - Small Residential Service ("SC No.
      1")
      that is receiving service from the Company upon the date this Order is entered.
      The $100 refund shall be provided to all SC No.1 customer accounts—both
      transportation and sales service. 

    

    After
      $100 dollars is allocated to each SC No. 1 customer account, the remainder
      of
      the $96,000,000 shall be allocated to all remaining Service Classifications
      (“Non-residential Service Classifications) based on each Non-residential Service
      Classification’s share of the total PGA gas consumed by all Non-residential
      Service Classifications during the 2001, 2002, 2003, and 2004 reconciliation
      periods (“Reconciliation Periods”). 

    

    Each
      Non-residential Service Classification’s allocation, with the exception of the
      allocations to Service Classification No. 3 - Large Volume Service ("SC No.
      3")
      and Service Classification No. 4 - Large Volume Demand Service ("SC No. 4"),
      shall be divided by the total number of customer accounts (both transportation
      and sales) receiving service under that Service Classification on the date
      this
      Order is entered. The result for each Service Classification shall be refunded
      on a per capita basis to each customer account receiving service under that
      Service Classification on the date this Order is entered. Refunds to all
      Non-residential Service Classifications shall be provided to both sales and
      transportation customer accounts with the exception of SC No. 3 and SC No.
      4
      customer accounts as outlined below. 

    

    Refunds
      to SC No. 3 customer accounts shall be allocated to individual SC No. 3 customer
      accounts based on PGA gas usage during the Reconciliation Periods. The amount
      allocated to SC No. 3 shall be refunded to each individual SC No. 3 customer
      account, which received service at any time during the Reconciliation Periods
      and purchased PGA gas at any time during the Reconciliation Periods, based
      on
      each customer account’s share of the total PGA gas used during the
      Reconciliation Periods. If any of these entities are still a going concern
      but
      no longer a customer of the Company, then the Company and the customer shall
      arrive at a mutually acceptable method of administering the refund. Refunds
      to
      SC No. 4 customer accounts shall be calculated in the same manner as refunds
      to
      SC No. 3 customer accounts. 

    
      
        

        
        

      

      
        9

        
          

        

      

      
        
        

        01-0707

      

    

    

    The
      Commission finds that the allocation methodologies for the different Service
      Classifications approved herein are equitable and take into consideration the
      administrative difficulties associated with providing refunds to nearly one
      million customers with vastly different usage characteristics and levels of
      service.

    

    Within
      seven days of the date this Order is served to the parties, PGL shall file
      an
      informational filing with the Commission's Chief Clerks Office describing the
      amount to be refunded to each customer in each Service Classification based
      on
      the methodology described herein and a plan for administering the refunds.
      

    

    The
      informational filing shall include the following information:

    

    
      	 	
              §

            	
              the
                number of customers receiving service on each Service Classification
                as of
                the date this Order is entered; 

            

    

    

    
      	 	
              §

            	
              the
                usage of PGA gas by each Service Classification during the Reconciliation
                Periods;

            

    

    

    
      	 	
              §

            	
              the
                amount to be refunded to each customer account in each service
                classification;

            

    

    

    
      	 	
              §

            	
              the
                number of current and former customers that held customer accounts
                on
                Service Classification No. 3 and Service Classification No. 4 during
                the
                Reconciliation Periods and consumed PGA gas at any time during the
                Reconciliation Periods;

            

    

    

    
      	 	
              §

            	
              the
                amount of PGA gas consumed during the Reconciliation Periods by each
                current and former customer that held a Service Classification No.
                3 or
                Service Classification No. 4 account during the Reconciliation
                Periods;

            

    

    

    
      	 	
              §

            	
              an
                indication of whether former SC No. 3 and SC No. 4 customers are
                still a
                going concern, the amount to be refunded to customers in each service
                classification; and, 

            

    

    

    
      	 	
              §

            	
              the
                amount to be refunded to each current and former customer account
                that
                received service under Service Classification No. 3 and Service
                Classification No. 4 during the Reconciliation
                Periods.

            

    

    

    The
      refund shall be issued in one installment and shall be considered a credit
      to
      each customer account. The credit shall be plainly designated on customers’
bills as a refund credit provided as a result of a Settlement and Addendum
      agreed upon by the City of Chicago, the Illinois Attorney General, the Citizens
      Utility Board, Peoples Gas, and North Shore and approved by the Illinois
      Commerce Commission.

    
      
         

        

        
        

      

      
        10

        
          

        

      

      
        
        

        01-0707

      

    

    

    Refunds
      shall be issued to all customer accounts within thirty days of the date this
      Order is entered. Within forty-five (45) days of the date this Order is entered,
      the Company shall file an informational filing describing how the refund process
      was administered, the speed at which the refund process was completed, any
      problems that were incurred during the refund process, and any other issues
      associated with the refund process. The filing will also include the total
      numbers of customers receiving the refund, and for all Service Classifications
      except for SC 1, the refund amount for each customer.

    

     

    2. Accounting
      Proposals Adopted from the ALJPO

     

    

    In
      the
      Settlement and the Addendum, the Settling Parties agreed that the Peoples
      Companies would adopt and incorporate into the Settlement several of the
      accounting provisions set forth in the ALJPO. Section III.A.2 of the Settlement
      includes a statement paralleling Finding (13) of the ALJPO. Section III.A.2.
      states:

    

    For
      a
      period of five years, Peoples Gas and North Shore Gas each shall perform an
      annual internal audit of gas purchasing and submit a copy of the audit report
      to
      the Manager of the ICC’s Accounting Department.

    

    (Settlement
      at 8.)

    

    Amendment
      Section A of the Addendum states that the Peoples Companies will account future
      HUB and third party non-tariff revenues in accordance with 83 Ill. Admin Code
      525, stating:

    

    Upon
      approval of the settlement agreement, Peoples Gas and North Shore Gas and all
      Peoples Companies shall account for all of their HUB revenues and third party
      non-tariff revenues, and any other revenues referred to as HUB revenues or
      non-tariff revenues (as those terms have been used in ICC Docket 01-0707) in
      accordance with 83 Ill. Admin Code 525.40(d). All such revenues shall serve
      to
      offset “recoverable gas costs” to arrive at the “gas charge” as those terms are
      used in Illinois Commerce Commission rules part 525.40(d) and in accordance
      with
      the Public Utilities Act. 83 Ill. Admin. Code 525.40(d); 220 ILCS 5/101
et.
      seq.
      The
      Peoples Gas and North Shore Gas and all Peoples Companies agree that this
      accounting of these revenues shall apply to all future Purchased Gas Adjustment
      reconciliation case and rate case filed by Peoples Gas and North Shore
      Gas.

    

    (Addendum
      at 1-2.). Therefore, Peoples Gas and North Shore must account for all of their
      HUB revenues and third-party non-tariff revenues as is set forth
      above.

    
      
         

        

        
        

      

      
        11

        
          

        

      

      
        
        

        01-0707

      

    

    

    The
      text
      of those findings from the ALJPO incorporated into the Settlement by the
      Addendum are:

    

    
      	 	
              (7)
                

            	
              Peoples
                Gas Light and Coke Company shall update its operating agreement,
                which was
                approved by this Commission in Docket No. 55071,
                prior to filing its petition with the ICC for its next rate case
                or within
                sixty days after the date a final order is entered in this docket,
                whichever occurs first;

            

    

    

    
      	 	
              (8)
                

            	
              Peoples
                Gas Light and Coke Company shall account for all gas physically injected
                into Manlove Field by including the cost associated with maintenance
                gas
                in the amount transferred from purchased gas expense to the gas stored
                underground account, Account 164.1;

            

    

    

    
      	 	
              (9)
                

            	
              Peoples
                Gas Light and Coke Company shall account for the portion of gas injected
                into the Manlove Storage Field to maintain pressure, as credits from
                Account 164.1, Gas Stored Underground, as charges to Account 117,
                Gas
      Stored Underground, in the case of recoverable cushion gas,
                or to Account
                101, in the case of non-recoverable portions of cushion
                gas;

            

    

    

    *  *  *

    

    
      	 	
              (11)
                

            	
              Peoples
                Gas Light and Coke Company shall revise its maintenance gas accounting
                procedures related to gas injected for the benefit of the North Shore
                Gas
                Company and third-parties to require those entities to bear the cost
                of
                maintenance gas, and it shall revise its maintenance gas accounting
                procedures to ensure that all customers/consumers bear equal
                responsibility for maintenance gas;

            

    

    

    
      	 	
              (12)
                

            	
              Peoples
                Gas Light and Coke Company shall submit its revised maintenance gas
                accounting procedures to the Commission’s Chief Clerk with a copy to the
                Manager of the Accounting Department within 30 days after the date,
                upon
                which, a final Order is entered in this
                docket;

            

    

    

    *  *  *

    

    
      	 	
              (14)
                

            	
              Peoples
                Gas Light and Coke Company shall submit quarterly reports reflecting
                its
                use of journal entries regarding maintenance gas to the Manager of
                this
                Commission’s Accounting Department within 45 days of the end of each
                quarter, after the date of a final order is entered in this docket,
                through the quarter ending September 30,
                2009;

            

    

    

    
      
         

        

        
        

      

      
        12

        
          

        

      

      
        
        

        01-0707

      

    

    
      	 	
              (15)
                

            	
              Peoples
                Gas Light and Coke Company shall engage outside consultants to perform
                a
                management audit of its gas purchasing practices, gas storage operations
                and storage activities. The firm selected to perform the management
                audit
                shall be independent of Peoples Gas Light and Coke Company, its
                affiliates, Staff, and all parties in this docket, and approved by
                this
                Commission. Monthly reporting of the progress of the conduct of the
                management audit shall be submitted to the Bureau Chief of the
                Commission’s Public Utilities Bureau, with a copy to the Manager of the
                Commission’s Accounting Department, until the management audit report has
                been submitted. Completion of this management audit shall occur no
                later
                than eighteen months after the date, upon which, a final order is
                entered
                in this docket. Upon completion, copies of the management audit reports
                shall be submitted to the Commission’s Public Utilities Bureau Chief and
                the Manager of the Commission’s Accounting
                Department.

            

    

    

    (ALJPO
      at
      135-136.)

    
      	 	
              3.

            	
              Hardship
                Reconnection Program 

            

    

    

    The
      Peoples Companies agreed to instate a Hardship Reconnection program to allow
      certain customers who have been disconnected for non-payment to be reconnected
      and their debt forgiven. The Commission applauds this program and the Companies’
pledge to permanently instate it. The Commission has high hopes for the
      program’s success. To keep ourselves informed of the success, the Commission
      finds that the Peoples Companies should file quarterly reports on the progress
      of the program.

    

     

     

    
      
         

        

        
        

      

      
        13

        
          

        

      

      
        
        

        01-0707

      

    

     

    
      	 	
              4.

            	
              Gas
                Reconciliation

            

    

     

    

    A
      reconciliation of Peoples Gas’ total gas revenues with total gas costs for the
      reconciliation period October 1, 2000, through September 30, 2001 is shown
      in
      Appendix A hereto. This Appendix A contains an independent reconciliation for
      each of the following; Commodity Gas Charge, Non-Commodity Gas Charge and Demand
      Gas Charge, and Transition Surcharge. Below is an aggregation of the above
      referenced reconciliations. 

    

    
      	
              1. Unamortized
                Balance at 9/30/00 per 2000 reconciliation
                (Refund)/Recovery

            	
              $30,466,781.15

            
	
              2. Factor
                A Adjustments Amortized to Sch. I at 09/30/00 per 2000 reconciliation
                (Refund)/Recovery 

            	
              13,153,581.51

            
	
              3. Factor
                O (Refunded)/Recovered during 2000

            	
              _______0_______

            
	
              4. Balance
                to be (Refunded)/Recovered during 2001 from prior periods

            	
              43,620,362.66

            
	
              5. 2001
                PGA Recoverable Costs

            	
              883,501,818.75

            
	
              6. 2001
                PGA Actual Recoveries

            	
              958,580,973.43

            
	
              7. Interest

            	
              801,015.36

            
	
              8. Other
                Adjustments

            	
              0

            
	
              9. Pipeline
                Refunds 

            	
              ___(614,882.34)__

            
	
              10. 
                (Over)/Under Recovery for 2001

            	
              (74,893,021.66)

            
	
              11. 
                PGA Reconciliation Balance at 9/30/01 

              (Over)/Under
                Collected

            	
              (31,272,659.00)

            
	
              12. 
                Factor A Adjustments unreconciled at 9/30/01

              (Refund)/Recovery

            	
              (10,342,032.56)

            
	
              13. 
                Unamortized Balance at 9/30/01

              (Refund)/Recovery

            	
              ($20,930,626.44)

            
	
              14. 
                Requested Ordered Reconciliation Factor to be (Refunded)/Recovered
                [Factor
                O]

            	
              0

            

    

    

    
      
         

        

        
        

      

      
        14

        
          

        

      

      
        
        

        01-0707

      

    

    

    
      	
              II.

            	
              The
                Procedural History of this
                Docket

            

    

    

     

    
      	 	
              A.

            	
              Disclosure
                of Pertinent Information During
                Discovery

            

    

     

    As
      is
      often the case in litigation, the ALJ assigned to this docket set a cut-off
      date
      of March 17, 2003 for completion of all discovery, except for the prefiling
      of
      testimony.5
      (See,
      e.g., Mann v. Upjohn Co.,
      324 Ill.
      App. 3d 367, 373, 753 N.E.2d 452 (1st
      Dist.
      2001); Besco
      v. Henslee, Monek & Henslee,
      297 Ill.
      App. 3d 778, 781, 701 N.E.2d 1126 (3rd
      Dist.
      1998)). On February 10, 2004, however, discovery was reopened. In Motions to
      Compel brought by several parties, parties contended that in discovery, PGL
      was
      asked to provide information about its business dealings with an affiliate,
      enovate. Recently-released information on the website of the Federal Energy
      Regulatory Commission (“the FERC”) about Enron’s relationship with PGL and its
      affiliates indicated that PGL entered into transactions with enovate that were
      not disclosed in discovery. (See,
      e.g.,
      CUB
      Motion to Compel, February 3, 2004). In fact, PGL contended that it had no
      business dealings with enovate. (See,
      e.g.,
      CUB
      Motion to Compel, February 3, 2004). enovate is described below. When reopening
      discovery, the ALJ permitted the movants to seek additional information through
      discovery from PGL about its relationship with its affiliate, enovate, but
      ruled
      that the discovery requests the movants sought to enforce were vague and
      overbroad. (Tr.132-33). 

    

    Also
      on
      February 10, 2004, the ALJ required parties to adhere to discovery practices
      in
      the Ill. Supreme Court Rules, as opposed to the discovery practices in the
      Commission’s rules.6
      The Ill.
      Supreme Court Rules require verification of answers to discovery requests.
      (See,
      e.g.,
      S. Ct.
      Rule 213(i)). While ultimately PGL did respond to discovery requests asking
      for
      information about its relationship with enovate, those records are not complete.
      Throughout the course of discovery, PGL maintained that Enron North America,
      a
      co-owner of enovate, had that information. (See,
      e.g.,
      GCI
      Init. Brief at 30). 

    

    

    ____________________

    5   Administrative
      Law Judge Erin O’Connell-Diaz was originally assigned to this docket. It was
      reassigned to Administrative Law Judge Claudia E. Sainsot on April 30, 2003.
      

    6   Commission
      rules require full disclosure of all information that is relevant and material.
      (See,
      e.g., 83
      Ill,
      Adm. Code 200.340). Commission rules do not require any person to verify
      discovery responses. And, Commission rules provide no penalties for failure
      to
      provide discovery or for inaccurate discovery responses. 

    
      
         

        

        
        

      

      
        15

        
          

        

      

      
        
        

        01-0707

      

    

    

     

    
      	 	
              B.

            	
              The
                Protective Order

            

    

     

    

    Another
      contested item in this docket was the Protective Order, which was entered after
      the parties fully briefed this issue.7
      At that
      time, PGL maintained that highly confidential information about its gas-buying
      practices was being tendered in discovery and these documents needed to be
      kept
      under seal to protect PGL from unscrupulous use of information in this docket
      in
      the marketplace. In response, Staff, CUB, the City and the AG maintained that
      the information PGL claimed was confidential was “stale;” that is, it was too
      old to be used against PGL in the marketplace. Except for the obvious lapse
      of
      time, these parties did not provide factual support for this factual conclusion.
      

    

    There
      is
      evidence in this proceeding concerning PGL’s and its affiliates business
      dealings with Enron which, if revealed in a competitive setting could cause
      harm
      to PGL or an affiliate.8
      Therefore, the protective order remains in place. However, the Commission
      concludes that the information set forth herein discussing certain terms in
      the
      business dealings among PGL/PGL affiliates and Enron Midwest/Enron
      North

    

    America
      is not protected by the protective order, as it is not information that, if
      revealed in a competitive setting, would cause harm to PGL or an affiliate.
      This
      information does not divulge PGL’s gas buying needs, its buying practices, or
      like information that could be used against PGL or an affiliate in the
      marketplace. 

    

    The
      Commission additionally notes that the contracts in question were executed
      in
      September of 1999, over six years ago, and they created a highly unique business
      arrangement. The full consideration (what is given up or taken pursuant to
      a
      contract,
      i.e., money
      or
      services) cannot necessarily be ascertained by analyzing any one contract,
      or
      even all of the contracts, as some of the contracts were inter-dependent. Also,
      some of the contracts were verbal. And, some of the consideration provided
      is
      not mentioned in the contracts. 

    

    Finally,
      the contractual arrangements amongst PGL/PGL affiliates and Enron North
      America/Enron Midwest were designed to avoid Commission detection. Thus,
      consideration for the transactions represents what personnel at the parties
      thereto were willing to give up in these transactions, while still avoiding
      Commission scrutiny. In other words, the consideration in these transactions
      is
      not representative of any true market value or true purchasing need on the
      part
      of PGL or a PGL affiliate.

    

    

    

    

    ____________________

    7   In
      an Interlocutory Appeal filed on behalf of the People of the State of Illinois,
      the AG maintained, essentially, that this order was entered without the parties
      having briefed the issue. (01-0707, Petition of the People of the State of
      Illinois for Interlocutory Review, August 11, 2004). This simply is not correct.
      (See,
      e.g.,
      Comments
      of City and CUB Regarding Issuing a Protective Order, July 20, 2004).

    8   The
      protective order only protected the confidentiality of documents subject to
      the
      attorney-client privilege and trade secrets, which is, information that, if
      revealed in a competitive setting, could cause harm. (See,
      01-0707,
      Protective Order, July 21, 2004). 

    
      
         

        

        
        

      

      
        16

        
          

        

      

      
        
        

        01-0707

      

    

    

    As
      to
      information about Manlove Field which could be considered to be proprietary,
      PGL
      divulged that information about Manlove Field in the public version of its
      briefs. That information, therefore, is not subject to the protective order.
      

    

     

    C. The
      Applicable Legal Standards

     

    

     

    1. The
      Duty Imposed on PGL by Statute

     

    

    Generally,
      base rates include a utility’s administrative costs and its Commission-approved
      rate of return, which is the cost of investor capital. (See,
      e.g., Ill. Power Co. v. Ill. Commerce Commission,
      339 Ill
      App. 3d 425, 434, 709 N.E.2d 377 (1st
      Dist.
      2003)). This proceeding, however, is a reconciliation, which determines the
      propriety of PGL’s purchased gas adjustment tariff(“PGA”), which allows it to
      pass its gas costs on directly to consumers.9
      (Id.
      at 427).
      Those charges are the cost of gas supplied to consumers, as well as the related
      expenses incurred, including but not limited to, expenses related to assets
      used
      by PGL in supplying gas to consumers. (83 Ill. Adm. Code 525.40(a)). With
      respect to gas costs, consumers pay PGL whatever price PGL paid for gas, with
      no
      markup for profit on the gas. (Tr. 782). 

    

    Recoverable
      gas costs include the cost(s) of gas, cost(s) of storage, transportation costs
      and other non-commodity costs. (83 Ill. Adm. Code 525.40(a)). If PGL derived
      revenues from any transactions with costs associated with costs recoverable
      under the above-mentioned section, any associated revenues must be used to
      offset those costs. (Id.
      at
      525.40(d)). When engaging in such transactions, PGL must “refrain” from doing
      anything that would increase the gas charge. (Id.).

    

    Although
      PGL’s tariff allows it to pass on the cost of gas to consumers without
      Commission approval, the Commission is required annually by statute, to
      determine whether the charges PGL imposed reflect the cost of gas and to
      determine whether such purchases were prudent. (220 ILCS 5/9-220). In this
      context, prudence has been defined as [t]hat standard of care which a reasonable
      person would be expected to exercise under the same circumstances encountered
      by
      utility management at the time decisions had to be made. (Illinois
      Power Co. v. Ill. Commerce Comm.,
      245 Ill.
      App. 3d 367, 371, 612 N.E.2d 925 (3rd
      Dist.
      1993)). Thus, only what PGL’s decision-makers actually analyzed, or should have
      analyzed, can be considered here. (Id.).
      

    

    If,
      after
      a hearing, the Commission finds that a utility has not established that the
      costs it passed on to consumers in a PGA clause were prudently incurred, the
      difference determined by the Commission must be refunded, along with any
      interest or carrying charge authorized by the Commission. (83 Ill. Adm. Code
      Sec. 525.70(b)). Section 9-220 and its predecessor, Section 36 of the previous
      Public Utilities Act, confer a broad grant of authority on this Commission.
      (Business
      and Professional People for the Public Interest v. Ill. Commerce
      Comm.,
      171 Ill.
      App. 3d 948, 957, 525 N.E.2d 1053 (1st
      Dist.
      1988)). 

    

    ____________________

    9   The
      word “consumer” is used here to mean PGL’s rate-paying customers, including both
      residential customers and businesses.

    

    
      
         

        

        
        

      

      
        17

        
          

        

      

      
        
        

        01-0707

      

    

    

     

    2. The
      Burden of Proof

     

    

    The
      Commission commenced this reconciliation proceeding, as it does every year.
      However, the burden of proof is on PGL to establish the prudence of its costs
      of
      gas purchases and related costs. (220 ILCS 5/9-220(a)). PGL has the burden
      to
      prove this by a preponderance of the evidence. (5 ILCS 100/10-15). Preponderance
      of the evidence has been defined as the evidence that is more probably true
      than
      not. (See,
      e.g., Witherell v. Weimer, 118
      Ill.
      2d, 321, 336, 515 NE2d 68 (1987)).

    

     

    III. Entities
      Involved

     

    

     

    A. Findings
      of Fact

     

    

    As
      the
      record demonstrates, several entities are involved in this rather complicated
      fact pattern. Of primary importance is PGL, a local distribution company (“LDC”)
      and the subject of this reconciliation proceeding. It distributes gas to
      consumers that are within its service territory, chiefly located in the City
      of
      Chicago. It must purchase the gas that it distributes to consumers. (Tr. 871,
      887). Next, Peoples Energy Corporation (“PEC”), PGL’s parent company, is a
      player in several scenarios discussed later in this order. Affiliated with
      PGL
      and PEC are Peoples Energy Resources Company (“PERC”) and North Shore Gas
      Company. (PGL Ex. L at 3). Additionally, Enron North America Corp. (“Enron NA”)
      was wholly-owned by Enron Corp. (Staff Ex. 2.00, Attachments, Guaranty, at
      1).
      The list does not stop here.

    

    PGL
      furnished Staff and the parties with two letters of intent (“First LOI” and
“Second LOI”) between PEC and Enron NA. The First LOI was executed on September
      16, 1999 by PEC and Enron NA.10
      

    

    The
      First
      LOI outlined Enron NA’s and PEC’s intent to pursue a joint venture. In this LOI,
      Enron NA and PEC stated a desire to enter into Hub and marketing services to
      the
      Chicago wholesale marketplace, including: parking, balancing, exchange and
      title
      tracking services, risk management services, asset optimization services to
      PEC
      and affiliates, wholesale bundled services to PEC in power and gas, and
      investment in and monetization of capital improvement of PEC’s Chicago
      infrastructure. (Id.
      at
      ST-PG
      192)). To effectuate these dealings, PEC and Enron NA were to form a new company
      in the form of a joint venture.

    

    

    

    

    

    

    ____________________

    10   The
      First LOI was executed on the same day as the GPAA. The signatories to this
      LOI
      were William Morrow, Vice President of PEC, and David Delainey, Managing
      Director of Enron NA, the same as the signatories to the GPAA.

    

    
      
         

        

        
        

      

      
        18

        
          

        

      

      
        
        

        01-0707

      

    

    

    The
      Second LOI outlined profit-sharing of hub revenues between PEC and Enron NA,
      sharing of peaking service between the two parties and sharing of Enron NA’s
      revenues. Though this document was apparently not executed (signed by the
      parties), the actual relationship between the parties was very similar to what
      the First LOI provided. It provided that the terms of a definitive contract
      between the two were to specify the terms of conditions of the business
      arrangements and the sharing of profits and losses. (Id.
      at
      192).
      No
      written contract was actually ever executed by these parties; instead, they
      proceeded to do business based on a verbal commitment. (Staff Ex. 9.00,
      Attachment G). 

    

    Enron
      NA
      and PERC each formed a subsidiary for the purpose of owning interest in another
      limited liability company. Enron NA formed Enron Midwest, LLC (“Enron Midwest”
or “Enron MW”); PERC formed Peoples Midwest, LLC (“Peoples Midwest”). (Staff Ex.
      7.00 at 8). These two entities then formed enovate, LLC11
      to
      facilitate a profit-sharing arrangement that gave PEC/PERC 50% of all of the
      profits Enron Midwest gleaned through various business dealings with PGL.

    

     

    1. enovate,
      LLC

     

    

    Peoples
      Midwest and Enron Midwest formally created enovate, LLC (”enovate”) by a Limited
      Liability Company (“LLC”) Agreement dated April 26, 2000. (PGL Ex. N at 3).
      According to the agreement, Peoples Midwest and Enron Midwest each invested
      approximately $100,000 in enovate. In return, each entity received, 50% of
      the
      profits from enovate. (PGL Ex. N at 3, Staff Ex. 9.00 at 9, Attachment C; Tr.
      800). When Enron Midwest transacted business with PGL during the time period
      in
      question, 50% of Enron Midwest’s profits were credited to enovate. Thus PEC/PERC
      received that 50% of Enron Midwest’s profits. (Staff Ex. 9.00 at 15-16; 7.00 at
      11). Enron Midwest was the managing partner of enovate because it possessed
      the
      skills, resources and expertise to operate enovate efficiently and profitably.
      (Tr. 812-13).

    

    enovate
      had few tangible assets or expenses of its own. enovate owned pipeline
      transportation rights with Trunkline Gas Company, interruptible services that
      it
      purchased from interstate pipelines and local gas distribution companies, as
      well as physical gas supply agreements with Northern Illinois Gas Company and
      Northern Indiana Public Service Co. (PGL Ex. N at 4-5). enovate also claimed
      to
      have 30 Bcf of storage.12
      (See,
      City-CUB
      Ex. 2.00 at 18). The record demonstrates that Enron NA and PERC provided
      operations and management needs. enovate used office space rented by Enron
      NA
      and other facilities, computer systems and training systems provided by Enron
      NA. The personnel who ran enovate were employed by and paid by PERC. (Tr. 793,
      795). enovate had no payroll. (Tr. 794-95). Because PERC and Enron NA each
      bore
      the labor costs associated with enovate, there was no need for enovate to have
      a
      payroll. (PGL Ex. N at 6). enovate had no administrative costs and no cash
      on
      its books. (City-CUB Ex. 1.0 at 65). 

    

    

    ____________________

    11  enovate,
      LLC was originally named Midwest Energy Hub, LLC.

    12   A
      Bcf of gas is one million MMBtus; a MMBtu is one million Btus. (Staff Ex. 2.00,
      Attachments, GPAA, at 5; Tr. 1004). Also, a decatherm, or a Dth, is one million
      Btus. (NYMEX.com\glossary). A Btu is a British thermal unit, which is the amount
      of energy required to raise the temperature of one pound of pure water the
      one
      degree from 59 degrees to 60 degrees, Fahrenheit, at sea level pressure. (Staff
      Ex. 2.00, Attachments, GPAA, at 2). 

    
      
         

        

        
        

      

      
        19

        
          

        

      

      
        
        

        01-0707

      

    

    

    On
      November 28, 2000, PGL filed an application pursuant to Section
      7-10113
      of the
      Public Utilities Act (“PUA” or “the Act”) for Commission permission to enter
      into a contract with an affiliate, enovate, LLC. In that verified application,
      PGL averred that PGL and enovate entered into a contract, subject to Commission
      approval, which governed the terms of purchases and sales between PGL and
      enovate. This contract was for the purpose of “optimizing” the use of PGL’s gas
      supply and capacity assets. (Application
      of Peoples Gas Light and Coke Co. for Authority under Section 7-101 of the
      Ill.
      Pub.
      Utilities
      Act to enter into a Master Natural Gas Agreement with enovate, LLC,
Docket
      No. 00-0760, at 2). On March 21, 2001, PGL filed a motion to dismiss its
      application, stating that PGL no longer desired to expend the resources
      necessary for the proceeding. (Motion
      to Dismiss,
      March
      21, 2001, Docket No. 00-0760). The Commission granted the Motion to Dismiss
      on
      May 9, 2001. However, PGL continued to directly transact business with enovate.
      PGL also transacted business with enovate indirectly, through Enron NA/Enron
      Midwest. At no time did the Commission approve any affiliate interest agreement
      between PGL and enovate.

    

    Evidence
      adduced during this reconciliation proceeding outlines transactions between
      PGL
      and enovate. PGL witness Mr. Morrow14
      testified that during the time period in question, enovate purchased “Hub
      services” from PGL pursuant to an operating statement on file with the Federal
      Energy Regulatory Commission (“FERC”). (PGL Ex. N at 5). enovate also used PGL’s
      gas distribution system. Without PGL’s gas distribution system, enovate would
      not have been able to conduct the transactions set forth herein. enovate also
      sold gas directly to PGL in the “Trunkline Deal” and Transaction 16/22. These
      transactions will be discussed below. enovate further conducted other
      transactions with PGL through Enron Midwest. To reiterate, none of enovate’s
      transactions with PGL were made with Commission approval of an affiliated
      interest contract. 

    

    According
      to Mr. Morrow, to keep track of transactions between enovate and Enron, enovate
      issued a series of daily reports that recorded and valued activity every day,
      year-to-date, and it valued what might have occurred that day. (Tr. 798). Those
      reports were distributed among PEC personnel in its risk and credit areas,
      and
      to the PERC employees who worked at enovate. (Id.;
      Tr.
      804). enovate also distributed all of the accounting data that was needed to
      record its income. (Tr. 798). Additionally, if PEC accountants needed details
      on
      a daily basis or on a monthly basis, Enron provided this information to those
      accountants. (Tr. 798-99). These reports were also published and circulated
      daily; they tracked information from trades and other activity. (Tr. 804).
      

    

    

    

    

    

    

    

    ____________________

    13   Section
      7-101 of the PUA governs transactions between affiliated interests.

    14   In
      addition to being the Vice President of PEC, Mr. Morrow is also the Vice
      President of PGL, the President of PERC, member of the Board of Managers for
      enovate, and Peoples Midwest’s representative on enovate’s Board of
      Directors.

    
      
         

        

        
        

      

      
        20

        
          

        

      

      
        
        

        01-0707

      

    

    

    Mr.
      Morrow testified generally as to the types of transactions enovate engaged
      in.
      He testified that as a wholesale gas marketer, enovate entered into physical
      and
      financial gas purchases and sales, as well as speculative trading.15
      ( PGL
      Ex.
      N at
      4).
      enovate concentrated its business in the Upper Midwest. (Id.).
      Mr.
      Morrow also testified as to the nature of enovate’s transactions with Peoples
      and enovate's sources of revenue. He stated that, although he received daily
      reports about enovate’s business activities, he did not know what percentage of
      enovate’s activities were devoted to speculative trading. (Tr. 804-806). He
      testified that because Enron Midwest was the managing partner of enovate, Enron
      kept all of the books. (Tr. 806). According to Mr. Morrow, the data provided
      by
      Enron to Peoples Energy was not “fine cut” enough to be able to calculate how
      much of enovate’s activities concerned speculative trading. (Tr. 806). Peoples’
personnel did not feel that it was necessary or required of them to have a
      sub-split of enovate’s business activities. (Id.).
      There
      is no evidence in this record that any of enovate’s revenue came from sources
      other than the revenue-sharing of Enron Midwest’s profits gleaned from PGL.
      (See,
      e.g.,
      PGL Ex.
      N at 4; Tr. 805). 

    

    PEC
      had
      an audit performed of enovate to determine that the correct procedures and
      monitoring practices were in place to protect PEC in its new venture with
      enovate. (Tr. 808-09)._ This audit was conducted by an internal group and an
      outside consultant who specialized in derivatives in energy trading.
      (Id.).
      In
      this audit, the auditors expressed concern that revenue-sharing between PEC
      and
      Enron “related to the optimization of the PGL Hub” and the activities of Enron
      Midwest were not formally documented. The auditors noted that Enron Midwest
      revenues were being transferred quarterly to enovate through an “annuity trade”
(quotes in original text) between the two entities, but because nothing was
      in
      writing, PEC exposed itself to higher financial risk than it would have if
      there
      were written contracts memorializing its profit-sharing agreement with Enron.
      (Staff Ex. 9.00, Attachment G at 2). 

    

    enovate
      was in existence for only a short period of time when Enron filed for
      bankruptcy.16
      After
      Enron’s bankruptcy filing, PEC bought Enron’s share in enovate for approximately
      $2 million. (Tr. 814, 817). PEC sent a “team” to Houston after that to retrieve
      any record that was necessary to wind down enovate’s business for that year.
      (Tr. 815). PEC personnel did not gather all of enovate’s documents. enovate
      discontinued operating in 2002. (Id.).
      

    

    The
      following represents significant financial milestones in enovate’s history:
      Enron Midwest and PEC each contributed $100,000 paid-in capital to enovate.
      (See.,
      e.g., City-CUB
      Ex. 1.0 at 65). On September 30, 2000, which was the end of enovate’s first year
      of operation, enovate reported revenues of $4,319,083. enovate did not receive
      capital contributions from PEC/Enron until October of 2000. During the
      reconciliation period, enovate gained $100 million in revenues and approximately
      $20 million in profits. (See,
      e.g.,
      City-CUB
      Ex. 1.0 at 64-65). During the reconciliation period, PEC garnered $9,052,823
      in
      revenues from enovate. Enron garnered an additional $10,630,817.17
      (Staff
      Exs. 5.00 at 27; 9.00, Attachments, Scheds. 9.05 and 9.06). City of Chicago/CUB
      witness Ms. Decker opined that such astronomical earnings are not commonplace
      in
      the midstream gas industry. (City-CUB Ex. 1.0 at 65). 

    

    ____________________

    15   Speculative
      trading is the act of engaging in buying or selling natural gas at a definite
      price, where the entity engaged bears the risks and opportunities associated
      with continual changes in price. (PGL Ex. N at 4).

    16   The
      Commission takes judicial notice of the fact that Enron Corporation filed for
      bankruptcy on December 2, 2001.

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

     

    B. Conclusions
      of Law - Scope of this Proceeding

     

    

     

    1. PGL’s
      Argument

     

    

    PGL
      argues that the scope of this proceeding should not include transactions
      involving enovate because those operations are only relevant if and to the
      extent that they affected recoverable gas costs. PGL states that because the
      actions of enovate had no effect on recoverable gas costs, the Commission cannot
      consider those transactions here. PGL maintains that Business
      and Professional People for the Public Interest v. Ill. Commerce
      Comm.,
      171 Ill.
      App. 3d 948, 525 N.E.2d 1053, (1st
      Dist.
      1988), does not apply here because that case concerned a FAC reconciliation
      and
      was governed not only by Section 9-220 of the PUA, but also by the federal
      Public Utilities Regulatory Policies Act of 1978 (“PURPA”). According to PGL,
      PURPA required the utility in that case, Commonwealth Edison Company (“ComEd”),
      to insure maximum economies in those operations and purchases that affect the
      rates to which such clauses apply. Because the transactions in question here
      are
      not subject to PURPA, PGL avers that the ruling in Business
      and Professional People for the Public Interest v. Ill. Commerce Comm.,
does
      not
      apply here. (PGL Reply Brief at 9-11). 

    

     

    2. The
      Position of the GCI 

     

    

    The
      GCI
      contend that the scope of this proceeding is broad, citing Business
      and Professional People,
      171 Ill.
      App. 3d at 958. The GCI argue that the scope of any reconciliation proceeding
      encompasses the non-procurement actions of a utility that have both direct
      and
      indirect impact on utility charges when those charges are passed on to
      consumers, which they allege is the case here. The GCI aver that in Business
      and Professional People,
      the
      Appellate Court rejected an argument that a $70 million refund ordered by the
      Commission due to the poor performance of a nuclear power plant was outside
      the
      scope of ComEd’s FAC reconciliation, even though the costs incurred regarding
      nuclear power plants were in base rates, not in a FAC reconciliation. ComEd
      incurred this $70 million charge because the nuclear power plant was supposed
      to
      operate at 60% capacity, but it only operated at 18% capacity, requiring ComEd
      to purchase additional power and pass the cost of that power on to consumers
      in
      its FAC. (See,
      GCI
      Reply Brief at 19). 

    

    When
      rejecting ComEd’s argument that the Commission exceeded the authority conferred
      on it by the statutory predecessor to Section 9-220, the Appellate court ruled
      that “To rule otherwise would result in an extremely narrow interpretation of a
      broad grant of statutory power and would also defy common sense.” The GCI posit
      that the enovate and hub-related transactions had an effect on what consumers
      paid. (Id.).

    

    

    

    ____________________

    17  
      These amounts do not include profits from the Trunkline Deal and the SOC. (Staff
      Ex. 9.00, Attachments, Scheds. 9.05, 9.06). 

    
      
         

        

        
        

      

      
        22

        
          

        

      

      
        
        

        01-0707

      

    

    

    The
      GCI
      also cite Ill.
      Commerce Commission, on its own Motion, Revisions of Part 525,
      1995
      Ill. PUC Lexis 579, in which the Commission ruled that reconciliation
      proceedings are the proper venue for examining utilities’ design-day planning
      and the way that utilities have used their system supply and capacity in
      off-system transactions and in exchanges. In the Part
      525
      Order,
      the Commission also concluded that prudent management and gas supply and storage
      capacity could include economic use of PGA assets or costs, to reduce PGA
      charges imposed on consumers. The GCI reason that here, under a variety of
      arrangements between PGL and Enron affiliates, opportunities to realize revenues
      that could offset PGA costs were either foregone or they were diverted to a
      PGL
      affiliate. (GCI Init. Brief at 23).

    

    The
      GCI
      maintain that hedging activities are among the Section 9-220 recoverable costs,
      as those activities are price management costs. Also, 83 Ill. Adm. Code Section
      525.40(d) requires that all gas costs recovered by a utility must be offset
      by
      the revenues derived therefrom, if any of the associated costs regarding that
      transaction are recoverable PGA gas costs. (Id.).
      

    

     

    3. Commission
      Analysis and Conclusions

     

    

    As
      shall
      be set forth herein in the section entitled “enovate,” the record evidence
      establishes that in several instances, PGL’s affiliates used enovate to
      artificially inflate costs borne by consumers in a manner that unfairly
      conferred profits on Enron and PGL affiliates. In the face of this evidence,
      PGL
      argues that the Commission should not be determining whether those profits
      artificially inflated costs borne by consumers in its PGA. The Commission
      disagrees. PGL cites no law that requires us to ignore transactions that raised
      gas costs, either by passing on unnecessary costs through enovate, or by
      engaging in transactions with enovate at less than market value, depriving
      consumers of the true market value of the transactions. 

    

    We
      also
      note that discovery was reopened in February of 2004 in order to determine
      what
      transactions involving enovate affected PGA gas costs. Since at least that
      time,
      with regard to enovate transactions, counsel for PGL was on notice that evidence
      regarding enovate’s business, which impacted PGL’s gas costs, could be an issue
      at the hearing. The hearing convened over a year later, in April of 2005. Yet,
      during the hearing, PGL made no attempt to exclude the evidence it now contends
      is extraneous to this proceeding. PGL, therefore, has waived its right to do
      so.
      (See,
      e.g., Smith v. Department of Professional Regulation,
      202 Ill.
      App. 3d 279, 287, 559 N.E.2d 884 (1st
      Dist.
      1990), ruling that failure to raise issues such as due process, at hearing,
      constitutes waiver of that issue.).

    

    PGL’s
      construction of Business
      and Professional People,
      171 Ill.
      App. 3d at 958, does not aid it. In Business
      and Professional People,
      the
      Appellate Court concluded that ComEd was subject to the same requirements under
      the PUA as it was under PURPA. However, it noted that the PUA conferred a broad
      grant of authority on the Commission to inquire into production management,
      in
      order to determine whether ComEd’s fuel purchases were prudently made.
      (Business
      and Professional People,
      171 Ill.
      App. 3d at 958). In so ruling, it stated: 

    
      
        

        
        

      

      
        23

        
          

        

      

      
        
        

        01-0707

      

    

    If
      in a
      fuel reconciliation proceeding, the Commission could not examine the reasons
      that necessitated a fuel purchase, the (statutory) prudence standard would
      have
      no effect . . . a utility could generate electricity in any manner it chose,
      efficiently, or inefficiently. 

    

    (Id.
      at 958).
      Thus, in Business
      and Professional People,
      the
      Appellate Court did not apply PURPA, as PGL suggests. A FAC reconciliation
      is
      subject to the same statutory requirements as a PGA. (See,
      e.g., Ill. Power v. Ill. Commerce Comm.,
      245 Ill.
      App. 3d 365, 612 N.E.2d 925 (3rd
      Dist.
      1992)). Even if PGL did not waive its right to contest the propriety of this
      evidence, PGL has failed to establish that evidence regarding enovate
      transactions is not relevant. 

    

     

    C. Conclusions
      of Law - Enron Profits

     

    

    
      	 	
              a.

            	
              Staff’s
                Position

            

    

    

    Staff
      recommends that the Commission disallow $19,683,640 for PGL’s involvement with
      enovate, approximately $9.1 million of which is the profit PEC garnered through
      enovate during the year in question, and approximately $10.6 million of which
      is
      Enron’s profit for the year in question. (Staff Ex. 5.00 at 6-7). Staff posits
      that since Enron shared profits with PEC through enovate, PGL personnel had
      an
      incentive to use Enron/Enron affiliates, as opposed to other entities, for
      gas
      supply, irrespective of PGL costs. This profit-sharing agreement provided both
      PGL/PEC and Enron affiliates with the motive to manipulate the prices PGL paid
      to Enron/Enron affiliates for gas, so that profits would be allocated to PEC
      shareholders, instead of consumers through PGL’s PGA. Dr. Rearden opined that
      without such an intention, it would be difficult to understand why PGL entered
      into transactions that were so transparently imprudent. (Staff Ex. 12.00 at
      2-3). 

    

    According
      to Staff, the “enovate P & L” statement establishes that some, if not all,
      of enovate’s transactions were recovered through the PGA. Transactions such as
      the “38 Special” and other 3PSEs were recorded as credits to PGL’s PGA gas
      charge. Staff also takes issue with PGL’s statement that Staff does not have
      more concrete evidence regarding enovate’s activities. PGL did not tender
      documents in discovery regarding enovate, stating that Enron kept these
      documents. (Staff Reply Brief at 68, 69). Staff additionally contends that
      a
      lack of documentation regarding enovate’s business transactions is prohibited by
      General Instructions Nos. 2, and 14, of Part 505 of the Commission Rules, which
      require PGL to keep all records needed to develop the history or facts regarding
      a transaction. (Id.
      at
      75).

    

    Staff
      points out that both agreements, the GPAA and the LOI, were executed on the
      same
      day. According to Staff, it defies logic to maintain that two parties executed
      two agreements on the same day, without having the parties consider both
      contracts as part of the same arrangement. (See,
      e.g.,
      Staff
      Ex. 7.00 at 8). Staff acknowledges that it does not matter that the entity
      involved in the profit-sharing was Enron, which, filed for bankruptcy subsequent
      to the reconciliation period. Rather, what is important to Staff is the nature
      of the transactions at issue that PGL entered into. (Staff Ex. 12.00 at 2-3).
      

    

    
      
        

        
        

      

      
        24

        
          

        

      

      
        
        

        01-0707

      

    

    Staff
      maintains that it presented evidence establishing that enovate could not have
      done business without using PGL’s PGA assets, such as interstate transportation
      and leased storage. Staff provided documents, like PGL’s list of “annuities” it
      paid to Enron Midwest/enovate. Staff concludes that PGL presented no evidence
      refuting that which Staff presented. (Staff Reply Brief at 70). 

    

    
      	 	
              b.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      concur with Staff. (See,
      CUB
      Ex.
      1.0 at 8). GCI points to additional transactions that show PGL’s improper
      dealings with enovate, Enron and PGL’s parent. The GCI contend that when PEC
      assumed the Citgo Contract and sold gas to PGL through Enron Midwest, PEC
      structured this transaction to avoid Commission scrutiny under Section 7-101.
      Also, the Trunkline Deal was not an arm’s-length transaction. According to the
      GCI, the Trunkline Deal involved Enron Midwest in a manner that conferred no
      benefit on ratepaying consumers, as Enron Midwest was only involved to avoid
      the
      Commission’s scrutiny, in an attempt to conceal an unapproved affiliate
      transaction. (GCI Init. Brief at 70, 72-73). The record contains various e-mails
      to William Morrow. The GCI argue that these e-mails establish that PEC
      deliberately avoided filing for Commission approval of enovate pursuant to
      Section 7-101 of the PUA. (GCI Init. Brief at 60; City-CUB Exs. 1.32, 1.33,
      2.0
      at 14). 

    

    The
      GCI
      point out that PGL never presented evidence that refuted Ms. Hathhorn’s
      testimony that 100% of Enron Midwest’s activities flowed to enovate, 50% of
      which was shared with PERC/PEC. They maintain that once evidence establishing
      a
      nexus between PGA assets and enovate profits was revealed, PGL had the burden
      to
      rebut that evidence. Instead, PGL offered a vague assertion that enovate had
      a
      variety of assets. Some amount of enovate’s income came from speculative trading
      and enovate purchased non-tariff services from Nicor and Northern Indiana Public
      Service Co. In support, the GCI cite PGL Ex. N at 5. (GCI Reply Brief at
      49-51).

    

    The
      GCI
      contend that enovate used PGA assets-PGL’s owned and leased storage, its gas
      supply and system injection and withdrawals. They aver that the only explanation
      in this record for enovate’s astronomical profits was enovate’s preferential use
      of PGL assets. (GCI Init. Brief at 59-61). 

    

    
      	 	
              c.

            	
              PGL’s
                Position

            

    

    

    PGL
      concedes that enovate was its affiliate. Nevertheless, it contends that
      affiliates can purchase services at the regulated rates and PGL can enter into
      transactions with affiliates without Commission approval, if those transactions
      are made in the ordinary course of business, citing 220 ILCS 5/7-101 and 83
      Ill.
      Adm. Code 310. PGL further claims that neither enovate nor any other affiliate
      bought or sold gas from it, citing PGL Ex. C, 37-38. (See,
      also,
      PGL
      Init. Brief at 86). Allegedly, PGL had no other contact with enovate; enovate
      did not manage PGL’s Hub and enovate costs and revenues did not flow through
      PGL’s PGA. Thus, according to PGL, any transaction PGL entered into with enovate
      was not subject to Section 7-101 of the PUA. Citing no fact of record, PGL
      further argues that any enovate transaction on PGL’s system, or through
      association with PGL, has “no bearing on (PGL’s) costs.” (PGL Init. Brief at
      87-88). However, PGL admits that enovate purchased hub services from PGL in
      the
      reconciliation period. (PGL. Init. Brief at 86, PGL Ex. C at 37-38).

    
      
         

        

        
        

      

      
        25

        
          

        

      

      
        
        

        01-0707

      

    

    PGL
      further contends that enovate had a variety of assets, even if those assets
      were
      not physical things. PGL concludes that Staff has unjustly maintained that
      enovate’s profits were derived solely from its association with PGL. PGL lists
      various assets enovate had, such as office space, capital contributions from
      PEC
      and Enron Midwest, parent guarantees, and firm pipeline capacity from Trunkline.
      PGL does not mention one instance in which enovate generated income from using
      these assets. (PGL Init. Brief at 86-88). PGL believes that its witnesses Zack
      and Morrow rebutted Staff’s and the GCI’s recommended disallowances.
      (Id.
      at 88;
      PGL Ex. K at 11-13). 

    

    PGL
      concedes that enovate used its gas supply system, but contends that the fact
      that enovate profited from that use is no basis for a cost disallowance. PGL
      cites no law or facts in support of this argument. Instead, PGL argues that
      businesses always intend to “make money.”  PGL
      asserts that Staff and the GCI failed to prove that there was a tie between
      enovate’s income and the prudence of its recoverable gas costs. Moreover, there
      is no evidence that the lawful business dealings between PEC and enovate harmed
      consumers. According to PGL, Staff and the GCI did not present any actual proof
      that enovate made profits through use of PGL’s system. (PGL Reply Brief at
      56-57, 89).

    

    Also,
      according to PGL, it was unable to quantify the amount of money enovate
      generated from speculative trading, citing Mr. Morrow’s testimony that the data
      PEC had regarding enovate was not “fine cut” enough to precisely calculate this
      amount. (Tr. 805-06). PGL also had no burden to respond to Staff’s and the GCI’s
      allegation about enovate generating profits from PGL’s ratepaying consumers
      because those allegations were unsupported. (Id.
      at
      58-59).

    

    
      	 	
              d.

            	
              Commission
                Analysis and Conclusions

            

    

    

    1) Lack
      of Evidence Regarding enovate’s Operations 

    

    PGL
      claims that it did not conduct business with enovate. It asserts that enovate
      had assets through which it gained profits that have nothing to do with PGL.
      However, at hearing, Mr. Morrow admitted that PGL supplied no proof as to how
      much, if any, of enovate’s profits were gained from these other sources. (Tr.
      805-06). Conspicuously absent from this record is any documentation, on the
      part
      of PGL, as to what business enovate, its affiliate, actually conducted. For
      example, Mr. Morrow, who received daily reports as to enovate’s activities,
      testified that enovate engaged in speculative trading. He could not say,
      however, how much of this trading occurred, because Enron had all of the
      documentation. (Id.).
      It is
      noteworthy that both the SOC and the GPAA required Enron North America to
      provide PGL with documentation, which is some indicia that generally, Enron
      was
      contractually required to provide PEC/PGL with appropriate documentation. Yet,
      often PGL did not have documentation regarding enovate’s
      operations.

    

    
      
         

        

        
        

      

      
        26

        
          

        

      

      
        
        

        01-0707

      

    

    On
      two
      occasions, PGL successfully retrieved documents from Enron regarding enovate’s
      business activities. (See, e.g.,
      Tr.
      610-611; 617-18; 814-819). Yet, even in the face of outstanding discovery
      requests, PGL never tendered evidence in discovery or at hearing regarding
      enovate’s operations.18
      PGL has
      provided no explanation as to why enovate records were still with Enron after
      PEC purchased Enron’s half of enovate and continued to wind up enovate’s
      business. The Commission finds PGL’s lack of documentation regarding its
      dealings with enovate to be imprudent.

    

    PGL’s
      failure to produce such documentation has other ramifications. A trier of fact
      can draw an inference, when a party has failed to produce evidence within its
      power to produce, that this evidence if produced would be adverse to that party.
      (Schaffer
      v. Chicago and Northwestern Co.,
      129
      Ill. 2d 1, 25-26, 541 N.E.2d 643 (1989)). However, this inference may be drawn
      only when: a.) the evidence was under the party’s control and could have been
      produced through reasonable diligence; b.) a reasonably prudent person would
      have offered the evidence, if he believed that it would have been favorable;
      and
      c.) no reasonable excuse for failure to produce the evidence has been shown.
      (Kersey
      v. Rush Trucking Co., 344
      Ill.
      App. 3d 690, 696, 800 N.E.2d 847 (2nd
      Dist.
      2003)). 

    

    Part
      505
      of the Commission’s Rules requires PGL to keep documents verifying the reasons
      for its transactions. The fact that PGL later acquired documents from Enron
      on
      more than one occasion, establishes that PGL was able to access those documents.
      The fact that PGL could obtain these documents establishes that these records
      were under PGL’s control. (Berlinger’s
      v. Beef’s Finest,
      57 Ill.
      App. 3d 319, 325, 372 N.E.2d 1043 (1st
      Dist.
      1978); Fentress
      v. Triple Mining,
      261 Ill.
      App. 3d 930, 938, 633 N.E.2d. 102 (4th
      Dist.
      1994)). A reasonable person would offer documentary evidence establishing what
      transactions enovate entered into, with specificity, if that evidence supported
      a contention that enovate conducted business that had nothing to do with use
      of
      PGL’s PGA assets. This is especially true here, as Staff presented documentary
      evidence showing enovate’s profits were derived from use of PGL’s PGA assets and
      those profits unnecessarily raised PGA gas costs. In fact, Ms. Hathhorn
      testified that her review of various enovate records led her to believe that
      100%
      of
      enovate’s profits were derived from PGA gas costs. A reasonable person would
      proffer evidence to rebut or explain this very serious contention. 

    

    Also,
      the
      fact that Enron still had these documents even after PEC bought Enron’s share of
      enovate and wound up enovate’s business and even after information was requested
      in discovery is a flimsy excuse for PGL’s failure to keep track of its own
      business records. This is especially true, when as Staff points out, Section
      505
      of the Commission’s rules requires PGL keep records explaining the nature of and
      need for its transactions. 

    

    

    

    

    

    

    _____________________

    18   Apparently,
      however, after Staff’s request for enovate’s general ledger was ruled to be
      overbroad, Staff did not tender a narrower discover request on this matter.
      (Tr.
      608-10). 

    
      
         

        

        
        

      

      
        27

        
          

        

      

      
        
        

        01-0707

      

    

    

    In
      Berlinger’s
      cited
      above,
      Mr.
      Mizaur, the defendant, testified as to what his business sold. He never produced
      sales slips, but he testified that the proceeds from these sales were used
      to
      pay bills. Mr. Mizaur produced no documents to support this testimony. On
      appeal, Mr. Mizaur argued that the trial judge should not have drawn the
      inference that these documents, if produced, would be unfavorable to him. He
      averred that the Internal Revenue Service (the “IRS”) was in possession of these
      documents; he did not have them. The Appellate Court disagreed, ruling that
      Mr.
      Mizaur had the ability to request these documents from the IRS; thus, these
      documents were under his control. (Berlinger’s,
      57 Ill.
      App. 3d at 325). 

    

    The
      same
      legal reasoning applies in this case. PGL made no showing that it was unable
      to
      acquire pertinent enovate documents. To the contrary, on two occasions, PGL
      asked for and received enovate documents from Enron. As Staff points out, these
      documents were required to be in PEC/PGL possession pursuant to the USOA. The
      Commission can, therefore, draw the inference that if PGL had produced these
      records, they would have been adverse to PGL. If PGL had produced these
      documents, they would have established that enovate’s profits were garnered from
      its relationship with PGL.

    

    2) Section
      7-101 and 7-102 of the PUA

    

    An
      “affiliated interest” is a corporation that owns or holds, directly or
      indirectly, ten percent or more of the voting capital stock of a public utility.
      (220 ILCS 5/7-101(a)). The Act provides that:

    

    No
      management, construction, engineering, supply, financial or similar contract
      and
      no contract or arrangement for the purchase, sale, lease or exchange of any
      property or for the furnishing of any service, property or thing, hereafter
      made
      with any affiliated interest, . . . shall be effective unless it has first
      been
      filed with and consented to by the Commission or is exempted . . . Every
      contract or arrangement not consented to or excepted by the Commission as
      provided for in this Section is void. 

    

    (220
      ILCS
      5/7-101(d)(3)). (Emphasis added). Section 7-102 of the Act, which is entitled
      “Transactions Requiring Commission Approval” provides that: 

    

    No
      public
      utility may use, appropriate, or divert any of its moneys, property or other
      resources in or to any business or enterprise which is not, prior to such use,
      appropriation or diversion essentially and directly connected with or a proper
      and necessary department or division of the business of such public utility
      . .
      .

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    (220
      ILCS
      5/7-102(g)). It further provides that: 

    

    Every
      assignment, transfer, lease, mortgage, sale or other disposition or encumbrance
      . . . of the . . . plant, equipment, business or other property of any public
      utility, or any merger or consolidation thereof, and every contract, . . .
      or
      other transaction referred to in this Section and not exempted . . . made
      otherwise than in accordance with an order of the Commission authorizing the
      same . . . shall be void. 

    

    (220
      ILCS
      5/7-102(h)(E)). (Emphasis added). Any contract that confers benefits, whether
      directly or indirectly, upon affiliates is prohibited by law, unless a utility
      obtains Commission approval. If a utility enters into a contract with an
      affiliate without Commission approval, that contract is void, unless it is
      specifically exempted. PGL claims no such exemption here. (Id.).

    

    On
      September 16, 1999, the same two persons, David Delainey and William Morrow,
      executed both the GPAA and a letter of intent to divide profits between PEC
      and
      Enron NA, each to receive 50% of the profit from certain business dealings
      outlined in the letter of intent (the”1999 LOI”). (Group Ex. 1 at ST-PG-194). As
      PGL has contended, at the time these documents were executed, Enron was a very
      large and powerful company. There is no evidence that this large, powerful
      entity had any other need—except one, that would compel it to accept only 50% of
      the profits it garnered from PEC and its affiliates. 

    

    PGL
      contends, essentially, that enovate’s business transactions were unrelated to
      PGL. The record clearly shows otherwise. As is evidenced by the 1999 LOI, the
      intent of parties in that document was to confer profits on Enron, half of
      which
      would be shared with PEC through enovate. It defies common sense to contend
      that
      Enron would be willing to share half of the profits Enron North America gained
      through enovate with PEC, unless Enron North America was dependent on PGL/PEC
      for profits. Otherwise, Enron could simply take its business elsewhere and
      enter
      into a contract with another company, whereby Enron would provide services
      and
      not be subject to sharing 50% of the profits with an affiliate of that
      entity.

    

    The
      credible evidence does not establish that the transactions set forth herein
      benefited PGL. The only explanation left, based on the credible evidence, for
      PGL’s willing compliance in deals that did not gain it profit, and indeed, often
      lost
      money
      when compared with what it could have received on the open market, was that
      PGL
      acquiesced so that PEC/PERC could benefit through its 50% of enovate’s
      profits.

    

    The
      record is replete with evidence that enovate was just a shell company formed
      to
      glean profits from PGL’s PGA consumers without conferring any benefits. For
      example, PGL’s accounting records regarding the “Trunkline Deal” make no mention
      of Enron Midwest, even though Enron Midwest sold the gas to PGL in that
      transaction. This is some indicia that PGL personnel did not view Enron
      Midwest’s role in this transaction as consequential. (Group Ex. 1, ST-PG-75-76).
      What PGL personnel did find important enough to mention in PGL accounting
      records was PERC’s 50% profit from this deal--through enovate. (Id.).
      Also,
      Ms. Hathhorn testified that 100% of Enron Midwest’s activity flowed first to
      enovate, for a subsequent 50/50 sharing with PERC/PEC. (Staff ex. 9.00 at 9).
      

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Further,
      the evidence shows a systematic pattern of transactions using PGA assets with
      Enron Midwest that conferred 50% of Enron Midwest’s profits on PEC/PERC through
      enovate, at PGA customers' expense. As has been set forth herein, Transactions
      16/22; Transaction 103; the “Hub Blowout;” “Manlove Jumpstart,” and other
      transactions conferred profits on PEC/PERC that were paid for by consumers.
      There is no evidence that PEC/PERC performed any consideration to earn the
      profits gleaned through enovate. In addition to reaping profits at consumers’
expense, these transactions brazenly made little, if any, economic sense. For
      example, “Manlove Jumpstart” was a loan of gas to Enron Midwest, while at the
      same time, Enron Midwest sold gas back to PGL at a higher price. (Staff Ex.
      7.00
      at 53-54; Staff Ex. 3.00 at 56). Profits from the sales of gas flowed to
      PEC/PERC through enovate, not to consumers as required by the PUA and Commission
      rules. 

    

    While
      typically, in the context of prudence, the fact that a service could have been
      acquired for less cost does not necessarily make a transaction imprudent, it
      does here. Enron North America, or Enron Midwest took a profit for its part
      in
      the shell game, with an additional profit passed on to PEC/PERC at the expense
      of PGL, and ultimately at the PGA consumers’ expense. enovate was nothing more
      than subterfuge for PEC or PERC reaping profits from PGL, which is prohibited
      by
      Section 7-101(d) of the PUA. 

    

    At
      a
      minimum, these transactions were all conducted in such a manner as to confer
      profit on PGL affiliates at the expense of PGL, the regulated utility. Often,
      Enron Midwest was the contractual “straw man,” performing nothing in exchange
      for services or payment rendered, but acting as a third-party so that the
      PGL/PGL affiliate transactions could evade Commission detection. Sections 7-101
      and 7-102 do not provide for an exception for business dealings with affiliated
      interests that are effectuated through third-parties. (220 ILCS 5/7-101, 7-102).
      What was accomplished by effectuating the transactions here through Enron North
      America or Enron Midwest, was escaping Commission detection. Use of a
      third-party did not make these transactions legal. All enovate contracts
      involving PGL directly or indirectly are, therefore, void, ab
      initio.

    

    Further,
      the Commission finds evidence regarding PGL’s dealings with enovate is properly
      reviewed in a PGA reconciliation. As the GCI point out, Section 525.40(d) of
      the
      Commission’s rules require that revenues derived from non-tariff transactions
      must be used to offset recoverable gas costs if any
      of the
      associated costs are recoverable gas costs. (83 Ill. Adm. Code 525.40(d)).
      Here,
      the evidence established that enovate used PGL’s PGA assets such as its PGA gas
      supply. (See,
      e.g.,
      City
      -CUB Ex. 2.5 at 9; City-CUB Ex. 2.0 at 18). Therefore, the profits derived
      therefrom must offset PGA costs. (Id.).
      Staff
      presented evidence establishing that enovate’s profits were solely derived from
      use of PGA assets. (See, e.g., Staff Ex. 9.00 at 9). PGL’s vague assertion that
      enovate made an unspecified amount of money that it could not ascertain through
      means other than use of PGL’s PGA assets does not rebut the evidence presented
      establishing that enovate made money at the expense of ratepaying consumers.
      

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    PGL
      avers
      that it is improper to “summarily” hold it responsible for what it deems to be
      lawful arm’s length transactions between PEC, Enron North America and their
      subsidiaries. PGL points out that its parent has every legal right to structure
      transactions in any legitimate manner it chooses, even if the effect of that
      structure avoids Commission jurisdiction. According to PGL, there never was
      a
      claim that the transactions between PEC and Enron were unlawful. (PGL BOE at
      31). 

    

    PGL
      overlooks the evidence and the arguments presented. By its own admission, PGL’s
      parent only has a right to structure legitimate, legal transactions in a manner
      that avoids Commission jurisdiction. It is true that PEC’s unregulated
      activities do not fall under Commission jurisdiction. However, when PEC
      structures transactions that involve the use of regulated assets, the Commission
      has every right and indeed an obligation, to consider the effects of these
      transactions. PGL’s assertion that no one claimed that transactions between PEC
      and Enron were unlawful misstates the record. Staff and other parties have
      established that these transactions violated the law, were not arm’s length
      transactions, and, they created profits for PEC while increasing consumer gas
      costs. PGL’s argument is without merit. 

    

    PGL
      also
      argues that there was no “direct evidence” that the transactions between PEC,
      Enron North America and their unregulated subsidiaries were structured to avoid
      Commission scrutiny. Even if this were so, according to PGL, this structure
      would not be unlawful or in violation of Commission rules. The Commission finds
      PGL’s argument is baseless. PGL does not state what “direct evidence” is and it
      cites no law requiring that this Commission only consider it. PGL also cites
      no
      law construing Sections 7-101 and 7-102 of the PUA to apply only to transactions
      that do not involve third-party “straw men” like Enron Midwest. PGL also ignores
      the fact that it did not present credible evidence rebutting or explaining
      the
      evidence presented by Staff establishing that enovate’s transactions with PGL
      unnecessarily raised gas costs.

    

    PGL
      further asserts that the findings in the ALJPO do not support piercing the
      corporate veil. (“Courts are willing to treat parent and subsidiary corporations
      as ’alter egos’ only where the evidence shows that the parent exercises
      day-to-day business control over the subsidiary.”). This argument ignores the
      fact that the law asserted here does not concern piercing a corporate veil
      pursuant to corporate law. The law asserted here is Sections 7-101 and 7-102
      of
      the PUA. 

    

    On
      Exceptions, PGL avers, citing no fact of record, that when it withdrew its
      petition for Commission approval of its transactions with enovate, it only
      continued to conduct transactions with enovate that did not need Commission
      approval pursuant to Section 7-101 of the PUA. (PGL BOE at 30). Because PGL
      cites no factual basis for this argument, PGL waived its right to have this
      Commission consider it. (Fraley,
      251 Ill.
      App. 3d at 77). This argument ignores the evidence presented at hearing
      establishing that PGL did enter into transactions, directly and indirectly,
      with
      enovate. 

    

    For
      all
      of the above reasons, the Commission finds that PGL acted imprudently when
      directly or indirectly transacting business with enovate.

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    3) Ordinary
      Course of Business

    

    PGL
      correctly asserts that transactions made in the ordinary course of business
      do
      not require Commission approval. However, PGL’s direct and indirect transactions
      with enovate were not conducted in the ordinary course of business.
      (See,
      e.g., 83
      Ill.
      Adm. Code 310.10-310.60 defining the ordinary course of business, within the
      context of what is excluded from Commission approval of affiliated interest
      transactions, as routine transactions, like routine banking transactions;
      settling accounts of $5,000 or less with consumers who have financial
      difficulties; employment contracts; supply contracts and contracts, pursuant
      to
      which, the total financial obligation is $500 or less.). For example, PGL paid
      enovate for gas and pipeline delivery in the “Trunkline Deal.” (Staff Ex. 5.00
      at 6). This certainly does not fall within “ordinary course of business”
activities outlined above. PGL cites no authority interpreting the phrase
“ordinary course of business” to include a purchase or sale of gas made by an
      LDC. 

    

    PGL
      also
      ignores its own actions. PGL filed an application seeking Commission approval,
      pursuant to Section 7-101 of the Act, of its relationship with enovate. PGL’s
      petition indicated its relationship with enovate would be for the purpose of
      optimizing “the use of the Company’s gas supply and capacity assets.”
(Peoples
      Gas Light and Coke Co., Application for Authority under Section 7-101 of the
      Public Utilities Act to Enter into a Master Natural Gas Contract with enovate,
      LLC,
      Docket
      No. 00-0760). The existence of this application is indicia that PGL
      decision-makers knew that PGL was required by law to petition for Commission
      approval before it transacted business with its affiliate, enovate. PGL chose
      to
      terminate that proceeding because it didn’t want to spend any more resources
      pursuing Commission approval, not because PGL thought Commission approval was
      unnecessary. However, after PGL withdrew its application for Commission approval
      of its relationship with enovate, it continued to transact business with
      enovate, sometimes directly and sometimes through Enron North America/Enron
      Midwest. Given all the evidence and other nuances of PGL’s relationship with
      enovate, the Commission has no choice but to conclude that PGL’s failure to
      obtain approval of its affiliated interest with enovate was for the purpose
      of
      avoiding Commission detection. 

    

    For
      all
      of the reasons above, the Commission finds PGL acted imprudently by transacting
      business with enovate. Any disallowance associated with the Commission’s finding
      of imprudence for this provision is properly included in the Settlement
      Agreement fully discussed in Section I . 

    

     

     

    
      
        

        
        

      

      
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    IV. The
      Gas Purchase Agency Agreement

     

    

     

    A. Findings
      of Fact

     

    

     

    1. Background

     

    

    In
      October of 1998, PGL filed a petition with the Commission, Docket No. 98-0820,
      requesting permission to eliminate its PGA and instead impose a fixed gas charge
      of 31.08 cents per therm. In an Order dated June 7, 1999, the Commission allowed
      PGL to impose a fixed gas charge, but it authorized PGL to charge a fixed rate
      of 25.63 cents per therm. In reaching this decision, the Commission concluded
      that PGL included several items in its proposed charge at erroneous amounts
      or
      improperly included those items. The Commission found that the proposed charge
      included payment for a set of premiums for the acquisition of natural gas
      options with delivery months extending out for several years into the future,
      which violated Section 9-220(d) of the PUA. Additionally, the Commission ruled
      that PGL’s proposal improperly normalized day-to-day variations in demand
      through the spot market, instead of relying on storage. The Commission further
      concluded that PGL undervalued the credits consumers received for the net
      revenue from off-system transactions. (See,
      Peoples Gas Light and Coke Company, Proposal to Eliminate its Purchased Gas
      Adjustment (PGA) Clause and Include Gas Charges in Base Rates,
      1999
      Ill. PUC Lexis 414 at *15-21, 24-25). 

    

    Pursuant
      to the effort described above, PGL sent “requests for qualifications” (“RFQs”)
      to gas marketers and selected Enron NA to be its gas supplier for the fixed
      gas
      charge. PGL never implemented a fixed gas charge. PGL believed the Commission
      decision on the fixed gas charge to be too low to obtain the necessary supply
      contracts. Instead, it continued utilizing a PGA Rider, which imposes gas
      charges and related costs on consumers on a monthly basis. (PGL Ex. C at 8-12).
      

    

    On
      September 16, 1999, PGL entered into a five-year agreement with Enron NA.
      Pursuant to this contract, effective October 1, 1999, Enron NA supplied PGL
      with
      66% of its gas supply during the reconciliation year. (See,
      e.g., Tr.
      1011;
      Staff Ex. 2.00, attachments, GPAA). This contract was called the Gas Purchase
      Agency Agreement (“GPAA”). (Tr. 907). Before entering into the GPAA, PGL did not
      seek competitive bids. Rather, it engaged in private negotiations with Enron
      NA.
      (PGL Ex. C at 4-5). 

    

    The
      person primarily responsible for entering into the contract with Enron was
      William Morrow. Mr. Morrow also oversaw the negotiations of the GPAA with Enron
      North America. (PGL Ex. C at 10). As noted previously, Mr. Morrow and David
      Delainey, Managing Director of Enron North America, executed the GPAA. (Staff
      Ex. 2.00, attachments, GPAA, at 36). 

    

    Before
      the GPAA, PGL usually entered into gas contracts with several suppliers for
      smaller volumes of gas. Those contracts, typically, had terms ranging from
      four
      months to five years. (See,
      e.g.,
      Staff
      Ex. 2.00 at 8-9). 

    

     

     

    
      
         

        

        
        

      

      
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        01-0707

      

    

     

    2. The
      Terms of the GPAA

     

    

    Mr.
      Wear
      testified as to the terms of the GPAA. Mr. Wear has been the Manager of Gas
      Supply Administration at PGL since April of 2000. (Tr. 1039). The Gas Supply
      Division includes the Gas Supply Administration Department and it is responsible
      for entering into and administering contracts for gas supply and for purchasing
      transportation and storage services. (PGL Ex. B at 3). Mr. Wear’s involvement in
      the negotiations with Enron NA regarding the GPAA was to provide information
      to
      the decision-makers determining whether the GPAA would be a reliable supply
      of
      gas when needed. Mr. Wear was not one of the persons at PGL who actually decided
      whether to enter into the contract with Enron NA. (Tr. 1046). Previous to the
      GPAA, PGL’s gas supply contracts provided that PGL would purchase the same
      quantity for a fixed five-month period (November through March) or for a period
      of one or two years. 

    

    In
      general, the GPAA had three main provisions through which Enron North America
      provided PGL with approximately 66% of its total gas supply. (See,
      e.g., PGL
      Ex.
      F, Attachment 10). Those provisions were for Baseload Quantity gas, Summer
      Incremental Quantity gas (“SIQ”), and Daily Incremental Quantity gas (“DIQ”).
      (Staff Ex. 2.00, Attachments, GPAA, at 7). The GPAA also required PGL to release
      pipeline capacity to Enron North America. (Id.
      at 12).
      The GPAA was negotiated with a view toward other transactions between the
      parties. Reference is made therein to several other agreements, gas
      transportations contracts, the gas supply contracts and the “Master Agreement.”
(Id.
      at 16).
      These provisions will be further described below.

    

    According
      to Mr. Wear, when PGL negotiated the GPAA with Enron NA, the following were
      PGL’s objectives: 

    

    -market-based
      pricing with no demand or reservation charges;

    -flexible
      pricing options;

    -preservation
      of transportation capacity in the face of projections of  shrinking
      basis;

    -flexibility
      to meet demand in weather under normal conditions, colder than  normal
      conditions and warmer than normal conditions; and 

    -the
      contract should substitute for the aggregate of what PGL previously  had
      with
      other suppliers.

    

    (PGL
      Ex.
      C at 11). Later, Mr. Wear asserted that the GPAA also conferred certain
      non-quantifiable benefits on PGL, like technical support provided by Enron
      North
      America and training as to the use of financial hedging instruments, like energy
      derivatives and options. (PGL Ex. F at 8-9). PGL has never proffered any reasons
      other than these for entering into the GPAA. Other than expressions of concern
      over mitigating the decline in value of its pre-existing pipeline contracts,
      (basis) this record is devoid of any evidence indicating that decision-makers
      at
      PGL were concerned that the GPAA could increase the gas costs it passed on
      to
      consumers in its PGA. 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    a. Baseload
      Quantity Gas

    

    This
      provision refers to the established daily volume of gas PGL was required to
      purchase from Enron NA by month from October 1999 to October 2004. Daily
      baseload purchases are ones that PGL made in order to meet its overall supply
      requirements. (Tr. 1070). The GPAA had a fixed, predetermined schedule of
      baseload quantities. (Staff Ex. 2.00, Attachments, GPAA, Schedule 2.1). However,
      the parties could meet annually to discuss changes to the baseload quantity
      or
      to the SIQ quantity. (Staff Ex. 2.00, Attachments, GPAA, Art. 2.8).

    

    PGL
      used
“normal weather” to establish its baseload needs, although PGL did not provide
      any study or analysis to support its decision to use “normal weather” as its
      determinant for baseload quantity gas. (Staff Ex. 2.00). The price of baseload
      quantity gas purchased pursuant to the GPAA was the price published in Natural
      Gas Intelligence Chicago citygate19
      First-of-the-Month (“FOM”) price, less a three cent per MMBtu
      discount.20
      (See,
      e.g., Id., Staff
      Ex.
      3.00 at 8). 

    

    b. The
      SIQ and DIQ Provisions

    

    Two
      of
      the GPAA provisions allowed PGL to purchase gas supply to meet its incremental
      needs. Gas purchased pursuant to the Summer Incremental Quantity (“SIQ”) clause
      was used to fill PGL’s on-system and purchased gas storage facilities from the
      months of April through November. SIQ gas was used to create a supply of less
      expensive summer gas to meet PGL’s needs in the winter, when gas prices would be
      higher. (Tr. 1209-20). SIQ gas was, in effect, PGL’s “hedging gas.”
(See,
      e.g.,
      PGL Ex.
      C at 14; Staff Ex. 7.00 at 34).

    

    Pursuant
      to the GPAA’s SIQ clause, Enron NA agreed to supply gas to PGL at the Natural
      Gas Intelligence Chicago citygate FOM price, minus three cents per
      MMBtu.21
      (Staff
      Ex. 2.00, Attachments, GPAA, at 2, 9). During the months of April through
      November, Enron North America was required to provide at least 45,000 MMBtus
      of
      gas per day to PGL. (Id.
      at
      6, 9;
      Tr. 908). Enron NA could, at its sole discretion, deliver an amount up to and
      including 125,000 MMBtus of gas to PGL. (Id.
      at 6).
      Also during this period, whenever Enron MW delivered more than 45,000 MMBtus
      of
      gas, PGL was obliged to purchase this gas as long as the gas delivered did
      not
      exceed 125,000 MMBtus. (Tr. 909). Thus, Enron NA had the option to, but not
      the
      obligation to, deliver up to 80,000 MMBtus of gas to PGL, over and above the
      contractual minimum of 45,000 MMBtus of gas. (Id.
      at 2,
      9). 

    

    ______________________

    19  The
      Chicago citygate is a term that refers to the delivery points on the systems
      of
      PGL, North Shore and Nicor Gas. (Tr. 1078).

    

    20   FOM
      pricing is driven by the market activity during the preceding month, and is,
      therefore, less susceptible to price fluctuations that occur subsequent to
      the
      first of the month. It is, therefore, generally, less expensive than daily
      index
      pricing. (See,
      Staff
      Ex. 2.00 at 25). 

    

    21   Citygate
      pricing includes the cost of transporting the gas to the Chicago citygate.
      (See,
      e.g.,
      Staff
      Ex. 2.00 at 20). 

    

    
      
         

        

        
        

      

      
        35

        
          

        

      

      
        
        

        01-0707

      

    

    

    On
      any
      given day, PGL had no control over the amount of gas it received pursuant to
      the
      SIQ clause. This clause allowed Enron NA to control a portion of PGL’s supply by
      choosing the amount of SIQ gas delivered to PGL. On 236 of the 244 summer days
      during the time period in question, Enron forced PGL to purchase maximum SIQ
      volumes. (Staff Ex. 3.00 at 31). Over 70% of the days when Enron NA delivered
      the maximum amount of SIQ gas, PGL was forced to sell gas back to Enron NA.
      (City-CUB Ex. 2.00 at 13; Staff Ex. 2.00 at 29; Tr. 869)

    

    The
      Daily
      Incremental Quantity (“DIQ”) clause gave PGL the right to purchase gas at the
      Gas Daily Chicago citygate Daily Midpoint Price, up to a certain specified
      level. PGL received DIQ gas with no discount. (Staff Ex. 2.00, Attachments,
      GPAA, at 3). Pursuant to the DIQ clause, PGL could nominate any portion or
      no
      portion of the DIQ. The amount of gas that PGL could purchase on any given
      day
      pursuant to the DIQ clause was determined by subtracting the total pipeline
      capacity that PGL released to Enron North America on that day from the sum
      of
      gas purchased that day through the baseload and SIQ provisions. (See,
      e.g.,
      Staff
      Ex. 2.00, Attachments, GPAA, at 3; PGL Initial Brief at 11).

    

    The
      DIQ
      provision replaced what is known as “swing gas,” for which there is usually an
      added premium called a “demand charge” paid by a gas buyer like PGL.22
      (PGL
      Ex.
      B at 5). The DIQ clause, however, did not impose this added premium. Mr. Wear
      calculated the savings incurred by not paying this added premium to be $345,894
      for the time period in question. Staff concurs that this provision saved
      consumers money and it concurs with this calculation.

    

    

    ______________________

    21   Citygate
      pricing includes the cost of transporting the gas to the Chicago citygate.
      (See,
      e.g.,
      Staff
      Ex. 2.00 at 20). 

    22   A
      demand charge is a premium for being “on call” on short notice for the
      possibility of delivering gas with no assurance that the buyer will ever
      actually take the gas. (PGL Ex. C at 17). 

    
      
         

        

        
        

      

      
        36

        
          

        

      

      
        
        

        01-0707

      

    

    

    Staff
      witness Mr. Anderson opined that the combination of the SIQ provision and the
      DIQ provision gave Enron NA the incentive to force PGL to pay higher gas prices.
      The SIQ was priced at lower FOM index prices, minus three cents per MMBtu.
      The
      SIQ provision required PGL to take a minimum 45,000 MMBtus per day, although
      Enron NA could force PGL to take up to 125,000 MMBtus per day. The DIQ, on
      the
      other hand, was priced at no discount and it was based on the generally higher
      Daily Midpoint Price. Often when the Daily MidPoint Price rose above the FOM
      price, Enron NA would deliver less SIQ gas and deliver the more expensive DIQ
      gas instead. When the Daily Midpoint Price rose above the FOM price, Enron
      had
      the economic incentive not to sell PGL the full SIQ amount, irrespective of
      PGL’s needs, forcing PGL to purchase gas at higher prices. (Staff Ex. 2.00 at
      24-25). 

    

    GCI
      witness Ms. Decker also averred that the terms of the GPAA allowed Enron NA
      to
      force PGL to buy more gas, when doing so was advantageous economically to Enron
      NA. She opined that allowing Enron NA to determine how much gas PGL received
      pursuant to the SIQ clause had no practical or prudent purpose. (City-CUB Ex.
      1.0 at 11-12). Ms. Decker noted that normally, sellers maximize their profits.
      Thus, the interest of Enron NA would not translate into the best interest of
      PGL. Also, normally, LDCs like PGL recover their carrying costs in base rates.
      Since an LDC cannot increase base rates without filing a rate case, an LDC
      has
      the incentive to recover carrying costs by passing on such costs in the form
      of
      a gas cost. (Id.
      at 15).
      Ms. Decker pointed out that during the reconciliation period, overall, PGL
      gas
      prices were 22.28% higher than Chicago citygate prices. She also noted that
      PGL’s gas prices decreased after Enron filed bankruptcy and concluded that this
      decrease was caused by the GPAA, as, pursuant to the GPAA, PGL ceded control
      of
      price and quantity to Enron NA at the expense of consumers. (Id.
      at
      23-24). 

    

    Before
      entering into the GPAA, PGL performed no analysis of the effect of the DIQ
      or
      SIQ provisions on consumers. PGL also did not assess the value that Enron North
      America received as a result of its ability to manipulate the SIQ clause. (Tr.
      911-12). Staff calculated that Enron’s use of the SIQ and DIQ clauses in this
      manner incurred unnecessary costs that were passed on to consumers in the amount
      of $4,818,319. (Staff Ex. 3.00 at 35). 

    

    c. Provisions
      that Allowed Enron North America to Increase 

    the
      Cost of Gas

    

    According
      to Staff and GCI, the GPAA contained several provisions that allowed Enron
      NA to
      unilaterally increase the cost of PGL’s gas supply. Pursuant to the “Baseload
      Price Adjustment Clause” (“BLPA”), Enron NA had the option to change the price
      of a portion of baseload volumes from the FOM price to the Gas Daily and Chicago
      citygate Daily Price, without notice or limit.23
      (Staff
      Ex. 2.00, Attachments, GPAA, at 9). The Chicago citygate Daily Price was often
      higher than the Gas Daily price. However, Enron NA did not invoke this right
      to
      change the price during the reconciliation period. (Staff Ex. 3.00 at
      18).

    

    

    ______________________

    23   Both
      the Gas Daily and the Natural Gas Intelligence Weekly are readily-available
      sources for setting prices in gas contracts. These two publications, however,
      do
      not always have the same prices for the same thing. (See,
      e.g.,
      PGL Ex.
      C at 18-20). One million MMBtus is approximately equivalent to one Bcf of gas.
      (Tr. 1004). A MMBtu is one million Btus. (Staff Ex. 2.00, Attachments, GPAA,
      at
      5). A decatherm is also one million Btus. (NYMEX.com\glossary). A Btu is a
      British thermal unit, which is the amount of energy required to raise the
      temperature of one pound of pure water the one degree from 59 degrees Fahrenheit
      to 60 degrees Fahrenheit, at sea level pressure. (Staff Ex. 2.00, Attachments,
      GPAA, at 2)

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    Notwithstanding
      any increase imposed by Enron NA made pursuant to the BLPA, pursuant to Articles
      4.2(b) and 4.2(c) of the GPAA, Enron NA could change the price of gas without
      any input from PGL. (Staff Ex. 2.00, Attachments, GPAA, Articles 4.2(b) and
      4.2(c)). Article 4.2(b) gave Enron NA the right, during December through March,
      to change the price of baseload gas for up to 71,250 MMBtus per day of gas.
      Pursuant to Article 4.2(b), Enron NA could elect to change the baseload purchase
      price from the FOM price to the daily midpoint Gas Daily Chicago citygate price.
      (Staff Ex. 2.00 Attachments, GPAA, at 3, 10). Article 4.2(c) also gave Enron
      NA
      the right, during the winter period (December through March), to change the
      price of baseload gas for up to 71,250 MMBtus per day of gas. Pursuant to
      Article 4.2(c), Enron North America could elect to change baseload purchases
      from the Natural Gas Intelligence Chicago citygate FOM prices to the daily
      midpoint Gas Daily Chicago citygate price. (Staff Ex. 2.00, Attachments, GPAA,
      at 3, 10). 

    

    Ms.
      Decker opined that Articles 4.2(b) and 4.2(c) gave control over pricing to
      Enron
      NA. Under various market conditions, one or the other of the pricing options
      would be more advantageous to Enron NA and less advantageous to PGL. (City-CUB
      Ex. 1.0 at 10-11). 

    

    d. Released
      Pipeline Capacity and Foregone Demand Credits 

    

    PGL
      articulated several reasons for its decision to enter into the GPAA. These
      reasons will be discussed more fully below. Two of PGL’s reasons for executing
      the GPAA were to prevent the erosion of basis and to eliminate demand charges.
      As part of PGL’s plan to prevent the erosion of basis, it agreed to relinquish
      certain pipeline capacity rights, and to forego certain demand credits.

    

    The
      GPAA
      required PGL to release all of its rights, title and interests to certain
      pipeline capacity to Enron NA. (Staff Ex. 2.00, Attachments, GPAA, at 12, 13).
      According to Mr. Wear, Enron NA sold gas to PGL at the citygate to meet PGL’s
      requirements. To facilitate this, PGL released some of its pipeline capacity
      to
      Enron NA (PGL Ex. B at 4; Staff Ex. 2.00, Attachments, GPAA, par. 4.3, Schedule
      6.2). PGL released pipeline capacity to Enron NA on the following interstate
      pipelines: Midwestern Gas Transmission (“MG”) Trunkline, American Natural
      Resource Company, (“ANR”) and Natural Gas Pipeline Company. (See,
      e.g.,
      Staff
      Ex. 3.00 at 22; Staff Ex. 2.00, Attachments, GPAA, Schedule 6.3). Enron NA
      paid
      the pipelines directly and then PGL reimbursed Enron NA for all the pipeline
      transportation costs that it paid. (Staff Ex. 2.00 at 17-19; Attachments, GPAA,
      Article 4.3). PGL, though, was entitled to all credits, refunds and
      reimbursements due it from any pipelines for demand or reservation charges.
      (Id.
      at 11).
      PGL also bore the cost of and received the credits from any increase or decrease
      in variable transportation costs and fuel, when those increases or decreases
      resulted from its usage and were created due to changes in the applicable
      tariffs. (Id.
      at
      11).

    

    Also
      pursuant to the GPAA, PGL agreed to renew one of its contracts with Natural
      Gas
      Pipeline of North America until the term of the GPAA expired on October 31,
      2004. (Id.
      at Art.
      6.4). PGL also had recall rights. Enron NA did not have management rights or
      responsibilities associated with storage. (PGL Ex. C at 22). Enron could,
      however, use whatever capacity PGL did not need for Enron’s own business
      purposes without paying PGL anything for the use of those pipelines. (Staff
      Ex.
      2.00 at 19). 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    Mr.
      Anderson pointed out that PGL traded the use of its pipeline capacity in
      exchange for citygate prices. These citygate prices included the cost of
      transporting the gas to Chicago, PGL paid twice for transporting gas to Chicago
      and passed those costs on to its PGA customers. Furthermore, PGL gave away
      its
      excess capacity to Enron NA. (Id.
      at 20).
      In Mr. Anderson’s opinion, the GPAA did not protect PGL’s PGA customers from
      eroding basis. (Id.
      at 18,
      20). 

    

    PGL
      did
      not achieve its goal of eliminating demand charges by executing the GPAA.
      According to Mr. Anderson, the GPAA contained certain embedded demand charges.
      (Staff Ex. 2.00 at 20). The GPAA required PGL to reimburse Enron NA for all
      pipeline demand charges incurred. (Staff Ex. 2.00, Attachments, GPAA, Art.
      4.3).
      PGL failed to provide an analysis of the cost components of the GPAA; therefore,
      there is no evidence to show that PGL isn’t paying demand charges. Mr. Anderson
      avers that mere statements concluding that the GPAA contains no demand charges
      are not enough. 

    

    In
      the
      reconciliation year24
      PGL
      entered into 103 off-system transactions.25
      In 1998,
      PGL entered into 346 such transactions. In 1999, it entered into 358 off-system
      transactions. In 2000, when PGL operated under the GPAA, PGL entered into only
      114 off-system transactions. (PGL Ex. C at 31).

    

    Mr.
      Wear
      testified that the number of off-system transactions declined after PGL entered
      into the GPAA. The reason for the decline, according to Mr. Wear, was the fact
      that PGL had released some of its transportation assets to Enron NA pursuant
      to
      the terms of the GPAA. Many of the off-system transactions in previous years
      involved use of those assets. (PGL Ex. C at 31-32). 

    

    Dr.
      Rearden opined that, during the months when the SIQ was in effect, there was
      usually plenty of “slack” in the released pipeline capacity for PGL to choose
      DIQ gas for at least as much volumes as was specified in the DIQ provision.
      Thus, PGL could force the price of gas upward. (Staff Ex. 7.00 at
      35).

    

    e. Flexible
      Pricing

    

    As
      more
      fully articulated below, one of PGL’s reasons for executing the GPAA was that it
      allowed for flexible pricing options. Article 4.2 of the GPAA allowed the
      parties to renegotiate the price of gas. Enron NA, however, was under no
      obligation to furnish gas at a lower price than the terms of the GPAA. Instead,
      the price of gas could only be changed upon mutual assent by both parties.
      (Staff Ex. 2.00, Attachments, GPAA, Article 4.2). PGL did not attempt to arrive
      at a mutually agreed-upon alternative price to that which was specified in
      the
      GPAA until May of 2001. (Tr. 978). There was no reason that PGL personnel could
      not have procured a lower price before May of 2001. (Tr. 978-79).

    

    

    ______________________

    24  PGL’s
      reconciliation year is also the same as its fiscal year.

    25
        PGL’s
      fiscal year is the same as the reconciliation period, October 1, through
      September 30 of any given year. 

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    f. Penalties
      Paid on Re-sales of Gas to Enron 

    

    Article
      2.4 gave PGL the right to resell gas to Enron NA. The price for resales was
      a
      daily price, minus a penalty. The amount of the penalty was contingent upon
      how
      timely PGL was at nominating the resale and the amount of the resale. Also,
      larger resales incurred larger penalties. The penalties ranged from 1.00 cents
      to 3.50 cents per MMBtu. (Staff Ex. 2.00, Attachments, GPAA, 9-10; Staff Ex.
      3.00 at 28). 

    

    Staff
      witness Rearden provided an explanation of Staff’s interpretation of this
      provision of the GPAA. Dr. Rearden opined that the existence of this provision
      is indicia that PGL expected to have an oversupply of gas. (Staff Ex. 3.00
      at
      29). Resales occurred most often when Enron NA had already forced PGL to
      purchase the maximum amount of SIQ gas. Only 3.4% of resales during the summer
      period were made on days in which Enron NA personnel did not choose to deliver
      the SIQ maximum or an amount near the maximum. On 93.9% of the days when Enron
      NA forced PGL to buy these large quantities, PGL made resales back to Enron
      NA.
      Dr. Rearden opined that if PGL had entered into a contract that did not require
      it to make excess purchases pursuant to the SIQ clause, it would not need such
      a
      provision. (Staff Ex. 7.00 at 33). 

    

    PGL
      witness Wear explained why PGL wanted this provision to be included in the
      GPAA.
      Mr. Wear stated that when negotiating the GPAA, PGL required a sell-back
      provision in the contract because a sell-back provision created a firm market
      that PGL could turn to when it had an oversupply. (PGL Ex. C at 23). A standing
      firm bid to purchase oversupply, which would likely be executed under excess
      conditions in the marketplace, is valuable. (Id.
      at
      20-21). He also testified that it was often difficult for PGL to unload large
      amounts of gas. (Tr. 1071). According to Mr. Wear, it was not advantageous
      to
      PGL to be in a position in which it had to unload a large amount of gas. In
      such
      an instance, the counterparty is often aware of the need to unload the gas.
      As a
      result, PGL would receive less money than it would have received otherwise.
      (Tr.
      1071). Mr. Wear testified that most spot transactions are 5,000 to 10,000
      MMBtus. The more gas PGL has to unload, the more time it could take to
      accomplish that goal. 

    

    An
      oversupply can also cause pipeline imbalances. An imbalance can occur when
      PGL’s
      no-notice storage contractual rights are exceeded by the amount of gas that
      is
      in that storage. Under these circumstances, pursuant to contract, PGL must
      pay a
      penalty, which can be substantial. (PGL Ex. C at 26-27).  Mr.
      Wear
      stated that the resale provision was not placed in the GPAA in anticipation
      of
      an oversupply. Rather, PGL personnel recognized that resales might be necessary.
      (PGL Ex. F at 19-20). 

    

    g. Annual
      Review

    

    Article
      2.8 of the GPAA required the parties to meet annually to discuss any necessary
      or appropriate adjustments to baseload quantity gas and SIQ gas. (Staff Ex.
      2.00, Attachments, GPAA, at 10). 

    

    
      
         

        

        
        

      

      
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    h. Conversion
      to Performance-Based Rates

    

    Article
      4.5 of the GPAA provided that, if during the term of the GPAA, PGL filed,
      pursuant to Section 9-220(d) of the Public Utilities Act, a petition seeking
      authority for performance-based rates, thus eliminating its PGA, or if it sought
      alternative regulation pursuant to Section 9-224 of the Act, the parties could
      re-negotiate the pricing terms of the GPAA. (Staff Ex. 2.00, Attachments, GPAA,
      at 12). 

    

    i. Books
      and Records

    

    Article
      19.9 of the GPAA required PGL and Enron NA to maintain all books and records
      related to Transaction Agreements for a period of three years from the end
      of
      the terms of the GPAA, or three years from termination of the GPAA. (Staff
      Ex.
      2.00, Attachments, GPAA, at 34). 

    

    j. The
      “Master Contract”

    

    Attached
      to the GPAA was the “Master Contract.” It was the master agreement, pursuant to
      which PGL and Enron NA could enter into transactions, like Transaction 19.
      (Tr.
      1085). Pursuant to the GPAA, the terms and conditions of any sales or purchases
      “shall be set forth in a Transaction Agreement pursuant to the Master
      Agreement.” (Staff Ex. 2.00, Attachments, GPAA at 7). Thus, Enron North America
      and PGL were contractually required to document the transactions between them
      in
      the form of a formal contract. 

    

     

    
      	 	
              3.

            	
              Economic
                Analyses Made of the GPAA Just Before it was
                Executed

            

    

     

    

    During
      discovery, Staff and the GCI requested any studies, analysis or like information
      used by PGL to determine the economic benefits of the GPAA. Initially, PGL
      denied that any economic analysis of the effect of the GPAA on consumers had
      ever been performed. (See,
      e.g.,
      Staff
      Ex. 2.00 at 5; GCI Init. Brief at 31). In fact, PGL’s chief witness, Mr. Wear,
      the Manager of Gas Supply Administration at PGL, testified that no economic
      analysis of the GPAA was performed. (PGL Ex. F at 14; Tr. 1009-10).

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    However,
      after discovery reopened, a study called the “Aruba Analysis” surfaced. Roy
      Rodriguez, who was employed in Peoples Energy Corp’s Risk Management Department,
      prepared this document in August and September of 1999. The Aruba Analysis
      only
      evaluated certain terms of the GPAA, not the entire agreement. (Tr. 1294).
      Using
      information gathered by PGL personnel26,
      Mr.
      Rodriquez analyzed the projected economic value conferred on Enron NA by PEC
      and
      the projected effect of the GPAA gas prices on consumers. (Tr. 1294; Staff
      Ex.
      7.00 at 12). 

    

    In
      the
      Aruba Analysis, Mr. Rodriguez compared the GPAA FOM price, minus the three-cent
      discount, with the NYMEX cost of gas in the field, plus the forecast field-Henry
      Hub basis differential and the variable cost of transportation to
      Chicago.27
      (See,
      e.g.,
      Staff
      Ex. 7.00 at 13). Mr. Rodriguez calculated two scenarios to determine the effect
      of the GPAA on consumers. One scenario used a high amount of SIQ volumes and
      the
      other used a low amount of SIQ volumes. He determined, using different
      scenarios, that the extra costs resulting from the GPAA would be in a range
      between approximately $19 million to approximately $24 million. (Group Ex.
      1 at
      ST-PG-135-161). In both scenarios that Mr. Rodriguez used, the results indicated
      that the GPAA would increase
      consumer
      gas costs. (Group Ex. 1 at ST-PG-135-161). Mr. Rodriguez discussed the findings
      in his “Aruba Analysis” with Mr. Wear, meaning decision makers at PGL knew or
      should have known the GPAA would cost PGA customers more than other supply
      arrangements. (See,
      e.g., City-CUB
      Ex. 1.0 at 18).

    

    Mr.
      Wear
      also performed an analysis of the economic costs of the GPAA. At hearing,
      counsel for the City questioned Mr. Wear about a document, Wear Cross Ex. 15,
      which had been produced by PGL in discovery. This document was taken from Mr.
      Wear’s computer and it was in a file created by Mr. Wear. (Tr. 1036-46). It
      simulated what total gas costs would have been pursuant to the GPAA compared
      to
      what PGL’s supply practices for the previous four years. It was created on
      September 8, 1999, and it was last modified on September 10, 1999, six days
      before the GPAA was executed by Delainey and Morrow. (Wear Cross Exhibit 15).
      Wear Cross Exhibit 15 indicated that gas costs passed on to consumers would
      increase by approximately $50 million throughout the first four years of the
      five-year life of the GPAA.28
      (See,
      Wear
      Cross Exhibit 15). 

    

    During
      the hearing phase of this docket, Mr. Wear’s behavior called into question his
      credibility. Mr. Wear testified that he did not recognize Wear Cross Exhibit
      15.
      (Tr. 1011). He did not recall performing any comparisons regarding the price
      of
      gas paid to Enron NA. (Tr. 1076; 1010). Mr. Wear professed to have no memory
      regarding a document that he admitted was on his password-protected computer
      in
      a computer folder that he created. (Tr. 1036-46). However, he admitted preparing
      a similar document, PGL Exhibit 8. (Tr. 1013). 

    

    

    

    ______________________

    26   This
      is the same data contained in PGL Exs. 2 and 3, attached to Mr. Wear’s
      testimony. (PGL Ex. C, Attachments 2,3).

    27   The
      Henry Hub, in southern Louisiana, is the largest centralized point in the U.S.
      for purchasing gas, or, for purchasing gas futures contracts. It is a nexus
      of
      16 natural gas pipeline systems that draw supplies from the region’s gas fields.
      (Nymex.com\glossary). 

    28   In
      its Initial Post-trial Brief, PGL avers that Mr. Wear did not recall this
      document, but, he “may have” nevertheless conducted an analysis of how a supply
      agreement like the GPAA would have affected consumers. (PGL Init. Post-trial
      Brief at 60). PGL further asserts that Wear Cross Exhibit 15 established that
      the GPAA was “increasingly favorable” over the four-year period it analyzed.
      (Id.).
      This
      is not correct. Not surprisingly, PGL cites no actual dollar amounts from that
      document. 

    
      
         

        

        
        

      

      
        42

        
          

        

      

      
        
        

        01-0707

      

    

    

    Neither
      of the analyses discussed above took the economic impact of all of the GPAA
      provisions into consideration. However, according to both analyses, the GPAA
      would result in higher gas costs being passed on the consumers. (Wear Cross
      Ex.
      15; Group Ex. 1 at ST-PG-135-161;Tr. 911-12).

    

     

    4. The
      Reasons Articulated by PGL for Entering into the GPAA

     

    

    PGL
      articulated several reasons for its decision to execute the GPAA. Industry
      studies indicated that basis would begin to decline. PGL believed the GPAA
      would
      protect against the erosion of basis. Additionally, PGL averred that the GPAA
      provided certain unquantifiable benefits. The discussion below fully outlines
      PGL’s reasoning for entering into the GPAA.

    

    a. Eroding
      Value of Basis

    

    “Basis”
      is the difference in gas price at a location in the field area (either at the
      wellhead or at a specific trading point) and gas prices at another market point.
      In this case, that other market point is the Chicago citygate. (Tr. 881). It
      is,
      essentially, the cost, as is reflected in the marketplace, of transporting
      the
      gas to Chicago citygate. (Tr. 883, 885; PGL Ex. C at 7). Basis has two elements,
      the variable transportation cost and a certain percentage of gas taken off
      at
      the top by a pipeline to maintain pressure in the pipelines and to account
      for
      lost gas. As the price of gas increases, so does basis. (Staff Exs. 3.00 at
      24;
      7.00 at 20-21). 

    

    At
      the
      time the GPAA was executed several pipeline construction projects were underway
      that would soon increase the natural gas supply to the Chicago area.
      (See,
      e.g., PGL
      Ex. F
      at 5). Specifically, Northern Border Pipeline Co. and Alliance Pipeline had
      projects planned for Chicago that would increase capacity to the Chicago area
      by
      almost 2.0 Bcf of gas per day. (PGL Ex. C at 6). The effect of these projects
      would be to erode the value of PGL’s existing transportation contracts.
      (Id.).
      PGL
      witness Wear testified that one reason PGL entered into the GPAA was to
      counteract the predicted decline in basis from a field location to Chicago.
      (Tr.
      1067). As basis declines, a citygate purchase becomes more attractive; in such
      a
      scenario, the difference in price between the field gas and transportation
      costs
      and citygate gas decreases. (Staff Ex. 3.00 at 12). 

    

    Before
      signing the GPAA, PGL purchased a portion of its portfolio at citygate prices.
      (Tr. 937). According to Mr. Wear, these citygate purchases mitigated some of
      the
      effect of a decline in basis. (Tr. 937-38). However, in order for the citygate
      delivery price to be profitable, the average basis would have to fall below
      the
      transportation costs. (PGL Ex. H at 34). 

    
      
         

        

        
        

      

      
        43

        
          

        

      

      
        
        

        01-0707

      

    

    

    Additionally,
      in the past, PGL was able to “optimize” its transportation assets on days when
      they were not needed to meet system requirements.29
      (PGL.
      Ex. C at 8). A decrease in basis might also result in a decrease in the amount
      of demand credits PGL received through “optimization” of its firm transportation
      contracts through off-system transactions. (See,
      e.g., Staff
      Ex.
      2.00 at 14 and PGL Ex. C at 6). Mr. Wear estimated that the decrease in
      optimization credits available resulting from a decline in basis was $400,000.
      (PGL Ex. C at 9). 

    

    Mr.
      Wear
      testified that PGL decision-makers determined that Enron NA’s proposal for a
      substantial gas supply contract would remove the risk of a decline in basis
      by
      ensuring index-based market pricing for gas supply and guaranteeing demand
      credits. (PGL Ex. B at 6). According to Mr. Wear, declining basis was a reason
      PGL personnel decided to enter into the GPAA with Enron NA. (Tr. 883). Mr.
      Wear
      testified that purchasing gas at the citygate index price would lower the cost
      of gas. (Tr. 888). Mr. Wear also opined that the three-cent discount offset
      the
      financial impact of declining basis on consumers. (Tr. 1079-81). Mr. Wear
      projected the decline in basis to be slightly more than one cent per MMBtu
      per
      year. (PGL Ex. C at 8-9). There is no credible evidence that any of the PGL
      decision-makers contemplated that basis would decline more than this amount.
      Mr.
      Wear sponsored PGL’s basis projections. (Tr. 890). 

    

    Staff
      Witness Dr. Rearden testified that the most important evaluation of the GPAA
      is
      a comparison between that which PGL did before entering into the GPAA—buy gas in
      the field and pay the cost of variable transportation—with the cost of gas
      pursuant to the GPAA, which provides for gas transported to the Chicago
      citygate, less three cents per MMBtu. To acquire a “hedge” against basis, PGL
      agreed to several terms that raised prices for consumers. According to Dr.
      Rearden, for the GPAA to be a prudent decision, the decline in basis must exceed
      the increase the consumers incurred in gas costs as a result of the GPAA.
      (Id.
      at
      23-24).

    

    

    _____________________

    29   The
      term “optimize,” as it is used here, means to rent those facilities out, to
      others, for a fee, when they are not being used. (See,
      e.g., Tr.
      996-999). 

    
      
         

        

        
        

      

      
        44

        
          

        

      

      
        
        

        01-0707

      

    

    

     

    Staff
      Witness Mr. Anderson testified that PGL had other options with which it could
      have avoided a loss in released capacity revenues and demand credits due to
      eroding basis. PGL had, at the time period in question, a portfolio of
      transportation contracts with various pipelines that expired, or would expire
      shortly, that it could have negotiated at a lower cost, as eroding basis causes
      pipeline transportation to be worth less. Just before the time when PGL entered
      into the GPAA, it renegotiated four pipeline contracts. (Staff Ex. 2.00 at
      16-17). Mr. Anderson opined that there is no evidence that PGL personnel were
      unaware that potential basis erosion was on the horizon at that time. To combat
      a decline in basis, PGL could have negotiated shorter-term contracts, to be
      re-negotiated as competition reduced pipeline rates. (Id.
      at 18).
      Mr. Anderson also opined that load shifting is another way to mitigate the
      financial effect of declining basis. Load-shifting between competing pipelines
      is a common practice in the industry. (Tr. 875). PGL conducts business with
      six
      pipeline suppliers and has the flexibility to shift load between those
      suppliers. (Id.).
      When a
      gas company puts more load on a pipeline, it can receive discounts from the
      pipeline at rates below the maximum FERC rate. (Tr. 875). The basis projections
      that Mr. Wear prepared showed a projected decline in basis of approximately
      one
      cent per MMBtu. (Tr. 890). 

    

    Staff
      believes that to properly evaluate the prudence of the GPAA, one must consider
      the information available to PGL at the time it executed the GPAA. Dr. Rearden
      opined that, in order to determine what the decline in basis actually was,
      one
      must determine the difference between the price of gas bought in the field
      and
      delivered, versus the Chicago citygate price. Using information that Mr. Wear
      used to prepare PGL Ex. 2, Dr. Rearden compared the citygate price with the
      field price, plus the cost of delivery from the field to the citygate. He
      calculated the difference between the two and concluded that the citygate price
      did not offset any decline in basis. He estimated that the gas purchased through
      the GPAA, using the GPAA prices, would increase gas prices by approximately
      $26,205,000 over the five-year life of the GPAA. (Staff Init. Brief at 50).
      Dr.
      Rearden used the same data as that used by PGL witness Mr. Wear. However, in
      Mr.
      Wear’s calculations, he found the projected decline in basis to be approximately
      one cent per MMBtu per year. (PGL Ex. C at 8; Staff Ex. 12.00 at 8).

    

    Dr.
      Rearden testified that, in order to accurately determine basis for delivered
      gas, one must use both the Chicago-Henry Hub basis and the weighted average
      basis from Henry Hub to a field zone. This method is how Mr. Rodriguez analyzed
      basis when preparing the “Aruba Analysis.” (PGL Ex. L at 2). In Dr. Rearden’s
      opinion, PGL witness Mr. Graves’ calculation of basis was incorrect; Mr. Graves
      only examined the effect of changing Chicago-Henry Hub basis. Mr. Graves did
      not
      consider the changes to the weighted average basis from the field to the Henry
      Hub that are implied by using the alternative projected basis for Chicago-Henry
      Hub. (Staff Ex. 12.00 at 15-16). 

    

    b. The
      CERA Report and Other Industry Information

    

    At
      the
      time the contract with Enron NA was being negotiated, there was some speculation
      in the industry that basis would decline dramatically. (Tr. 891). Information,
      such as a report issued by the Cambridge Energy Research Associates, (“CERA”)
      was available to PGL decision-makers at the time PGL was negotiating the GPAA
      indicated that basis would decline. The CERA Report, however, contains
      information about the value of basis declining in some locations that are not
      pertinent to PGL. (Staff Exs. 12.00 at 17; 7.00 at 25). 

    
      
        

        
        

      

      
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        01-0707

      

    

    Mr.
      Graves testified that Dr. Rearden’s calculations of basis were incorrect because
      several scenarios were possible, given the information that was known to persons
      in the industry, and some of those scenarios suggest that the GPAA could have
      a
      net savings with respect to the basis-variable transportation cost component.
      (PGL Ex. L at 45). Mr. Graves admitted that whether the GPAA would “pay off” for
      PGL was not a certainty. (PGL Ex. L at 47). There is no evidence indicating
      that
      decision-makers or anyone else at PGL considered the CERA Report or other
      industry data indicating the possibility of a steep decline in basis, when
      deciding to enter into the GPAA. 

    

    c. A
      Liquidity Premium

    

    A
      liquidity premium is an adjustment made in order to take into account the fact
      that PGL, when buying large amounts of gas, can be required to buy gas to meet
      the needs of consumers, irrespective of market conditions. In other words,
      in
      such a situation, PGL must meet consumer needs; it cannot wait until gas prices
      fall. Mr. Graves opined that, when calculating basis, a liquidity premium must
      be used. (See,
      PGL Ex.
      L at 19). Mr. Rodriguez used a liquidity premium when he prepared the “Aruba
      Analysis.” Using a 1.5 cent liquidity premium, Mr. Graves determined that a
      liquidity premium reduced Dr. Rearden’s calculated delivered price of gas,
      versus the citygate cost disadvantage, by $5.7 million. (PGL Ex L at 19). Mr.
      Graves never stated why he determined that this was the correct amount of his
      liquidity premium.

    

    Dr.
      Rearden opined that a liquidity premium should not be used. He pointed out
      that
      while in some instances, PGL may be subject to increased prices due to its
      need
      to purchase gas, the converse is also true. That is, a large purchaser, such
      as
      PGL, can have a superior ability to buy gas below that which other buyers pay.
      (Staff Ex. 12.00 at 13).

    

    d. Unquantifiable
      Benefits 

    

    According
      to PGL, the GPAA also provided certain unquantifiable benefits. In September
      of
      1999, Enron NA was a large company that dominated the marketplace. It was a
      well-established gas supplier. Pursuant to the GPAA, Enron NA supplied PGL
      with
      some technical support, such as a secure webpage that allowed PGL and Enron
      NA
      to exchange information about daily activity, a database on weather , and
      training regarding hedging instruments, like energy derivatives and options.
      (PGL Ex. F at 9). However, there is no evidence that PGL’s employees ever used
      any of these services. Because PGL traded no options or derivatives at all
      during the time period in question, PGL’s employees never used the training
      regarding options and derivatives for the benefit of ratepaying consumers.
      

    

    
      
         

        

        
        

      

      
        46

        
          

        

      

      
        
        

        01-0707

      

    

     

    B. Conclusions
      of Law

     

    

     

    
      	 	
              1.

            	
              Proposed
                Disallowances

            

    

     

    

    Staff
      proposed a total cost disallowance for the GPAA of $13,304,910. Staff’s proposed
      disallowances are as follows: $10,755,048 for the increase in prices due to
      citygate versus delivered gas prices; $847,429 for foregone demand credits;
      $86,681 for resale penalties; $4,818,319 for increased gas costs due to the
      SIQ
      option. Staff also proposed credits of approximately $3.2 million for the
      provisions that saved consumers money. (See,
      Staff
      Ex. 7.05). The GCI’s total recommended disallowance is $37,470,517 for increased
      gas costs. (City-CUB Ex. 1.0 at 4). As is set forth below, Staff and the GCI
      raise several issues regarding the prudence of the GPAA, in light of what
      decision-makers at PGL knew or should have known. 

    

     

    2. Ignoring
      Internal Unfavorable Economic Analyses

     

    

    a. Staff’s
      Position

    

    Two
      internal economic analyses performed just before PGL entered into the GPAA
      indicated that the GPAA would raise the price of gas borne by consumers through
      PGL’s PGA. PGL witness Mr. Wear performed an economic analysis of the financial
      impact of the GPAA that indicated a possible increase in the price of gas passed
      on to consumers in the amount of $50 million for the four-year period he
      analyzed. (Wear Cross Exhibit 15). Mr. Rodriguez’s “Aruba Analysis” determined
      the extra costs imposed on consumers to be in a range between approximately
      $19
      million and $24 million. (Group Ex. 1 at ST-PG-135-161). 

    

    According
      to Staff, there are no economic analyses indicating that the GPAA was prudent.
      And, the two analyses PGL did perform established that the GPAA would be more
      costly than PGL’s supply purchasing practices in previous years. Nevertheless,
      PGL entered into the GPAA. (Staff Init. Brief at 44, 47-48). 

    

    Staff
      posits that PGL presented no evidence that it considered any alternative to
      the
      GPAA, which was a dramatic departure from PGL’s gas-buying practice in prior
      years. Previously, PGL purchased gas in the field and paid for transportation
      to
      the Chicago citygate. In contrast, the GPAA represented 66% of PGL’s system
      supply purchases for the time period in question. Another major difference
      between the GPAA and PGL’s previous supply contracts was the length of the
      contract. The GPAA was a five-year contract. Typically, PGL’s gas supply
      contracts were one or two years in duration. (Id.
      at
      44-45). Thus, Staff argues that a change in purchasing method requires evidence,
      perhaps in the form of a request for proposal (an “RFP”) or in the form of an
      economic study, establishing the prudence of PGL’s decision to enter into the
      GPAA. (Id.
      at 46).
      Staff views the lack of any quantitative analysis supporting the GPAA as indicia
      of imprudence. Staff does not contend that PGL should be required to perform
      any
      specific type of analysis. (Staff Reply Brief at 20).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    b. GCI’s
      Position

    

    The
      GCI,
      as well, argue that entering into the GPAA in the face of two analyses
      indicating that the GPAA would raise gas costs is imprudent. (GCI Initial Brief
      at 36-38). The GCI point out that the credibility of PGL’s chief witness on this
      issue, Mr. Wear, was impeached through the existence of Wear Cross Ex. 15.
      Despite Mr. Wear’s testimony that no economic analysis was performed of the GPAA
      by any PGL personnel, an economic analysis of the GPAA Mr. Wear performed,
      and
      it was unfavorable. The GCI point out that Wear Cross Ex. 15 is also a
      party-admission, as it contradicts PGL’s assertion that no economic analysis of
      the GPAA was performed by PGL personnel. (GCI Init. Brief at 31-35).

    

    The
      GCI
      aver that Wear Cross Ex. 15 and the “Aruba Analysis” establish that entering
      into the GPAA would increase the cost of gas borne by consumers. PGL produced
      no
      analyses made at the time the GPAA was entered into indicating that that the
      GPAA would not increase the cost of gas. The GCI contend that, because
      contemporaneous analyses were performed demonstrating the imprudence of the
      GPAA, PGL’s justifications of its failure to conduct a favorable economic
      analysis are no longer relevant, except to demonstrate PGL’s lack of
      credibility. (GCI Init. Brief at 35-37).

    

    c. PGL’s
      Position

    

    PGL
      concedes that Mr. Wear “may have looked at the economics of the GPAA.” It
      asserts that Mr. Wear was “unable to testify about the substance” of his
      analysis, or with whom he may have discussed this analysis. According to PGL,
      Mr. Wear’s analysis (Wear Cross Ex. 15) showed that the characteristics of the
      GPAA were, in fact, increasingly favorable over the four-year period Mr. Wear
      analyzed. PGL argues that this exhibit showed directionally improving results,
      when comparing the last year of historical data used for comparison purposes
      (1999) in that document with the fourth year the GPAA would be in effect. From
      this single year of a four-year comparison, PGL asserts that its expectations
      with regard to the effect of declining basis were correct.30
      (PGL
      Reply Brief at 29). PGL also asserts that its Ex. 8, which was prepared by
      Mr.
      Wear, establishes that the GPAA would be beneficial to consumers. (PGL Init.
      Brief at 60-61). 

    

    PGL
      further claims that the Commission should not consider the “Aruba Analysis”
because PGL decision-makers did not consider it when deciding to enter into
      the
      GPAA. Also, the “Aruba Analysis” is not consistent with conclusions drawn by
      PGL’s expert witness Mr. Graves after the GPAA was executed. (PGL Init. Brief at
      61). PGL maintains that Staff and the GCI have placed far too much emphasis
      on
      the “Aruba Analysis” and Wear Cross Ex. 15, as there is no evidence that PGL
      decision-makers were privy to these analyses. Further, even though PGL did
      not
      object to admission of the “Aruba Analysis” into evidence at hearing, Staff
      could have, but did not, subpoena Mr. Rodriguez to testify. (Id.).
      

     

    Both
      Staff witnesses Dr. Rearden and Mr. Anderson criticized PGL for not implementing
      an RFP bidding process and not relying on a written quantitative analysis when
      electing to execute the GPAA. According to PGL, in so doing, Staff has required
      PGL to have these tasks performed for the first time. In the past, PGL did
      not
      conduct formal bidding or conduct economic analysis of its supply contracts.
      (See,
      PGL
      Init. Brief at 56-59; PGL Ex. L at 12). 

    _____________________

    30   Declining
      basis is discussed in Section (b)(2) herein.

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    On
      Exceptions, PGL argues that the Commission is altering the applicable standard
      when requiring it to justify its decisions based on information that could
      have
      been available to decision-makers at the time the relevant decisions were made.
      PGL argues that this Commission should not require utilities to use information
      that decision-makers knew or should have known at the time they made a decision.
      (PGL BOE at 57).

    

    d. Commission
      Analysis and Conclusions

    

    After
      the
      ALJ reopened discovery in this matter, two economic analyses of the GPAA,
      performed by employees of PGL/PEC, magically emerged. These analyses are the
      Wear Cross Ex. 15 and the colorfully titled “Aruba Analysis.” While these
      analyses did not evaluate all of the cost terms of the GPAA, both analyses
      indicated that the GPAA would cause gas prices borne by consumers to
increase.31 

    

    The
      “Aruba Analysis” included a liquidity factor and two different scenarios
      regarding a decline in basis. Under both of these scenarios, the GPAA
increased
      gas
      costs borne by consumers. Yet, in the face of these unfavorable analyses and
      with no other information indicating that the GPAA would not increase consumer
      costs, PGL chose to execute the GPAA. This alone gives the Commission pause
      when
      considering the prudence of PGL’s decision.

     

    The
      Commission notes that PGL’s error is not in failing to perform a certain type of
      study or in failing to solicit a certain type of bid. Rather, PGL’s error is its
      lack of evidence indicating consideration by PGL personnel of the economic
      impact of the GPAA on consumers prior to executing it. Additionally, we agree
      with the GCI that the importance of PGL’s assertions that it should not be
      required to conduct an economic analysis has to do with credibility, given
      the
      fact that there were unfavorable economic analyses available. 

    

    While
      the
      Commission does not require utilities to perform any particular type of analysis
      or bidding process, we do require utilities to provide evidentiary support
      demonstrating the prudence of all gas supply contracts for which the costs
      are
      passed on to PGA customers. Here, PGL embarked on an encompassing venture with
      Enron North America when it executed the GPAA. At the time of execution, the
      GPAA governed approximately two-thirds of PGL’s supply for a period of five
      years. PGL had an obligation, pursuant to statute, to mitigate rising gas costs.
      (220 ILCS 5/9-220). Yet, here, PGL presented no evidence that its
      decision-makers made any attempt to consider the effect of the costs it incurred
      through the GPAA on ratepaying consumers. What we are requiring is that
      utilities must be able to prove that their expenditures were not, as was often
      the case here, money spent unnecessarily. (See,
      e.g.,
      the
      portions of this Order concerning the impact of foregone demand credits, and
      the
      economic impact of the SIQ provision in the GPAA.). 

    

    

    _____________________

    31   The
      “Aruba Analysis” included transportations costs and basis. Wear Cross Ex. 15
      merely compared past base gas prices with the base prices in the GPAA. Neither
      one of these analyses covered such items as the economic impact of the DIQ
      clause, the possible effects of Enron changing the price of baseload gas
      pursuant to the GPAA, and various other provisions that had an obvious impact
      on
      the price of gas borne by consumers. (Wear Cross Ex. 15; Staff Group Ex. 1
      at
      ST-PG-135-161). 

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    While
      PGL
      cites its Exhibit 8 as evidence of economic analysis of the GPAA, which was
      prepared by Mr. Wear, this document does not aid it. There is no evidence in
      this record establishing that PGL
      Ex. 8
      was created at the time the decision was made to enter into the GPAA. Therefore,
      it is not probative as to what PGL decision-makers consulted, or should have
      consulted, when entering into the GPAA. Similarly, Mr. Graves’ conclusions were
      drawn after the time PGL entered into the GPAA, and his testimony does not
      establish what information decision-makers at PGL considered when entering
      into
      the GPAA. 

    

    PGL’s
      assertion that Wear Cross Ex. 15 establishes that its expectations with regard
      to the effect of declining basis were correct is without merit. PGL overlooks
      the fact that, in Wear Cross Exhibit 15, Mr. Wear did not analyze basis. He
      merely compared PGL’s historical purchases of gas with four years of previous
      gas purchases PGL made (from October, 1995 to September, 1999) using GPAA
      purchases prices, like FOM minus three cents per MMBtu. (Wear Cross Ex. 15).
      Mr.
      Wear’s analysis proves nothing with regard to the impact of basis and the GPAA.
      

    

    Mr.
      Wear
      projected an approximate loss of $50 million over the four-year period he
      analyzed. Mr. Wear also projected a gain in the fourth year (1999) of
      $10,920,308. (Id.).
      PGL
      does not explain how incurring a loss of $50 million over four years is offset
      by approximately $11 million in the last of these four years. 

    

    The
      record evidence shows that Mr. Wear was not a credible witness. At hearing,
      he
      often evaded answering the questions asked of him, and many times he changed
      his
      testimony in significant ways. Mr. Wear also contradicted his own testimony
      on
      several occasions. (See,
      e.g.,
      Tr.
      1072, where Mr. Wear stated that he previously testified that PGL did not
      renegotiate with Citgo because the Citgo gas PGL received previously was
      inferior, but, admitted that, after PEC assumed the Citgo contract, PGL
      continued to receive this same inferior gas (through Enron Midwest)).
      Additionally, Mr. Wear often made factual conclusions without stating the
      factual foundation for those conclusions. This Commission need not consider
      factually unsupported conclusions of fact. (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 77, 621 N.E.2d 276 (2nd
      Dist.
      1993)).

    

    Furthermore,
      Wear Cross Exhibit 15 impeached Mr. Wear’s credibility, as the record is replete
      with statements he made that no economic analysis was performed. (See,
      e.g.,
      Tr.
      1009-10). However, Wear Cross Ex. 15 established, at a minimum, that Mr. Wear
      created a document on his computer approximately one week before PGL executives
      signed the GPAA. (Wear Cross Ex. 15; Staff Ex. 2.00, GPAA). Any statement made
      by Mr. Wear that he did not recall Wear Cross Ex. 15, or that he did not recall
      with whom he spoke regarding this document is not credible. 

    

    The
      Commission concludes that PGL
      presented no evidence establishing that it had a prudent reason for ignoring
      these two unfavorable analyses. Mere statements that decision-makers did not
      consider these analyses does not absolve PGL from its obligation to incur only
      those costs that are prudently incurred. (220 ILCS 5/9-220). And, any objection
      PGL had to the failure of Staff to subpoena Mr. Rodriguez should have appeared
      at hearing. It cannot do so now. (See,
      e.g., People v. Robinson,
      157 Ill.
      2d 68, 79, 623 N.E.2d 352 (1993); Fleeman
      v. Fischer, 244
      Ill.
      App. 3d 753, 755-56, 244 N.E.2d 836 (5TH
      Dist.
      1993)). 

    
      
         

        

        
        

      

      
        50

        
          

        

      

      
        
        

        01-0707

      

    

    It
      is
      unfathomable to the Commission that PGL executed the GPAA when at least two
      analyses showed an increase in costs to PGA customers. It would seem that any
      negative attributes of a supply contract would be an integral part of the
      decision-making process, especially given that Commission rules require PGL
      to
“refrain” from actions that lead to an increase in costs for consumers. The fact
      that PGL’s decision-makers did not consider them actually shows that PGL acted
      imprudently when entering into the GPAA. Failure to consider what increases
      in
      gas costs, actual or potential, as a result of entering into the GPAA,
      constitutes an exercise in judgment outside the standard of care that a
      reasonable person would be expected to exercise under the same circumstances
      encountered by utility management at the time decisions had to be made. PGL’s
      decision was, therefore, imprudent. (Illinois
      Power, 245 Ill.
      App.
      3d at 371). Disallowances based on the specific increases in costs caused by
      PGL’s imprudent decision will be discussed in detail below. 

    

    On
      Exceptions, PGL ignores the law in arguing that the Commission should only
      require it to justify its decisions based on information that could have been
      available to decision-makers at the time the relevant decisions were made.
      The
      Commission is required to determine whether a decision is prudent based on
      what
      decision-makers knew or should have known. (See,
      e.g., Ill. Power,
      245 Ill.
      App. 3d at 371). Moreover, we decline to allow utilities to justify decisions
      based on information that decision-makers might have known, unless, as is the
      case with the “Aruba Analysis and Wear Cross Ex. 15, those documents were
      prepared for the purpose of making the decision in question. In such a case,
      the
      decision-makers should have known the contents of those documents.

    

     

    
      	 	
              3.

            	
              Enron’s
                Ability to Change the Price of Gas: the Baseload Price Adjustment
                Clause
                and Articles 4.2(b) and 4.2(c) of the GPAA 

            

    

     

    

    a. Staff’s
      Position

    

    Staff
      contends that, pursuant to the BLPA, Enron NA could increase the price of
      baseload gas. Also, Articles 4.2(b) and 4.2(c) of the GPAA allowed Enron to
      increase the price of baseload gas in wintertime, notwithstanding any increases
      Enron North America imposed pursuant to the BLPA. Staff acknowledges that no
      harm actually resulted from these three clauses, as Enron never actually changed
      the price of gas pursuant to these three clauses during the reconciliation
      period. Staff avers that it was unreasonable for PGL to enter into a contract,
      pursuant to which a supplier could increase the amount of money charged. This
      holds especially true for baseload gas, which PGL needed to meet customer
      demands. (Staff Init. Brief at 41; 50-51). Because consumers suffered no
      economic harm from these provisions, Staff seeks no disallowance. (Id.
      at
      56).

    

    b. GCI’s
      Position

    

    The
      GCI
      also contend that the BLPA and Articles 4.2(b) and 4.2(c) of the GPAA allowed
      Enron NA to unilaterally increase the price of baseload gas in wintertime,
      which
      was imprudent. (GCI Init. Brief at 45, 47).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    c. PGL’s
      Position

    

    PGL
      acknowledges that the BLPA clause allowed Enron NA to choose to price up to
      45,000 MMBtus per day of the baseload quantity at a daily price, rather than
      the
      FOM price, during December through March. According to Mr. Wear, PGL agreed
      to
      include the BLPA clause in order to secure the three-cent per MMBtu discount
      on
      baseload gas and SIQ gas. (Id.
      at 21).
      PGL argues that the emphasis on the existence of these clauses is misplaced
      because Enron NA never invoked these clauses. And, Articles 4.2(b) and 4.2(c)
      expired, unexercised, before the commencement of the reconciliation year. (PGL
      Reply Brief at 30). 

    

    d. Commission
      Analysis and Conclusions

    

    The
      Commission agrees with Staff and the GCI that facts were known to PGL
      decision-makers at the time the GPAA was negotiated which established that
      these
      clauses could have resulted in harm to ratepaying consumers. A simple review
      of
      these three clauses in the GPAA would have revealed that Enron NA could have
      imposed unnecessary costs on consumers. Baseload gas is critical for PGL to
      meet
      the demands of its customers. Because PGL is required by law to pass on only
      those costs that are prudently incurred, price of baseload gas (or any supply
      of
      gas) should always be a concern for PGL. (220 ILCS 5/9-220). Yet, conspicuously
      absent from this record is evidence that anyone at PGL was concerned that Enron
      could increase the price of gas, if Enron decided to do so. 

    

    The
      Commission finds that PGL acted imprudently by entering into a contract with
      three provisions that potentially allowed Enron NA to increase the price of
      baseload gas, which is the quantity PGL needs to satisfy its customer demands.
      However, Enron NA did not actually invoke its rights pursuant to these
      provisions. No harm to ratepaying consumers actually occurred. The fact that
      Enron NA did not invoke these clauses only has to do with the level of economic
      harm PGL caused by failing to analyze the GPAA. It is simply imprudent to enter
      into a contract with these provisions when the potential for harm is so
      patent.

    

     

    4. Baseload,
      SIQ and DIQ Gas

     

    

    
      	 	
              a.

            	
              Staff’s
                Position

            

    

    

    Staff
      argues that the baseload, SIQ and DIQ gas clauses lend further support for
      finding the GPAA to be imprudent.

    

    PGL
      indicated that it established baseload requirements through negotiations with
      Enron NA and did not necessarily reflect demand. PGL stated that baseload
      quantities included in the GPAA were similar to baseload purchases prior to
      the
      existence of the GPAA. Finally, PGL claimed that baseload quantities were based
      on normal weather conditions, although daily and monthly purchases might be
      based on other factors. According to Staff, none of PGL’s explanations justify
      the contracted amount of baseload included in the GPAA. (Staff Init. Brief
      at
      41).

    

    
      
         

        

        
        

      

      
        52

        
          

        

      

      
        
        

        01-0707

      

    

    Baseload
      requirements represent the portion of customer demand that a gas utility can
      take on its system. If a gas utility purchases baseload based on normal weather
      conditions, its goal is to obtain supplies that meet the load requirements
      of
      its customers. Sound business practice dictates that PGL would provide some
      sort
      of study or analysis to support its decision to use normal weather conditions
      to
      establish baseload requirements. PGL did not do that here. Staff believes PGL
      to
      be unreasonable in committing to purchase baseload requirements without first
      analyzing the needs of its customers. (Staff Ex. 2.00 at 21-22).

    

    Pursuant
      to the SIQ provision, Enron NA chose the amount of gas it delivered to PGL
      during the summer period defined in the GPAA. Enron NA sold SIQ gas to PGL
      at
      the FOM price, less a three-cent per MMBtu discount. However, the GPAA enabled
      Enron NA to force PGL to purchase maximum SIQ volumes of gas when the Gas Daily
      price was less than the FOM price. (See, Staff Ex. 3.00 at 31). According to
      Staff, the SIQ provision forced PGL to buy gas it did not need. Enron NA could,
      and did, deliver large amounts of SIQ gas to PGL when the FOM price was higher
      than the daily price, which forced PGL to buy gas it did not need at a higher
      price than what was available in the marketplace at the daily price. Staff
      argues that it was imprudent for PGL to allow Enron NA to determine how much
      gas
      PGL would receive. (Staff Ex. 12.00 at 24; Staff Init. Brief at 49).

    

    Staff
      sets forth that DIQ gas was sold at daily prices, which are usually higher
      than
      FOM prices, with no discount. Thus, when the daily price was above the monthly
      price, Enron NA had the incentive to deliver the minimum SIQ volumes allowed
      by
      the GPAA. By merely delivering a small amount of SIQ gas, Enron NA forced PGL
      to
      purchase the remainder of what it needed, either through the DIQ clause, or
      from
      another source, at the higher daily prices. In other words, when Enron NA
      elected not to sell the full 80,000 MMBtus of SIQ gas to PGL, and if PGL needed
      that amount of gas, PGL would be required to purchase gas at a higher cost.
      (Staff Ex. 12.00 at 24). PGL submitted evidence establishing that on only 20%
      of
      the days on which Enron NA made such a decision, PGL did not purchase DIQ
      volumes from Enron NA at the daily price. (PGL Ex. L at 11; Staff Init. Brief
      at
      43). Staff determined that the SIQ increased consumer costs during the year
      in
      question in the amount of $4,818,319, which represents the difference between
      the daily price index and the FOM index price, times incremental SIQ gas
      volumes. (Staff Init. Brief at 56).

    

    b. GCI’s
      Position

    

    The
      GCI
      argue that the SIQ clause virtually guaranteed that Enron would benefit, at
      the
      expense of consumers. Citing Mr. Wear’s testimony on this issue, they conclude
      that PGL should not have been “indifferent to when the volumes of gas showed
      up.” (GCI Init. Brief at 47-48)

    

    c. PGL’s
      Position

    

    PGL
      contends that the SIQ provision was prudent because relinquishing control over
      how much SIQ gas was delivered to it was done in exchange for a three-cent
      discount. (See,
      e.g.,
      PGL
      Init. Brief at 18). According to Mr. Wear, the three-cent per MMBtu discount
      in
      both the baseload clause and the SIQ clause saved consumers $2.7 million. (PGL
      Ex. C at 16). 

    

    
      
        

        
        

      

      
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    PGL
      argues that Staff and the GCI exaggerate the effect of the SIQ provision, which
      PGL acknowledges “allowed Enron some control over the timing and amount of gas
      sold to Peoples Gas under the GPAA.” (PGL Reply Brief at 35). PGL points out
      that Enron NA had no control over the amounts of PGL’s higher-priced purchases
      from Enron North America pursuant to the DIQ clause. Also, citing Staff’s
      Initial Brief and Mr. Anderson’s testimony, PGL argues that Enron NA never
      forced PGL to buy DIQ gas when Enron NA selected the minimum amount of SIQ
      gas.
      (PGL Reply Brief at 36). 

    

    d. Commission
      Analysis and Conclusions

    

    As
      an
      initial matter, the Commission agrees with Staff that PGL should have performed
      some sort of analysis to determine its baseload requirements prior to executing
      the GPAA. Contracting for baseload requirements without an idea as to what
      demand might be defies logic. The Commission notes that no party proposes a
      disallowance for the baseload provision of the GPAA. However, we find PGL simply
      acted imprudently by not performing a quantitative analysis.

    

    The
      Commission will now consider the effects of the SIQ and DIQ clauses. Normally,
      price and amount are essential terms in a contract. (See,
      e.g., Butler v. Butler,
      275 Ill.
      App. 3d 217, 225-29, 655 N.E.2d 1120, (1st
      Dist.
      1995), upholding refusal to grant specific performance when the contract that
      the plaintiff sought to enforce did not have a specific price; City/CUB Ex.
      1.0
      at 9). Mr. Wear testified that having an oversupply could produce undesirable
      consequences for PGL. Yet, the SIQ provision relinquished PGL’s control over the
      amount of gas PGL would receive on any given day to Enron NA. 

    

    It
      defies
      logic for PGL to contend, on the one hand, that the GPAA was prudent, yet on
      the
      other hand to contend that an oversupply was undesirable. The record clearly
      demonstrates that the SIQ clause not only created an oversupply, but created
      an
      oversupply beyond PGL’s control. Without control over the amount of gas Enron NA
      delivered to PGL on any given day, it is difficult to imagine how PGL could
      effectively plan how to meet its responsibilities. Too little gas, also, brought
      about undesirable consequences, as it required PGL to buy gas at the higher
      DIQ
      price from Enron NA, or elsewhere, at a daily price. (See,
      e.g.,
      PGL Ex.
      B at 6). The SIQ clause allowed Enron NA to force PGL to pay more for gas when
      Enron NA manipulated the difference between the price in the SIQ clause and
      the
      DIQ clause. And, there is simply no evidence substantiating PGL’s claim that
      this provision would be offset by the three-cent discount. 

    

    PGL’s
      reference to Staff witness Mr. Anderson’s testimony in support of its claim that
      Enron NA never forced PGL to take maximum SIQ gas is taken out of context.
      (See,
      Tr.
      869). So is its reference to Staff’s Initial Brief in support of its contention
      that Enron NA never forced PGL to take the maximum amount of SIQ gas. In fact,
      Staff argued on page 43 of this Brief that when Enron NA delivered only the
      minimum SIQ gas, PGL was required to find volumes to replace SIQ gas. Staff
      averred that Enron NA forced PGL to take minimum volumes approximately 80%
      of
      the time when doing so was economically advantageous for Enron NA. (Staff Init.
      Brief at 43). There is other evidence, however, that Enron also forced PGL,
      on
      236 of the 244 summer days, to purchase maximum SIQ volumes. (Staff Ex. 3.00
      at
      31). PGL’s argument ignores the evidence. 

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Essentially,
      the SIQ gas was injected to create a supply of less expensive summer gas to
      meet
      PGL’s winter load requirements, which includes gas for ratepaying consumers. PGL
      had an obligation, pursuant to Section 9-220 of the PUA, to procure that gas
      in
      a manner that did not unnecessarily increase consumer gas costs. The SIQ
      provision caused PGL to fail in this obligation. Any disallowance associated
      with the Commission’s finding of imprudence for this provision is properly
      included in the Settlement Agreement and Addendum fully discussed in Section
      I
      .

    

    The
      Commission notes that Section 4.5 of the GPAA allowed PGL to renegotiate the
      price of gas, if PGL were to discontinue use of a PGA rider and therefore would
      no longer be directly passing the price of gas on to consumers. (Staff Ex.
      2.00,
      Attachments, GPAA, Par. 4.5). The existence of this clause is some indicia
      that
      if the prices in the GPAA were not passed on directly to consumers, PGL would
      not find those prices to be satisfactory. If PGL had to pay for this gas and
      account to its shareholders for those costs, the prices would be re-negotiated.
      This is further evidence that PGL did not have its customer’s best interests in
      mind when negotiating the GPAA.

    

     

    5. Foregone
      Demand Credits

     

    

    a. Staff’s
      Position

    

    Staff
      contends that, by releasing pipeline capacity pursuant to the GPAA, PGL
      surrendered its ability to engage in demand-credit transactions. Before the
      GPAA, PGL obtained revenues that were flowed through its PGA, offsetting costs
      that were passed on to consumers. These revenues were obtained in two ways.
      Either PGL released pipeline capacity, earning a fee, or it engaged in demand
      credit transactions where it purchased gas at one point in a pipeline and sold
      it at another. The margin on such a sale covered other demand charges imposed,
      which reduced the costs passed on to consumers in the PGA. Staff maintains
      that
      releasing this pipeline capacity unnecessarily increased consumer costs. (Staff
      Ex. 3.00 at 34; Staff Init. Brief at 55).

    

    b. PGL’s
      Position

    

    PGL
      asserts that it is not possible to calculate the demand credits it would have
      earned if it had not entered into the GPAA. It contends that there are many
      unpredictable factors in these types of transactions. 

    

    
      	 	
              c.

            	
              Commission
                Analysis and Conclusions

            

    

    

    Even
      assuming that PGL is correct in its contention that it is not possible to
      determine the amount of foregone demand credits with certainty, PGL was
      imprudent in relinquishing the revenues and credits from the pipeline capacity
      to Enron NA with no benefit conferred upon consumers as a result of this
      relinquishment. Record evidence establishes that the pipeline capacity PGL
      ceded
      to Enron NA pursuant to the GPAA generated income before the GPAA was executed.
      (PGL Ex. C at 31; Staff Ex. 3.00 at 34). After the GPAA was executed, this
      pipeline capacity generated no income. It should have been obvious to PGL that
      this capacity could generate no income. (Staff Ex. 2.00, Attachments, GPAA,
      Art.
      4.3) 

    
      
         

        

        
        

      

      
        55

        
          

        

      

      
        
        

        01-0707

      

    

    While
      PGL
      has contended, essentially, that Dr. Rearden’s calculation of foregone demand
      credits is inaccurate, PGL proffers no evidence as to what would be accurate.
      There is nothing patently inaccurate about Dr. Rearden’s use of the profits PGL
      gleaned during a previous fiscal year to determine what PGL would have earned.
      The Commission agrees with Staff that PGL’s release of pipeline capacity
      increased consumer costs with no benefit for consumers resulting from this
      release. Any disallowance associated with the Commission’s finding of imprudence
      for this provision is properly included in the Settlement Agreement and Addendum
      as approved in Section I.

    

     

    6. Penalties
      for Resales of Gas

     

    

    
      	 	
              a.

            	
              Staff’s
                Position

            

    

    

    Dr.
      Rearden estimated that penalties on resales of gas pursuant to the GPAA raised
      consumer costs by $86,681. (Staff Ex. 3.00 at 34). Dr. Rearden opined that
      the
      existence of this provision is indicia that PGL expected to have an oversupply.
      (Id.
      at 29).

    

    
      	 	
              b.

            	
              PGL’s
                Position

            

    

    

    PGL
      argues that the resale provision, even with its penalties, was beneficial.
      An
      oversupply creates significant issues, as it is difficult for PGL personnel
      to
      unload large amounts of gas, and, an oversupply can create an overpressure
      situation. (PGL Init. Brief at 23). PGL argues that Staff continues, wrongfully,
      to characterize the financial onus imposed by the GPAA on consumers whenever
      resales occurred as a “penalty.” According to PGL, Staff has ignored the
      dynamics of the marketplace. Also, Dr. Rearden acknowledged that a sale at
      less
      than the daily midpoint price does not necessarily reflect a penalty. (Tr.
      1292,
      PGL Reply Brief at 31). 

    

    Referring
      to Mr. Wear’s testimony, PGL maintains that the sell-back provision is not an
      uncommon one. Mr. Wear testified that once, in a contract that spanned from
      1996
      through 1998, PGL had a similar arrangement with an unnamed supplier.
      (See,
      PGL Ex.
      C at 32). Also, the sell-back provision compared favorably with alternatives,
      like purchasing “Park and Loan” services from an interstate pipeline. Further,
      if PGL had too much gas, it could incur substantial pipeline overrun charges.
      (PGL Reply Brief at 32-33). 

    

    
      
         

        

        
        

      

      
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              c.

            	
              Commission
                Analysis and Conclusions

            

    

    

    PGL
      asserts that unloading excess gas can be a very difficult task. (See,
      e.g.,
      PGL Ex.
      C at 23). However, to counteract the difficulties encountered by an oversupply,
      a reasonably prudent person would have placed himself in a position in which
      an
      oversupply is a rare occurrence. If PGL personnel were truly concerned with
      the
      detrimental effect of an oversupply, logic would dictate that it would not
      have
      allowed Enron NA to control the amount of SIQ gas that PGL received on a daily
      basis. Instead, PGL chose to enter into a supply contract where Enron NA could
      decide to deliver, at Enron NA’s sole discretion, the maximum SIQ. Enron NA
      exercised its option under the SIQ provision on 236 out of 244 summer days
      during the reconciliation period. On an astonishing 70% of those days, PGL
      was
      forced to resell the Enron NA-caused oversupply back to Enron NA and incur
      penalties. It is unclear to the Commission how allowing another entity to
      control the delivered SIQ gas, the same entity to which PGL must ‘conveniently’
resell any artificially created oversupply at a loss, could be considered
      prudent. Compounding that with the profit sharing arrangement between PGL’s
      parent and Enron NA, the Commission finds the reselling of gas to Enron NA
      to be
      imprudent. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as approved in Section I.

    

    PGL’s
      citation to Dr. Rearden’s testimony overlooks the fact that penalties were
      imposed by the GPAA every time a resale was made, irrespective of the daily
      midpoint price. PGL’s argument concerning Dr. Rearden’s testimony does not aid
      it. 

    

    Mr.
      Wear’s testimony regarding one single two-year contract with an unnamed supplier
      for an unspecified amount of gas does not aid PGL. Mr. Wear mentions but one
      contract, which is not an industry-wide practice. There is no evidence that
      this
      unspecified contract contained provisions like the SIQ clause in the GPAA,
      which
      forced PGL to accept excess gas supply from Enron NA. Finally, there is no
      evidence that this unnamed contract involved the supply of 66% of PGL’s total
      intake of gas, which is the situation here. 

    

     

    7. Released
      Pipeline Capacity

     

    

    
      	 	
              a.

            	
              Staff’s
                Position

            

    

    

    Staff
      argues that, when PGL released pipeline capacity to Enron NA, it surrendered
      an
      item for which consumers paid for through the PGA. The value of that pipeline
      capacity is $3,377,303, over the five-year life of the contract. (See,
      Staff
      Init. Brief at 51). 

    

    
      	 	
              b.

            	
              PGL’s
                Position

            

    

    

    PGL
      contends that it did not release pipeline capacity. It cites FERC rules, which
      provide that when pipeline capacity is released, the released shipper receives
      a
      credit on its pipeline invoice in an amount equal to the charges paid by the
      replacement shipper. Pursuant to the GPAA, Enron NA paid PGL whatever PGL was
      required to pay the pipelines. (See,
      18. C.
      F. R. 284.8(f); PGL Init. Brief at 20).

    

    
      
         

        

        
        

      

      
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              c.

            	
              Commission
                Analysis and Conclusions

            

    

    

    The
      regulation cited by PGL provides that:

    

    unless
      otherwise agreed to by the pipeline, the contract of the shipper releasing
      capacity will remain in full force and effect, with the net proceeds from any
      resale to a replacement shipper credited to the releasing shipper’s reservation
      charge. 

    

    (18
      C.F.R. 284.8(f)). Thus, this regulation contemplates a situation akin to a
      tenant’s sublease, in which the subleasing tenant actually pays the landlord, as
      the subleasing user of the pipeline pays the pipeline. However, it is not
      disputed that pursuant to the GPAA, Enron NA has the responsibility to pay
      shippers. Rather, Staff has maintained that because the GPAA required PGL to
      reimburse Enron NA for those charges, PGL still paid those pipeline charges.
      (See,
      e.g., Staff
      Ex.
      2.00 at 18, 20). 18 C.F.R. 284.8(f) is therefore not relevant. 

    

    PGL
      bears
      the burden of proof here, which it failed to meet. It did not provide evidence
      establishing that the pipeline capacity it released was not paid for by
      consumers pursuant to the terms in the GPAA. (See,
      generally, PGL Init. Brief). Enron NA had use of that pipeline capacity for
      its
      own business purposes above and beyond facilitating supply to PGL. Enron paid
      nothing for the use of that pipeline. (Staff Ex. 2.00, Attachments, GPAA, Arts.
      6.1, 6.4). The Commission concludes, therefore, that this clause also was
      imprudent. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as approved in Section I.

    

     

    8. Eroding
      Basis

     

    

    
      	 	
              a.

            	
              PGL’s
                Position

            

    

    

    The
      cost
      of transporting gas to Chicago is passed on to consumers in PGL’s PGA. (83 Ill.
      Adm. Code 525.40(a)). Based on Mr. Wear’s and Mr. Graves’ testimony about a
      concern in the industry regarding an impending decline in pipeline
      transportation value, PGL contends that it entered into the GPAA to protect
      itself, and therefore consumers, from a decline in the value of PGL’s
      preexisting transportation contracts (“basis”). Because more pipelines were
      being built to Chicago, people in the industry began to speculate that there
      would soon be excess pipeline capacity, causing the value of pipeline capacity
      to decrease. 

    

    It
      is not
      contested by any party that if basis shrunk enough, it would be less expensive
      to buy gas at the citygate price than to buy it in the field and pay to
      transport it. (PGL Initial Brief at 29-30; See
      also,
      PGL Ex.
      H at 42; PGL Ex. E. at 6). Also, as basis declined, so would PGL’s revenues from
“optimizing” transportation assets. (PGL Ex. C at 9). According to Mr. Wear,
      purchasing gas at the citygate price, as well as the three-cent discount on
      baseload and SIQ gas, offset the impact of a decline in basis. Citing this
      testimony, PGL argues that the three-cent discount “guaranteed” value for its
      transportation assets and offset the expected decline in basis. (See,
      e.g.,
      Tr. 883,
      1079-81; PGL Init. Brief at 48-50). Also, the expected basis decline was not
      an
      event that would occur immediately. (PGL Reply Brief at 27). 

    
      
         

        

        
        

      

      
        58

        
          

        

      

      
        
        

        01-0707

      

    

    PGL
      argues that Staff unjustly accuses it of failing to just shift loads amongst
      pipelines in order to obtain better pipeline prices. PGL points out that, even
      Mr. Anderson acknowledged that price is not the only factor when selecting
      pipeline capacity. Also, operational considerations limit the extent to which
      PGL personnel can shift a load. Further, Natural Gas Pipeline is the only
      interstate pipeline directly connected to PGL’s distribution system. Natural Gas
      Pipeline uses “pressure control” operations instead of “flow control”. Pipelines
      that use pressure control operations provide “true” no-notice service. As
      consumption on PGL’s system changes, the pressure changes, causing PGL to take
      more or less gas as pipeline pressure dictates. With pipelines that operate
      under flow control, changes in pipeline pressure do not affect the flow of
      gas
      upstream on PGL’s system. PGL contends that therefore, only Natural Gas Pipeline
      by way of its pressure control operations, can assist it in real time balancing.
      (PGL Reply Brief at 29-30). 

    

    
      	 	
              b.

            	
              Staff’s
                Position

            

    

    

    Staff
      maintains that buying gas at the citygate price, as opposed to buying it in
      the
      field and delivering it, unnecessarily increased the price of gas in the amount
      of $10,755,048. (Staff Init. Brief at 55). Staff argues that PGL did not
      demonstrate that the GPAA preserved the value of pre-existing transportation
      assets against a falling basis. Staff points out that PGL negotiated four new
      pipeline contracts in 1998 and another in 1999, just before PGL executed the
      GPAA, which occurred in September of 1999. If PGL decision-makers were truly
      concerned about the decline in basis, they could simply have renegotiated those
      pipeline contracts to reflect the decline in market value of those contracts,
      but they did not. (Id.
      at
      36-37). 

    

    Staff
      points out that PGL had other options available to it that would offset the
      effect of eroding basis. Utilities often shift the load between pipelines to
      negotiate lower transportations costs. In fact, Staff maintains, PGL has used
      this practice in the past. However, PGL presented no evidence that it considered
      this alternative before it executed the GPAA. (Staff Init. Brief at 35-36).
      Staff states that it is not requiring PGL to investigate these two alternatives.
      Instead, the evidence indicates that PGL did not even consider alternatives
      available to it when negotiating the GPAA. Staff points to the profit-sharing
      partnership PEC formed with Enron North America/Midwest and contends, in
      essence, that the real reason PGL entered into the GPAA was that arrangement.
      (Id.
      at 37).

    

    Staff
      also argues that the GPAA did not offset any decline in basis because the GPAA
      caused PGL to pay twice for transportation. Consumers paid once for delivery
      of
      gas to the citygate, and again when the GPAA required it to release
      transportation capacity to Enron NA at no cost to Enron NA. (Id.).
      

    
      
         

        

        
        

      

      
        59

        
          

        

      

      
        
        

        01-0707

      

    

    

    Staff
      avers that there is no evidence that PGL decision-makers actually contemplated
      a
      steep decline in basis when the GPAA was signed. Staff contends that PGL failed
      to present evidence that before signing the GPAA, PGL conducted an evaluation
      of
      the probability of a steep decline in basis. (Staff Reply Brief at 36). Staff
      further contends that the three-cent discount must be compared to the field
      price, plus the variable cost of transportation versus the citygate price.
      Staff
      argues that the economic impact of other provisions of the GPAA must also be
      examined, such as Enron NA’s re-pricing options, the resale penalty, lost demand
      credits due to the GPAA, and, the financial impact of Enron’s manipulations of
      the SIQ provision. 32
      (Staff
      Init. Brief at 48-49). 

    

    Given
      PGL’s projections of basis made at the time the GPAA was executed, Staff
      contends that the GPAA’s discounts were not enough to offset the projected basis
      decline. (Id.
      at
      37-38). Staff avers that correct manner to determine the field price and
      delivery costs, versus the citygate price, is to do the same analysis PGL
      performed when it valued the transportation it released to Enron North America
      pursuant to the GPAA. For each delivery point in the transportation contracts
      PGL released to Enron, PGL projected a basis from the Henry Hub to that point,
      and, to Chicago, using NYMEX futures contract prices to determine the amount
      of
      these prices. PGL also used NYMEX futures prices to determine the price of
      gas
      in the field. Similarly, PGL calculated the citygate price as the Henry Hub
      price, plus basis. PGL determined variable transportation costs by viewing
      the
      applicable tariffs. (Id.).
      

    

    Staff
      does not dispute that the three-cent per MMBtu discount conferred a benefit
      on
      ratepaying consumers. Using the amounts just previously described, Staff
      estimated that the value of the three-cent discount, over the life of the GPAA,
      was $13,176,693, and the extra cost imposed on consumers by use of the citygate
      price was $26,205,000, over the life the GPAA.33
      (Staff
      Ex. 3.00 at 17-18; Staff Init. Brief at 50; FCG-ARG-3). Staff avers that this
      differential, coupled with other harmful clauses in the GPAA, make it imprudent.
      (Id.
      at
      49-52). 

    

    
      	 	
              c.

            	
              Commission
                Analysis and Conclusions

            

    

    

    PGL
      professes that its decision-makers were concerned about the value of preexisting
      transportation contracts. However, the record indicates otherwise. The terms
      of
      the GPAA contract actually increased the cost of transportation that was passed
      on to consumers. Pursuant to the GPAA, PGL relinquished pipeline capacity to
      Enron NA to “facilitate the citygate supply relationship.” (PGL Ex. B at 4).
      Consumers also paid the citygate price of gas, which includes the cost of
      transportation to Chicago. PGL does not explain how the GPAA could offset a
      decrease in previously contracted-for transportation costs when consumers
      actually paid twice for transportation. Nor is it obvious. In contrast, Dr.
      Rearden’s testimony established that the GPAA increased gas costs to a point at
      which purchasing gas at the citygate prices, even with the three-cent discount,
      did not offset the decline in basis. 

    

    

    _____________________

    32   These
      other provisions of the GPAA shall be discussed herein, in other sections of
      this Order. 

    33   Staff’s
      figures here were proffered for purposes of price comparison, not as a
      disallowance. (See,
      Staff
      Ex. 7.02). 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    Further,
      the evidence did not establish that the citygate prices and the three-cent
      discount on baseload and SIQ gas actually protected PGL, and thus consumers,
      from declining basis. This is true because, as previously set forth herein,
      PGL
      had no control over the amount of SIQ gas it received pursuant to the GPAA.
      The
      presence of the SIQ clause and other clauses previously mentioned herein, which
      increased the price consumers paid for gas, eroded the value of the three-cent
      discount included in PGL’s citygate purchases to the point of non-existence.
      Given the amount of extra costs that the GPAA imposed, it makes no sense to
      focus on basis as a measure of the prudence of the GPAA without looking at
      the
      substantial increases in costs that the GPAA imposed.

    

    PGL
      contends that it did not consider any other economic aspect of the GPAA, such
      as
      the BLPA or the interplay between the SIQ and DIQ provisions. (See,
      e.g.,
      PGL Ex.
      C at 11). In so arguing, PGL merely admits that its decisions-makers did not
      act
      in a manner in which a reasonable person would under the same circumstances
      encountered by utility management at that time. (Illinois
      Power,
      245 Ill.
      App. 3d at 371). In other words, essentially PGL admits that it entered into
      the
      GPAA imprudently. (Id.).
      

    

    PGL
      cites
      no authority, and indeed there is none, that allows utilities to enter into
      contracts that pass on costs to consumers without considering the effect of
      those costs on consumers. When determining whether the provisions in the GPAA
      passed on prudently-incurred costs, the Commission cannot be limited to what
      PGL
      decision-makers claim to have considered when executing the GPAA. (Illinois
      Power,
      245 Ill.
      App. 3d at 371). 

    

    There
      are
      other reasons in this record that cast doubt on PGL’s contention that the GPAA
      was entered into to protect against declining basis. Just prior to the time
      when
      PGL executed the GPAA, it re-negotiated four pipeline contracts. (Staff Ex.
      2.00
      at 16-17). As Staff witness Mr. Anderson pointed out, PGL could simply have
      renegotiated transportation contracts at lower costs, since if pipeline capacity
      was worth less, PGL should have been able to just pay less for it. Certainly,
      PGL had other well-known and simpler alternatives available to it. Yet, there
      is
      no evidence that PGL personnel even considered these alternatives. 

    

    PGL
      argues that it could not engage in load-shifting among pipelines to reduce
      costs
      due to the nature of the pipelines with which it connects. But this does not
      explain why other, more commonly used methods of mitigating a decline in basis
      were not explored. While the Commission is not requiring PGL to explore
      alternatives to the GPAA, the fact that PGL did not explore any of these
      alternatives casts doubt on the credibility of its contention that the GPAA
      was
      executed to offset the effect of a decline in basis. 

    

    In
      sum,
      the Commission finds PGL’s failure to fully evaluate its options to combat
      eroding basis, if indeed this was a reason to execute the GPAA, to be imprudent.
      Ample evidence exists showing that the costs of the GPAA far out-stripped any
      benefits to be gained by purchasing gas at the citygate instead of in the field.
      Any disallowance associated with the Commission’s finding of imprudence for this
      provision is properly included in the Settlement Agreement and Addendum as
      discussed in Section 1. 

    

     

     

    
      
         

        

        
        

      

      
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        01-0707

      

    

     

    
      	 	
              9.

            	
              The
                CERA Report and Other Reasons for Possibly Higher
                Basis

            

    

     

    

    
      	 	
              d.

            	
              PGL’s
                Position

            

    

    

    PGL’s
      expert witnesses Mr. Graves and Mr. Wear testified that, at the time the GPAA
      was being negotiated, there was information within the industry projecting
      that
      basis could decline sharply. (PGL Ex. H at 45-46; Attachments, FCG-6 and FCG-7;
      PGL Ex. C at 7-8). For example, the Cambridge Energy Research Associates
      (“CERA”) issued reports in the Spring and Summer of 1999 projecting that in many
      parts of the United States, basis in 2000 and 2001 would be
      negligible.34
      (See,
      e.g.,
      PGL Ex.
      2, Spring 1999 CERA Report). Based on information that existed at the time
      PGL
      executed the GPAA, PGL argued that when comparing basis with actual
      transportation costs, Dr. Rearden improperly determined that an average decline
      in basis was $0.01 per MMBtu per year.35
      However,
      PGL admits that there is no evidence establishing that the PIRA and CERA Reports
      were considered by PGL decision-makers when entering into the GPAA. It argues
      that Mr. Graves’ estimates are still valid. (PGL Reply Brief at
      39-40).

    

    PGL
      also
      argues that the Commission should not consider Staff’s estimate of the harm
      caused by the GPAA because Dr. Rearden did not use a liquidity premium in his
      calculations. Mr. Graves used a liquidity premium of .5 cents when calculating
      his estimate of harm caused by the GPAA. 

    

    Even
      though PGL has repeatedly asked the Commission to ignore the “Aruba Analysis,”
it contends here that, because Mr. Rodriguez used a liquidity premium when
      preparing the “Aruba Analysis,” the “Aruba Analysis” is evidence that a
      liquidity premium should be used. PGL argues that illiquidity is a phenomenon
      that it experiences in the field. Dr. Rearden used field prices in his basis
      calculations, which according to PGL, underestimated the actual field prices
      because field areas are not as liquid as trading hubs. (PGL Reply Brief at
      37-39). PGL also argues that Mr. Graves “followed Dr. Rearden’s lead” when only
      calculating basis from Ventura and Henry Hub to the Chicago citygate. Mr. Graves
      did not study the effect of the CERA scenarios on basis from the field to the
      citygate. (Id.
      at
      39-40). 

    

    

    _____________________

    34   At
      trial, none of the parties objected to the admission of this testimony and
      documents into evidence.

    35   PGL
      stated in its Initial Brief that its review of projections for the GPAA showed
      that basis “likely would decline,” implying that PGL personnel analyzed basis
      when the GPAA was negotiated and projected a steep decline in basis.
      (See,
      PGL
      Init. Brief at 48). However, there is no evidence, in this record, that the
      projections it cites were made when the GPAA was negotiated, and are, therefore,
      relevant. (See,
      also,
      PGL Ex.
      C. at 78, where Mr. Wear stated that the CERA Reports existed
      at the
      time when PGL negotiated the GPAA. He never stated that anyone at PGL actually
      read that report. (See,
      e.g.,
      Tr.
      944-45, where Mr. Wear admitted that “scenarios” illustrating a dramatic decline
      in basis were not part of the record.)).

    
      
         

        

        
        

      

      
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              e.

            	
              Staff’s
                Position

            

    

    

    Staff
      maintains that there is no evidence in this record that any PGL decision-maker
      considered steep basis projections, like those found in the CERA Study, before
      entering into the GPAA. Also, locations in the CERA Study are not the same
      as
      the pertinent PGL delivery points. Therefore, Staff concludes that the CERA
      Study is not relevant because the information therein is not comparable to
      the
      facts here. And, Mr. Graves’ projections are not accurate because he only used
      the CERA scenarios to examine changes in basis from the Henry Hub to the Chicago
      citygate. An accurate depiction of the basis at issue would account for the
      effects of basis changes at other field locations in each scenario, and would
      therefore, examine any effect from altering the field zone prices, as well
      as
      the Chicago citygate price. (Staff Ex. 12.00 at 15-17).

    

    Staff
      also points out that the CERA report only contained information regarding
      regional markets, not delivery points. Thus, in order for the information in
      such a study to be useful, a person would have to perform calculations tying
      the
      information in that report to a delivery point on its interstate pipeline
      service. That was not done here. (Staff Reply Brief at 27-28). 

    
      	 	
              f.

            	
              Commission
                Analysis and Conclusions

            

    

    

    The
      portion of Mr. Graves’ testimony that PGL cites is not an analysis of the GPAA.
      As is set forth herein, many other clauses in the GPAA passed on unnecessary
      costs to consumers, or placed consumers at unnecessary risk of increased gas
      costs. Even if the Commission were to accept PGL’s contention that its
      decision-makers thought that basis could be much steeper than it was, that
      alone
      does not justify entering into many other provisions in the GPAA. A steep
      decline in basis would not offset the increase costs borne by consumers through
      the SIQ clause, foregone demand credits, paying twice for pipeline
      transportation to Chicago and other costs that have been set forth herein.
      A
      steep decline in basis does not excuse PGL personnel from entering into a
      contract that contained clauses, like the BLPA, with an obvious potential to
      cause economic harm to consumers. 

    

    The
      Commission finds PGL’s reliance on the “Aruba Analysis” as evidence of the
      effects of the decline in basis rather curious, if not disingenuous. First,
      PGL
      wants us to ignore it since PGL decision-makers did when executing the PGAA.
      Now, PGL wants the Commission to consider the “Aruba Analysis” as evidence that
      PGL’s efforts to combat eroding basis were legitimate. Interestingly, PGL’s
      request does nothing to strengthen its case. In the “Aruba Analysis,” Mr.
      Rodriguez used a high and low SIQ volume to examine the effects of the projected
      basis on consumer gas costs. Both sets of projections indicated that the GPAA
      would increase consumer costs. (Group. Ex. 1.00 at ST-PG 50-74). Even including
      a liquidity premium, as Mr. Graves recommends, and as Mr. Rodriguez did in
      the
“Aruba Analysis,” the disadvantages of the GPAA, in total, are not outweighed by
      any effect it had on declining basis. As discussed previously herein, the GPAA
      provisions produced many, many unwarranted costs on consumers, with no
      offsetting benefit. 

    

    Further,
      Mr. Graves never explained why he determined that the liquidity premium he
      used
      was the proper amount. Nor did he explain how he calculated liquidity premium
      he
      used. Therefore, the Commission agrees with Staff that use of Mr. Graves’
liquidity premium is not substantiated. 

    
      
         

        

        
        

      

      
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        01-0707

      

    

    As
      stated
      earlier, the GPAA actually increased the pipeline transportation costs, because
      consumers paid twice for transportation costs. The citygate price included
      the
      cost of transportation to Chicago; consumers paid again for the capacity PGL
      released to Enron NA to “facilitate the citygate supply relationship.” Enron NA
      paid nothing to PGL for the privilege of using this capacity for its own
      business purposes, although Enron NA only used this capacity when PGL did not
      use this capacity. (See,
      e.g., Staff
      Ex.
      2.00, Attachments, GPAA, pars. 6.1, 6.4, PGL Ex. B at 4). Thus, the GPAA did
      not
      offset the effect of any decline in preexisting transportation costs.

    

    PGL
      is
      asking the Commission to make determinations about facts without presenting
      evidence that those facts were considered by its decision-makers when entering
      into the GPAA. In so doing, PGL ignores the fact that we are required, by law,
      to consider only what decision-makers considered, or should have considered,
      at
      the time a decision was made. (Illinois
      Power,
      245 Ill.
      App. 3d at 371). There is no evidence in this record that decision-makers at
      PGL
      knew of, or should have considered, possible projections in industry
      publications, such as the CERA Reports, as to the possible decline in basis.
      

    

    Additionally,
      Mr. Wear’s testimony that PGL entered into the GPAA to protect the value of this
      capacity is not credible. As stated earlier, Mr. Wear was not a credible
      witness. And, Mr. Wear did not make the ultimate decisions regarding the terms
      of the GPAA. There is no evidence that someone like Mr. Morrow, who executed
      the
      GPAA, considered declining basis when he negotiated this contract. 

    

    Moreover,
      Mr. Graves’ calculations as to basis are inaccurate. PGL’s transportation is
      from the field to a hub, such as the Henry Hub in Louisiana, and then to the
      Chicago citygate. Yet, Mr. Graves only considered transportation from a hub
      to
      the Chicago citygate. Contrary to PGL’s assertion that Mr. Graves “followed Dr.
      Rearden’s lead” and calculated basis from the Henry Hub or Ventura to the
      Chicago citygate, PGL’s own brief asserts that this statement is incorrect, and
      states that Dr. Rearden calculated basis from the field to the pertinent Hub
      and
      then to the Chicago citygate. (See,
      PGL
      Reply Brief at 38).

    

     

    9. Differing
      Economic Theories

     

    

    
      	 	
              g.

            	
              PGL’s
                Position

            

    

    

    Various
      witnesses recommended different dollar amounts as to the recommended
      disallowances for the GPAA. These different opinions as to how much the GPAA
      was
      imprudent, according to PGL, illustrate that how the GPAA should be quantified
      is subjective, making it unreasonable to view the GPAA as imprudent. (PGL Init.
      Brief at 57). 

    

    PGL
      points to the GCI testimony on the GPAA and states that the differences amongst
      the experts as to the dollar values of the harm it caused for consumers
      demonstrates that it is not possible to determine the GPAA’s economic impact.
      PGL concludes that therefore, neither Staff nor the GCI provided a basis for
      finding the GPAA imprudent. PGL points out that honest differences of opinion
      are not necessarily evidence of imprudence. (PGL Init. Brief at 56-57).

    

    
      
         

        

        
        

      

      
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              h.

            	
              Staff’s
                Position

            

    

    

    Staff
      posits that the GPAA was a complex contract and, for the most part, the experts
      only differ in terms of mathematical approaches, not in their opinions as to
      why
      PGL personnel acted imprudently. Additionally, the existence of a variety of
      approaches of experts is often the case in litigation. In support, Staff cites
      Hall
      v. National Freight, Inc.,
      264 Ill.
      App. 3d 412, 422-23, 636 N.E.2d 791 (1st
      Dist.
      1994)). Staff concludes that PGL’s argument confuses the reasonableness in the
      amount of the adjustment proposed as a result of imprudence with a determination
      as to prudence. (Staff Reply Brief at 31-33). 

    

    
      	 	
              i.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      aver that all of the experts PGL cites agreed that the GPAA was imprudent.
      Their
      differing estimations only have to do with the amount of damage conferred on
      consumers, which does not mean that the GPAA was prudent. The GCI posit that
      PGL’s contention is disingenuous, as it ignores the fact that some experts only
      addressed specific provisions of the GPAA, while others examined the entire
      contract. (GCI Reply Brief at 30). 

    

    
      	 	
              j.

            	
              Commission
                Analysis and Conclusions

            

    

    

    PGL
      overlooks the fact that all of the Staff witnesses, as well as Mr. Mierzwa,
      Mr.
      Effron and Ms. Decker, concluded that the GPAA was imprudent. There is, in
      fact,
      no disagreement amongst Dr. Rearden, Mr. Mierzwa, Mr. Effron, Ms. Hathhorn,
      Mr.
      Knepler, Mr. Anderson, Ms. Decker and other witnesses that the GPAA was
      imprudent. Some of these witnesses testified only as to different aspects of
      the
      GPAA. Others examined the total contract. Different issues were raised by
      different experts. 

    

    As
      Staff
      points out, there is nothing unusual about experts espousing different opinions
      as to the economic harm of a person’s actions. The same rules as to weight and
      credibility apply to experts as to other witnesses; it is up to the trier of
      fact to assess the credibility of an expert, as the trier of fact is in the
      best
      position to do so. (Hall,
      264
      Ill. App. 3d at 422-23). PGL’s argument on this issue is without merit.

    

     

    10. Staff
      Witness Dr. Rearden’s Dollar Values

     

    

    
      	 	
              k.

            	
              PGL’s
                Position

            

    

    

    PGL
      contends that Dr. Rearden’s extensive calculations as to the economic value of
      the harm to consumers resulting from the GPAA are but “mathematical exercises.”
PGL avers that these calculations are erroneous because they are based on a
      single set of assumptions and inputs, rather than considering a “range of
      realistic scenarios.” According to PGL, Dr. Rearden’s calculation of basis was
      too precise to be meaningful. (PGL Init. Brief at 59). 

    

    
      
         

        

        
        

      

      
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              l.

            	
              Commission
                Analysis and Conclusions

            

    

    

    While
      PGL
      contends Dr. Rearden improperly treated prudence as a “mathematical exercise” in
      fact, the measure of economic harm to consumers resulting from increased costs
      is mathematical. Dr. Rearden’s determination as to what harm consumers incurred
      is something that PGL decision-makers could, and should, have contemplated,
      but
      did not, prior to executing the GPAA. 

    

    It
      should
      also be pointed out that many provisions in the GPAA had the obvious potential
      to increase costs, with no offsetting benefit to consumers from those additional
      costs. Calculating a “range of scenarios” of potential disasters is not helpful,
      or even meaningful, when PGL personnel could have simply read the GPAA and
      determined that harmful terms existed, like the BLPA, or the fact that Enron
      North America could have forced unnecessary costs on consumers. 

    

    The
      Commission concludes that PGL overlooks the fact that it had the burden to
      prove
      that the GPAA was prudent. Merely stating generalities as to possible ways
      in
      which Dr. Rearden’s calculations might be erroneous is not the same as
      presenting evidence explaining why Dr. Rearden is in error. PGL’s argument is
      without merit. 

    
      	 	
              11.

            	
              PGL’s
                Previous Reconciliation

            

    

    

    
      	 	
              m.

            	
              PGL’s
                Position

            

    

    

    PGL
      points to its previous PGA reconciliation, Docket 00-0720, which concerned
      its
      gas purchases from October 1, 1999, through September 30, 2000, and therefore
      concerned PGL’s gas purchase practices pursuant to the GPAA during the first
      year of its existence. In that docket, however, Commission Staff found no
      imprudence on the part of PGL. (See,
      Ill. Commerce Commission, on its own Motion, v. Peoples Gas Light and Coke
      Co.,
      2002
      Ill. PUC Lexis 170). PGL reasons that finding the GPAA imprudent here, after
      having found it prudent in PGL’s previous reconciliation, is unreasonable. Such
      a conclusion would “stand the Commission’s prudence standard on its head.” PGL
      points out that an unexplained and unsupported departure from past practice
      is
      contrary to Commission policy and Illinois case law, citing Ill.
      Power Co. v. Ill. Commerce Commission,
      339 Ill.
      App. 3d 425, 790 N.E.2d 377 (1st
      Dist.
      2003). (PGL Init. Brief at 53). PGL maintains that Commission past practices
      may
      not be binding on it, but prior decisions of the Commission are not ignored
      by
      the appellate courts and they should not be ignored by the Commission. (PGL
      Reply Brief at 7-9). 

    

    
      	 	
              n.

            	
              Staff’s
                Position

            

    

    

    Staff
      contends that allowance of a cost item in one year does not guarantee that
      the
      Commission will allow that cost item in future years, citing Governors
      Office of Consumer Services v. Ill. Commerce Comm.,
      242 Ill
      App. 3d 172 (1st
      Dist.
      1993) and Ill.
      Commerce Comm. on its own Motion, v. Ill. Power Co., Reconciliation of FAC
      and
      PGA Clauses,
      2004
      Ill. PUC Lexis 101 at *13, 16-17). Staff maintains that new evidence, such
      as
      the “Aruba Analysis” and Wear Cross Ex. 15, came to light for the first time in
      this docket, even though this evidence was under PGL’s control. (Staff Init.
      Brief at 33-34). 

    

    
      
         

        

        
        

      

      
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              o.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      posit that the reason previous Commission decisions do not bind it is because
      this Commission has quasi-legislative powers, as well as judicial functions.
      It
      cites Business
      and Professional People for the Public Interest v. Ill. Commerce
      Comm.,
      1171
      Ill. App. 3d 948, 525 N.E.2d 1053 (1st
      Dist.
      1988)). The GCI additionally maintain that reconciliation proceedings like
      this
      one are single-year proceedings. This Commission’s determination in each
      reconciliation proceeding is confined to relevant evidence presented regarding
      the costs incurred in that 12-month period. 

    

    The
      GCI
      additionally assert that the GPAA was not thoroughly reviewed in PGL’s previous
      reconciliation, as PGL initially concealed information. (GCI Reply Brief at
      14-16). The GCI distinguish Ill.
      Power Co. v. Ill. Commerce Commission,
      339 Ill.
      App. 3d 425, 790 N.E.2d 377 (1st
      Dist.
      2003), because here, Staff and the GCI argue that PGL’s failure to heed the
      results of two internal analyses was imprudent. In contrast, in Ill.
      Power,
      Staff
      required Ill. Power to conduct a specific type of analysis that it had never
      required of it before. (GCI Reply Brief at 38-40).

    

    
      	 	
              p.

            	
              Commission
                Analysis and Conclusions

            

    

    

    The
      Commission concludes that
      Illinois Power
      does not
      apply here. In Ill.
      Power,
      the
      Appellate Court reversed a Commission ruling that Ill. Power’s decision to
      retire a propane plant that it used at peaking times was imprudent for failure
      to conduct a study, specifically, a Present Value Revenue Requirement Study,
      supporting that decision. Both Commission Staff and Ill. Power agreed, however,
      that Ill. Power would be required to expend $1.873 million to keep that plant
      safe and operational. Ill. Power had retired four other propane plants prior
      to
      the reconciliation year, and Commission Staff never raised any issue regarding
      a
      Present Value Revenue Requirement Study and those other propane plants in Ill.
      Power’s previous reconciliations. (Ill.
      Power, 339
      Ill.
      App. 3d at 437). 

    

    In
      reversing the Commission, the Appellate Court noted that there was nothing
      in
      the record establishing a difference between the first four propane plant
      retirements and the one at issue, the Freeburg Plant. The Court concluded that
      it was not disputed that significant capital expenditures were needed to keep
      that plant operational and safe. And, Ill. Power had the prior experience of
      retiring four propane plants within the previous six years without needing
      the
      Present Value Revenue Requirement Study to justify these retirements. The Court
      noted that the Commission did not adopt a new standard or policy. It decided,
      after the fact, that this analysis should have been conducted. In so reasoning,
      the Appellate Court noted that the Commission considered each of the factors
      Ill. Power considered in isolation, rather than viewing those factors in their
      totality. (Id.
      at
      437-39). 

    

    The
      Commission concludes that Illinois
      Power only
      supports a finding of imprudence here. PGL correctly points out that in the
      previous reconciliation, Commission Staff did not voice a concern with PGL/PGL
      affiliates’ relationship with Enron NA. However, as the Ill.
      Power
      Court
      noted, in order to determine whether a decision is prudent, a fact-finder must
      view the circumstances, in their totality. Commission Staff and other parties
      to
      this proceeding did not know the true set of circumstances, such as the
      profit-sharing arrangement between PEC and Enron NA, or the existence of the
      “Aruba Analysis” until February of 2004, when discovery was reopened.

    
      
         

        

        
        

      

      
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    PGL
      is
      required by law to petition the Commission for approval of affiliated-interest
      transactions. PGL did not divulge pertinent information to Staff in this
      proceeding before discovery was reopened, and it did not acquire Commission
      approval of its relationship with enovate. (See,
      220 ILCS
      5/7-101; 102). Documents such as the “Aruba Analysis” and Wear Cross Exhibit 15,
      which both establish that PGL/PEC personnel had actual knowledge that the GPAA
      would unnecessarily increase consumers’ costs were only tendered to Staff and
      other parties here after discovery in this docket was reopened. Unlike the
      situation in Ill.
      Power,
      PGL’s
      failure to disclose pertinent facts distinguishes this case from PGL’s previous
      reconciliation. In contrast, in Illinois
      Power,
      the
      Commission’s approval of Ill. Power’s three prior reconciliations was not based
      on Ill. Power’s withholding of pertinent information from Staff perusal.

    

    In
      Ill.
      Power,
      the
      Commission required a utility, for the first time, to obtain a certain type
      of
      study to document the validity of its decision to retire a peaking propane
      plant, even though Ill. Power was not required to obtain this study in prior
      years when it retired four other propane plants in three previous
      reconciliations. (Ill.
      Power,
      339 Ill.
      App. 3d at 437). When finding imprudence here, this Commission is not imposing
      a
      new standard. Rather, it is imposing the standard it would have imposed, if
      pertinent information had been disclosed properly by PGL. 

     

    The
      Commission reiterates that Section 9-220 of the Public Utilities Act puts the
      burden of proof of prudence on PGL. Section 9-220 does not give PGL a
      presumption of prudence from the prior Docket 00-0720. The prior docket does
      not
      give rise to the presumption of prudence to the GPAA for several reasons. First,
      this Commission is not a judicial body; there is no res judicata here. Second,
      Section 9-220 calls for annual reconciliations before this Commission. A utility
      cannot escape the annual reconciliation provision of the statute. In the
Illinois
      Power
      case, in
      Docket 01-0701, the Commission ruled that the fact that we had disallowed a
      contract in a prior year did not mean that we could not, on evidence, allow
      it
      in a subsequent year. And, in this case, the same argument applies: Section
      9-220 does not give any utility a presumption, just because the items have
      been
      looked at before. 

    

     

    12. Proxy
      for Historical Gas Purchase Practices 

     

    

    
      	 	
              q.

            	
              PGL’s
                Position

            

    

    

    PGL
      avers
      that the GPAA was a good proxy for its historical purchases, when compared
      to
      PGL’s past practices. (PGL Init. Brief at 44). The mix of baseload and swing
      gas, as well as index-based pricing, were the same as the contracting approach
      it used prior to the GPAA. (Id.
      at
      52).
      PGL asserts that its Exhibit 8 establishes that the GPAA was a reasonable proxy
      for its actual monthly gas costs for the two fiscal years prior to the GPAA,
      1998 and 1999. According to PGL, this exhibit establishes that its total average
      gas price it previously paid was $0.0327 per MMBtu more than the Chicago
      citygate prices it incurred pursuant to the GPAA. (PGL Init. Brief at 53).
      

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    PGL
      Ex. 8
      was prepared by Mr. Wear. When preparing it, he weighted the average price
      paid
      during the two previous years, with 35% of purchases at a daily index price
      and
      65% of purchases at an FOM price. He concluded that the cost of gas prior to
      the
      GPAA was comparable to the average of what was paid pursuant to the GPAA.
      (See,
      PGL Ex.
      C at 28). Mr. Wear testified that PGL did not use this type of analysis when
      assessing the GPAA’s value (when this contract was being negotiated) because
      changing market conditions “dictate” a more forward-looking approach to
      negotiations. (Id.).

    

    PGL
      also
      cites its Ex. 9, which is attached to Mr. Wear’s Rebuttal testimony, PGL Ex F.
      It contends that the increases in costs associated with GPAA were less than
      0.25% of the total GPAA costs passed on to consumers. Finally, PGL cites its
      Ex.
      10, which is also attached to PGL Ex. F. It is a comparison between its GPAA
      gas
      purchases and its non-GPAA purchases. PGL’s GPAA purchases, which comprised
      approximately 66% of the total in Ex. 10, were approximately 14% less expensive
      than its non-GPAA gas purchases. (PGL Ex. F, Attachment 10; PGL Initial Brief
      at
      53). 

    

    
      	 	
              r.

            	
              Staff’s
                Position

            

    

    

    Staff
      points out that, in the past, PGL had multiple contracts with many suppliers
      for
      both supply and transportation. A single, five-year contract with one vendor
      is
      not equivalent to those previous contracts. (See,
      e.g.,
      Staff
      Initial Brief at 40; Staff Ex. 2.00 at 27). Staff maintains that, according
      to
      the basis projections PGL provided Staff, it would not have been less expensive
      to buy gas at the citygate price than it would have been to buy gas at the
      field
      and pay for delivery to the Chicago citygate. Staff concludes that the GPAA
      was
      not a proxy for what PGL did in previous years. (Staff Ex. 3.00 at 22-24; Staff
      Ex. 7.00 at 20-21). 

    

    
      	 	
              s.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      aver that PGL Ex. 10 does not aid PGL, as the GPAA covered a very large portion
      of PGL’s gas-buying needs. Non-GPAA purchases were, therefore almost by
      definition, unplanned and spot purchases made under unfavorable market
      conditions. The GCI conclude that absent anomalous market behavior, it is
      predictable that non-GPAA costs would be higher than the planned gas cost
      purchases PGL made pursuant to the GPAA. Also, PGL did not address the
      significantly different risk profile of the GPAA due to having only one contract
      with a single supplier for approximately two-thirds of its supply. The GCI
      maintain that PGL’s argument overlooks the harms to consumers caused by the
      GPAA, which ceded control over price and the amount of gas delivered. The GCI
      argue that there is no evidence that PGL personnel considered any of these
      large
      deficiencies when entering into this contract. (GCI Reply Brief at 23-25).
      

    
      
         

        

        
        

      

      
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              t.

            	
              Commission
                Analysis and Conclusions

            

    

    

    While
      the
      GPAA provided both baseload and swing gas, it did so in a manner that harmed
      consumers, as Enron NA could unilaterally change the price of baseload gas.
      PGL
      provided no evidence that, in the past, gas sellers could change the price
      of
      gas. Additionally, Enron NA could, and did, determine the amount of SIQ and
      DIQ
      gas, which forced PGL to buy gas on the spot market on some occasions and left
      PGL with gas to unload on other occasions. When PGL unloaded the excess gas
      by
      selling it back to Enron NA, PGL paid a penalty every time it made a resale.
      PGL
      made no showing that its previous gas purchase contracts contained such
      provisions. The GPAA was not a prudent proxy for PGL’s previous gas contracts.

    

    Moreover,
      PGL’s Exhibit 8 does not establish that the GPAA was prudent. While PGL cited
      this document for the proposition that the GPAA was a reasonable proxy for
      what
      was done in previous years, the fact that this document shows the average cost
      of gas under the GPAA was fairly comparable to prices in previous years, does
      not establish that the costs imposed by the GPAA were reasonable. This is
      especially true here, when the credible evidence established that profits from
      this contract were gleaned by PGL affiliates/Enron North America/Enron Midwest,
      often for performing no real service or for performing very little
      service.36
      PGL Ex.
      9 also does not aid it; the amount of costs passed on to consumers has no
      relevance to the issue here-whether the GPAA was prudent. An imprudent cost
      can
      be in any amount. 

    

    PGL
      cites
      no authority that would require the Commission to consider that which has been
      done under different circumstances, i.e.,
      a
      different year, with different climate and very different contractual
      obligations and supplies, which is relevant when establishing prudence. PGL
      also
      cites no authority establishing that a comparison between the costs passed
      on to
      consumers in the year in question and what it passed on 1998 or 1999 is relevant
      in the context of passing on only prudently-incurred costs to consumers. It
      should also be pointed out that, according to Mr. Wear, PGL did not perform
      an
      analysis like Exhibit 8 before executing the GPAA. (PGL Ex. C at
      28).

    

    Finally,
      as the GCI point out, PGL presented no evidence at hearing indicating that
      its
      purchases in addition to those made pursuant to the GPAA were made under
      circumstances like those made pursuant to the GPAA. The fact that the GPAA
      was a
      contract to supply two-thirds of PGL’s gas supply is some indication that
      purchases made outside the GPAA were made on more of an emergency basis.
      Therefore, PGL Ex. 10 does not aid PGL. 

    

    

    

    

    _____________________

    36   See,
      the
      analysis herein regarding third-party transactions.

    
      
         

        

        
        

      

      
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    13. Market-Based
      Pricing with No Demand or Reservation Charges

     

    

    
      	 	
              u.

            	
              PGL’s
                Position

            

    

    

    PGL
      maintains that one of the key elements in the GPAA was market-based pricing.
      All
      three quantity components in the GPAA, baseload, SIQ and DIQ, were market-based.
      PGL has used market-based contracts in the past. (PGL Init. Brief at 47-48;
      Ex.
      L at 13). Market-based pricing results in gas costs that track market
      conditions. (PGL Ex. L at 13-14). 

    

    Also,
      the
      GPAA had no reservation or demand charges with respect to DIQ gas. Demand
      charges are typical for swing services, and the DIQ clause, essentially,
      provided a swing service. In the past, however, PGL has paid demand charges
      for
      swing services. PGL points out that not paying demand charges for swing gas
      saved consumers money. (PGL Init. Brief at 48)). 

    

    PGL
      avers
      that reference by Staff and the GCI to pipeline demand charges is disingenuous,
      as PGL personnel were not concerned with the costs consumers would pay in the
      way of pipeline demand charges when entering into the GPAA. Rather, PGL
      personnel were only concerned with commodity demand charges. (PGL Reply Brief
      at
      35). 

    

    
      	 	
              v.

            	
              Staff’s
                Position

            

    

    

    Staff
      points out that, pursuant to the GPAA, PGL continued to pay pipeline demand
      charges. (Staff Init. Brief at 38-39; Staff Ex. 2.00 at 20). However, Staff
      acknowledges that the DIQ clause did not have demand charges, which lowered
      gas
      costs for consumers. Staff estimated that the amount of gas demand charges
      saved
      pursuant to the DIQ clause was $1,750,000, over the life of the GPAA. (Staff
      Ex.
      7.02; Staff Init. Brief at 51-52). Staff recommends offsetting its proposed
      disallowances for the time period in question in the amount of $350,000 (Staff
      Ex. 7.02). 

    

    
      	 	
              w.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      point out that there were, in fact, pipeline demand charges embedded in the
      GPAA. The GCI concur with Staff that market-based pricing, with no demand
      charges for DIQ gas, does not justify entering into the GPAA. (GCI Init. Brief
      at 43). 

    

    The
      GCI
      posit that there is nothing per
      se
      prudent
      about market-based pricing. Mr. Graves, PGL’s expert, acknowledged that in
      circumstances like those involved in the Citgo contract, PGL is obligated to
      take advantage of a reasonable opportunity to acquire gas at less than the
      market price.37
      (GCI
      Reply Brief at 20). 

    

    

    _____________________

    37   The
      Citgo contract is discussed herein under the heading “the Citgo
      Contract.”

    
      
         

        

        
        

      

      
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              x.

            	
              Commission
                Analysis and Conclusions

            

    

    

    The
      GPAA
      eliminated the demand charges that would have been incurred for swing gas.
      While
      Staff has provided evidence that PGL continued to pay pipeline demand charges
      pursuant to the terms of the GPAA, Staff did not provide an amount paid. (Staff
      Ex. 2.00 at 20). However, for the year in question, the undisputed amount of
      saved gas demand charges is $350,000. (See,
      e.g.,
      PGL Ex.
      C at 15). Based on the evidence provided, it appears that the GPAA provided
      this
      benefit to consumers. 

    

    PGL’s
      argument that the GCI and Staff disingenuously raise the issue of pipeline
      demand charges is
      a
      party-admission. PGL is required by statute to consider the effect of all costs
      it passed on to consumers, including pipeline charges. (220 ILCS 5/9-220).
      The
      Commission concludes that PGL’s assertion that it did not consider these charges
      when entering into the GPAA is an admission that it acted imprudently.

    

    Finally,
      as the GCI point out, PGL’s assertion that market-based pricing was beneficial
      ignores the situations it created regarding the market in the reconciliation
      year. As shall be set forth herein, situations like the Citgo contract could
      be
      considered to be market-based pricing, even though PEC/Enron Midwest
      artificially inflated the prices consumers paid for the gas procured pursuant
      to
      that contract. As the GCI point out, there is nothing per
      se prudent
      about market-based pricing. PGL’s assertion that market-based pricing in the
      GPAA is evidence of prudence is without merit. 

    

     

    14. Flexible
      Pricing

     

    

    
      	 	
              z.

            	
              PGL’s
                Position

            

    

    

    PGL
      argues that the GPAA was beneficial because, pursuant to the GPAA, the parties
      could agree to an alternative to the index pricing set forth in the GPAA. It
      could, for example, lock in prices other than the applicable index price. (PGL
      Init. Brief at 48). PGL argues that the GPAA’s flexible pricing provision
      (Article 4.2(a)) provided a benefit for consumers. Beginning in May, 2001,
      PGL
      locked-in the price of certain baseload quantities under the GPAA. PGL personnel
      did this pursuant to its “Gas Price Protection Strategy,” which was in place
      during the reconciliation period. (Id.
      at 51).

    

    
      	 	
              aa.

            	
              Staff’s
                Position

            

    

    

    Staff
      posits that the flexible pricing provision only had value because the GPAA
      was a
      five-year contract. It maintains that PGL could have gained pricing flexibility
      by merely doing what it did in the past-entering into contracts of shorter
      duration. Staff argues that the flexible pricing provision merely restores
      the
      flexibility PGL would have had if it had not committed itself to a five-year
      contract with Enron NA. And, according to Staff, other parts of Article 4.2
      decreased PGL’s pricing flexibility, while enhancing Enron NA’s flexibility.
      (Staff Ex. 2.00 at 26). 

    

    
      
         

        

        
        

      

      
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    Further,
      Article 4.2(a) did not allow PGL to unilaterally change the GPAA prices.
      Instead, pursuant to this provision, both PGL and Enron NA were required to
      agree to a price change. Presumably, Staff contends, Enron NA would only agree
      to a price change if it benefited from that change. Additionally, almost any
      contract can be changed by mutual assent. Thus, Staff concludes that flexible
      pricing does not compensate consumers for a pricing provision that does not
      provide gas at the least cost. (Staff Ex. 3.00 at 30). 

    

    
      	 	
              bb.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      contend that the GPAA’s flexibility in pricing was one-sided. The BLPA clause in
      the GPAA allowed Enron NA to increase the price of up to 71,250 MMBtus of gas,
      per day, in the winter period. The GCI aver that the amount of the change was
      from the FOM price to the daily price. Thus, Enron North America had the
      flexibility to raise gas prices through the BLPA clause.

    

    PGL,
      on
      the other hand, could change the price of gas only if Enron NA agreed to that
      change. The GCI aver that flexible pricing was only an issue because the GPAA
      was such an extensive contract. It covered 66% of PGL’s gas supply and it lasted
      five years; thus, granting this substantial power to Enron NA was not prudent.
      (GCI Init. Brief at 43). 

    

    
      	 	
              cc.

            	
              Commission
                Analysis and Conclusions

            

    

    

    PGL’s
      argument does not square with basic contract law. Irrespective of what was
      in
      the GPAA, a written contract can always be modified upon the written assent
      of
      both parties, provided that such mutual modification does not violate the law
      or
      public policy. (See,
      e.g., Schwinder v. Austin Bank,
      348 Ill.
      App. 3d 461, 468, 809 N.E.2d 180 (1st
      Dist.
      2004); Nebel
      v. Mid-City National Bank of Chicago,
      769 Ill.
      App. 3d 957, 964, 769 N.E.2d 45 (1st
      Dist.
      2002)). This term in the GPAA merely reiterated what PGL would be entitled
      to
      pursuant to the law. Because the law has provided this right, any clause in
      the
      GPAA setting forth this same right has no value except the nominal value of
      reminding the parties what the law is. 

    

    Anything
      in the GPAA allowing PGL to renegotiate prices with Enron NA must be viewed
      in
      the context of the whole contract. The BLPA clause allowed Enron NA to change
      the price of baseload gas, if it so desired. (Staff Ex. 2.00, Attachments,
      GPAA,
      at 9). And, Articles 4.2(b) and 4.2(c) of the GPAA gave Enron NA the right,
      above and beyond the BLPA, to change the price of gas to the Gas Daily Midpoint
      Price for up to 71,250 MMBtu for any day in the contractually-defined winter
      period. Thus, anything modified mutually, could be unilaterally modified again
      by Enron NA. (Staff Ex. 2.00, Attachments, GPAA, at 9). The Commission concludes
      that the flexible pricing provision conferred no benefit on consumers.

    
      
         

        

        
        

      

      
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    15. Load
      Flexibility

     

    

    
      	 	
              dd.

            	
              PGL’s
                Position

            

    

    

    PGL
      argues that the GPAA also provided it with flexibility. PGL points out that
      its
      load is weather-sensitive and its day-to-day requirements can fluctuate
      substantially. The negotiation of baseload, SIQ and DIQ gave PGL the flexibility
      to address these fluctuations. (PGL Exs. C at 14; Ex. L at 15-16). 

    

    Also,
      the
      GPAA gave PGL the right to resell gas to Enron NA. According to PGL, this right
      substantially eliminated the uncertainty associated with finding a market for
      gas, often on short notice. PGL contends that the need to sell gas is
      substantially influenced by variables, such as weather, customer usage and
      transportation customers’ deliveries, over which PGL has little or no control.
      PGL points out that an oversupply can cause a pipeline imbalance, which can
      result in penalties that it must pay. (PGL Init. Brief at 49-50). 

    

    PGL
      maintains that the penalties it incurs when selling gas back to Enron NA are
      not
      really penalties. This is true because the sell-backs in the GPAA are based
      on
      daily prices. (See,
      Staff
      Ex.
      2.00, Attachments, GPAA, at 9-10). However, according to PGL, it is not always
      possible to receive bids at the daily midpoint price. Often, to attract buyers,
      it is necessary to offer a discount from that price. Then, too, unloading a
      large amount of gas can be a formidable task. (PGL Init. Brief at 50-51).

    

    
      	 	
              ee.

            	
              Staff’s
                Position

            

    

    

    Staff
      contends that PGL presented no evidence establishing that the GPAA was equal
      to,
      or superior to, PGL’s contracts in previous years. And, a five-year contract
      with one vendor is not as flexible as multiple contracts for supply and
      transportation with multiple suppliers and varying expiration dates. (Staff
      Init. Brief at 39; Staff Ex. 2.00 at 26). Staff points out that PGL had no
      control over the amount of gas Enron NA delivered to it pursuant to the SIQ
      provision. As a result, PGL had too much gas on its hands. Without the GPAA,
      PGL’s need to unload excess gas would have been occasional and in small
      quantities. (Staff Ex. 7.00 at 33). 

    

    
      	 	
              ff.

            	
              GCI’s
                Position

            

    

    

    PGL
      ceded
      control over the amount of gas that the GPAA required PGL to purchase. Enron
      North America’s decisions regarding how much SIQ gas it delivered to PGL led,
      repeatedly, to oversupply situations that required PGL to sell gas back to
      Enron
      NA. The GCI argue that on 93% of the occasions when the sell-back provision
      was
      used, Enron NA had delivered maximum SIQ volumes, citing Staff Ex. 2.00 at
      20.
      (GCI Init. Reply Brief at 22-23).

    
      
         

        

        
        

      

      
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              gg.

            	
              Commission
                Analysis and Conclusions

            

    

    

    While
      the
      arrangement in the GPAA (the mix of baseload, SIQ and DIQ gas) provided PGL
      with
      flexibility, it did so in a manner that passed unnecessary costs on to
      consumers. As has been previously discussed, the harm this contract passed
      on to
      consumers outweighs any benefit conferred by the mix of baseload, SIQ and DIQ
      gas. 

    

    Finally,
      the Commission previously determined that PGL failed to prove that the resale
      provision was beneficial. There is no evidence, given the amount of SIQ gas
      that
      Enron NA was allowed to control, that this provision conferred any benefit
      on
      PGL or on consumers. When weighed against the harm that the provisions PGL
      cites
      in support of its contention that it had load flexibility, PGL has not sustained
      its burden to establish that the beneficial aspects its cites outweigh the
      harmful aspects of these provisions. 

    

     

    16. Unquantifiable
      Benefits

     

    

    
      	 	
              hh.

            	
              PGL’s
                Position

            

    

    

    PGL
      contends that the GPAA conferred benefits on it that are not easily quantified.
      A large contract with a single supplier allowed PGL to conduct its daily
      purchases while remaining hidden from the larger market. Citing Mr. Wear, PGL
      avers that without direct knowledge of PGL’s purchase plans in that marketplace,
“daily prices might tend to rise less dramatically than if (PGL) were out in
      the
      open market soliciting offers from dozens of counterparts.” (PLG Ex. F at 8; PGL
      Init. Brief at 56). 

    

    PGL
      also
      argues that the GPAA preserved the reliability of its supply. When it negotiated
      the GPAA, Enron NA was the dominant gas trader in the United States. And, Enron
      NA had a presence in the Chicago market. Also, according to PGL, Enron provided
      other benefits, benefits it would not have received with a portfolio of smaller
      contracts. (PGL Init. Brief at 55). Enron NA further supplied PGL with technical
      support to facilitate operations, including a secure webpage that allowed PGL
      and Enron NA to exchange information about daily activity. Enron NA additionally
      created a database for PGL’s gas controllers. This database retrieved historical
      system send-outs based on weather outputs. Enron NA also provided training
      to
      PGL employees as to how to use financial hedging instruments, like energy
      derivatives and options. (See,
      PGL Ex.
      F at 9). 

    

    
      	 	
              ii.

            	
              Staff’s
                Position

            

    

    

    Staff
      contends that PGL offered no facts or concrete examples to demonstrate the
      value
      of those benefits. Instead, according to Staff, PGL asserted only vague
      generalizations. And, these benefits did not provide direct results for
      consumers. (Staff Init. Brief at 53). 

    
      
         

        

        
        

      

      
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              jj.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      argue that none of the unquantifiable benefits cited by PGL supports its claim
      that the GPAA was prudent. They contend that PGL presented no evidence
      establishing that its daily price activity was large enough to have an impact
      on
      the prices in the larger market. Also, PGL presented no evidence establishing
      that the GPAA actually made prices less dramatic in the larger market. Rather,
      Mr. Wear merely stated that such a situation might occur. (GCI Reply Brief
      at
      25-26). Additionally, PGL presented no evidence that Enron North America’s size
      and market dominance, at the time the GPAA was executed, were elements of the
      GPAA. Finally, the GCI posit that, while Mr. Wear testified that certain aspects
      of the GPAA benefited operations and employee education, Mr. Wear did not
      testify that anyone at PGL considered these benefits when deciding whether
      to
      enter into the GPAA. (Id.
      at
      26-27). 

    

    
      	 	
              kk.

            	
              Commission
                Analysis and Conclusions

            

    

    

    Mr.
      Wear’s statement, quoted above, is too vague to be given any evidentiary weight.
      He also offers no examples, and the phrase “might tend to rise,” is speculative.
      Mr. Wear does not explain what PGL would be doing in the open marketplace
      soliciting bids, or why. And, Mr. Wear points to no information establishing
      that previously, PGL’s baseload gas was purchased on a daily basis in the open
      marketplace. 

    

    There
      also is no evidence establishing that training PGL employees on futures and
      financial derivatives provided any benefit to consumers or that such training
      ever occurred; PGL conducted no such transactions during the time period in
      question. Additionally, while PGL argues that Enron NA was a premier supplier,
      it proffered no evidence indicating that Enron NA’s reputation was an asset to
      PGL consumers. Therefore, there is no evidence that Enron NA being a premier
      supplier, at the time the GPAA was entered into, is of any benefit. And, as
      the
      GCI point out, there is no evidence that PGL decision-makers considered these
      benefits, or even knew of these benefits at the time the GPAA was executed.
      The
      Commission concludes that PGL failed to present evidence establishing that
      the
“unquantifiable benefits” it cites conferred any meaningful benefit on
      consumers. 

    

     

    17. Conclusions
      Regarding the GPAA, in Total

     

    

    
      	 	
              ll.

            	
              PGL’s
                Position

            

    

    

    Citing
      Mr. Graves’ testimony, PGL asks the Commission, if it feels that CERA and PIRA
      basis data should be considered, to consider what Mr. Graves estimated as a
      disallowance. Since the actual credit for baseload and SIQ purchases was three
      cents, the disallowance should only be for the gap between the required credit
      to show prudence taking the three-cent discount on baseload and SIQ purchases
      into account. PGL reasons that the amount of increased costs per MMBtu should
      be
      multiplied by the FOM volumes taken during the reconciliation period to
      calculate a disallowance. Using

    
      
        

        
        

      

      
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        01-0707

      

    

    this
      approach, Mr. Graves estimated that harm to consumers was in the range between
      $2.9 and $8 million. PGL avers that Dr. Rearden’s calculations treat all of the
      unspecified “anomalous results” of the 2000-2001 winter period as attributable
      to the GPAA. (See,
      PGL
      Reply
      Brief at 40-41). 

    

    On
      Exceptions, PGL argues that the ALJPO’s proposed disallowance of $13,304,910 is
      only 2.3% of the total gas costs paid to Enron North America pursuant to the
      GPAA during the reconciliation period. It reasons that therefore, 97.7% of
      the
      GPAA gas costs were prudent. According to PGL, based on this result, finding
      its
      decision to be imprudent “seemingly runs afoul” of the principle that a finding
      of imprudence requires more than a mere difference of opinion. (PGL BOE at
      33-34).

    

    Commission
      Analysis and Conclusions

    

    Certain
      obvious harms exist in the GPAA that, even without some sort of economic
      analysis, are apparent upon a reading of this contract. A diligent reading
      of
      the BLPA, Articles 4.2(b) and 4.2(c) and the SIQ provision would place a
      reasonable person on notice that executing the GPAA would relinquish control
      to
      Enron North America over price and amount, essential contractual terms. There
      are other, less obvious harms to the GPAA, such as paying twice for the same
      delivery of gas, decreasing the amount of demand credits available due to
      release of pipeline capacity, and paying penalties on resales, when resales
      were
      necessitated by the SIQ provision. 

    

    PGL
      correctly maintains that the GPAA conferred some benefits. For example, it
      imposed no demand fees on swing gas. When the benefits of the GPAA are weighed,
      however, against the harms it caused, it is overwhelmingly clear that the GPAA
      was indeed a harmful contract. 

    

    PGL
      accepted the GPAA, in the face of two economic analyses indicating that this
      contract would increase consumer costs, and PGL decision-makers, nevertheless,
      executed this contract. There is ample evidence of disregard for the negative
      effects of the GPAA on consumers—executing the GPAA, despite two economic
      analyses establishing its harm on consumers—and the obvious harms in that
      contract, mentioned above, that should become apparent to any PGL
      personnel—exercising a stand of care that a reasonable person would use—upon
      reading this contract.

    

    There
      is
      no credible evidence that PGL personnel were concerned about the increased
      costs
      resulting from the GPAA. Based on this record, the Commission cannot draw the
      conclusion that entering into the GPAA was an inadvertently bad decision. Nor
      can we conclude, based on this record, that it was a good decision that simply
      went awry. Rather, the Commission concludes that entering into a relationship
      with Enron NA—conferring profits to its parent company, PEC with no offsetting
      benefit derived by PGA consumers from those profits—is astonishingly imprudent.
      PGL decision-makers willingly entered into a contract that created oversupplies,
      as is evidenced by the fact that 93.9% of the time when Enron North America
      sold
      the

    
      
         

        

        
        

      

      
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        01-0707

      

    

    maximum
      amount of SIQ gas, PGL had to sell gas back to Enron NA, and had to pay a
      penalty every time it made a sell-back. 

    

    Additionally,
      we cannot view the GPAA in a vacuum. On the same day Mr. Morrow signed the
      GPAA,
      he also signed an LOI on behalf of PEC, PGL’s parent company, agreeing to share
      profits with the same company that provided PGL with gas pursuant to the GPAA.
      As shall be set forth herein, there is credible evidence in this record,
      establishing that the GPAA was negotiated with an eye toward profit-sharing
      from
      PGL’s relationship with Enron NA. 

    

    The
      Commission finds PGL’s use of the GPAA to be imprudent. Any disallowance
      associated with the Commission’s finding of imprudence for the GPAA is properly
      included in the Settlement Agreement and Addendum as discussed in Section
      I.

    

     

    V. Manlove
      Field

     

    A. Findings
      of Fact

     

    1. Background

     

    

    Gas
      utilities typically employ some means of storage to meet supply needs. PGL’s
      Manlove Field (“Manlove”) is one such facility. Manlove is an aquifer, which is
      a water-bearing porous geologic structrure with properties that lend to
      conversion to a natural gas storage facility. (Staff Ex 2.00 at 42). Manlove
      is
      dome-shaped, with a cover of impermeable rock that prevents the upward migration
      of natural gas. Porous, water-filled rock exists underneath the layer of
      impermeable rock. PGL injects natural gas into the pores of the water-filled
      rock, displacing the water. The displaced water then contains the natural gas
      by
      forming a seal at the bottom of the aquifer (also known as a reservoir).
      (Id.).
      

    

    Three
      basic components of natural gas exist in storage reservoirs: top or working
      gas
      (“working”); recoverable base gas and non-recoverable base gas. Gas utilities
      cycle working gas during the course of normal operations during the
      injection/withdrawal seasons. Recoverable base gas is not cycled, but provides
      the necessary pressure to cycle the working gas. Recoverable gas represents
      a
      non-depreciating capital plant while in operation. This gas can only be removed
      from the reservoir upon abandonment. Non-recoverable gas is trapped in the
      reservoir and cannot be recovered, even at abandonment. This gas is capitalized
      and depreciated over the life of the reservoir. (Staff Ex. 2.00 at
      42-43).

    

    
      
         

        

        
        

      

      
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    PGL
      typically injects gas into storage during the summer when natural gas prices
      are
      lower. During the winter, PGL relies on stored gas to meet its customers’
heating needs, supplementing with spot purchases as needed. PGL also provides
      storage services for third parties, including North Shore Gas. PGL also uses
      storage to accommodate for weather that was not forecasted, a force
      majeure,
      and
      situations, in which, gas suppliers provide a different amount of gas other
      than
      that which was agreed upon.38
      (PGL Ex.
      D at 17). PGL stores 27 Bcf of natural gas for PGA customers and 8 Bcf for
      non-tariffed services at Manlove. (See,
      e.g.,
      PGL
      Initial Brief at 9). Mahomet pipeline connects Manlove to PGL’s Chicago
      distribution system. (Tr. 1301). 

    

    The
      injection season for Manlove Field usually commences the first or second week
      of
      March and it ends in the first or second week of December. (PGL Ex. I at 6).
      Once withdrawal season begins, PGL personnel continues to withdraw gas for
      the
      remainder of the season. (Id.
      at 7).
      At the start of each injection season, a working gas target for that season
      is
      established. Then, an injection schedule is made, whereby certain injection
      volumes are targeted, as well as average daily rates for each month. (PGL Ex.
      I
      at 5). PGL personnel monitor monthly totals of injections and the seasonal
      cumulative totals. If a particular month is long or short compared to the
      schedule, or if the working gas target is revised, the rest of the injection
      season is adjusted. (Id.).
      When
      PGL shifts to the withdrawal season, withdrawals from Manlove should not fall
      below a certain level. (PGL Ex. L at 50). Once withdrawals begin, they cannot
      be
      stopped. (Id.).
      PGL
      personnel are not able to change from injections to withdrawals and back again.
      (Tr. 1066). Therefore, if PGL is in its injection phase, Manlove can be
      unavailable for withdrawals during the months of October, November, March and
      April. (Id.).

    

    During
      the winter of 2000-2001, PGL personnel planned to keep enough gas in Manlove
      to
      carry it through the third week in January, in order to meet peak winter
      conditions. (Staff Ex. 6.00 at 40-41). In November of 2000, PGL stored gas
      for
      its ratepaying customers, North Shore Gas and third-party customers. PGL
      considers this to be “Hub services,” or “non-tariff” services. Withdrawals from
      Manlove commenced on November 21, 2001, two weeks earlier than usual. At the
      time PGL began withdrawing gas from Manlove, third-party customers had already
      injected approximately 7.1 Bcf of gas. (Staff Ex. 7.00 at 46). 

    

    Certain
      events happened that caused PGL to alter its storage withdrawal plans for
      Manlove. Record cold conditions existed in Chicago in the months of November
      and
      December of 2000. (See,
      e.g., Tr.
      1066-67). Heating degree-days were 6% higher than normal at Midway Airport
      and
      11% higher than normal at O’Hare International Airport. In December of 2000,
      heating-degree days were 28% above the normal at Midway Airport and 27% at
      O’Hare. Also, natural gas prices increased dramatically in November. In
      December, gas prices peaked at over $10 per MMBtu and remained above $5 per
      MMBtu almost through April. (Staff Ex. 3.00 at 50). 

    

    

    _____________________

    38   A
      force
      majeure
      is an
      unforeseen act of God, or man, such as flooding, war, or vandalism.
      (Kahara
      Bodas Co. v. Perusahaan Pertambangan,
      335 F.3d
      357, 360 (5th
      Cir.
      2003)).

    
      
         

        

        
        

      

      
        79

        
          

        

      

      
        
        

        01-0707

      

    

    

    PGL
      witness Mr. Wear testified that the reason PGL personnel decided to withdraw
      gas
      from Manlove earlier than usual was because the weather at that time was colder
      than normal and gas prices at that time were at an unprecedented high. PGL
      decided to begin withdrawals earlier than planned because November 2000 gas
      prices were higher than December 2000 and January 2001 forward prices and it
      was
      possible that the colder than normal weather would subside. (PGL Ex. F at 35).
      Because of this decision, Mr. Wear stated that PGL needed to buy less gas to
      balance the system. Also as a result of this decision, PGL had less storage
      gas
      to use going into December, which necessitated modifying PGL’s withdrawal plan.
      (PGL Ex. F at 35-36). 

    

    As
      mentioned above, PGL used Manlove to provide storage for its PGA customers
      and
      to provide services to third parties. Some of PGL’s third party transactions
      involved Enron. In November of 2000, PGL allocated only half of Manlove’s
      storage capacity for consumers. The other half of this gas went to
      third-parties. As discussed in more detail below, “Manlove Jumpstart” was one
      such third party transaction. In December of 2000, 52% of the gas withdrawn
      from
      Manlove went to consumers. In January of 2001, 78.4% of Manlove gas withdrawals
      were for consumer use. (See,
      Staff
      Ex. 3.00 at 50). None of the revenues from third-party transactions were used
      to
      offset gas costs passed on to consumers pursuant to PGL’s PGA. (Staff Ex. 7.00
      at 54). 

    

    To
      facilitate the non-tariffed39
      third-party transactions, PGL increased the amount of working gas in Manlove
      by
      8 Bcf, representing a significant increase of approximately 30%. (See,
      e.g.,
      Staff
      Ex. 2.00 at 29, 45). According to Staff witness Mr. Anderson, an increase in
      working gas must be supported with an increase in recoverable and
      non-recoverable base gas. Ideally, PGL should perform reservoir engineering
      studies to determine the appropriate amounts of recoverable and non-recoverable
      gas needed to support an increase in working gas. PGL provided no data in this
      proceeding demonstrating that PGL increased recoverable and non-recoverable
      gas
      when it increased working gas at Manlove. Essentially, PGL failed to show how
      it
      increased non-tariffed working gas in Manlove without increasing recoverable
      gas
      and non-recoverable gas. This failure lead to PGA customers improperly paying
      for the necessary recoverable and non-recoverable gas. PGL improperly passed
      costs for non-tariffed services on to PGA customers. (Staff Ex. 2.00 at 46).
      

    

    

    

    _____________________

    39   Non-tariffed
      services are not subject to rates on file with the ICC. Rather, these
      transactions are performed either pursuant to a FERC operating statement or
      through third party storage agreements. For third party storage arrangements,
      PGL leverages its system assets. (Staff Ex. 2.00 at 30).

    
      
         

        

        
        

      

      
        80

        
          

        

      

      
        
        

        01-0707

      

    

    

    Staff
      provided an analysis of third party transactions during the winter of the
      reconciliation period at Manlove. On January 5, 2001, PGL’s non-tariff,
      third-party inventory balance turned negative; meaning third-parties removed
      more gas from Manlove than they had injected into it. On February 28, 2001,
      PGL’s maximum negative third-party inventory occurred at -4,903,211 Dth. This
      third-party inventory remained negative for almost five months, until May 3,
      2001. (Staff Exs. 2.00 at 37; 3.00 at 59). During this five-month period, it
      was
      not possible for PGL to meet third-party obligations without using the gas
      it
      stored for consumer use—the PGA gas. (Staff Ex. 2.00 at 37). PGL did not use a
      total of 25.5 Bcf of gas stored in Manlove, which PGL claims is reserved for
      consumers use during the winter months. PGL withdrew a total of 12 Bcf of gas
      over the 2000-2001 winter heating season (November through March) for
      third-parties. Seven Bcf of that gas was injected by third-parties during that
      season. (Staff Ex. 7.00 at 46). An additional five Bcf of gas used for
      third-parties, however, was the less expensive gas purchased for consumer use
      in
      the winter. (See,
      e.g.,
      Staff
      Ex. 3.00 at 44; 7.00 at 47-49; City-CUB Ex. 4.0 at 45). 

    

    Staff
      witness Dr. Rearden explained the significance of the negative third party
      balances. According to Dr. Rearden, a negative third-party balance shows PGL
      gave preference to third party transactions at the expense of PGA customers.
      PGL
      measured the gas flows into and out of Manlove and then allocated those volumes
      between various entities. In doing this, PGL must ensure it meets its
      obligations to PGA customers, as well as third parties. In December 2000 and
      January 2001, PGL over-allocated resources to third party customers and
      under-allocated resources to PGA customers. During this period of particularly
      high gas prices, PGL denied its PGA customers the benefit of lower priced
      storage withdrawals. (Staff Ex. 12.00 at 30-31). Further, these negative
      balances also evince that third-party transactions do not have a benign impact
      on consumers. When PGL over-allocated gas for third-parties, this
      over-allocation interfered with withdrawal plans for consumers. (Id.
      at 31).
      CUB witness Ms. Decker additionally opined that the gas used in third-party
      transactions was not limited to just an oversupply of gas. (City-CUB Ex. 1.0
      at
      47). 

    

    PGL
      used
      all of its supply assets to meet its system load requirements for any given
      day.
      Thus, on any given day, the PGL consumer requirements and PGL’s third-party
      requirements were fulfilled by whatever gas PGL had on hand. (Staff Ex. 2.00
      at
      38). Third-party services also altered the timing and use of PGA purchases
      and
      injections, as well as the timing and use of withdrawals from leased storage
      and
      withdrawals from Manlove, especially during periods of high demand. (Staff
      Ex.
      2.00 at 38-39). 

    

    The
      gas
      stored at Manlove for use in the 2000-2001 winter was purchased in the summer
      of
      2000. Because PGL over-allocated resources to third parties during Manlove’s
      withdrawal season, it then needed to purchase replacement gas for PGA customers.
      PGL acquired this replacement (or swing) gas by purchasing expensive winter
      gas
      and passing the cost of that gas on to consumers. Two of PGL’s major suppliers
      for this replacement gas were Enron NA and Enron Midwest. In some instances,
      PGL
      delivered gas from Manlove to Enron Midwest and then purchased expensive spot
      winter gas to replace that gas. (See, e.g.,
      Staff
      Ex.
      3.00 at 59). Enron Midwest and Enron NA, combined, accounted for 28% of PGL’s
      swing purchases for the month of November 2000. In December, 2000, these two
      entities provided 36.8% of PGL’s swing gas. In January, 2001, these two entities
      supplied 23.3% of PGL’s swing gas. (Staff Ex. 7.00 at 55). Dr. Rearden opined
      that PGL’s primary use of Manlove during the winter season was to benefit
      third-party Hub transactions. (Staff Ex. 7.00 at 38). 

    
      
         

        

        
        

      

      
        81

        
          

        

      

      
        
        

        01-0707

      

    

    

    According
      to CUB-City witness Mr. Mierzwa, the average price of gas during the Manlove
      summer injection season of 2000 was $4.12 per Dth. The average cost of gas
      purchased to replace this gas was $10.76 per Dth. Mr. Mierzwa determined that
      the economic loss suffered by consumers as a result of PGL’s giving preference
      to third party transactions over PGA customer needs was $51.2 million. (City-CUB
      Ex. 4.02 at 18). 

    

    Staff
      witness Mr. Anderson concluded that, in addition to using Manlove Field to
      provide non-tariff services, PGL also used leased storage services, the cost
      of
      which consumers paid for through the PGA. (Staff Ex. 2.00 at 39). In his
      opinion, PGL would not be able to perform non-tariff services without all of
      its
      supply resources, including, the gas it bought for consumers and leased storage,
      without using that which was designated for consumers in third-party
      transactions. (Id.
      at
      39).
      Mr. Anderson further testified that PGL had an inappropriate incentive to use
      PGA assets to provide non-tariff services. PGL recovers the costs of serving
      consumers through the PGA. However, PGL engages in non-tariff transaction,
      subject to competitive market conditions. PGA costs are an automatic pass
      through, whereas PGL must compete to win non-tariff business. The pressure
      to
      generate revenue in the competitive market likely caused PGL to favor its
      non-tariff services customers at the expense of PGA customers. (Id.
      at 40).
      The costs PGL avoided by using storage gas designated for consumers in third
      party transactions increased the net revenues received by PGL/PGL affiliates
      from those transactions. (Staff Ex. 2.00 at 39). Ms. Decker, also, opined that,
      when accomplishing third-party transactions, PGL used its storage and
      transportation assets. (City-CUB Ex. 1.0 at 44).

    

    PGL
      responded to Staff’s and CUB-City’s concerns. According to Mr. Wear, even if PGL
      had not used Manlove Field for third-parties, the same amount of gas would
      have
      been available for consumer use and the consumers would be unaffected, both
      in
      terms of the withdrawal season and Manlove’s peak day activity. Mr. Wear
      testified that PGL usually plans to have only 25.5 Bcf of gas storage available
      for consumers. That is all PGL would have had for consumer use, even if PGL
      personnel had not decided to withdraw gas from Manlove early, (in November,
      as
      opposed to December) in the time period in question. (PGL Ex. F at 38). One
      of
      the reasons for this is that PGL attempts to fully cycle the working inventory
      of its storage fields to maintain overall performance and the lifespan of the
      fields. Experience with the Manlove aquifer showed that storing 25.5 Bcf for
      consumers fit PGL’s load profile. (Id.).
      

    

    Further,
      under warmer-than-normal weather conditions, Mr. Wear continued, PGL would
      not
      be able to withdraw more than 25.5 Bcf of gas. Under other weather scenarios,
      PGL would use the extra gas injected into Manlove Field, but such use would
      reduce or replace the need for baseload purchases. Mr. Wear stated that reducing
      baseload purchases would be economically unwise because baseload purchases
      are
      necessary to achieve a mix of FOM prices and daily prices. Mr. Wear reasoned
      that, without baseload purchases, PGL could be required to buy gas on the daily
      market, subjecting it to daily price volatility. Also, PGL would not be able
      to
      reduce much of its other storage services. Those services perform unique
      functions to meet PGL’s load requirements. (PGL Ex. F at 39). Also, according to
      Mr. Wear, the peak day capacity of Manlove would not change. The amount of
      gas
      stored in Manlove has no impact on peak day capacity. Rather, that capability
      is
      determined by Manlove’s geological characteristics. (Id.).
      

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Mr.
      Wear
      further testified that PGL could not have interrupted deliveries to third party
      customers and instead used that gas for PGA customers. If PGL had interrupted
      third-party services, it would have been in breach of its contractual
      commitments and its tariff obligations to those third-parties. Gas delivered
      by
      third parties to Manlove either must be returned to those parties at some point.
      Mr. Wear did not specifically state what those contractual commitments or tariff
      obligations were. (PGL Ex. F at 40). 

    

     

    2. The
      Decline Point for Manlove 

     

    

    When
      determining whether and when to withdraw gas from Manlove, PGL personnel
      consider Manlove’s geological factors. (Tr. 873-4). PGL witness Mr. Puracchio,
      who is responsible for operating Manlove, testified that gas storage in an
      aquifer, such as Manlove, is less efficient than other types of storage. This
      is
      because injecting gas into, and withdrawing gas from, an aquifer results in
      large proportions of gas being trapped in the pores of the rocks by the
      water.40
      Along
      with the gas in the aquifer, large amounts of water are also produced. (PGL
      Ex.
      I at 3). The water must be displaced by injecting gas at a pressure that is
      higher than the pressure of the water. (PGL Ex. I at 3). 

    

    Because
      a
      certain pressure must be maintained to withdraw gas from an aquifer, after
      a
      certain point in time in the withdrawal season, Manlove can no longer meet
      its
      rated maximum capacity. This is called its “decline point.” (Tr. 679). At that
      point, usually in February, Manlove cannot be counted on as a source of supply
      for peak delivery. (Tr. 677). During the reconciliation period, PGL personnel
      projected that Manlove Field would reach its decline point on February 4, 2001.
      Manlove Field actually reached its decline point on February 2, 2001. (PGL
      Ex. M
      at 5).

    

    Mr.
      Puracchio testified that PGL cycled more than 27 Bcf of gas per season at
      Manlove. Injecting more gas extends the field decline point, which extends
      how
      long Manlove is useful for storage. When more gas is injected, less gas becomes
      trapped. (Id.
      at 7;
      Tr. 681). During the time period in question, PGL personnel successfully
      extended the decline point of Manlove, which increased Manlove Field’s storage
      capability. (Tr. 681). PGL presented no evidence establishing that this
      increased capacity was used to benefit consumers directly, through use of this
      extra capacity, or indirectly, through profits from the use of this extra
      capacity. 

    

    

    _____________________

    40   Use
      of the term “trapped gas” in Mr. Puracchio’s testimony does not refer to any
      accounting terminology. (See,
      e.g., PGL
      Ex I.
      at 27). Instead, it speaks to the term “trapped” as it is used in common
      parlance. (Id.).
      

    
      
         

        

        
        

      

      
        83

        
          

        

      

      
        
        

        01-0707

      

    

    

     

    3. Maintenance
      Gas or “Cushion Gas”

     

    

    Maintenance
      gas is gas that is used to keep a certain, necessary level of pressure in a
      natural gas utility’s system. Because this pressure must be maintained,
      maintenance gas cannot be withdrawn under normal operating conditions. (Staff
      Ex. 1.00 at 13). Historically, until the reconciliation year in question, PGL
      designated this gas as “maintenance gas;” which is recoverable in base rates,
      not in a PGA. For the time period in question, however, PGL recorded this gas
      as
      gas that was lost and unaccounted for (“GLU”). Staff maintains that $4,628,267
      represents the amount of gas that was improperly recorded as GLU. PGL does
      not
      contest this proposed disallowance. (PGL Init. Brief at 104).

    

    Before
      1999, PGL personnel allocated 6.5% to 7.5% of the gas it injected into Manlove
      to cushion gas. (Staff Ex. 2.00 at 58; PGL Ex. I at 13). PGL hired consultants,
      who performed the Roxar Study to determine what effect, if any, adding this
      gas
      to Manlove would have on Manlove. Both the Roxar study and the Smedivg Study,
      cited by Mr. Anderson, recommended allocating 5%-6% to cushion gas. (PGL Ex.
      M
      at 5). 

    

    In
      1999,
      PGL personnel began allocating only 2% of the total injected gas at Manlove
      to
      cushion gas, including the gas injected for third-parties. (See,
      e.g.,
      PGL Ex.
      M at 4). However, third-parties received 100% of the gas injected for them
      during the time period in question. Staff witness Mr. Knepler concluded that
      consumers subsidized third-parties by paying for the third-parties’ share of the
      maintenance gas. (Staff Ex. 1.00 at 13). PGL also injected gas into Manlove
      for
      use by North Shore. However, PGL did not charge North Shore for maintenance
      gas.
      Mr. Knepler concluded that PGL customers also subsidized North Shore. (Staff
      Ex.
      1.00 at 27). Further, according to Staff witness Mr. Anderson before PGL used
      Manlove for third-party services, PGL should have considered the results of
      the
      studies PGL conducted, recommending an increase in the volume of recoverable
      and
      non-recoverable base gas. (Staff Ex. 2.00 at 58). 

    

    Mr.
      Puracchio testified that performance at Manlove was adequate with a 2%
      allocation to cushion gas. As a result of allocating only 2% of gas to “cushion
      gas,” field performance at Manlove has not declined. This, he stated, was “clear
      evidence” that a 6.5-7.5 % allocation of gas to cushion gas is not needed. (PGL
      Ex. I at 13; PGL Ex. M at 5). 

    

    Mr.
      Anderson testified that when PGL personnel increased the amount of gas injected
      by eight Bcf, the amount of gas lost increased by 0.52 to 0.60 Bcf of gas,
      which
      cost consumers $3.2 million to $3.7 million. (Staff Ex. 2.00 at 13). In Mr.
      Anderson’s opinion, it was imprudent of PGL to increase the amount of gas it put
      into Manlove, even after having studies performed which determined that
      substantial additional costs to consumers would be necessary to support those
      services. (Staff Ex. 2.00 at 30). 

    
      
        

        
        

      

      
        84

        
          

        

      

      
        
        

        01-0707

      

    

    4. Displacement

    

    Staff
      witness Mr. Anderson testified that PGL could not have been able to supply
      non-tariff, third-party services without using assets that are included in
      PGL’s
      PGA. Mr. Anderson opined that PGL used displacement to perform these services
      with its PGA gas. (Staff Ex. 2.00 at 31-32). Mr. Anderson explained that
      displacement is the process by which gas moves through a pipeline transportation
      system, without the physical delivery of the same molecules of gas. Displacement
      concerns accounting entries instead of the physical movement of gas. If, for
      example, PGL injected 1,000 units of gas into Manlove during a 24-hour period
      and withdrew 10 units of non-tariff gas from Manlove, PGL personnel would
      execute an accounting entry with ten units of PGA gas that it could have, but
      did not, inject into Manlove. Instead, these 10 units were supplied to the
      third-party. In this example, physically, PGL only injected 990 units of gas
      and
      another ten units was used for the third-party transaction. (Id.
      at
      32).
      Displacement permits the movement of gas through a pipeline without actually
      delivering the same molecules of gas. (Staff Ex. 2.00 at 32). 

    

    Thus,
      gas
      is a fungible commodity; it is not possible to physically distinguish whether
      gas stored in Manlove was purchased for consumers, or whether it was injected
      for third-party use. What separates various injections and withdrawals is only
      accounting entries, which include the gas volume and price paid for it, where
      applicable. (Staff Ex. 2.00 at 32). 

    

    Mr.
      Anderson analyzed the injections and withdrawals during the months of October,
      2000 through September of 2001. He concluded that PGL used displacement to
      accomplish many non-tariff services. The data showed PGL physically operated
      Manlove in a manner consistent with practices at other aquifers in Illinois.
      Like other aquifers, PGL injected gas into Manlove from April through October
      and withdrew gas from December through February. PGL treated May and November
      as
      swing months, where both injections and withdrawals may take place. However,
      Mr.
      Anderson noticed PGL recorded injections during the winter months and
      withdrawals during the summer months. He opined that because injections were
      recorded during winter months when, normally, no physical injections take place
      and withdrawals occurred during summer months, when no physical withdrawals
      take
      place, PGL used displacement to accomplish its third-party services.
      (Id.
      at
      34-35). 

    

    Mr.
      Anderson concluded that approximately 8,506 Dths of gas did not physically
      move.
      (Staff Ex. 2.00 at 36-37). He averred that PGL’s records established that
      approximately 9,237,000 Dths more gas was withdrawn from Manlove than actual
      metering records at Manlove stated. (Id.
      at 37).
      This discrepancy shows that PGL used displacement to perform non-tariff
      services. Additionally, use of displacement allowed PGL to arrange third-party
      transactions without incurring the cost of physically transporting that gas.
      (Id.
      at 38).

    

    Displacement
      uses recoverable gas costs for the performance of non-tariff services. Mr.
      Anderson concluded that, if non-tariff revenues do not flow through
      PGL’s

    
      
         

        

        
        

      

      
        85

        
          

        

      

      
        
        

        01-0707

      

    

    PGA,
      personnel at PGL will have the inappropriate incentive to use gas costs passed
      on to consumers to provide third-party, non-tariff services. (Id.
      at 40).
      He stated that, in his opinion, there is nothing wrong with displacement
per
      se.
      Rather,
      Staff objects to PGL’s use of displacement of gas while still contending that
      only its rate-based assets (Manlove and its transmission system) are used to
      perform non-tariff services. (Id.
      at 39).

     

    
      	 	
              5.

            	
              Large
                Withdrawals from Manlove for Third-Parties at the Onset of
                Winter

            

    

     

    

    During
      the time period in question, PGL provided services to third-parties that were
      not pursuant to its Commission-jurisdictional tariff. In general, it provided
      transportation, storage and “park and loan” services.41
      PGL also
      provided 3PSes, which were exchanges of gas with third-parties. (PGL Ex. C
      at
      29-31). 

    

    Also
      during the time period in question, PGL entered into what is referred to herein
      as 3PSE exchanges with Enron Midwest, three of which PGL personnel colorfully
      entitled; “38 Millennium Special;” “Manlove Jumpstart;” and “Hub Blowout.”
Collectively, these three contracts called for PGL to supply 3.5 Bcf of gas
      to
      Enron Midwest during November, 2000 and continuing through February of 2001.
      The
      three exchange agreements provided that Enron Midwest would return this gas
      to
      PGL beginning in April of 2001 through October of 2001. PGL derived minimal
      payments from these three contracts.

    

    In
      the
      course of discovery, PGL provided Staff with three different explanations as
      to
      how it was compensated for entering into these exchange contracts. At first,
      PGL
      maintained that two of these contracts were priced at “the cost of carry” which
      means that a value was assigned to the gas loaned, as well as the gas delivered,
      with the difference between the two treated as a loan. (See,
      Staff
      Ex. 3.00 at 52). PGL provided no explanation at that time with regard to the
      third contract, the “38 Millennium Special” . (Id.).
      Next,
      PGL claimed that it determined the values attached to the loan and repayment
      of
      gas in these contracts by examining the pricing differentials using NYMEX
      forward prices (for futures contracts). (See,
      Staff
      Ex. 3.00 at 52). Later, it averred that two of the three contracts were paid
      for
      in conjunction with FERC Operating Statement firm transportation services it
      provided to Enron Midwest, Meaning PGL bundled two services together and
      received one payment for both (Id.).
      

    

    The
“Hub
      Blowout” exchange provided for a loan to Enron MW of .5 Bcf of gas in November
      of 2000 and PGL was to receive an equal amount of gas back again in August
      and
      September of 2001. The articulated “cost of carry” for this transaction was
      $145,000, payable to PEC, PGL’s parent company. (See,
      Staff
      Ex. 3.00 at 54). While PGL delivered the loan as planned, Enron MW actually
      repaid the loan from June through August 2001. Actual compensation to PEC was
      $368,125. PGL asserted that the reason the change occurred was due to
“additional value that was created after the original transaction was entered
      into.” (sic).
      (Id.).

    

    

    _____________________

    41   A
      “park and loan” transaction is one, in which, a shipper delivers gas to PGL on
      an agreed-upon schedule, subject to interruption, (a ”park”) and PGL would then
      be obliged to return a like quantity of gas to that shipper, on an agreed-upon
      schedule, also subject to PGL interruption (the “loan”). A loan, however, can
      occur before a park. PGL does not use any of its pipeline transportation for
      these transactions. (PGL Ex. C at 33). 

    

    
      
         

        

        
        

      

      
        86

        
          

        

      

      
        
        

        01-0707

      

    

    “Manlove
      Jumpstart” consisted of a loan of gas, occurring on November 21, 2000 through
      November 30, 2000, of one million MMBtus of gas to Enron Midwest at the Chicago
      citygate Daily Price, the same price as DIQ gas. PGL received $265,000
      compensation for this transaction. “Manlove Jumpstart” commenced at the same
      time PGL began withdrawing gas for PGA customers from Manlove Field. PGL stopped
      purchasing DIQ gas from Enron NA during this time period. Instead, on almost
      every day that PGL withdrew gas and sold it to Enron MW pursuant to “Manlove
      Jumpstart,” it also purchased the same amount of gas at the higher Gas Daily
      Chicago citygate Daily Price. PGL received funds for the exchange, but did
      not
      pass them through to consumers. (See,
      Staff
      Ex. 7.00 at 53-54; Staff Ex. 3.00 at 56). 

    

    At
      that
      time, the applicable NYMEX futures price differential was 85.5 cents per MMBtu.
      In fact, the spot price for gas at this point in time was at a record high.
      (See
      Staff Ex. 3.00 at 53-54). PGL’s compensation from Enron MW, however, was 10.8
      cents per MMBtu, less than one-eighth of the value of that gas. This gas loan
      was not repaid until April through October of 2001. (Id.
      at 56).

    

    The
“38
      Millennium Special” was an attempt to expand Manlove’s storage capacity by using
      two summer storage cycles, instead of only one. (City-CUB Ex. 1.0 at 54). It
      consisted of a loan of 2 Bcf of gas to Enron MW in February of 2001, which
      was
      repaid in March and April of 2001. The compensation Enron MW paid to PGL was
      $124,022. This compensation was part of a non-tariff service contract. At that
      time, the smallest price differential between pertinent futures contracts in
      Natural Gas Intelligence was 107 cents per MMBtu. PGL’s compensation for
      entering into the “38 Millennium Special,” however, was at 6.2 cents per MMBtu.
      (Staff Ex. 3.00 at 56-57). 

    

    Using
      Manlove Field, PGL also offered “Park and Loan” storage services to Enron and
      others during the time period in question. (Staff. Ex. 5.00 at 5). These
      services were interruptible, thus, PGL had the right to refuse service or
      discontinue providing service, if supplying such service would impair its
      ability to draw on this resource to meet the needs of consumers. (Tr. 928-29).
      

     

    A. Conclusions
      of Law

     

    1. Staff’s
      Position

     

    Staff
      argues that PGL acted imprudently with respect to several decisions involving
      Manlove Field and proposes two disallowances for this imprudence. The first
      is
      $10,268,171, which is the value of the gas loaned to third-parties, minus the
      value of the gas those third-parties returned to Manlove at the time when the
      gas was returned. (Staff Init. Brief at 57, 62). Staff also proposes to disallow
      $25,920,181, which is the cost of gas PGL purchased to initially replace that
      gas, for a total proposed gross disallowance of $36,188,352. From this amount,
      Staff deducts $6,628,631; $4,378,466 of which represents the amount of profit
      gained from FERC operations, and $2,250,165 of which represents profits from
      PGL
      storage exchange transactions. The latter amount concerns third-party
      transactions and will be discussed in the Section here discussing third-party
      transactions. Thus, Staff’s net disallowance for imprudent use of Manlove Field
      is $29,559,721. (See,
      attached
      Schedule, Staff Init. Brief at 57, 62). 

    
      
         

        

        
        

      

      
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    Staff
      notes that in November of 2000, PGL allocated only half of Manlove’s storage
      capacity for consumers. The other half was used to deliver gas to third parties.
      PGL did not offset gas costs passed on to consumers with these revenues as
      Commission rules require. (Staff Ex. 7.00 at 54-55). Staff maintains that PGL
      over-allocated Manlove to third-parties in a manner that raised gas costs that
      were borne by consumers. Staff argues that PGL also over-allocated usage of
      Manlove at a time when the prices were high. According to Staff, PGL’s
      over-allocation of gas to third-parties additionally required it to purchase
      gas
      on the spot market to support Manlove’s peak delivery. Staff avers that PGL
      could have interrupted its third-party services to prevent the need for spot
      purchases for PGA customers, but it did not. PGL had an option through which
      it
      could have averted buying gas on an exceptionally high market in a
      colder-than-normal winter, but PGL did not avail itself of this option.
      (Id.
      at
      58).

    

    Staff
      points out that, by January 5, 2001, PGL’s third-party customers had drained all
      of the gas injected into Manlove for these third-parties’ benefit. Staff
      maintains that PGL allowed third-party customers to continue to remove gas
      after
      January 5, 2001 through March of 2001. (Staff Reply Brief at 55). Since
      third-parties had withdrawn their gas from Manlove as of January 5, 2001, PGL
      used the gas it stored for its ratepaying customers, and those of North Shore,
      to satisfy its third-party customers’ demands. (Id.
      at
      57-58). PGA customers suffered increased costs as a result. 

    

    Also,
      since PGL loaned gas to third-parties, Staff asserts that there was less volume
      in Manlove Field. A certain volume is necessary in order to keep the pressure
      at
      peak deliverability. (Staff Ex. 3.00 at 59). PGL bought gas for storage in
      Manlove to maintain sufficient pressure to keep Manlove at peak deliverability.
      The price of this new gas was borne by consumers instead of the third-parties.
      (Id.
      at 58;
      Staff Ex. 7.00 at 46). Staff contends that PGL acted imprudently when loaning
      gas stored for winter use by consumers to third-parties, rather than using
      it
      for ratepaying consumers. (Id.
      at 58).

    

    Staff
      argues that when PGL made these withdrawals at the expense of consumers and
      replaced that gas, it did so in a manner that conferred benefit on its parent,
      PEC. PGL’s major suppliers for spot gas were Enron NA and Enron MW. Staff avers
      that the partnership between PEC and Enron was established to earn profits
      for
      both partners, thus, Hub services with third-party customers allowed PEC to
      enjoy those profits. (Staff Init. Brief at 58-59). 

    

    Staff
      opines that PGL acted imprudently by not interrupting these third-party
      transactions, as PGL’s failure to interrupt them left PGL with far less capacity
      to deliver the inexpensive summer gas that was purchased for consumers. (Staff
      Ex. 3.00 at 47). Staff acknowledges that there could be instances where the
      amount of money paid by a third party could overcome the added costs incurred
      by
      contracting for non-interruptible services. That was not the case here, however.
      PGL did not use the revenues from third-party services to offset consumer gas
      costs. Therefore, Staff concludes that consumers received no benefit from these
      transactions, instead consumers were harmed. 

    

    Staff
      posits that PGL limited its withdrawals from Manlove during a time when
      consumers needed it most---in December of 2000. Staff avers that if PGL
      personnel really intended to meet PGL’s articulated goal of maintaining peak
      delivery from Manlove until late January of 2001, PGL personnel would have
      interrupted service to its third-party consumers. (Staff Reply Brief at 41;
      Staff Ex. 7.00 at 50). 

    
      
         

        

        
        

      

      
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    Staff
      states, essentially, that PGL ignores the record when relying on Mr. Wear’s
      statement that the amount of Manlove Field storage capacity used for consumers
      was established independently from its decisions to store gas for third-party
      services. Staff points to the evidence provided by Dr. Rearden, which Staff
      contends, established that PGL put third-party customers’ needs before those of
      consumers. (Staff Reply Brief at 42-43). 

    

    Staff
      disagrees with PGL’s assertion that displacing storage services for withdrawing
      additional gas from Manlove is not feasible. Staff points out that it has never
      asserted that PGL’s use of its leased storage was improper. Therefore, PGL’s
      argument on this issue is irrelevant. (Staff Init. Brief at 49). 

    

    Also,
      Staff states that while it may be true, for planning purposes that storage
      services are not substitutable, in operational terms, this is less true.
      According to Staff, when planning, PGL cannot consider all storage as the same,
      but in operations, PGL can alter the use of leased storage in conjunction with
      Manlove Field. Since PGL used displacement to perform third-party services,
      leased storage and storage at Manlove had an impact on each other. (Staff Reply
      Brief at 44; Staff Ex. 2.-00 at 31-41). Staff posits that PGL proffered no
      evidence of specific instances in which these operational factors occurred
      and
      to what extent they occurred during the reconciliation period. (Staff Reply
      Brief at 45-46). Also, according to PGL’s Initial Brief, PGL had no-notice
      services, which enabled PGL to withdraw or inject gas with little or no “lead
      time.” According to PGL, the no-notice services allowed it to serve load
      variations quickly, when unforeseen circumstances occurred. Staff concludes
      that
      PGL’s Brief establishes that it had service options with which it could have
      accommodated third-party obligations instead of allowing third parties to
      withdraw gas from Manlove allocated for PGA customer use. (Staff Reply Brief
      at
      47, citing PGL Initial Brief at 67). 

    

    Staff
      takes issue with PGL’s assertion that Staff’s use of the LIFO rate required PGL
      to have knowledge of information (PGL’s annual LIFO rate) that was not available
      to PGL personnel at the time the withdrawals from Manlove took place. Staff
      argues that it used LIFO to calculate the harm done to consumers as a result
      of
      PGL’s imprudent actions; Staff did not determine that PGL should use LIFO on a
      daily basis. (Staff Reply Brief at 50-51; 53-54). 

    

    Staff
      finds PGL’s contention that it made almost no “incremental” purchases beyond
      baseload purchases to be misleading, citing PGL’s Initial Brief at 68-69. Staff
      points out that PGL purchased additional gas for PGA customers due to its
      third-party transactions. According to Staff, it does not matter whether those
      purchases are baseload purchases or other purchases. (Staff Reply Brief at
      55).

    

    On
      Exceptions, Staff argues that in fact, PGL personnel should have been able
      to
      determine the cost of gas from one transaction relative to another at any given
      time. This is true, Staff continues, because the Public Utilities Act requires
      PGL to manage its gas costs in a manner that allows PGL to prove the prudence
      of
      transactions affecting the PGA. In support, Staff cites 220 ILCS 5/9-220. Staff
      points out that PGL’s alternative to Dr. Rearden’s determination as to the cost
      of replacement gas is based on the LIFO value of gas. The LIFO value, however,
      overstates the value of gas and therefore it understates the adverse impact
      of
      the third-party transactions. (PGL Reply Brief on Exceptions at
      10-11).

    

     

     

    
      
         

        

        
        

      

      
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    2. PGL’s
      Position

     

    

    Without
      any record citation, PGL argues that it did nothing wrong in failing to use
      gas
      stored at Manlove “in excess of the 25.5 Bcf of gas it bought and injected in
      Manlove.” PGL claims that if it had not used this gas for third-parties, it
      would have been in breach of contractual commitments and/or violating
      unspecified laws by “stealing gas that belonged to third parties.” (PGL Init.
      Brief at 68). PGL further maintains that none of its customers have a right
      to
      demand services from Manlove Field or any other specific resource. It points
      out
      that during its withdrawal period within the reconciliation period, Manlove
      never had a negative balance. Also, PGL avers that its accounting regarding
      what
      customer gets what gas has no operational relevance. (Id.
      at 70).
      According to Mr. Wear, consumers should not have “unfettered use” of a storage
      field. (PGL Ex. H at 30).

    

    PGL
      admits that it bought gas to replace that which it loaned to third-parties.
      It
      argues that it did not purchase as much replacement gas as Staff states. And,
      the loaned gas was replaced by third parties. PGL asserts that while Staff’s
      proposed disallowance is based on 4,914,182 Dth of “loan activity,” at most PGL
      only bought 352,342 Dth of replacement gas. PGL claims that no one was harmed
      by
      these purchases. (PGL Init. Brief at 70-71; PGL Ex. 14, 15). 

    

    Citing
      Mr. Wear’s testimony, PGL argues that no damage was done to consumers due to
      third-party transactions because, even if PGL did not engage in such
      transactions, the same amount of storage at Manlove would have been used for
      consumers. No additional volume of gas would have been in PGL’s storage
      inventory for consumer use. Mr. Wear stated, in essence, that injecting more
      gas
      into Manlove would have been financially unwise because then PGL would not
      have
      been purchasing gas at FOM prices, which is less expensive than gas purchased
      on
      the daily market. (PGL Init. Brief at 65; PGL Ex. F at 38-39).

    

    PGL
      asserts that Staff and the GCI failed to consider the purpose of its purchased
      storage. PGL does not state that it used purchased storage for consumer use;
      instead, it states that total withdrawals from purchased storage for the five
      winter months (November through March) were greater than those it made in the
      previous year. (PGL Reply Brief at 43). 

    

    PGL
      argues that displacing purchased storage service with additional gas from
      Manlove Field is not possible because only a marginal amount of “tweaking” can
      be done between these two types of storage. Its services from Natural Gas
      Pipeline are used to correct weather forecast errors. Also, PGL has firm storage
      from ANR Pipeline for swing loads in the fringe months of October, November,
      March and April, when Manlove is not available for withdrawals. PGL acknowledges
      that it had no-notice services from ANR, but, it contends that Manlove does
      not
      have a no-notice feature to it. Citing Mr. Wear’s testimony, PGL concludes that,
      in addition to the difficulty in cycling additional Manlove inventories during
      warmer than normal conditions and its effect on baseload purchases, PGL must
      maintain diversity for operational and reliability concerns. (PGL Init. Brief
      at
      67-68). 

    

    
      
         

        

        
        

      

      
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    PGL
      maintains that providing service to third-parties has also produced operational
      benefits for Manlove Field, as less gas becomes trapped and the field decline
      point is extended when more gas is stored at Manlove. PGL avers that increasing
      the amount of gas injected into Manlove Field by eight Bcf extended the decline
      point (from approximately 18 Bcf to approximately 27 Bcf), resulting in an
      increase of one Bcf of cumulative withdrawal. (PGL Initial Brief at 71).

    

    Citing
      no
      portion of the record, PGL states that it did not need to use Manlove Field
      for
      consumers in December of 2000 because purchased gas nominations could not be
      changed. PGL also contends that it did not use more of the gas stored in Manlove
      for consumers in January and February of 2001 because it did not need to do
      so.
      PGL points out that January and February are the coldest months of the year
      in
      Chicago. Usually, there are about nine days in January and February in Chicago
      where the temperature is below 10 degrees Fahrenheit. In January and February
      of
      2001, however, there was only one day in which the weather dipped below 10
      degrees Fahrenheit. PGL personnel could not know in advance that the storage
      would not be needed for anticipated cold days. (PGL Init. Brief at
      77-79).

    

    PGL
      avers
      that Dr. Rearden’s calculations as to the harm from its withdrawals for
      third-party use are improper because he used NYMEX futures prices to determine
      the price of gas at certain times. NYMEX data for January through March of
      2001
      would not establish that prices during that time would be lower than December
      2000 prices. And, according to PGL, NYMEX futures prices are a very poor
      indicator as to the actual price. (PGL Init. Brief at 80-81).

    

    PGL
      further argues that Dr. Rearden’s calculations as to the harm caused by its use
      of PGA gas for third-party use is improper because Dr. Rearden based his
      calculations on PGL’s LIFO price. PGL’s LIFO price, however, is unknown until
      the end of its fiscal year. PGL contends that therefore, it could not be used
      to
      make daily withdrawal decisions. (PGL Init. Brief at 81). Also, Staff’s
      recommended disallowance did not take PGL’s operational considerations, like
      peak day protection, its balancing needs and the possibility that summer prices
      could exceed winter prices, into account. PGL concludes that it must be flexible
      and use storage to accommodate discrepancies between planned and actual
      conditions. (Id.
      at
      81-82). 

    

    PGL
      agrees with Mr. Anderson that it used displacement to accomplish the third-party
      transactions. PGL maintains that it cannot color-code the molecules of gas
      it
      injects into Manlove. There is no guarantee that the same gas that was injected
      for a particular purpose, such as for consumers, will be withdrawn for that
      purpose. And, gas is a fungible commodity; it really does not matter what gas
      a
      person or entity receives. PGL concludes that it impossible, from an operational
      perspective, to state that a transaction did or did not have any recoverable
      gas
      costs associated with it. (Id.).
      

    

    PGL
      further asserts that Commission Staff should not be allowed to contest its
      use
      of Manlove Field because Commission Staff participated in PGL’s FERC proceeding
      in which PGL was certificated by the FERC to provide such services. (PGL Reply
      Brief at 49).

    

    
      
         

        

        
        

      

      
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    In
      its
      Brief on Exceptions, PGL contends that Dr. Rearden’s calculation of damages with
      regard to the purchases of replacement gas is too high because Dr. Rearden
      used
      the actual, but highest, withdrawals from Manlove Field, minus the LIFO price,
      to determine the avoided costs, or how much consumers were harmed. PGL reasons
      that CUB Witness Mr. Mierzwa’s estimated analysis is more accurate. However,
      according to PGL, given that both Staff and the GCI based their disallowances
      on
      factors that improperly exaggerate their calculations, an unspecified adjustment
      is necessary to reduce the disallowance to $12,960,090.50. PGL asserts that
      when
      making a determination as to the harm resulting from replacement gas purchases,
      Dr. Rearden improperly assumed that PGL could know what purchases had the
      highest price. (PGL BOE at 17-18). 

    

     

    3. GCI’s
      Position

     

    

    GCI
      witness Mr. Mierzwa testified that PGL used 12 Dths of gas to support
      third-party transactions conducted during the winter of 2000-2001. He
      recommended a disallowance of $51.2 million due to PGL’s imprudent use of
      Manlove Field. (CUB Ex. 2.00 at 7). The GCI argue that the actual amount of
      gas
      withdrawn from Manlove was 12 Dth of gas. This is the amount of gas that PGL
      could have used for consumers, but did not, resulting in PGL personnel having
      to
      purchase gas at prices more than double the average cost of the gas in storage.
      (GCI Init. Brief at 57-58). 

    

    The
      GCI
      contend that gas stored in Manlove and the costs of operating and maintaining
      Manlove are encompassed by the PGA. They argue that therefore, those facilities
      should be used first for consumers, or exclusively for consumers. The GCI
      concede that there is nothing wrong with using storage facilities to generate
      revenues from third-party transactions. Rather, the GCI maintain, PGL was
      unreasonable in engaging in such activities in a manner that increased consumer
      costs. (GCI Init. Brief at 56-57).

    

    The
      GCI
      take issue with PGL’s assertion that it could not have used more than 25.5 Bcf
      of gas for consumers during the time period in question. The GCI point to Mr.
      Mierzwa’s testimony that PGL could have used its computerized gas planning model
      to determine how much stored gas should be used for system supply, rather than
      giving third-party transactions priority over consumers. In fact, PGL did not
      even prepare a gas supply plan for the winter of 2000 through 2001 regarding
      warmer than normal weather conditions. Since PGL planned to make no daily-priced
      purchases if the winter of 2000 through 2001 was normal (not colder or warmer
      than normal), the GCI maintain that under warmer than normal conditions, it
      would be unlikely that PGL would purchase significant amounts of gas at the
      daily price. (GCI Reply Brief at 45-48). 

    

    The
      GCI
      additionally point out that while PGL argues that adding more gas to Manlove
      Field extended Manlove’s decline point, which increased the amount of gas that
      could be stored at Manlove, PGL witness Mr. Puracchio was unable to identify
      any
      economic benefit to consumers associated with the extension of Manlove’s decline
      point. (GCI Init. Brief.
      at 53;
      Tr. 681-82). 

    

    
      
         

        

        
        

      

      
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    The
      GCI
      further posit that PGL entered into the third-party transactions in the summer
      of 2000, at the same time when it would also be planning to store enough gas
      to
      serve customers under extreme winter conditions. The GCI conclude that because
      PGL failed to maintain sufficient flexibility to meet consumer needs in the
      winter of 2000 through 2001, PGL cannot now complain that it could not meet
      those needs due to contracts that PGL imprudently entered into. (Id.
      at
      48).

    

     

    4. Commission
      Analysis and Conclusions

     

    

    The
      PUA
      requires PGL to do what is reasonable and necessary to prudently incur gas
      costs. (220 ILCS 5/9-220). PGL failed to provide evidence establishing that
      its
      withdrawal practices from Manlove Field during the winter of the reconciliation
      period complied with the prudence requirement in the PUA. Not only did PGL
      fail
      to meet its burden of proof with respect to its withdrawal practices, but other
      parties provided ample evidence showing PGL acted imprudently.

    

    As
      an
      initial matter, what the Commission finds particularly appalling is PGL’s third
      party transactions with Enron that increased consumers PGA costs without giving
      consumers the benefits of any profits gained from these transactions. As
      discussed elsewhere in this order, the Commission can think of no other
      explanation for the creation of the corporate consanguinity here than to divert
      revenues from PGL to an unregulated entity. Parties to Manlove Jumpstart and
      38
      Special clearly intended to use PGL’s PGA assets for the unregulated entities’
shareholder gain, to the detriment of consumers. This lends considerable support
      to the Commission’s finding that many of PGL’s third party transactions
      involving gas stored at Manlove were imprudent.

    

    PGL
      contends that stored gas cannot be labeled for a particular customer’s use. From
      a purely operational perspective, this is true. However, proper accounting
      should allow PGL to track gas stored in Manlove for PGA customer use and gas
      stored for third party use. The record demonstrates that PGL knew of at least
      three accounting options for managing third party withdrawals from Manlove
      Field. PGL could have used the lower-priced summer gas for third-parties and
      allowed consumers to benefit from the profits from those transactions. It also
      could have used the lower-priced summer gas for consumer benefit and charged
      third-parties for the cost of higher-priced winter gas. The third of PGL’s
      options, charging consumers for higher-priced gas and loaning the less expensive
      summer gas to third parties, with none of the profits benefiting consumers,
      is
      what PGL chose to do. This flies in the face of the requirement that PGL offset
      any costs of using PGA assets with any profits gleaned from such
      transactions.

    

    Further,
      PGL’s contention that no customer has the right to use Manlove overlooks the
      evidence, which concerns what gas was used for third-parties and for consumers,
      in terms of the accounting treatment it received. No party has asserted that
      any
      customer of PGL, consumer or otherwise, has a right to use a particular
      facility. Rather, various parties in this proceeding have consistently
      maintained that PGL had a duty, conferred upon it by Section 9-220 of the PUA,
      not to engage in transactions in a manner that increase consumer gas
      costs.

    

    It
      is
      noteworthy that PGL contends that its use of storage provides a “hedge” for
      consumers. Yet, as Staff established, during the winter of 2000-2001, Manlove
      Field was not providing much of a “hedge” for consumers. 

    
      
         

        

        
        

      

      
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    PGL’s
      factually unsupported conclusion that it should not be required to “use gas in
      excess of the 25.5 Bcf it bought and injected into Manlove” to provide consumers
      with gas lacks validity for many reasons. (See,
      PGL
      Init. Brief at 68). This conclusion of fact is asserted with no factual basis
      cited. This Commission need not consider factually unsupported conclusions
      of
      fact. (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 77, 621 N.E.2d 276 (2nd
      Dist.
      1993)). Additionally, PGL’s conclusion is erroneous. During much of the time
      when PGL was withdrawing gas for third-parties from Manlove, its inventory
      for
      third-party gas was at a negative balance. Consumers did not even have full
      access to the 25.5 Bcf of gas allocated for their use. 

    

    PGL
      claims its third-party services were not interruptible without providing any
      evidence to support this assertion. In fact, the record demonstrates PGL could
      interrupt third party services. The Commission finds it difficult to believe
      that PGL could not have interrupted its third-party contractual obligations
      to
      honor its obligations to consumers, had it so chosen. PGL’s decisions to
      position third-party requests before the needs of consumers placed PGL in the
      undesirable position of being required to buy large quantities of replacement
      gas at higher prices. In turn, PGL passed these imprudently incurred costs
      on to
      PGA customers.

    

    Further,
      PGL’s assertion that not using stored gas third-party contractual commitments
      and unspecified laws would be “stealing” that gas from third-parties contradicts
      Mr. Wear’s testimony that third-party services could be interrupted. (Tr.
      929-35). It also contradicts PGL’s statement on page 25 of its Initial Brief
      that its park and loan services were interruptible. (PGL Init. Brief at 25).
      PGL
      cannot have it both ways. It would seem to the Commission that prudent storage
      management would not place the needs of third parties above the needs of PGA
      customers. This PGL did not do. 

    

    Mr.
      Wear’s testimony that PGL could not have used its purchased storage to
      accomplish third-party transactions does not aid PGL. The propriety of PGL’s use
      of its purchased storage has never been an issue. Therefore, this testimony
      is
      irrelevant. Even if this testimony was relevant, it is vague. Mr. Wear cites
      no
      examples as to why PGL had no alternatives to use of Manlove for third-parties,
      or even why PGL decision-makers entered into third- party storage contracts
      knowing that use of Manlove Field was its only option. Staff offered evidence
      to
      sufficiently contradict Mr. Wear’s testimony on this issue. As Staff points out,
      the existence of no-notice contracts is some indicia that PGL had alternatives
      to use of Manlove Field. 

    

    PGL
      believes the Commission should compare PGL’s storage withdrawals during the
      reconciliation period to PGL’s withdrawals during the previous winter. This does
      not aid PGL because there is no evidence here as to the circumstances in the
      winter of 1999-2000. For example, PGL could have been using Manlove in the
      previous year for third-party storage in the same manner in which it did here.
      There is no evidence here establishing what was done in the previous year.
      Certainly, there is evidence here establishing that the GPAA was in effect
      during the previous year, but beyond that, there is no evidence establishing
      what occurred during the winter of 1999 through 2000. 

    

    
      
         

        

        
        

      

      
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    PGL’s
      argument that it used baseload gas, instead of swing gas, to replace the stored
      summer gas misses the point. The issue here is not where the replacement gas
      came from. Rather it is what consumers were required to pay as a result of
      PGL’s
      decision to use its consumer“hedge”
      for third-parties. PGL’s Exs. 14 and 15 indicate that great amounts of gas
      stored for consumer use were withdrawn from Manlove and used for third-parties.
      PGL Ex. 15 compares its swing purchases in the month of March to the value
      of
      the loan paybacks that occurred in that month. However, it does not mention
      the
      value of the gas when it was loaned to third-parties. (See,
      PGL Exs.
      14, 15). These Exhibits do not establish that that PGL acted prudently.

    

    PGL’s
      contention that the loaned gas was paid back, therefore no harm was done, is
      also without merit. Dr. Rearden calculated the value of gas bought, less the
      value of the gas returned by third-parties. (See,
      e.g., Staff
      Init. Brief at 57). Because third-party gas was not returned until March through
      September of 2001, that gas was not available to consumers during the winter,
      meaning PGL had to purchase any supply shortfalls elsewhere, typically at
      increased costs. And, the gas was worth less when it was paid back by
      third-parties. 

    

    Mr.
      Puracchio, who is PGL’s Gas Storage Manager, testified that injecting more gas
      into Manlove makes it more useful because this use extends the decline point
      of
      Manlove, which is the point, at which, a given daily withdrawal rate can no
      longer be met. (PGL Ex. M at 8). The problem with this assertion is that there
      is no credible evidence in this record that the additional gas injected could
      not have been used to confer a benefit on ratepaying consumers, either directly
      or indirectly, by passing the profits on from third-party use of Manlove to
      consumers. At a minimum, PGL should have managed the extra storage space at
      Manlove in a way that did not increase the costs passed on to consumers. The
      record shows that PGL’s management of Manlove withdrawals increased consumers
      costs either indirectly, through increased costs caused by but not borne by
      third-parties and directly, through PGL’s practice of “dipping into” the gas
      purchased for consumers and using that gas for third-parties, requiring PGL
      to
      purchase more expense replacement gas. This only leads to a conclusion of
      imprudence.

    

    PGL’s
      assertion that it did not use Manlove in December as much as has been forecast
      is factually unsupported. We need not consider it. (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 76, 621 N.E.2d 276 (2nd
      Dist.
      1993); In
      re
      Marriage of Thornquist,
      79 Ill.
      App. 3d 791, 798, 399 N.E.2d 176 (1st
      Dist.
      1979)). 

    

    PGL’s
      assertion that it did not need to use the gas stored in Manlove Field because
      the weather was warm in the winter of 2001 is equally without merit. PGL, the
      party that had the burden of proof, could have provided evidence establishing
      the weather conditions in January and February of 2001. It did not. Merely
      stating that there was only one day in that two-month period in which the
      weather dipped below 10 degrees Fahrenheit does not establish that the weather
      was not cold during this period. PGL provided no evidence as to what the weather
      was like or how the weather affected consumer demand. Furthermore, the
      Commission finds it difficult to follow PGL’s logic here when it actually
      started withdrawals from Manlove earlier than planned due to colder than normal
      weather in December 2000. PGL has not established that it did not need to use
      gas stored in Manlove Field during January and February 2001 because of warmer
      than usual weather conditions. 

    

    
      
         

        

        
        

      

      
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    PGL’s
      contention that NYMEX futures prices are not the same as actual prices also
      ignores the fact that it had the burden of proof. PGL could have presented
      evidence establishing what it determined was the actual relevant prices to
      be.
      It did not. The only evidence as to what gas was worth at the pertinent times
      on
      this issue was Dr. Rearden’s assessment of NYMEX futures prices. Dr. Rearden did
      not proffer NYMEX futures prices to suggest that PGL should have purchased
      futures in December, which is what PGL suggests in its argument. Rather, he
      proffered those prices to determine the value of gas on the open
      market.

    

    Mr.
      Wear’s testimony that the additional working capacity would not have been deemed
      to be useful for use by ratepaying consumers is also not credible. Mr. Wear
      stated that, to place more gas in Manlove would be financially unwise because
      PGL would then be using stored gas, in part, instead of purchasing baseload
      gas.
      This, he averred, is bad because baseload gas was the less expensive FOM Gas,
      as
      opposed to gas purchases on the daily market. (PGL Ex. F at 38-39). There
      is
      nothing in this record, however, indicating that using gas already in storage
      would be more expensive than buying FOM gas. While it is true that FOM gas
      is
      generally less expensive than gas purchased on a daily market, there is no
      evidence that using more of Manlove’s storage for consumers would raise the cost
      of gas passed on to consumers. And, as the GCI point out, under warmer than
      normal conditions, it is unlikely that PGL would need to purchase much gas
      at a
      daily price. Mr. Wear again misstated facts, casting further doubts as to his
      credibility. 

    

    Record
      evidence indicates that PGL loaned gas to third-parties that was originally
      purchased to meet some of consumers’ supply needs during the winter months.
      Commission regulations bar a utility from engaging in any transaction that
      raises the costs that are passed on to consumers. These regulations provide
      that
      utilities “shall refrain from entering into any such transaction” that would
      raise such charges. (83 Ill. Adm. Code 525.40(d)). (emphasis added). Were the
      Commission to accept PGL’s position, we would only encourage utilities to use
      assets meant for consumers as a means to cull corporate profit that is not
      passed on to consumers. We would also be encouraging utilities not to actively
      participate in gas price reduction on behalf of consumers. This scenario was
      not
      the intent of this Commission when it promulgated Section 525.40. (Ill.
      Commerce Comm., on its own Motion: Revision of 83 Ill. Adm. Code 525,
1995
      Ill.
      PUC Lexis 592 at *17). Section 525.40(d) was meant to deter utilities from
      subsidizing off-system transactions with assets used for consumers and thus
      subject to a PGA. This
      is
      not to suggest that the Commission disapproves of all third-party transactions
      on the part of utilities. Rather, when third-party transactions involve use
      of
      PGA assets, use of those assets, especially gas supply, must be prudent.

    

    The
      Commission finds PGL acted imprudently with regard to many aspects of its
      operation of Manlove Field. Any disallowance associated with the Commission’s
      finding of imprudence for this provision is properly included in the Settlement
      Agreement and Addendum as discussed in. 

    
      
         

        

        
        

      

      
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    VI. Unaccounted
      for Gas- “GLU”

     

    A. Findings
      of Fact

     

    According
      to Staff witness Mr. Anderson, Unaccounted-for Gas (“GLU”) is defined as the
      difference between gas available from all sources and gas sales accounted for
      by
      the utility as sales, net interchange and company use. This difference, or
      “lost” gas can occur in a variety of ways, such as leakage, theft, meter
      inaccuracies, or temperature or pressure changes. (Staff Ex. 2.00 at 50). GLU
      is
      an accounting term for gas that has become lost or is otherwise unaccounted
      for.
      It is the difference between the amount of gas sent out and that which has
      been
      sold. (Tr. 702). GLU is recovered by PGL in its PGA. (Staff Ex. 2.00 at 50).
      

    

    Evidence
      adduced during the hearings shows PGL’s GLU levels for several years. In fiscal
      year 1998, PGL reported GLU at 1.10 %. (Tr. 714). In fiscal 1999, it was 1.09%.
      In fiscal 2000, it was at 0.84 %. In 2002, PGL’s GLU was 2.89%. (Id.).
      However, during the reconciliation period, PGL’s GLU level was approximately
      3.76%, which is an increase from the previous year of almost 400%. (Tr. 699).
      Management at PGL was aware that its GLU increased dramatically during the
      time
      period in question. (Tr. 694). 

    

    PGL
      witness Mr. Zack concluded that the level of GLU recorded during the
      reconciliation period was not excessive. Also, he did not believe that
      increasing GLU from 1999 to 2002 represented a trend. Mr. Zack testified that
      it
      is not uncommon for GLU to be 6.0%. He bases his conclusions on his experience
      with GLU, not his experience at PGL. Mr. Zack is in charge of gas supply
      planning, gas supply administration, gas control and gas storage for both PGL
      and North Shore. (Tr. 735). Mr. Zack was not in PGL’s gas supply administration
      department during the reconciliation period. (Tr. 736). 

    

    City-CUB
      witness Ms. Decker testified that during the reconciliation period, PGL
      consumers paid for a significantly larger amount of gas than was actually
      delivered during the reconciliation period. (City-CUB Ex. 1.0 at 28; 2.0 at
      25).
      Because PGL personnel did not correct this increase in GLU, she opined that
      PGL
      was imprudent. (Id.
      at
      33-34). While GLU may be a relatively low in terms of a percentage, here, it
      represents a very large amount of gas. (Id.
      at 41).
      Ms. Decker pointed out that PGL initiated an investigation to determine why
      GLU
      increased so much. (City-CUB Ex. 1.0 at 34-35).

    

    Ms.
      Decker averred that gas shippers acknowledge that a small percentage of gas
      in
      their pipeline, or “throughput,” is taken or consumed along the way to run
      compressors as the gas travels through shipping pipelines and storage devices.
      (City-CUB Ex. 1.0 at 29). She also stated that a significant amount of PGL’s
      total gas is customer-owned gas. Ms Decker recommended a disallowance in the
      amount of $38,102,680, which represents excess costs PGL recovered from
      consumers. (Id.
      at 34).

     

     

    
      
         

        

        
        

      

      
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    B. Conclusions
      of Law

     

    1. Staff’s
      Position

     

    Staff
      took no position on the issue of excess GLU. As has been previously discussed
      herein, Staff recommended a disallowance in the amount of $4,628,267, which
      represents the amount of maintenance gas that was improperly accounted for
      as
      GLU and recovered through the PGA. PGL does not contest Staff’s proposed
      disallowance. (See,
      e.g., PGL
      Init.
      Brief at 104). 

    

     

    2. GCI’s
      Position

     

    

    City-CUB
      witness Ms. Decker testified that during the reconciliation period, PGL
      consumers paid for a significantly larger amount of gas than was actually
      delivered during that period. (City-CUB Ex. 2.0 at 25). During the time period
      in question, PGL’s GLU increased by approximately 400%. (Id.
      at
      33-34). According to GCI, PGL executives were alarmed at the GLU levels. The
      GCI
      argue that PGL personnel did not attempt to correct this problem, therefore,
      PGL
      was imprudent. (Id.
      at
      33-34; GCI Initial Brief at 74-77). Ms. Decker opined that the Commission should
      disallow $38,102,680, which represents excess costs PGL recovered from consumers
      due to PGL’s excessive GLU. (Id.
      at 34).
      The GCI assert that this unexplained increase in GLU, which resulted in
      increased costs to consumers, was imprudent. (See,
      e.g.,
      GCI
      Initial Brief at 14, 74-76). 

    

    Furthermore,
      PGL’s claim that its GLU was within the range of PGL’s Illinois peers is
      hindsight, as this could not have been known at the time in question. The GCI
      conclude that therefore, consideration of other Illinois gas companies’ GLU is
      not permitted. (GCI Reply Brief at 78). 

    

     

    4. PGL’s
      Position

     

    

    PGL
      argues that Ms. Decker’s benchmark of 1% GLU was based solely on PGL’s GLU from
      two prior years. This, PGL contends, is an arbitrary benchmark. Also, Ms. Decker
      did not include maintenance gas in her total figure when determining the
      percentage of GLU. If she had done this, GLU would have been reduced from 3.76%
      to 3.44%. (Id.
      at 91).
      PGL presented statistics as to its Illinois peers as to their GLU during the
      time period in question. Based on these statistics, PGL concludes that the
      amount of its GLU was not imprudent. (PGL Init. Brief at 90). 

    
      
         

        

        
        

      

      
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    On
      Exceptions, PGL maintains that GLU rises and falls by its very nature. It
      concluded that given the fluctuating nature of GLU, a comparison of
      multiple-year averages is a better indicator of PGL’s performance, as opposed to
      a single year. (PGL
      Reply BOE at 6-7). According to PGL, what appears to be a large increase in
      GLU
      in terms of percentage, can be quite large in actual quantity, even when the
      percentage changes from one small percentage to another small percentage.
      (Id.
      at
      7).

    

     

    5. Commission
      Analysis and Conclusions

     

    

    The
      Commission agrees with the GCI that PGL should have exercised more care with
      respect to GLU. We also agree with the GCI that evidence of the GLU levels
      of
      PGL’s peers during the time period in question could not have been known to PGL
      personnel at that time. It is, therefore, impermissible hindsight and we will
      not consider it.

    

    The
      Commission cannot state, based on this record, that PGL’s conduct rose to the
      level of imprudence. PGL personnel did note that there was a problem. However,
      there is simply no evidence that, if PGL personnel had undertaken any course
      of
      action, its GLU would have been reduced. We also note that Ms. Decker did not
      take into account that maintenance gas, which, when properly recorded, will
      increase the total amount of gas, and reduces her GLU percentage, albeit
      slightly. 

    

    The
      evidence established that GLU can occur in a variety of ways, such as meter
      inaccuracies, leakage, or temperature changes. (See,
      e.g.,
      Staff
      Ex. 2.00 at 50). The source of the problem can be difficult to detect. There
      is
      no evidence that PGL personnel knew or should have known what was causing a
      sharp increase in its GLU during the time period in question. Ms. Decker’s
      testimony on GLU speaks to what is acceptable for pipelines, not LDCs.
      (See,
      City-CUB
      Ex. 1.0 at 29). There is no evidence that LDCs like PGL would have the same
      factual considerations as those of pipelines. Finally, we agree with PGL that
      a
      benchmark based on two previous years is not reasonable, as, generally,
      benchmarks are based on a wider time-frame in order to ensure that anomalies
      do
      not occur. Therefore, the Commission declines to accept the GCI’s recommended
      disallowance on this issue. 

    

    The
      GCI’s
      point is well-taken regarding Ms. Decker’s testimony as to how PGL corrected its
      level of GLU. The PGL investigation she referred to did not occur in the
      reconciliation period. However, there is no evidence that in this proceeding
      if
      PGL personnel had undertaken an investigation in the reconciliation period,
      they
      would have been able to determine the cause of the GLU and correct the problem.
      

    

    Finally,
      the GCI blame PGL for the fact that Ms. Decker’s benchmark for GLU was only two
      years in duration, as the GCI assert that this was all the information that
      PGL
      gave them in discovery. However, the remedy for an incomplete discovery response
      is another discovery request or a motion to compel. We note that there is no
      indicia that this situation is like the one regarding enovate’s activities,
      where the evidence was allegedly with Enron and PGL claimed that therefore,
      it
      did not have that evidence.

    

     

     

    
      
        

        
        

      

      
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    VII. Off-System
      Transactions in General

     

    A. Findings
      of Fact

     

    According
      to PGL, off-system transactions (i.e.,
      sales
      for resale) are a routine part of the management of its system. PGL used Manlove
      Field and Mahomet Pipeline to provide third-party services. (See,
      e.g.,
      Staff
      Ex. 3.00 at 45). PGL also used leased storage and PGA gas to provide third-party
      services. PGL did not offset PGA costs passed on to consumers with profits
      earned from these. (Id.).
      

    

    Mr.
      Wear
      averred that all off-system transactions must accomplish one or more of the
      following criteria: a.) provide a positive commodity or demand credit; b.)
      meet
      operational needs; or c.) test the logistics or feasibility of future
      transactions that would meet operational needs or provide demand/commodity
      credits. (PGL Ex. C at 29). According to Mr. Wear, off-system transactions
      can
      reduce the gas costs PGL passed on to consumers in its PGA. When an off-system
      transaction uses an asset, the costs of which PGL recovers through its PGA,
      the
      revenues from that transaction flow through that PGA gas charge as well. Mr.
      Wear acknowledged that the reason such revenues offset gas charges is that
      the
      law requires PGL to use those revenues to offset the gas charges PGL passes
      on
      to consumers in its PGA. (PGL Ex. C at 30). PGL classified its system
      transactions in two categories, Hub and PGA. Mr. Wear testified that the
      third-party transactions that used only base rate assets were considered to
      be
      Hub transactions. Those transactions that used gas charge assets were considered
      to be PGA transactions. (Tr. 993). 

    

    GCI
      witness Mr. Mierzwa testified as to how a gas utility should determine how
      much
      storage should be used to serve its load. He opined that a major gas utility
      such as PGL should have utilized its Gas Dispatch Model to determine how much
      gas storage should be used for system supply. However, PGL personnel chose
      not
      to use the model during the winter of 2000/2001. (CUB Ex. 4.0, at 25-28). Mr.
      Mierzwa also testified that, based on the gas supply plan prepared by PGL,
      an
      additional 12 Bcf of storage could have been used. PGL could have reduced the
      amount of baseload purchases it made during warmer than normal weather by merely
      reducing baseload purchases up to 13.5 Bcf during the months of December, 2000
      through February of 2001. (Id.).
      Mr.
      Mierzwa proposed a disallowance for PGL’s storage and exchange activities that
      do not involve loans of gas in the amount of $27.1 million. He used the average
      cost of gas that was used to displace higher gas costs. In Mr. Mierzwa’s
      opinion, the amount of gas used for third-parties was actually 12 Bcf of gas.
      (Id. at 10). Mr. Mierzwa further opined that Staff’s use of PGL’s LIFO rate
      understated the adverse impact on sales customers of the PGL storage and
      exchange activities. Under PGL’s LIFO rate, storage injections and withdrawals
      are based on the average cost of gas for the fiscal year. Gas injected by
      third-parties in the summer of 2000 would not have been included in the LIFO
      rate. (Id.
      at
      12-15). 

    

     

     

    
      
        

        
        

      

      
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    B. Conclusions
      of Law

     

    1. Staff’s
      Position

     

    Staff’s
      total proposed cost disallowance for off-system loans of gas, or what Staff
      has
      referred to as non-tariff services, is $6,628,631. Staff’s recommended
      disallowance contains two components: $4,378,466 for revenues from PGL’s FERC
      operations and $2,250,165 for its storage exchange transactions. Staff argues
      that the revenues from PGL’s off-system transactions should be included in PGL’s
      PGA, as opposed to its base rates. Including these revenues in PGL’s PGA would
      offset the gas costs that are borne directly by consumers through the PGA.
      Staff
      contends that to accomplish the off-system transactions, PGL used all of its
      assets, including gas, leased storage and the Mahomet Pipeline and Manlove
      Storage Field. Pursuant to this Commission’s PGA regulations, the costs
      associated with these items, (i.e.,
      leased
      storage and flowing gas) as well as the profits therefrom, should be passed
      on
      to consumers through PGL’s PGA. (See,
      e.g.,
      Staff
      Ex. 12.00 at 31; Staff Init. Brief at 63-64). 

    

    PGL’s
      use
      of the term “above the line” in its Initial Brief is incorrect, according to
      Staff; it refers to an incomparable situation to the one here-revenues and
      expenses that are included in a utility’s operating income for purposes of
      determining rates. Staff argues that an expense recorded “above the line” can be
      flowed through a PGA. (Staff Reply Brief at 63). 

    

    Staff
      contends that if the Commission were to allow PGL to recover the profits from
      use of these assets in base rates, the Commission would provide PGL with the
      incentive to unnecessarily increase the cost of gas passed on to consumers.
      Indeed, according to Staff, here, PGL did raise gas costs borne directly by
      consumers in order to support its off-system transactions. (See,
      e. g.,
      Staff
      Ex. 3.00 at 5). 

    

    Staff
      argues that any third-party transaction used at least three assets, Mahomet
      Pipeline, Manlove Field and displaced gas. Staff points out that displaced
      gas
      is a recoverable gas cost, citing 83 Ill. Adm. Code 525.40(a)(1). Staff contends
      that Section 525.40 of the Commission’s rules does not address whether an asset
      is recorded
      through
      base rates. Rather, this Rule speaks to whether any associated cost necessary
      to
      complete a transaction is a recoverable cost, as is defined in Section
      525.40(a). (Staff Reply Brief at 58). 

    

    Staff
      maintains that PGL is required by law to refrain from actions that raise gas
      costs. When, as is the case here, non-tariff services alter the delivery of
      gas
      to ratepayers from least cost values, these non-tariff services raise the amount
      of gas costs passed on to consumers. Also, when PGL does not use the profits
      gleaned from third-party loans to offset gas costs borne by consumers, it does
      not have the incentive to limit non-tariff services in a manner that considers
      the needs of consumers. (Staff Ex. 10.00 at 9). 

    

    
      
         

        

        
        

      

      
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    Staff
      contends that use of displaced gas allowed PGL to enter into transactions that
      used facilities without the physical delivery of the same molecules of gas.
      Thus, displaced gas molecules injected into PGL’s system substituted for gas
      molecules that are presently in PGL’s system. (Staff Initial Brief at 65-66).
      Citing PGL’s Section 525.40 Brief at 12, Staff posits that PGL admitted that the
      transfer of gas may occur at different points in time and at different
      locations. And, under PGL’s FERC operating statement, PGL entered into
      transactions that first required it to loan gas to third-parties, which was
      repaid in-kind at a later date. Staff contends that it was impossible for PGL
      to
      accomplish such a transaction without using displacement of gas in its system.
      Because the cost of natural gas is defined as a recoverable gas cost by Section
      525.40(a)(1) of the Commission rules, Staff avers that PGL is required by
      Section 525.40(d) to include the revenues from use of that gas in its
      determination of what costs are recoverable here. (Staff Init. Brief at 66-67).
      

    

     

    2. PGL’s
      Position

     

    

    PGL
      disagrees with Staff and the GCI that the revenues in question are derived
      from
      transactions that are subject to gas charges. This is true, PGL continues,
      because the costs involved for all of the assets involved in these transactions,
      such as PGL’s transmission pipelines and Manlove Field, are included in PGL’s
      base rates, not passed through its gas charge. (PGL Init. Brief at 72-73).
      Mr.
      Wear stated that “none of the costs supporting PGL’s Hub transactions are
      recovered through the gas charge.” (PGL Ex. C at 33).

    

    PGL
      contends that the expenses it incurs in connection with Manlove Field and the
      Mahomet Pipeline are included in its base rates. It reasons that therefore,
      the
      profits from use of those assets should be in base rates, not passed on directly
      to consumers in its PGA to offset the cost of gas. PGL also asserts that because
      its Hub services are available only because of base rate assets that it owns,
      Section 525.40(d) does not require PGL to flow the revenues from these
      transactions through its PGA. (PGL BOE at 23). 

    

    PGL
      also
      argues that this Commission has consistently ruled that third-party revenues
      are
      not to be included in PGAs, citing 83 Ill. Adm. Code 525.40(d). (PGL Reply
      Brief
      at 72-73). PGL points to Northern
      Ill. Gas Co., Application for an Order Approving its Accounting Treatment
      Related to Certain Market Area Hub Activities,
      1996
      Ill. PUC lexis 151, *11), and contends that the Commission allegedly required
      Nicor to account for its revenues by including them in its next rate case.
      (Id.
      at
      74-75). Also, in Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 956, and Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 201, the Commission again found Nicor’s above-the-line treatment
      of its third-party revenues to be acceptable. (PGL Init. Brief at 74-75).

    

    PGL
      further posits that Staff is wrong in asserting that the two Nicor/North Shore
      pipeline contract dockets were exempt from PGA consideration because they were
      pursuant to tariffs. These contracts were filed pursuant to Section 7-102 of
      the
      PUA. According to PGL, there is no tariff under which Nicor provided service
      to
      North Shore. (PGL Reply Brief at 48). 

    

    
      
         

        

        
        

      

      
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    PGL
      further maintains that until this Commission issued a final Order in Nicor’s
      recent rate case, docket 04-0779, this Commission had a longstanding practice
      of
      allowing Nicor to account for its Hub revenue through base rates. PGL maintains
      that fairness dictates that the appropriate forum for deciding the treatment
      for
      PGL’s hub revenue is in its next rate case. (PGL BOE at 22). 

    

    Also,
      according to PGL, Staff’s assertion that only system supply gas can be used for
      third-party transactions elevates form over substance. There are many sources
      of
      gas, such as recoverable cushion gas and gas that is supplied to transportation
      and delivery customers, which do not touch the gas charge. Mr. Anderson knew
      that PGL had transportation programs, but he could not testify if gas was
      purchased from PGL or others. (Tr. 871-72). However, 40% of PGL’s annual
      throughput is gas supplied by third-parties who buy their gas from non-utility
      sources. Citing Section 525.40 generally, PGL argues that gas in storage affects
      its gas charge only when it is delivered to end users. Citing Mr. Wear’s
      testimony, PGL contends that merely because a transaction involves displacement
      does not mean that PGL has purchased gas for which the costs are recovered
      through its PGA. (PGL Reply Brief at 45-47). 

    

    PGL
      also
      cites Mr. Anderson’s testimony and asserts that it is impossible to know if the
      molecules placed in the system are the same as those later delivered to an
      entity. Also, according to PGL, third-party services can be supported without
      using gas charge assets. Interstate pipelines with no merchant functions provide
      services like park and loan services. PGL points to a service provided by
      Natural Gas Pipeline, but does not state that it ever contracted for this
      service. (PGL Reply Brief at 47-48). 

     

    3. GCI’s
      Position

     

    

    The
      GCI,
      also, cite 83 Ill. Adm. Code Section 525.50(d) and contend that revenues from
      use of PGL’s PGA assets, such as leased pipeline and gas, must offset consumer
      gas costs through the PGA. The GCI point out that this regulation requires
      that
      such revenues must offset PGA gas costs if
      any
      of the
      costs associated with the transaction in question is a “recoverable gas cost,”
as is defined in Section 525.40(a). (emphasis added). Because PGL used
      displacement of gas to accomplish these transactions, PGL could move the gas
      without incurring the cost of physically transporting gas to the customer,
      or
      having that customer arrange for transportation. The costs PGL avoided by using
      gas injected into storage to serve consumers on the operations of PGL’s system
      increased the revenues involved. However, consumers paid the entire cost of
      storage and for pipeline use without receiving any corresponding benefit. (GCI
      Init. Brief at 51-52).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    The
      GCI
      further contend that Northern
      Ill. Gas Co., Application for an Order Approving its Accounting Treatment
      Related to Certain Market Area Hub Activities,
      1996
      Ill. PUC Lexis 151, does not concern Section 525.40. In that docket, this
      Commission simply rejected Nicor’s contention that third-party revenues should
      be split between its shareholders and ratepayers and concluded that the
      ratepayers are entitled to the full amount of such revenues. It was in the
      context of rejecting Nicor’s proposal to share revenues, whose above-the-line
      treatment was not challenged, that the Commission determined that revenues
      should be treated above-the-line. (GCI Reply Brief at 43-44). And, in the two
      other Commission decisions cited by PGL, Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 956, and Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 201, no party argued that third-party revenues should flow
      through a PGA. (Id.
      at
      44).

    

    The
      GCI
      point out that PGL did not dispute that the transactions in question were
      accomplished through displacement. The GCI assert that the unrefuted evidence
      of
      record establishes that displacement is not possible without use of PGA gas.
      Also, leased pipeline and leased storage was used in displacement. These costs
      are recoverable gas costs under Section 525.40(a)(2) and the associated revenues
      must be used to offset gas charges. (GCI Initial Brief at 42-43). 

    

     

    4. Commission
      Analysis and Conclusions

     

    

    PGL’s
      contention that this Commission has consistently construed Section 525.40 of
      its
      rules in a manner that allows revenues from non-PGA assets to be accounted
      for
      in base rates is without a basis in fact. None of the cases PGL cites even
      mention Section 525.40. Moreover, the language in this regulation is
      unambiguous. This Commission cannot look to extrinsic sources to ascertain
      the
      meaning of a law that is unambiguous. (People
      v. Hari,
      355 Ill.
      App. 3d 449, 456-57, 822 N.E.2d 889 (4th
      Dist.
      2005)). Finally, as Staff points out, the term “above the line” refers to what
      is included in a determination of utility operating income when setting base
      rates, as opposed to what costs utility shareholders bear. This proceeding
      does
      not involve setting base rate revenues or determining what costs are recovered
      through base rates. It is not applicable to the situation here, where the
      Commission is determining what costs are borne directly by consumers through
      a
      PGA.

    

    The
      cost
      of system supply gas and any other gas “purchased for injection into the gas
      stream” is an expense that is passed directly on to consumers through a PGA. (83
      Ill. Adm. Code 525.40(a)(1)). The cost of leased pipeline and leased storage
      is
      also a PGA expense. (83 Ill. Adm. Code 525.40(a)(2) and (3)). All revenues
      from
      any transactions that use these assets must offset the costs imposed on
      consumers by a PGA, as the regulations further provide that recoverable gas
      costs “shall be offset by the revenues derived from transactions at rates that
      are not subject to the Gas Charge(s) if any of the associated costs are
      recoverable gas costs.” (83 Ill. Adm. Code 525.40(d)). (Emphasis added).
      Therefore, even when a third-party transaction only uses some PGA assets (in
      other words, when a third-party transaction only involves one recoverable
      associated cost), the revenues from those transactions offset the costs imposed
      by a utility in its PGA. (Id.).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    PGL
      ignores the issues raised by the parties by contending that it is impossible
      from an operational standpoint to state that a transaction did not have any
      recoverable gas costs associated with it. Section 525.40 is an accounting
      regulation. It does not concern operational matters. And, this regulation
      requires PGL to offset gas costs with the revenues from a transaction if any
      of
      its PGA assets are used for the benefit of third-parties. (83 Ill. Adm. Code
      525.40(d)).

    

    As
      Staff
      and the GCI point out, the two Nicor cases PGL cites approving transportation
      contracts, Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 956, and Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 201, are not applicable in this situation. Section 525.40(d)
      creates an exception in terms of what gas costs must be recovered through a
      PGA.
      It provides that “[T]his subsection shall not apply to transactions subject to
      rates contained in tariffs filed with the Commission, or in contracts entered
      into pursuant to such tariffs . . .” (83 Ill. Adm. Code 525.40(d)). The two
      Nicor transportation contracts in the dockets cited above were contracts entered
      into pursuant to tariffs filed at the Commission. (Nicor,
      2003
      Ill. PUC Lexis 956 at *3-4; Nicor,
      2003
      Ill. PUC Lexis 201 at *4-5). What was at issue in those transportation contract
      cases is not the situation here. 

    

    PGL
      contends that these two transportation contract dockets are not exempt from
      Section 525.40 because there was no tariff, under which, Nicor provided
      transportation service to North Shore. (See,
      PGL
      Reply Brief at 48). This argument ignores the language in this regulation.
      Section 525.40(d) specifically exempts contracts entered into “pursuant to
      tariffs on file with the Commission.” (83 Ill. Adm. Code Section 525.40(d)).
      (Emphasis added.). These transportation contracts were pursuant to tariffs
      on
      file with the Commission. (See,
      e.g., Nicor,
      2003
      Ill. PUC Lexis 956 at *3, where the Commission ruled that it was proper for
      North Shore to treat the charges for the service as recoverable gas costs that
      are accounted for in its PGA; Nicor,
      2003
      Ill. PUC Lexis 201 at *2, where the Commission commented that the maximum
      quantity that Nicor Gas would transport represented 1.4% of Nicor Gas'
      historical peak day sendout). The transportation contract provided services
      to
      consumers. Services to consumers are pursuant to tariffs on file with the
      Commission. Pursuant to Section 525.40(d), such contracts are exempt from the
      accounting treatment that Section 525.40 would otherwise impose. 

    

    PGL’s
      assertion that it is possible to accomplish third-party services without using
      gas charge assets also does not aid it. The issue here is what happened, not
      what services are possibly available to PGL. Stating that some interstate
      pipelines offer services that make it possible to transact third-party services
      is not the same as establishing what happened here. 

    

    PGL’s
      assertion that gas in storage affects its gas charge only when it is delivered
      to end users ignores the language in Section 525.40. There is no provision
      in
      this regulation that requires delineation of gas costs at the time of delivery.
      Moreover, essentially, in so arguing, PGL states that when a transaction is
      completed through displacement instead of delivery, none of the costs associated
      with the displacement transaction flows through its PGA. There is no such
      language supporting such an argument in Section 525.40. The Commission agrees
      with Staff and the GCI that Section 525.40(d) requires PGL to offset the PGA
      costs passed on to consumers with the revenues gleaned from, at a minimum,
      PGA
      gas, as well as other assets, during the reconciliation period.

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Finally,
      PGL has not established that the revenues from these services should be handled
      in PGL’s next rate case. The final Order amending the applicable regulation,
      Section 525.40(d), issued on October 3, 1995. (Ill.
      Commerce Comm. on its own Motion,
      Revision
      of 83 Ill. Adm. Code 525, 1995 Ill. PUC Lexis 640). The final Order issued
      in
      Nicor’s previous rate case on April 3, 1996 (Northern
      Ill. Gas Co., Proposed General Increase in Rates for Gas
      Services,
      1996
      Ill. PUC Lexis 204). This Order issued pursuant to a petition filed
      approximately 11 months prior to April 3, 1996. It appears, therefore, that
      there was an overlap in time between the two dockets and Section 525.40(d)
      was
      not incorporated in Nicor’s previous rate case.

    

    However,
      here, according to PGL, use of Manlove Field for park and loan and exchange
      services did not commence until 1998, well-after the time in which Section
      525.40(d) was promulgated. (Ill.
      Commerce Comm., on its own Motion, Revision
      of 83 Ill. Adm. Code 525,
      1995
      Ill. PUC Lexis 640; PGL Initial Brief at 23-25). We also note that PGL
      participated in the rulemaking proceeding that added Section 505.40(d)).
      (Id.).
      Further, during some of the time between Nicor rate cases, Nicor did not even
      have a PGA, it had a performance-based regulatory program. (See,
      e.g., Illinois Commerce Commission, on its own Motion, v. Northern Illinois
      Gas
      Co.,
      2002
      Ill. PUC Lexis 1164). Further, we note that PGL has not presented facts
      indicating that its situation is similar to that of Nicor. 

    

    In
      conclusion, the Commission finds that PGL improperly passed off-system
      transaction costs to consumers through the PGA without any corresponding offset
      in revenues. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as discussed in Section I. As a final note on this issue, the
      Commission recognizes PGL’s commitment in the Settlement Agreement and Addendum
      to include revenues from its off-system transactions, or its non-tariff
      services, in PGL’s PGA as opposed to its base rates.

    
      
         

        

        
        

      

      
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    VIII. Specific
      Off-System Transactions

     

    A. Transactions
      16/22

     

    1. Findings 

     

    During
      discovery, PGL advised Commission Staff that transactions 16/22 were as follows:
      Enron MW had the right to call on up to 20,000 Dths of gas per day, up to a
      total of 200,000 Dth of gas, during November and December of 2000. The price
      for
      the gas was set at the Natural Gas Intelligence Chicago citygate FOM. PGL
      characterized this transaction as a call option with a “demand credit” to PGL in
      the amount of $241,600.00.42
      However,
      PGL did not receive payment from Enron Midwest. Instead, it received payment
      for
      this transaction from enovate, three months after the gas was delivered. (Staff
      Ex. 1.00 at 28-30). 

    

    PGL
      needed to purchase gas in order to make up for the gas it sold to Enron Midwest
      pursuant to this transaction. The amount of money needed to make up this
      difference in gas was $535,554, which is Staff’s proposed disallowance. PGL does
      not contest this recommended disallowance. (PGL Initial Brief at 103-5).

    

    PGL
      personnel professed not to know the nature of this transaction until Staff
      served discovery on PGL asking for an explanation. PGL personnel then consulted
      with Enron Midwest to determine the nature of the transaction it entered into.
      (Staff Ex. 3.00 at 39-40). In Mr. Knepler’s opinion, the lack of documentation
      evincing the nature of this transaction establishes a breakdown in internal
      controls at PGL. Mr. Knepler recommended requiring PGL to conduct internal
      audits for five years.43
      (Staff
      Ex. 1.00 at 29).

    

    The
      Commission makes note of the agreed to disallowance and also notes that any
      disallowances are included in the Settlement Agreement and Addendeum as
      discusssed in Section I. The Commission further notes that the discussion of
      Staff’s recommendation to require PGL to conduct internal audits for five years
      will be discussed in another section of this order.

    

    

    _____________________

    42   A
      call option is a trading terms for the right to buy a contract at a specific
      price at a certain time. (NYMEX.com/Media/energyhedge).

    43   At
      the time this deal came into existence, enovate was called “Midwest Energy Hub.”
(Staff Ex. 9.00 at 18). 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

     

    B. The
      Trunkline Deal

     

    1. Findings
      of Fact

     

    The
      Trunkline Deal was a series of transactions between PGL, Enron Midwest and
      enovate. When it was effectuated, enovate already had leased Trunkline pipeline
      capacity from the South Texas field zone to the Chicago citygate. It obtained
      baseload gas supplies from PERC and Reliant to fill the leased pipeline
      capacity. (Staff Ex. 7.00 at 50; Staff Ex. 9.00 at 18). enovate then sold this
      gas to Enron Midwest with delivery at the Chicago citygate. (Staff Exs. 7.00
      at
      50, 68; Staff Ex. 9.00 at 18) enovate delivered the gas to Enron Midwest in
      the
      form of a call option. (See,
      Group.
      Ex. 1 at ST-PG-262-65). 

    

    Enron
      Midwest then sold this gas and pipeline service to PGL with delivery at the
      Chicago citygate at the same price at which Enron Midwest purchased from
      enovate. (Staff. Ex. 7.00 at 50, Staff Ex. 9.00 at 19). PGL then paid enovate,
      enovate, in turn, paid Trunkline. From these payments, PERC PGL’s affiliate,
      received 50% of the revenues enovate accrued. (Group Ex. 1 at ST-PG 76-77).
      This
      entire series of transactions was effectuated on the same day. (Id.
      at
      68-69). The total profit garnered by PERC/Enron Midwest for these transactions
      was $372,000. (Staff Ex. 5.00 at 6; Staff Ex. 9.00, Attachment F). 

    

    PGL’s
      accounting records regarding the “Trunkline Deal” show the following columns:
“PGL paying enovate” “enovate paying Trunkline” “net” and “PERC’s 50%.” No
      mention is made therein of Enron Midwest. (Staff Ex. 9.00, Attachment F). The
      “Trunkline Deal” was recorded in this manner because PGL and PERC were
      affiliates and PERC received one-half of enovate’s income. In such an instance,
      PGL would not recognize income coming from an affiliate in its accounting
      documents. (Group Ex. 1, ST-PG-75-76).

     

    Staff
      witnesses Dr. Rearden and Ms. Hathhorn opined that this series of transactions
      was not done at arms-length. (Staff Ex. 7.00 at 51; Staff Ex. 9.00 at 19; Staff
      Ex. 12.00 at 38). Enron Midwest provided no service. Enron Midwest did, however,
      serve as a “buffer” between PGL/PGL affiliates, which avoided Commission
      detection. (See,
      e.g., Staff
      Ex.
      9.00 at 19; Staff Ex. 12.00 at 38; Staff Ex. 13.00 at 19). 

    

     

    2. Conclusions
      of Law

     

    

    
      	 	
              a.

            	
              Staff’s
                Position

            

    

    

    Staff
      points out that PGL’s accounting treatment of the Trunkline Deal made no mention
      of Enron Midwest. According to Staff, this accounting treatment evinces that
      Enron Midwest performed no service. Staff maintains that Enron Midwest’s
      function in this transaction was to act as an intermediary in order to shield
      the Trunkline Deal from Commission scrutiny pursuant to Section 7-101 of the
      PUA. Staff recommends a disallowance in the amount of $372,000, which is the
      total profit garnered from this transaction by PEC and Enron Midwest. (Staff
      Init. Brief at 82-84; Staff Ex. 9.00, Attachment F).

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Dr.
      Rearden testified that, in his opinion, this was not an arm’s length
      transaction. Enron Midwest passed enovate’s costs through to PGL without any
      markup. PGL could have obtained gas at the same price at which enovate acquired
      it, but it chose to create a “daisy chain” to indirectly link itself to its
      affiliate enovate. (Staff Ex. 12.00 at 39). In his opinion, enovate earned
      profits due to its relationship with PGL, as all of enovate’s profits depended
      on PGL’s participation in this deal. (Staff Ex. 7.00 at 69-72). Without PGL to
      ensure the existence of a buyer, enovate may not have been able to assemble
      this
      transaction. (Id.).
      Staff
      points out that, because the Trunkline Deal was sponsored by enovate, the
      profits from this deal accrued to Enron Midwest and PEC. Because this was an
      affiliate transaction, the profits should have been flowed through the PGA.
      However, PGL’s consumers received no credit or other benefit from this
      transaction. (Id.
      at 70;
      Staff Ex. 12.00 at 39). 

    

    Staff
      contends that the $372,000 PGL paid to enovate should be disallowed. Staff
      maintains that the Trunkline deal was nothing but a ruse for PGL to transact
      business with enovate, using Enron Midwest as a “straw man” to escape the
      Commission’s scrutiny regarding affiliated interest transactions. It posits that
      finding this deal to be imprudent will discourage utilities from attempting
      to
“end-run the PUA.” (Staff Initial Brief at 84-85). 

    

    Staff
      maintains that by redirecting funds from PGL to enovate, PGL furthered the
      strategic partnership between PEC and Enron whose purpose was to use PGL assets
      and gas to increase PEC/Enron profits. Staff avers that its adjustment is not
      an
      attempt to undo the entire deal. Rather, Staff’s recommended disallowance
      recuperates the profits made at the expense of consumers. (Staff Reply Brief
      at
      84-86). 

    

    In
      its
      Brief on Exceptions, Staff argues there should be a finding that the Trunkline
      Deal was imprudent because there was no written contract between the parties.
      (Staff BOE at 18). 

    

    
      	 	
              b.

            	
              PGL’s
                Position

            

    

    

    PGL
      maintains that it acted prudently because it purchased, pursuant to this
      transaction, firm rights to purchase supplies year-round on a swing
      basis.44
      It avers
      that, pursuant to the Trunkline Deal, PGL customers received market-priced
      gas.
      PGL contends that the Trunkline Deal was just an ordinary gas purchase
      transaction, in that the pricing structure was not atypical. According to Mr.
      Wear, the reservation charge in that transaction was in consideration for the
      firm rights for swing delivery and for the implied cost of transportation from
      the field zone to the citygate. (PGL Init. Brief at 97-8). 

    

    

    _____________________

    44   Swing
      contracts permit a utility to take gas on any given day, subject only to timely
      notice to the seller and the pipeline.

    
      
         

        

        
        

      

      
        109

        
          

        

      

      
        
        

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    Mr.
      Wear
      testified that this contract provided the potential for PGL to alter its
      deliveries by 92,500 MMBtus from one day to the next in the winter, which
      provided PGL with supply flexibility and the ability to balance its load. The
      pricing formula in this transaction provided PGL with the opportunity to benefit
      from field prices, which at that point in time, lagged behind the citygate
      prices. PGL concludes that this transaction provided it with a significant
      amount of supply flexibility, as it allowed PGL to purchase up to 50,000 MMBtus
      of gas. PGL acknowledges that the Trunkline Deal was not part of its peak day
      supply portfolio, but maintains that nevertheless, swing gas pursuant to the
      Trunkline Deal could be used in the winter. (PGL Ex. L at 42-43; PGL Init.
      Brief
      at 96-98). 

    

    
      	 	
              c.

            	
              Commission
                Analysis and Conclusions 

            

    

    

    The
      Commission finds PGL acted imprudently by engaging in the Trunkline Deal. Any
      disallowance associated with the Commission’s finding of imprudence for this
      transaction is properly included in the Settlement Agreement and Addendum as
      discussed in Section I . The record indicates that PGL attempted to disguise
      an
      affiliate transaction by using Enron Midwest as a straw man. PGL directly paid
      enovate for the gas and pipeline capacity that Enron Midwest actually supplied
      to PGL. Thus, PGL did in fact, directly transact business with its affiliate,
      enovate. If this transaction were truly an arm’s length transaction, PGL would
      have paid the entity that was supposed to be its supplier, Enron Midwest, for
      gas and transportation. PGL did not. Further, the Commission notes that PEC
      gained 50% of the profits of this transaction by virtue of its relationship
      with
      enovate. Additionally, there is no evidence in this record establishing that
      Enron Midwest actually performed a service, other than acting as a conduit
      to
      remove the transaction from Commission detection. 

    

    PGL’s
      assertion that the value it received was really in the pipeline transportation
      (from the field to the citygate and the ability to divert gas away from the
      citygate) only demonstrates that this was really an affiliated interest
      transaction accomplished through Enron Midwest. enovate, the affiliated
      interest, held the Trunkline contract and enovate supplied pipeline
      transportation pursuant to this contract. As shall be discussed in the portion
      of this Order discussing enovate, since this was an affiliated interest contract
      that was not approved by this Commission, it is void, ab
      initio.
      (220
      ILCS 7-101(d)(3); 7-102(g)). Additionally, the Commission agrees with Staff
      that
      the profits from this transaction should have been flowed through the PGA.
      

    

    Staff
      also argues that the Trunkline Deal should be found to be imprudent because
      there was no written contract. We agree that the Trunkline Deal was imprudent,
      but it was imprudent because it passed on unnecessary costs to consumers. We
      agree with Staff that the Trunkline Deal should have been memorialized in some
      fashion. However, the Commission declines to require utilities to enter into
      written contracts for every purchase of gas. Rather, we stress that all
      transactions should be supported with adequate documentation, in whatever form,
      memorializing the terms of the transaction and otherwise complying with the
      USOA. PGL should be savvy enough to know that prudently incurred gas costs
      are
      easier to substantiate with written agreements than oral agreements. PGL alleges
      it memorialized the Trunkline Deal in writing. However, the contract which
      PGL
      claims memorialized the transaction here appears to concern Transaction 19
      or a
      similar type of arrangement. (Group Ex. 1 at ST-PG-254-57). 

    

     

     

    
      
         

        

        
        

      

      
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    C. Transaction
      103

     

    1. Findings
      of Fact

     

    On
      May 7,
      2000, PGL contracted with Enron Midwest to deliver gas to Enron Midwest in
      December of 2000 at the October FOM price. In exchange, Enron Midwest agreed
      to
      pay a pipeline penalty to Natural Gas Pipeline. The value of that pipeline
      penalty was $0.10 per MMBtu. (See,
      e.g.,
      Staff
      Ex. 7.00 at 41). 

     

    At
      the
      time this transaction was agreed upon, the NYMEX futures price for December
      2000
      delivery was $3.30 per MMBtu. The NYMEX futures price for October 2000 delivery
      was $3.094 per MMBTU. Enron Midwest gained a profit of $0.206 per MMBtu,
      resulting in a financial gain in the amount of $1,411,031. (Staff Ex. 7.00
      at
      42). 

     

    2. Conclusions
      of Law

     

    

    
      	 	
              a.

            	
              Staff’s
                Position

            

    

    

    Staff’s
      proposed disallowance for this transaction is $1,411,031. (Staff Ex. 7.00 at
      17,
      41). Staff states that Transaction 103 is imprudent because this transaction
      did
      not equal the projected difference in futures gas prices between October and
      December of 2000 at the time this transaction was consummated. The terms of
      this
      contract were “struck” in April of 2000 and it involved delivery of gas to Enron
      Midwest in December of 2000 at October, 2000 prices in exchange for Enron
      Midwest paying a pipeline penalty that PGL had incurred. (Staff Reply Brief
      at
      82-83). Staff avers that this transaction was imprudent because the dollar
      amount of the penalty Enron Midwest paid was less than the projected difference
      in the price of gas between October and December. PGL and Enron Midwest knew
      this since they had information about the October and December 2000 prices
      (i.e.,
      NYMEX
      futures) in April of 2000. Staff further contends that Transaction 103 was
      imprudent because basis usually increases in winter. Essentially, PGL
      decision-makers knew, when entering into this transaction, that payment of
      the
      penalty would not adequately compensate consumers. (Staff Init. Brief at 81).
      

    

    Staff
      points out that there is nothing uniquely beneficial about paying a penalty.
      To
      be prudent, the benefit conferred on Enron MW by this arrangement should equal
      what PGL gave up in exchange for the payment of this penalty. (Id.).
      Staff
      posits that here, the increased costs to consumers resulting from Transaction
      103 is the additional cost of gas that PGL purchased to replace the gas it
      sold
      to Enron Midwest pursuant to this transaction. (Id.).
      

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Staff
      opines that the spread between the October and December futures and forward
      gas
      markets provide a means by which one can determine whether Transaction 103
      is
      prudent. This is true because this contract was entered into in April or May
      of
      2000, when the actual contract price was not known. What was known at that
      time,
      were futures and forward prices. (Staff Ex. 7.00 at 41). Using NYMEX data,
      Dr.
      Rearden computed the value conferred on Enron at $0.206 per MMBtu. He then
      subtracted $0.10, which is the value of the pipeline penalty Enron Midwest
      paid.
      The results indicated that PGL received about half of what the gas was worth.
      Dr. Rearden opined that the value of obtaining gas in December 2000 at October
      2000 prices far exceed the value to PGL of Enron Midwest paying the penalty.
      He
      concluded that PGL imprudently gave up too much in Transaction 103. (Staff
      Ex.
      12.00 at 40). Dr. Rearden pointed out that his use of the NYMEX spread was
      to
      determine what was known to the parties when they entered into Transaction
      103,
      not to require PGL to perform hedges. (Id.).

    

    Staff
      posits that because this transaction was entered into in advance, the only
      valuation available to the decision-makers at the time the transaction was
      entered into was NYMEX futures prices. When determining the value of this
      transaction, to use any other type of information would entail using information
      that PGL personnel would not have known at the time the transaction was entered
      into. (Staff Reply Brief at 81-82). 

    

    
      	 	
              b.

            	
              PGL’s
                Position

            

    

    

    PGL
      contends that Transaction 103 was a reasonable business decision designed to
      avoid paying a pipeline penalty. Because of PGL’s Rate Schedule DSS (Delivered
      Storage Service) that PGL purchases from Natural, PGL was faced with either
      reduced injection rights in the upcoming injection season or pay a cycling
      charge t the pipeline. PGL could have paid the pipeline charge to preserve
      its
      injection rights. However, Enron MW offered an alternative—Enron MW would pay
      the entire charge in exchange for Transaction 103. PGL argues this arrangement
      allowed it balancing flexibility in the 2000 injection season and provided
      the
      opportunity to receive gas commodity charge credits through off-system
      transactions. PGL used these injection rights 69 times. (PGL Initial Brief
      at
      95-96). 

    

    PGL
      also
      argues that Dr. Rearden’s calculations are wrong because Dr. Rearden based his
      calculations on a theory that this transaction was purely a financial spread
      transaction that PGL could have undertaken. PGL avers that the injections to
      support the sale to Enron MW, which took place from May through October, were
      expected on a no-notice basis. Therefore, according to PGL, there could not
      be a
      baseload hedge on this gas. Also, the October, 2000 prices, which occurred
      at
      the time the transaction was entered into, were higher than NYMEX prices from
      May through October. Even with a hedge, PGL could not have achieved the economic
      result that Dr. Rearden asserted was possible. (PGL Initial Brief at 97).

    

    PGL
      characterizes Staff’s analysis of this transaction as a “purely theoretical
      economical analysis.” It argues that it could not have both paid the pipeline
      charge and also hedge the October/December spread because the benefit it
      received from payment of the pipeline penalty was a no-notice service that
      could
      not be hedged. (Id.).

    

    
      
         

        

        
        

      

      
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              c.

            	
              Commission
                Analysis and Conclusions

            

    

    

    PGL
      does
      not explain why it could not simply have paid this penalty. Also, Staff does
      not
      contend that that the penalty should not have been paid. While paying the
      penalty may have preserved PGL’s injection rights, there is no evidence here
      that who paid the penalty made a difference. Therefore, PGL could have paid
      the
      penalty. Nor does PGL explain why Enron Midwest could not have tendered fair
      market value (i.e.,
      the
      applicable futures price) in exchange for the payment of this penalty. What
      PGL
      should have considered before agreeing to this transaction was whether it would
      increase costs to PGA customers. PGL provided no evidence that it even
      considered the effects on PGA customers. 

    

    PGL’s
      averments regarding Dr. Rearden’s disallowance calculations overlook his actual
      testimony, which does not speak of NYMEX futures or options in terms of imposing
      a duty to purchase hedges through the use of futures. Rather, Dr. Rearden’s
      testimony speaks of the NYMEX futures in terms of what gas prices were known
      to
      the parties about the value of the gas conferred on Enron Midwest pursuant
      to
      Transaction 103 when they entered into it. (Staff Ex. 7.00 at 41). 

    

    PGL’s
      statement that the transaction was entered into in October is incorrect. The
      transaction was entered into in April or May of 2000. The events that took
      place
      pursuant to this agreement occurred in December of 2000. The only discernable
      connection in this record to the month of October, 2000 is that the gas price
      was the October price. (Staff Ex. 7.00 at 41). Therefore, the applicable NYMEX
      futures prices would be those that existed in April or May of 2000. PGL’s
      assertion that October futures prices were promising is based on prices that
      existed in October of 2000, not the October futures prices that existed when
      the
      transaction was entered into. Finally, Mr. Wear’s testimony that Dr. Rearden’s
      calculations as to NYMEX futures prices is incorrect is not credible. The
      Commission agrees with Staff that this transaction is imprudent. Any
      disallowance associated with the Commission’s finding of imprudence for this
      transaction is properly included in the Settlement Agreement and Addenduem
      as
      discussed in Section I.

     

    D. Transaction
      19

     

    1. Findings
      of Fact

     

    Transaction
      19 was an agreement where PGL resold baseload gas to Enron NA in the amount
      of
      50,000 Dths of gas per day, for each day in the month of December, 2000, at
      the
      Natural Gas Intelligence Chicago citygate FOM price. (Tr. 917). Enron Midwest
      sold this gas back to PGL at high winter daily spot prices. (See,
      e.g., Staff
      Ex.
      12.00 at 24). PGL executed this agreement in November 2000, around the time
      it
      decided to begin early withdrawals from Manlove. (PG Ex. F at 49-50). The
      replacement gas cost consumers $5,661,703. (AG Ex. 1.1 at 11-20). Dr. Rearden
      opined that the reason PGL personnel entered into this transaction was the
      desire for unregulated profits from this transaction. (Staff Ex. 7.00 at 28-29).
      

    

    The
      total
      value of this transaction was approximately $9.5 million. (Tr. 918). PGL entered
      into this contract based on one e-mail. (Tr. 1295). 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    According
      to Mr. Wear, the gas sold to Enron NA was just “excess gas.” Mr. Wear testified
      that PGL entered into this agreement based on several factors: The November
      2000
      gas prices were higher than the forward prices for December 2000 and January
      2001 and PGL believed the colder than normal weather that existed at the time
      would subside, leading to PGL’s early withdrawals from Manlove. (PGL Ex. F at
      35). Mr. Wear testified that this decision reduced the amount of purchased
      gas
      PGL needed to balance its system. At the time, the purchase price of gas was
      at
      unprecedented high levels. (PGL Ex. F at 35-36). 

    

    Also,
      PGL
      personnel were concerned with the possibility of having an oversupply of gas.
      At
      the same time, however, they were concerned with the possibility that PGL would
      have an undersupply of gas. (Id.).
      Transaction 19 and weather conditions in Chicago caused PGL to fall short in
      December of 2000, in terms of what gas it needed to serve its customers. Thus,
      PGL had to replace the 50,000 MMBtus of gas that it sold to Enron NA per day.
      It
      did so by buying an approximately equal amount of gas, at the higher daily
      price. (See,
      e.g.,
      AG Ex.
      1.1 at 11-12). 

     

    2. Conclusions
      of Law

     

    

    
      	 	
              a.

            	
              Staff’s
                Position

            

    

    

    Staff’s
      proposed disallowance for this transaction is $5,661,703, which represents
      the
      cost of replacement gas. (Staff Brief at 78). Dr. Rearden opined that this
      gas
      was sold before PGL personnel could determine what the weather in the beginning
      of winter would be like. (Tr. 1296). Staff points out that much of the gas
      withdrawn for third-parties in November was done to loan gas to Enron MW in
      the
      form of “Manlove Jumpstart.” Staff opines that PGL
      personnel needed to ensure that a sufficient amount of stored gas would be
      available, in case this gas was needed later on in the winter. Also, PGL’s
      explanation that it was planning for warmer than normal conditions in November
      was implausible. 

    

    Staff
      is
      of the opinion that Transaction 19 imprudently decreased PGL’s ability to
      respond to any weather other than a warmer than normal winter in Chicago. The
      risk PGL identified, facing oversupply due to warmer than normal winter, is
      a
      situation that PGL faces every year. Staff argues that PGL personnel traded
      the
      risk that it might suffer losses on the excess supply due to the winter weather
      for the risk of being short during an already cold winter. 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    
      	 	
              b.

            	
              PGL’s
                Position

            

    

    

    PGL
      argues that Transaction 19 was a reaction to an oversupply. PGL sold the gas
      involved because it had too much gas. PGL argues that if it had reduced its
      baseload purchases, it would still risk being exposed to daily price
      increases.45
      (PGL
      Init Brief at 93). Citing Mr. Wear’s testimony, PGL avers that at the time it
      entered into Transaction 19, it had purchased quantities of spot gas to fill
      Manlove Field and to meet a higher than normal demand. These gas purchases
      were
      at an unprecedented high level. Because gas prices were so high, an early onset
      of gas withdrawal would reduce gas purchases by nearly $3 million per day,
      but
      it would also mean that PGL would enter the heating season with less stored
      gas
      than what was planned, as well as the “increased likelihood of a weather-related
      oversupply.” (Id.
      at
      94).

    

    PGL
      disagrees with Mr. Effron’s assessment of Transaction 19. PGL argues that Mr.
      Effron purported to compare qualified “costs” with quantified “benefits” to
      produce a recommended disallowance of $8.1 million. (See,
      AG Ex.
      1.0 at 15, 18). This analysis was based on Mr. Effron surmising that Transaction
      19 was a surrogate for the BLPA clause in the GPAA. According to PGL, the only
      apparent purpose of Mr. Effron‘s statement was “to make his GPAA cost/benefit
      analysis produce a larger result than can be attributed to the GPAA.” PGL avers
      that both the GPAA and Transaction 19 are prudent. It contends that Mr. Effron
      presented no evidence of a tie between the BLPA, which Enron North America
      never
      exercised, and Transaction 19. In support, PGL cites PGL Ex. F at 53-54. (PGL
      Init. Brief at 63-64).

    

    Likewise,
      PGL argues that Staff’s proposed disallowance is too high. PGL seeks to reduce
      Staff’s disallowance to $5,057,982. PGL contends that Dr. Rearden should not
      have used PGL’s highest-priced purchases of replacement gas to determine what
      Transaction 19 cost consumers, as no particular gas purchase it made was
      allocated to any particular customer. PGL contends that the proper way to
      determine the value of the replacement gas necessitated by Transaction 19 is
      to
      use a weighted average of the pertinent gas purchases. (PGL Init. Brief at
      95-96). Also, Dr. Rearden used 50,000 Dth of gas, for every day Transaction
      19
      was replaced. However, there were days, in which, PGL did not buy 50,000 Dth
      of
      replacement gas. Correcting these errors, and allowing for a previous
      computational error made by Dr. Rearden, reduces Staff’s proposed disallowance
      by $1,299,706. (Id.
      at
      96).

    

    PGL
      asserts that Staff disregards the consequences of its decision to begin
      withdrawing gas two weeks early from Manlove Field. Because PGL had to withdraw
      350,000 MMBtus daily, PGL personnel were required to create a tendency at
      Manlove for gas and water to move toward the center of this reservoir. (PGL
      Reply Brief at 53-54). Also, by selling gas to Enron NA outside the GPAA resale
      provision, Transaction 19 preserved the three-cent per MMBtu credit. PGL
      concludes that therefore, this transaction was beneficial to consumers.
      (Id.
      at
      54-55). 

    

    

    

    _____________________

    45   In
      this
      context, it appears that PGL is referring to baseload purchases as DIQ gas,
      not
      baseload gas. Baseload gas was not sold at daily prices; instead, it was sold
      at
      FOM price, with a three-cent per MMBtu discount. (Staff Ex. 2.00, Attachments,
      GPAA). 

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    PGL
      further asserts that its decision to enter into Transaction 19 only can be
      criticized based upon an after the fact review. PGL personnel had to decide
      whether to engage in the transaction before it could know what the weather
      in
      December of 2000 would be. According to PGL, under different weather and price
      conditions, Transaction 19 would have been unfavorable to Enron NA. PGL does
      not
      state what those different weather and price conditions are. (PGL BOE at 26).
      

    

    
      	 	
              c.

            	
              GCI’s
                Position

            

    

    

    The
      GCI’s
      recommended disallowance for this transaction is $5,472,000. Mr. Effron opined
      that, while Enron NA never actually acted upon the BLPA, Transaction 19 was
      a
      substitute for increasing consumer gas costs pursuant to the BLPA. While PGL
      averred that Transaction 19 was meant to address an oversupply, Mr. Effron
      was
      of the opinion that PGL’s planning document regarding Transaction 19 showed the
      opposite, that PGL risked undersupply in December of 2000. (AG Ex. 1.1 at
      11-16). The GCI point out that the spot gas PGL bought to replace the 50,000
      MMBtus to Enron NA was higher than the average daily price in December of 2000.
      (GCI Init. Brief at 46). 

    

    The
      GCI
      posit that there was no clear oversupply situation in Chicago in November of
      2000 that merited this extraordinary situation. The planning documents that
      PGL
      offered to support this decision actually demonstrated the opposite. (AG Ex.
      1.0
      at 12; GCI Reply Brief at 33). This planning document established that there
      were as many days projected by PGL personnel that would be in excess of its
      available supply (short), as would be long. However, the largest daily short
      position would be greater than any long position projected. The GCI maintain
      the
      PGL disregarded the possible problems from being in a short position because
      PGL
      could have bought expensive spot gas to correct a short situation. (GCI Reply
      Brief at 33-34). 

    

    Also,
      the
      sellback provision had a maximum of 150,000 MMBtus, which was three times the
      amount of the transaction here. PGL could have exercised the sellback provision
      on individual days for a specific price, instead of doing what it did here,
      committing to a month-long obligation to sell gas. (Id.).
      

    

    
      	 	
              d.

            	
              Commission
                Analysis and Conclusions

            

    

    

    This
      is
      yet another in a long line of imprudent decisions PGL made during the
      reconciliation year in question. PGL bases its argument on the prudence of
      Transaction 19 on Mr. Wear’s testimony, which the Commission previously
      determined to be not credible. Mr. Wear testified, essentially, that PGL
      personnel made the decision to unload excess gas because they were concerned
      about both an undersupply and an oversupply, which makes no sense. (PGL ex.
      F at
      35-36). Mr. Wear offered no explanation as to why PGL personnel would be
      concerned with having too much gas in November, the beginning of the winter
      heating season. In fact, at that point in time, record cold conditions existed.
      (Staff Ex. 3.00 at 50). 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Even
      if
      the Commission were to accept Mr. Wear’s version of the events as true, it was
      imprudent for PGL to place itself in a position where its personnel feared
      having an oversupply of gas at the onset of winter. In fact, PGL’s subsequent
      purchases of gas to replace this gas is some evidence that a fear of having
      an
      oversupply was not the case. Moreover, PGL presented conflicting reasons for
      engaging in Transaction 19. To contend that early withdrawals from Manlove
      were
      necessary to protect PGA customers from high gas prices during the colder than
      expected November 2000 and to also contend PGL faced an oversupply simply
      flummoxes us. PGL’s imprudent behavior unnecessarily increased costs for PGA
      customers. The Commission finds Transaction 19 to be imprudent. Any disallowance
      associated with the Commission’s finding of imprudence for this transaction is
      properly included in the Settlement Agreement and Addendum as discussed in
      Section 1.

    

    PGL
      disagrees with Dr. Reardon’s assessment of the proposed disallowance. PGL did
      not establish that Dr. Rearden improperly used only high spot gas prices, as
      PGL
      did not present credible evidence establishing that these prices do not depict
      its actual purchases. If Dr. Rearden’s amounts were not correct, PGL could have,
      but did not, produce evidence documenting the correct gas prices.
      However,
      there
      is
      insufficient evidentiary support to conclude that Transaction 19 was a
      substitute for the BLPA. We cannot adopt this assumption without evidence that
      Transaction 19 was a substitute for the BLPA. We conclude, therefore, that
      Staff’s recommended disallowance better reflects the economic loss incurred by
      consumers as a result of this transaction. 

    

    Finally,
      the Commission notes that PGL transacted here with Enron MW, meaning one-half
      of
      the profits from any subsequent sales of gas garnered from this transaction
      were
      conferred upon PEC/PERC through enovate. The profits from this transaction
      flowed to enovate instead of through the PGA as required by Commission rules,
      lending further support to the Commission’s finding of imprudence on Transaction
      19. 

    

     

    E. The
      Storage Optimization Contract
      (“SOC”)

     

    1. Findings
      of Fact

     

    During
      the time period in question, PGL had contracts with six pipeline suppliers.
      (Tr.
      875). These contracts allowed PGL to purchase gas in the field and transport
      gas
      to the Chicago citygate at less than citygate prices, when the basis
      differentials for a given transportation contract was wider than the cost.
      (Tr.
      905). There were times, however, when PGL did not used these transportation
      rights. (See,
      e.g.,
      Tr.
      901). For a fee, PGL loaned its unused transportation rights to third-parties.
      (Id.).
      According to Mr. Wear, the purpose of making such loans is to generate income
      to
      be used as a credit that offset customer gas charges. (Tr. 901-02).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    PGL
      had
      two contracts, called the NSS Contracts, with Natural Gas Pipeline Company
      (“Natural”) for storage service. (Tr. 996-98). These contracts were for tariffed
      services that had rigid rules. (Tr. 997). Under Rate Schedule NSS (“NSS”),
      Natural provided PGL with 75-day storage service. PGL coupled the NSS with
      the
“no-notice balancing” under Natural’s Rate Schedule Firm Transportation Service
      (“FTS”). The NSS tariff required PGL to keep the gas stored at a certain level.
      (Tr. 999). PGL generally needed a 10 or 20 day of period of storage service
      which it used only on the coldest days in winter, both NSS contracts required
      PGL to purchase 75 days of capacity. (Tr. 997). The maximum storage volume
      for
      the two NSS Contracts, combined, was 19,218,750 MMBtus. (Tr. 1009).

    

    On
      January 21, 2000, PEC received an offer from the entity that had previously
      “optimized” the NSS contracts with Natural Gas Pipeline. This offer suggested
      three alternatives:

    

    
      	 	 	
              -the
                entity would market “seasonal gross margins” for 17% of the profits
                therefrom and market “unencumbered capacity” at 30% of the profits; and it
                would market “encumbered capacity for 10% of the profits. However, PEC
                would pay the carrying costs for “encumbered capacity.”
                

            

    

    

    
      	 	 	
              -a
                “Fixed Price Proposal,” in which the entity would pay PEC a fixed amount
                per month, in return for managing the NSS contract. PEC again would
                pay
                the carrying costs. 

            

    

    

    
      	 	 	
              -the
                entity proposed managing just one Bcf of the storage service in return
                for
                a fixed payment to PEC. 

            

    

    

    (Staff
      Ex. 7.00 at 63-64). PEC personnel chose not to explore any of these options
      with
      this company. Instead, they chose to execute the Storage Optimization
      Contract(“SOC”) with Enron MW. Under the SOC, Enron MW would “optimize” the
      excess leased storage capacity of PGL. PGL chose this because it wanted more
“no
      notice” rights in its portfolio, but did not need the 75 days of peaking
      capacity. PGL stated that by entering into the SOC, it was able to convert
      its
      two 75 day NSS contracts into a 10-day storage contract and a 20 day storage
      contract.46
      The
      costs and revenues associated with the SOC flowed through PGL’s gas charge and
      were paid by consumers. (Tr. 996). PGL received a total of $334,344 in credits
      from the SOC during the time period in question, which it flowed through the
      PGA. (Staff Ex. 9.02). 

    

    Article
      4, par. 2, of the SOC obliged Enron MW to purchase gas for injection into the
      Natural Gas Pipeline on behalf of PGL. (See,
      e.g.,
      Tr.
      1006). This was done so that PGL’s inventory never fell below the amount
      required by Natural Gas Pipeline in its tariffs. (Tr. 1007). When Enron MW
      caused gas to be injected into PGL’s NSS storage, PGL was obligated to
      compensate Enron MW for that gas. (Tr. 1007). PGL did so by transferring title
      to Enron MW of a quantity of gas equal to that which Enron Midwest injected
      into
      PGL’s NSS storage. (Tr. 1008). When Enron MW withdrew gas from the unrestricted
      NSS capacity, Enron MW would return title of the equivalent value of gas to
      Manlove. (Tr. 1008). 

    

    

    _____________________

    46   The
      10-day storage contract was for 90,000 MMBtus. The 20-day storage contract
      was
      for 85,000 MMBtus for a total of 1,700,000 MMBtus.

    
      
         

        

        
        

      

      
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        01-0707

      

    

    PGL
      paid
      Enron Midwest $20,000 per month as a management fee. (See,
      e.g.,
      Staff
      Ex. 7.00 at 64). This contract also provided that Enron MW took a percentage
      of
      the profits for providing optimization services. This percentage increased
      as
      the gross margin increased. (Staff Ex. 2.00, Attachments, SOC Contract). Not
      only did Enron MW profit from this arrangement, but so did PEC/PERC per the
      profit sharing arrangement with Enron NA. PEC/PERC received half of these fees
      paid for the year in question, or $120,000. ($20,000 x 12 divided by 2). (Staff
      Ex. 9.00 at 15, Sched. 9.02). 

    

    PGL
      paid
      other fees to Enron MW pursuant to the SOC as well. The total fees PGL paid
      to
      Enron Midwest pursuant to the SOC were $503,000. (Staff Ex. 15-16; Schedule
      9.02). Pursuant to the profit-sharing arrangement between Enron Midwest and
      PEC,
      PEC was entitled to 50% of the profits gained by EMW from the SOC. After
      PERC’s/PEC’s share was apportioned, Enron Midwest gleaned $717,455 from the SOC.
      (Staff Ex. 7.00 at 49). 

     

    The
      SOC
      required Enron MW to file reports with PGL setting forth what Enron MW was
      doing
      in the field. (Tr. 1324). Those reports would show what Enron MW did to earn
      the
      revenues it took. (Staff Ex. 3.00 at 64). Enron Midwest, however, did not file
      these reports with PGL. (Tr. 1324). There is no evidence to indicate that Enron
      Midwest actually earned any of the revenues it took pursuant to the SOC.

    

    The
      GCI
      contend that because the NSS contracts were used only during peak times, PGL
      only needed 15 days of capacity. However, the two NSS contracts each provided
      75
      days of capacity. (City-CUB Ex. 1.0 at 53). The cost in procuring this extra
      capacity and other related costs were borne by consumers. Ms. Decker opined
      that
      the SOC allowed Enron Midwest to gain control over Manlove Field because it
      required PGL to inject a substantial amount of gas into its NSS accounts.
      (City-CUB Ex. 1.0 at 53). 

     

    2. Conclusions
      of Law

     

    a. Staff’s
      Position

    

    Staff
      recommends a total disallowance for the SOC in the amount of $1,340,455, which
      Staff breaks down into two parts. Staff recommends a $717,455 disallowance
      for
      PGL’s failure to establish that the SOC was a prudent choice and which
      represents the amount Enron MW received from for “optimizing” the NSS contracts.
      Staff also recommends a disallowance of $623,000, which is PERC’s share of Enron
      MW’s management fees that were funneled through enovate, and its share of the
      revenues that Enron Midwest generated by “optimizing” the NSS capacity, but were
      also funneled to PEC/PERC through enovate. (Staff Init. Brief at 88-89; Staff
      Ex. 5.00 at 6). 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Staff
      articulated several other reasons PGL’s participation in the SOC was imprudent.
      Staff maintains that PGL’s failure to document what Enron MW was doing to earn
      the revenues it took pursuant to the SOC was imprudent. Staff posits that PGL
      never explained why it needed Enron Midwest to optimize its leased storage.
      And,
      PGL had an alternative to Enron Midwest, another company that was interested
      in
      optimizing this storage, at more favorable terms to consumers. Staff contends
      that PGL chose EMW over this other vendor due to the profit-sharing arrangement
      Enron Midwest had with PEC. Staff argues that therefore, PGL’s choice of Enron
      Midwest as its storage optimizer was imprudent. (Staff Init. Brief at 87-88,
      Staff Ex. 7.00 at 49). 

    

    Staff
      also argues that PEC gleaned profits pursuant to SOC from PGL. Enron MW paid
      PERC/PEC one-half of the management fees it collected which amounted to
      $240,000. Staff argues that this arrangement is blatant cross-subsidization,
      as
      it served no purpose other than to move money from PGL to its parent, just
      to
      increase PEC/PERC’s revenues. According to Staff, PGL has proffered no
      explanation for entering into a contract that conferred benefits on its
      corporate parent, which also denied consumers the full benefits of storage
      optimization. (Id.
      at
      88-89). 

    

    Staff
      takes issue with PGL’s statement that the SOC did not increase gas costs. The
      SOC caused PGL to spend more money for this service than it otherwise would
      have
      paid. The previous offer for “optimization services” would have resulted in PGL
      sharing approximately 19% of the profits with the offering company. The SOC,
      however, required PGL to pay Enron Midwest an amount between 20% to 40% of
      the
      profits from the optimized storage. (Staff Reply Brief at 71-74). 

    

    Staff
      points out that PEC received 50% of Enron MW’s profits from the SOC through
      enovate. The fact that PEC, PGL’s parent company, received a percentage of
      profits gleaned from PGL calls into question whether the SOC was an arm’s length
      transaction. Also, the fact that Section 525.40(a)(4) of the Commission’s Rules
      allows for recovery of supply management contracts does not, by itself, make
      such a contract prudent. (Id.).
      

    

    On
      Exceptions, Staff seeks a finding that the other optimization contract offer
      was
      a better choice for PGL. In effect, Staff seeks a finding that PGL was imprudent
      for failing to enter into the alternative optimization arrangement. (Staff
      Reply
      Brief on Exceptions at 12-14). 

    

    b. GCI’s
      Position

    

    The
      GCI
      point out that both of the NSS contracts underlying the SOC provided 75 days
      of
      (no-notice) service. In fact, PGL only needed one of the NSS contracts to get
      the 15 days or so of the no-notice service PGL needed. (City-CUB Ex. 1.0 at
      52;
      City-CUB Ex. 1.25). Also, Article IV(2) of the SOC obliged Enron MW to inject
      gas into PGL’s NSS storage. Article V(1) of the SOC provided that, when Enron MW
      caused gas to be injected into PGL’s NSS storage inventory, title to the same
      amount of PGL gas in Manlove Field was transferred to Enron MW pursuant to
      Article XI(1) of the SOC. (Staff Ex. 2.00, Attachments, SOC Contract, Tr.
      1007-8; City-CUB Ex. 1.0 at 51).

    

    
      
         

        

        
        

      

      
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    Thus,
      by
      having a second (and unnecessary) NSS contract, a much greater volume of gas
      in
      Manlove Field could be transferred to Enron MW. The amount of gas in Manlove
      that was made available was substantial. The GCI contend that through the SOC,
      PGL gave Enron MW more than 65% of the volume of gas in Manlove Field that
      was
      reserved for its customers, free of the restrictions attached to the NSS
      contracts. The GCI recommend no disallowance, however, as the harm to ratepaying
      consumers was not quantifiable. The GCI aver that PGL never produced information
      that would have allowed them to determine that harm. (GCI Initial Brief at
      66-69). 

    

    c. PGL’s
      Position

    

    According
      to PGL, the SOC did not increase gas costs. PGL points out that the NSS
      contracts in question provide no-notice, 75-day storage. For each MMBtu of
      peak
      withdrawal capability that a shipper wants, that shipper must also acquire
      75
      times that amount in capacity. PGL desired to acquire no-notice capacity rights,
      but it did not need 75 days of peaking capability. PGL entered into these two
      NSS contracts, and what was not needed was “optimized,” or used to support
      revenue-generating transactions pursuant to the SOC. Under the SOC, Enron
      Midwest was responsible for acquiring the supplies and coordinating with PGL
      to
      dispatch those supplies in order to optimize the storage PGL did not need.
      (PGL
      Init. Brief at 26-27, 81). 

    

    PGL
      contends that Section 525.40(a)(4) was promulgated so that third-parties could
      be paid through the PGA to manage excess capacity. According to PGL, it did
      not
      relinquish control over the gas it transferred to Enron Midwest. PGL
      acknowledges that it transferred title to this gas, but it claims that it only
      did so because federal policy necessitated the transfer in title. (PGL Init.
      Brief at 83; PGL Reply Brief at 83). 

    

    PGL
      states that it did not accept the other offer made for storage optimization
      services because, at that time, the offering company had just been acquired
      by
      another company. PGL personnel were concerned about entrusting the NSS contracts
      to a company with an uncertain future. Also, PGL had two NSS contracts because
      one contract was an extension of an existing arrangement; the other contract
      replaced a 30-day storage service that was not renewed. (PGL Reply Brief at
      66-67). 

    

    d. Commission
      Analysis and Conclusions

    

    The
      Commission finds PGL acted imprudently by entering into the SOC. Prior to
      executing the SOC, PGL received an offer from another company that presented
      terms more favorable to consumers than the SOC, yet PGL chose Enron Midwest
      to
      optimize storage. On its face, this might not look like a bad choice. But,
      when
      we consider the arrangement between PEC and Enron NA to funnel profits from
      their dealings from PGL up to the corporate parents, this smacks of imprudence.
      PEC gleaned not only 50% of the SOC profits, but PEC gleaned 50% of Enron MW’s
      management fees pursuant to this contract through enovate. 

    

    
      
         

        

        
        

      

      
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    PGL
      proffers no evidence establishing that Enron MW in fact, performed a legitimate
      service. Also, while Enron Midwest collected its profit, above and beyond its
      monthly charges, PGL has not proffered evidence, such as what space it
“optimized,” to whom, or when, establishing what Enron Midwest did to earn those
      profits. PGL cites no law that requires this Commission to deem a contract
      to be
      prudent when a utility is unable to explain what the provider did to earn
      monthly fees and contractually-established profits from that contract. Indeed,
      there is none. 

    

    While
      Commission regulations permit recovery of supply management costs, PGL is still
      subject to the statutory requirement that all costs must be prudently incurred.
      (220 ILCS 5/9-220). Therefore, PGL was required to account to the Commission
      for
      what Enron MW did to earn its monthly fees and commissions. Additionally, the
      record here is devoid of any evidence that PEC/PERC performed any service.
      Yet,
      it garnered $623,000 in fees collected from consumers. The fact that PEC
      garnered profits from this transaction casts doubt on any claim that it was
      an
      arm’s length transaction. 

    

    Citing
      no
      law or fact, PGL argues that the conclusions above are mere conjecture and
      speculation. PGL has waived its right to assert this argument. (Fraley,
      251 Ill.
      App. 3d at 77). PGL had the burden to prove the prudence of this contract.
      PGL
      cites no law or fact indicating that these conclusions were anything more than
      reasonable inferences drawn from the evidence by the trier of fact.

    

    The
      other
      optimization offer is evidence that PGL could have optimized the NSS contracts
      without Enron. This other offer is also some indicia that PGL personnel, when
      entering into the SOC contract, were motivated by a desire to confer profit
      on
      PEC, irrespective of whether the SOC was in the best interests of PGL. However,
      we decline to find, as Staff suggests, that PGL was imprudent for failing to
      enter into the other contract. To do so would be managing PGL’s day-to-day
      affairs. 

    The
      Commission finds the SOC to be imprudent. Any disallowance associated with
      the
      Commission’s finding of imprudence for this provision is properly included in
      the Settlement Agreement and Addendum as discussed in Section I.

    

     

    F. The
      Citgo Contract

     

    1. Findings
      of Fact

     

    Before
      the reconciliation period, PGL had a gas purchase agreement to buy refinery
      fuel
      gas from a Citgo subsidiary, also known as Uno-Ven, or PDVMR, at 75% of the
      Chicago citygate price. This gas was in the form of a peaking
      service.47
      (Group
      Ex. 1 at ST-PG-184). The Citgo contract was in effect from October 1, 1995
      through September 30, 1999. However, PGL continued purchasing pursuant to this
      contract after it expired, until October 1, 2000. William Morrow, Vice-President
      of PGL, executed this contract on behalf of PGL. After October 1, 2000, PERC
      assumed this contract. By way of a letter dated March 13, 2002, William Morrow
      terminated this contract on behalf of PERC, effective April 30, 2002. (Group
      Ex.
      1 at ST-PG-188). 

    

    _____________________

    47   The
      peak winter period is December through February. (Tr. 872). 

    
      
        

        
        

      

      
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    After
      PERC assumed PGL’s contract with Citgo, PERC purchased gas at 75% of the
      citygate price with the same terms and conditions as PGL had done before. PERC
      then sold gas to Enron MW for 92.5% of the citygate price. Enron MW then sold
      gas to PGL for 95% of the citygate price. Enron Midwest was the intermediary
      between PERC and PGL. (Staff Ex. 9.00 at 12; Attachment B; Staff Ex. 13.00
      at
      1-2). Enron Midwest’s 2.5% profit was transferred to enovate to be split between
      PEC and Enron North America. (Staff Ex. 9.00 at 9, 14). Also, PERC enjoyed
      a
      17.5% profit from selling this gas to Enron Midwest. (Staff Ex. 9.00, Attachment
      B). The amount of profit gleaned from this arrangement by PERC and Enron Midwest
      $2,232,490. (Staff Ex. 9.00, Sched. 9.01). 

    

    According
      to Mr. Wear, the refinery gas PGL previously received pursuant to its contract
      with Citgo was not of good quality. (Tr. 1072). However, Citgo sold gas to
      PERC.
      PERC sold gas to Enron Midwest, who sold gas to PGL. (Tr. 1072-73). Mr. Wear
      admitted that there was no way of knowing whether PGL was, in fact, receiving
      the same “inferior” gas from Citgo though PERC/Enron Midwest. (Tr. 1072). Mr.
      Wear stated that in his opinion, “[a]ny disallowance (regarding the Citgo
      contract) whatsoever is penalizing (PGL) for buying discounted gas for its
      customers.” (PGL Ex. L at 47). 

     

    2. Conclusions
      of Law

     

    a. Staff’s
      Position

    

    Staff
      proposes a cost disallowance for the Citgo Contract of approximately $2.2
      million. Staff maintains that this transaction added unnecessary costs to
      consumer gas costs. After PERC assumed PGL’s Citgo contract, the price of gas
      PERC paid did not increase, but, the price paid by consumers increased, from
      receiving a 25% discount to a 5% discount on the citygate price. Of the 20%
      difference in discounts, PERC received 17.5%, and Enron MW received 2.5%. Staff
      argues that Enron MW’s role in this transaction was to aid in the avoidance of
      Commission scrutiny. (Staff Init. Brief at 85-87). 

    

    According
      to Staff, PGL has never offered evidence indicating that Enron MW performed
      a
      service in consideration for the markup it received on this gas. Staff’s
      recommended disallowance of approximately $2.2 million does not include any
      profit PERC/PEC earned through its profit-sharing arrangement with Enron North
      America/Enron Midwest, enovate. Staff never received the documentation that
      would enable it to determine whether PEC received half of Enron Midwest’s
      markup. (Id.,
      Staff
      Ex. 13.00 at 14). 

    

    b. PGL’s
      Position

    

    PGL
      acknowledges that it purchased refinery gas from Enron MW, instead of Citgo,
      at
      95% pf the index price, instead of at 75%, which is what it previously had
      with
      Citgo. PGL avers that the Citgo contract terminated in 2001 and the arrangement
      through PERC/Enron Midwest actually saved consumers money because consumers
      paid
      5% less than the full price. (PGL Init. brief at 99-100). 

    

    On
      Exceptions, PGL explicitly waived its right to contest this disallowance. (PGL
      BOE at 37). 

    
      
         

        

        
        

      

      
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    c. GCI’s
      Position

    

    Pursuant
      to an unwritten agreement, PERC assumed PGL’s contract with Citgo. By inserting
      PERC in PGL’s position, according to the GCI, PGL paid 20% more for gas. Also,
      this arrangement was designed to avoid Section 7-101 of the PUA. Further,
      according to the GCI, this deal was imprudent because PGL personnel did not
      keep
      the contract with Citgo and they accepted the unnecessary mark-ups on the gas.
      The GCI posit that because PERC/PEC enjoyed 50% of Enron MW’s profits, it is
      likely that PEC/PERC received an amount of money in additional to its mark-up
      on
      the Citgo gas. (GCI Init. Brief at 69-71). According to the GCI, this
      transaction was imprudent because PGL accepted Enron MW’s markup. (Id.
      at
      69-71). 

    

    d. Commission
      Analysis and Conclusions

    

    The
      Citgo
      contract was in effect from October 1, 1995 through September 30, 1999. PGL
      continued purchasing pursuant to this contract after it expired, until October
      1, 2000. After that, PERC assumed this contract. PERC purchased refinery gas
      under the same terms, including paying 75% of the citygate price, then sold
      this
      to Enron MW at a markup. Coming full circle, Enron MW then sold this gas to
      PGL
      at an additional markup. The record is empty of evidence that the “middlemen,”
PERC and Enron MW, served any legitimate purpose. There is no evidence that
      this
      arrangement, through PERC/Enron Midwest was anything but imprudent.

    

    PGL’s
      contention that the Citgo contract “saved” consumers money after PGL transferred
      it to PERC is ridiculous . Consumers received the same gas through the
      PERC/Enron Midwest arrangement as they did from Citgo, but at a 5% discount
      instead of a 25% discount. By the Commission’s math, this was actually a 20%
increase
      in
      costs
      to consumers. PGL provided no evidence that any benefit was conferred on
      consumers as a result of the 20% increase in gas costs.

    

    PGL’s
      argument that consumers benefited from this arrangement is just wrong. In fact,
      the arrangement here was nothing more than an affiliated interest contract
      whereby PERC garnered profits from consumers through via another scheme with
      Enron MW. The contract is therefore, void ab
      initio.
      For all
      of these reasons, the Commission finds PGL’s behavior under the Citgo contract
      to be imprudent. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as discussed in Section I. 

    

     

     

    
      
         

        

        
        

      

      
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    G. Hedging 

     

    1. Findings
      of Fact

     

    a. Background

    

    Hedging
      is a way to reduce price volatility. Hedging instruments include futures
      contracts, option contracts, swap contracts, which are also called
“derivatives,” and are securities or contracts whose value depends on the value
      of the underlying asset. (PGL Ex. H at 9). 

    

    Mr.
      Wear
      testified that PGL took “several steps” to address price volatility during the
      reconciliation year. It used seasonal storage, and “followed” two separate price
      protection programs. During the reconciliation period, PGL had two different
      price protection programs that were in effect. PGL did not use one of its price
      protection programs at all during the time period in question. (Tr. 969-70).
      

    

    PGL
      provided descriptions of both of its price protection programs. Gas prices
      would
      have to drop below $2.30 per MMBtu before PGL personnel could purchase gas
      pursuant to the “Gas Supply Price Protection Financial Trading Strategy.” (Tr.
      968). PGL personnel could not lock in any price above $2.30 per MMBtu without
      the prior approval of its Gas Supply Administration Department. (Tr. 968).
      In
      the period up to and including the year in question, gas prices were, on
      occasion, below $2.30 per MMBtu. (Tr. 968, 969). However, PGL personnel did
      not
      purchase any hedges pursuant to this plan. (Tr. 969-70). 

    

    PGL’s
      second hedging program, the “Gas Supply Price Protection Strategy,” became
      effective in April of 2001. (Tr. 974). The second strategy allowed PGL personnel
      to lock into prices based on the forward market. (Tr. 975). Pursuant to the
      second hedging program, the recommended hedging amount was 44%, approximately
      53,120,000 MMBtus of gas, of its total purchase volumes from April through
      October of 2001. (Tr. 976). In November of 2001 through March of 2002, PGL
      hedged as much as 60% of its purchase volumes. (Tr. 977). PGL personnel used
      financial hedging instruments during its fiscal year 1999. PGL personnel did
      not
      use financial instruments during the instant reconciliation year. (Tr. 972-73).
      

    

    Mr.
      Wear
      testified that PGL’s price protection programs insulated consumers from price
      volatility. Making physical purchases at forward prices produced a ”dampening
      effect” on gas price movement. Mr. Wear further testified that the purchases PGL
      made mitigated price volatility for its customers, “not only for gas consumed
      during (the) May through September period, in which the deliveries were made,
      but also for the re-injection of gas withdrawn to satisfy customer requirements
      during the preceding winter months.” (PGL Ex. B. at 8). 

    

    
      
         

        

        
        

      

      
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    b. PGL
      Expert Witness Mr. Graves’ Testimony

    

    All
      opinions contained in this section of the order are those of Mr. Graves unless
      otherwise noted. Frank Graves, Audit Manager with Grant Thorton LLP, testified
      that exposure to price risk is the uncertain realization of what a cost of
      revenue is as the result of a purchase or sale. (Tr. 1160). That exposure is
      affected by the quantity involved in the purchase. (Id.).
      He
      opined that utilities should have some coherent plan to lessen the effect of
      price risk. (Tr. 1163). Mr. Graves also acknowledged that hedging by utilities
      can be very useful, when it achieves specific risk reduction goals that benefit
      consumers, as well as benefiting the financial health of a utility. (PGL Ex.
      H
      at 8). 

    

    PGL’s
      decision not to use financial hedging instruments “in light of the Commission’s
      lack of guidance” regarding financial hedging instruments was prudent. The
      Commission has clearly stated that hedging is not required. Regulated utilities
      cannot, without clear direction from regulators, internalize their own successes
      and failures. (PGL Ex. H at 6). The Commission has never required, or even
      encouraged, utilities to use financial hedging instruments. This is in contrast
      to other state commissions, like the New York Public Service Commission, cited
      by Mr. Ross, which requires the use of financial hedging instruments. Without
      a
      clear statement from the Commission supporting the use of financial hedging
      instruments, a utility could easily be found to be imprudent if it chose to
      embark on a financial hedging program. (Id.
      at
      16-17, 21). 

    

    It
      is
      only feasible to have such a program when there are specific hedging guidelines
      enunciated by regulators, determining when and why mitigating price volatility
      is worthwhile. It is “inappropriate” to impose disallowances, after market price
      spikes have occurred, when a utility did not have a “clear signal” from a
      regulatory commission as to how it should hedge. (Id.
      at
      8-9).

    

    Comparing
      PGL to unregulated companies, like its parent, PEC, is not “useful” because such
      companies hedge only to reduce their financial risk, not to manage consumer
      prices. These companies do not have to worry about what a regulatory body will
      determine with regard to their hedging purchases. PGL’s shareholders do not
      benefit from gains produced by hedging, as, pursuant to the PGA, all of the
      costs and benefits are passed on to consumers, not the shareholders.
      (Id.
      at
      23-24). In The appropriate level of hedging is not obvious, it is best
      determined by a Commission-generated inquiry and the gradual process of
      controlled customer exposure, as, the appropriate level of hedging depends
      on a
      consumer comfort with the idea. Some consumers may prefer to be at fixed prices,
      which provides stability, but may foreclose the opportunity of lower prices.
      Others may be averse to fixed prices. Still other, larger consumers, such as
      the
      City of Chicago, may be able to obtain their own hedges. (Id.
      at 29).
      Exposure to volatility is controllable, to a large degree, when there is an
      understanding of the costs and benefits of so doing. (Id.
      at
      16-17). 

    

    
      
         

        

        
        

      

      
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    Financial
      hedging instruments do not necessarily lower gas costs. A hedging program should
      only be expected to reduce volatility. A hedging program also increases gas
      costs and there is no way of knowing beforehand whether a hedging program will
      increase or decrease gas costs. Spot gas prices are always different than past
      forward (financial hedging instrument) prices, because unexpected market
      conditions often arise after a hedging instrument is bought or sold. (PGL Ex.
      H
      at 9). Additionally, financial hedging instruments have no effect on average
      prices paid in the primary gas supply market. Financial hedging instruments
      only
      reflect the risk tradeoffs between purchases at different times or at different
      places. Mr. Graves reasoned that therefore, financial hedging instruments do
      not
      gain control over average wholesale prices and there can be no expected savings
      when expected cost savings are fairly priced. (Id.).
      

    

    Volatility
      exposure, on the other hand, can be transferred from one party to another.
      Financial hedging instruments are traded on markets, with “sophisticated
      parties” on either side of a transaction. Thus, the prices at which hedges are
      available reflect a consensus view of the most likely outcome. Hedging is a
      risk
      management function; it is not a least-cost function. (Id.
      at 10,
      12). Price spikes in previous years (the winters of 1995 and 1996 through 1997)
      were indicia that the Commission chose not to implement price hedging programs
      after those two price spikes occurred. (Id.
      at 25).

    

    Mr.
      Graves noted that gas price volatility started in May of 2000. It approached
      65-70% in June and July of 2000. However, that level of volatility was not
      unusual, given the volatility that existed in the fall and winter of 1999-2000.
      The volatility increase in the summer of 2000 did not provide a strong signal
      that a hedging program should be initiated. Volatility in the winter of 2000
      through 2001 was much higher than the volatility in the summer of 2000, but
      this
      was only known “after the fact.” The extreme run-up in gas prices during the
      winter of 2000-2001 was unprecedented and unpredictable, and so was the rapid
      decline in gas prices shortly thereafter. In Mr. Graves’ view, both Mr. Herbert
      and Mr. Ross use “hindsight information” when advancing their proposed
      disallowances. (Id.
      at
      16-17). 

    

    The
      increase in gas costs PGL passed on to consumers in the winter of 2000-2001
      was
      unprecedented and unexpected. The peak daily price was more than six standard
      deviations over the average price.48
      This was
      an incredibly rare event, which occurred due a variety of facts, such as the
      surge in wholesale gas prices due to a decline in well production of gas, OPEC
      price-tightening, and the fact that gas prices remained high over the preceding
      summer, which resulted in many buyers filling their seasonal storage late,
      hoping for a price decline that never occurred. Also, in California, power
      markets experienced shortages in hydro-electric power, and at the same time,
      experienced an unusually hot summer. In Mr. Graves’ opinion, the “California
      crisis” may have contributed to a general anxiety about future energy prices,
      which increased a willingness in the marketplace to pay high gas prices.
      Further, futures prices for gas were at very high levels for two to three years
      forward. Finally, at that time, electric companies began to use gas to generate
      electricity. (Id.
      at
      27-29).

    

    _____________________

    48   The
      standard deviation Mr. Graves used is $1.26 per MMBtu and it is for a 10year
      period. It is based on data that includes a high-price period. (PGL Ex. H at
      26). 

    
      
         

        

        
        

      

      
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    PGL
      has
“significant storage resources,” which provided a hedge-like benefit to
      consumers. Any exposure consumers faced was not due to negligence on the part
      of
      PGL. Rather, it was due to the Commission’s decision not to require financial
      hedging and the lack of any process identifying when hedging might be desired.
      (Id.
      at
      22-23).

    

    Mr.
      Graves critiqued City and CUB witnesses Mssrs. Herbert and Ross’ proposed
      disallowance for PGL’s hedging practices during the reconciliation year. Hedging
      gas purchases made in the summer months would reduce summer volatility. There
      was good reason to believe that summer prices in 2001 would be high and
      volatile, due to the “California crisis.” Thus, Mr. Graves reasoned that, by
      excluding summer hedging, both Mr. Herbert and Mr. Ross created after-the-fact
      programs tailored to construct their disallowances. (PGL Ex. L at 30). If Mr.
      Herbert and Mr. Ross had included summer hedges in their recommended
      disallowances, their proposals would have been dramatically lower. (Id.).
      

    

    c. CUB
      Expert Witness Mr. Ross’ Testimony

    

    The
      opinions contained in this section of the order reflect those of Mr. Ross unless
      otherwise noted. CUB witness Mr. Ross, Principal with CRP Planning Inc.,
      considered PGL’s management decisions regarding price volatility and he
      evaluated whether PGL personnel took reasonable steps in the face of known
      risks
      and market conditions. He noted that PGL has faced price volatility in the
      past.
      Previously, during the winter of 1996-97, PGL faced extreme price volatility
      in
      the gas markets. That winter revealed both the magnitude of the price risk
      from
      volatility that PGL could face, and the extent to which PGL’s PGA customers are
      exposed to the volatility and price risk on the wholesale market. (CUB Ex 1.00
      at 1- 3). 

    

    Hedging
      is commonly used to mitigate price risk. Large gas consumers who procure their
      own gas supply frequently hedge some portion of their gas supply to limit price
      risk, either through participation in the futures market, or through the use
      of
      fixed price contracts and ceiling prices. PGL considered managing price risk
      in
      a study conducted in 1998, but ultimately declined to adopt that hedging
      strategy. (CUB Ex 1.00 at 6, 7). 

    

    PGL
      routinely manages weather risk in its annual, monthly, and daily supply
      planning. It can also limit customers’ exposure to volatility by using risk
      management tools, or, by “hedging.” Hedging, for gas buyers, is akin to
      insurance against unexpected price increases. Hedging techniques can include
      financial hedging instruments and the use of fixed-prices. Other forms of
      hedging include storing gas. (Id.
      at
      4-5,10-11). In the past, PGL affiliates have hedged against price risk. PGL’s
      parent company, PEC, invested in gas and oil fields by using swaps and options.
      (Id.
      at
      4-5,10-11). 

    

    PGL’s
      customers bore a substantial price increase during the reconciliation year
      because PGL personnel chose to link nearly all of its gas supply contracts
      to
      market indices, which followed the rapidly escalating market clearing price.
      These market price escalations created substantial hardship for PGL’s PGA
      customers. (CUB Ex. 1.00 at 12, 13). Because PGL faced little price risk when
      acquiring its gas supply, PGL does not have a strong incentive to mitigate
      this
      risk. Consumers, however, face a considerable price risk because this cost
      is
      passed on to them. 

    

    
      
         

        

        
        

      

      
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    Also,
      PGL
      personnel did not care to protect consumers from price risk, as PGL personnel
      were not required to adhere to any explicit hedging standards enunciated by
      the
      Commission. The Commission has not required companies to engage in any
      mitigation strategy, nor has it restricted utilities from using hedging
      strategies. Rather, the Commission has left whether a prudent strategy would
      include financial hedges up to utilities to decide. (CUB Ex. 1.00 at 9-10,
      12,
      13). He concluded that PGL failed to exercise a standard of care that a
      reasonable person would have used in light of known conditions and risks before
      and during the reconciliation period. (Id.
      at 1-2,
      9,14)

    

    PGL
      could
      have managed its price risk by making greater use of stored gas when spot market
      prices were high using financial hedging mechanisms, including fixed-price
      forward and ceiling prices, in its supply contracts. PGL made no attempt to
      use
      fixed price contracts or to hedge against the risk of price volatility. PGL
      also
      chose not to use hedging tools to mitigate the price risk of its contracted
      gas
      supply and it did not engage any of its suppliers to hedge as part of providing
      supply. For the 2000-2001 heating season, PGL’s gas purchasing strategy was
      dependent on contracts indexed to daily and monthly market rates. (CUB Ex 1.00
      at 9, 10-11).

    

    When
      determining what PGL should have hedged, Mr. Ross used a futures market hedging
      strategy, as futures are the most common and simplest financial hedges, assuming
      purchases of six-month natural gas futures (based on the monthly average of
      the
      daily midpoint futures prices at the Henry Hub) for the months of May through
      September.49
      Mr. Ross
      focused on PGL’s firm supply gas, because it is the gas purchased by PGL through
      pre-negotiated gas supply contracts for which a gas supplier guarantees
      delivery. Most of PGL’s winter firm supply is composed of PGL’s baseload
      contracts, which it cannot change in terms of volume or pricing. In the winter,
      firm supply is used to meet demand; it is not usually put in storage.
      (Id.
      at 6,
      17). 

    

    During
      the reconciliation year, PGL personnel knew that price volatility was affecting
      consumers, PGL personnel had developed familiarity with price risk hedging,
      had
      designed a hedging strategy, and were actively mitigating price risk for PGL’s
      shareholders. PGL personnel knew that price risk was a real risk deserving
      of
      mitigation, since they took proactive steps to protect shareholders from price
      risk in the reconciliation year. PGL personnel researched the available tools
      and implemented a strategy to hedge price risk; they simply chose not to do
      so
      for consumers. (Id.
      at
      16-18). The Commission’s prior decisions regarding hedging do not create a
      regulatory ‘safe harbor,’ which is an action or set of actions that PGL can take
      for which the Commission will not question the prudence thereof. PGL personnel
      should not rely on the Commission’s past decisions because this particular
      situation is different from the situations in those cases. (Id.
      at
      9).

    

    PGL
      personnel had sufficient knowledge, understanding, and experience with price
      risk, and had a demonstrated capability to address price risk, yet its personnel
      chose only to protect shareholders, not customers, from price volatility. (CUB
      Ex 3.00 at 10, 12). 

    

    

    _____________________

    49   A
      six-month futures contract is held six months in advance. Thus, a six-month
      May
      futures contract would be purchased in December, payable over the life of that
      contract. This differs from a forward contract, where payment is due at the
      time
      of, or following, delivery. (NYMEX.com\glossary).

    
      
         

        

        
        

      

      
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        01-0707

      

    

    PGL’s
      witnesses Zack and Graves completely ignored their own research and hedging
      design. Prior to the reconciliation year, PGL identified both hedging standards
      and a hedging program designed to mitigate some gas supply price risk pursuant
      to its Gas Price Protection Plan. In the reconciliation year PGL’s parent
      implemented a set of price risk management standards to protect shareholders.
      PGL, however, chose to disregard its research and standards when considering
      price risk for customers. (Id.
      at 19).

    

    Twenty
      percent of PGL’s winter volume is a minimum standard that the Commission should
      consider, given PGL’s decision to hedge nothing on behalf of consumers during
      the time period in question. Twenty percent of winter gas purchases were also
      a
      reasonable hedging standard at that time for a utility beginning to address
      price risk. (Id.
      at
      20-21). Mr. Ross stated that he did not need to consider the summer months
      because PGL had an active price risk hedging program at that time. (CUB Ex
      3.00
      at 22). Mr. Ross’ strategy focused on the volatility of firm gas supply and a
      minimum level of hedging, while Mr. Herbert did not determine a minimum
      standard. (CUB Ex. 3.00 at 23-26).

    

    The
      Commission is not responsible for the fact that PGL’s customers did not receive
      the benefit of a reasonable standard of care. The Commission has repeatedly
      stated that prudence is defined by the reasonable standard of care, and that
      PGL
      has the responsibility for understanding and applying a reasonable standard
      of
      care. PGL personnel had sufficient information and understanding of hedging
      strategies, yet they deliberately chose not to do so for PGL’s customers.
      Simultaneously, however, PGL personnel protected its shareholders from price
      risk. (CUB Ex 3.00 at 26-27).

    

    Mr.
      Ross
      calculated how futures purchase could have mitigated price volatility and price
      risk for two levels of gas purchases. The first is based on gas supply purchased
      under firm contracts for the winter heating months (November through March).
      The
      second is based on all gas purchases (firm and spot market purchases). The
      results for the total winter purchase scenario were $85,602,220 hedging total
      purchases and $53,166,127 hedging 20% of PGL’s winter purchases. The greatest
      level he used was 14,144,512 MMBtus, using only winter months. In his opinion,
      this is the minimum prudent volume that PGL should have used to hedge. Based
      on
      20% of PGL’s total supply, he concluded that consumers overpaid $53,166,127
      during the reconciliation year, due to PGL’s failure to mitigate higher prices.
      (Id.
      at 17,
      21).

    

    d. City
      Expert Witness Mr. Herbert’s Testimony

    

    The
      opinions contained in this section of the order are those of City witness Mr.
      Herbert unless otherwise noted. Mr. Herbert evaluated PGL’s supply and risk
      management practices during the reconciliation period. He considered PGL’s risk
      management knowledge and capabilities, price volatility, and the information
      relied upon by PGL personnel during this period. He reviewed PGL’s gas supply
      management practices focusing on the following: the market conditions during
      the
      2000-2001 winter heating season; how great the natural gas price risk was to
      ratepayers during this period; the safeguards that were available to PGL to
      reduce the price risk; the exposure for its regulated customers; PGL personnel’s
      awareness of the gas commodity price risk; what PGL did to address this risk;
      and whether it was possible to reduce the price risk exposure during the
      2000-2001 winter heating season. (City Ex. 1.0 at 4-5).

    

    
      
        

        
        

      

      
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        01-0707

      

    

    Mr.
      Herbert concluded that during the winter of 2000-2001, there were obvious
      indicators that prices were high and volatile and that storage quantities were
      low. Based on the available information at the time it was evident that, without
      some action to protect consumers, the PGA would place consumers at a risk of
      paying higher prices. PGL failed to take any action, based on the market
      conditions, to protect consumers from exposure to price risk. In fact, PGL
      personnel did nothing to fix or cap the price of gas for even the minimum amount
      of gas that its customers would pay. Consumers were harmed as a result of PGL’s
      decision not to hedge, as they would have benefited had PGL initiated a
      conservative price risk management program. Based on what PGL personnel should
      have known, consumers would have saved approximately $230 million. Consumers
      should not be compelled to pay for the cost consequences of PGL’s lack of
      prudent risk management. Mr. Herbert recommended that the Commission adjust
      PGL’s allowed costs to exclude $230 million of the more than $600 million in
      increased operating revenues PGL received when gas prices spiked in the
      reconciliation period. (City Ex. 1.0 at 6-7). 

    

    PGL
      had
      ample notice that these price risks could occur. In the natural gas market,
      risks surfaced in the 1980’s when daily and monthly market prices of gas were
      less than the price of gas in many long-term, take-or-pay contracts. Since
      short-term contracts provided more flexibility and options, gas companies became
      more dependent and a greater dependency meant more price volatility for
      utilities. By 1990, the risk was so great that NYMEX developed a natural gas
      futures contract market. In 2000, NYMEX gas futures became one of the largest
      regulated commodity markets in the world. Commodity future contracts allow
      buyers to moderate their exposure to price risk, so they can focus on other
      parts of their businesses. This allows companies to fix prices themselves for
      their customers for some period of time in the future. (Id.
      at
      9-12). 

    

    However,
      a futures contract is only one method of managing exposure to price risk. As
      the
      use of forward contract markets have matured, more sophisticated methods for
      managing price risks developed. Markets have since developed for paper
      contracts, including futures, swaps and option contracts, which are increasingly
      used. Paper contracts are used as temporary substitutes for the actual
      commodity. Paper contracts manage price risk where delivery of the commodity
      is
      expected. By doing this, a company can fix the price for a portion of its
      purchases or sales of the commodity, no matter how the physical market prices
      change. (Id.
      at
      11-13). 

    

    This
      process can break down or fail to fix prices for two reasons. A mismatch can
      occur between the physical and financial market volumes. If a utility
      over-projects the need for the commodity, there is a mismatch between utilities’
need and futures contract. The second reason for a hedge to fail is when there
      is a difference between the financial market and the cash market price at the
      point of delivery, or basis. If a change in the spot price where a utility
      purchases its gas is not highly correlated with the futures price in the
      financials market, exposure to price risk may not be completely eliminated.
      (Id.
      at
      13-15). 

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    The
      difference between a futures and an option is that while a futures contract
      allows a utility to fix the price of gas for a future time period, an option
      allows the utility company to put a cap on a price. The futures market requires
      a futures buyer to put a down payment on the futures position and to increase
      the size of that down payment, if price declines. An option contract purchases
      for a fixed price, with no down payment. (Id.
      at
      15-16).The event here would be a rise in the market price to a level that
      exceeds the price established by the option, or the “strike price.” If the price
      in the market exceeds the strike price, the option-holder could execute the
      contract and receive the gas at the strike price; or, the option-holder could
      sell the option and apply the gains from the sale to the cost of gas purchased
      at the market price. (Id.
      at
      17-19). 

    

    In
      liquid
      markets, as the gas futures and options markets usually are, these price and
      risk management arrangements can usually be made at little cost to the
      participants. There are administrative and transactional costs and costs
      associated with maintaining the margin for futures contracts or for selling
      an
      option contract. For PGL, that had a service contract with Enron, the cost
      of
      fixing the price would be an ordinary business expense. Hedging is not a
      guarantee of lower prices. But, the cost of assuring that customer costs are
      less volatile over time is insignificant, compared with the potential size
      of
      the price rises, from which, consumers will have been insulated. When the
      weather is cold, sometimes prices rise dramatically. (Id.
      at
      22-23). 

    

    Price
      volatility is quantitative measure of price risk. It is an indication of the
      likelihood of price changes of a certain magnitude over a period of time. It
      is
      the standard deviation concept. The greater the risk, the more important it
      is
      that a utility take action to
      mitigate the price risk exposure to its customers. Price volatility measures
      are
      very important because they allow us to understand what to expect in terms
      of
      potential price changes in future prices. These measures also determine the
      value or cost of hedging instruments in financial derivatives markets.
      (Id.).
      

    

    The
      precise magnitude of the price increases in the 2000-2001 winter heating season
      may have been a surprise but because actual volatility was high, it should
      have
      been obvious to PGL personnel that the prices changed significantly. Given
      the
      information available at the time, Mr. Herbert concluded that it was prudent
      to
      moderate the possible impact of such volatility on customer bills for the
      heating season. During the reconciliation period, an estimate of price
      volatility could be obtained from “Gas Daily” or daily and monthly spot prices
      can be used to estimate price volatility. The price risk that is associated
      with
      natural gas is greater than with other commodities, often 45% or greater, in
      the
      winter heating season. Because the volatility of the gas prices makes customers’
bills volatile, it is critical to use price risk management tools. Also, almost
      80% of a customer’s bill is based on the cost of the commodity. (Id.
      at
      22-25). 

    

    Supply
      managers must be aware of the price risks on PGL’s largest input purchases,
      irrespective of whether PGL is able to pass-through the cost. This is true
      because customers have very a limited ability to protect themselves against
      price risk or price volatility. (Id.).
      

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    PGL
      personnel were very familiar with concepts such as commodity futures and option
      markets, as well as hedging strategies. In 1998, PGL proposed the elimination
      of
      its PGA, recommending fixing prices for consumers through hedging. When PGL
      initiated its RFQ for this endeavor, PGL stated therein that it was interested
      in finding a company that was especially knowledgeable about price risk
      management to aid it in supply management. Despite the understanding of PGL
      personnel of futures market and risk management as a safeguard for regulated
      service customers, PGL left those customers completely exposed. Mr. Herbert
      noted that hedges were used to reduce price risks for PGL’s unregulated
      affiliates. (City Ex. 1.0 at 40). 

    

    At
      the
      same time as PGL’s decision not to cap prices for its ratepayers, PGL’s parent
      company was proactive in protecting company revenues by purchasing weather
      derivatives, resulting in caps on possible revenue loss to the utility due
      to
      weather-related declines in heating fuel. This protected shareholders, but
      not
      ratepaying consumers. (Id.).

    

    There
      was
      a blatant disparity of interest between the risks taken between shareholders
      and
      ratepaying consumers. Additionally, other regulated utilities used fixed-price
      forward contracts during the winter heating season of 2000-2001, as this is
      a
      common practice. Mr. Herbert added that most analysts were aware that market
      conditions were tentative in the winter of 2000-2001. Prices were on the
      incline, supply was limited, and prices were inelastic, in addition to record
      high gas prices. (City Ex. 1.0 at 28).

    

    Mr.
      Herbert additionally averred that what PGL did in its previous reconciliation
      period has no relevance here because the situation here is different from the
      year before. Even if price volatility had stayed the same, the price of gas
      was
      higher in this reconciliation period. (City Ex. 1.0 at 33). 

    

    He
      testified to what prudent risk management strategies were that a gas utility
      should provide for the benefit of its regulated customer. This includes a
      minimum assured level of demand to reduce exposure to price risk. Gas can be
      effectively hedged, because utility personnel know the minimum amount of gas
      that will be needed each month. When there is a significant price risk, it
      is
      imprudent not to hedge. The minimum requirement level must be established by
      reviewing all weather conditions. (Id.
      at
      35-37). Customers could suffer an opportunity cost, if prices go down, even
      if
      hedging is prudent. However, such a loss would be relatively insignificant.
      Additionally, over time, the opportunity costs would be less than the savings
      from hedging. (Id.
      at
      41-42). 

    

    A
      prudent
      utility company would include in its risk management program reviews of hedges
      for gas purchases at the Chicago and Gulf markets, regular estimates of price
      volatility in market analysis, storage, financial hedges to manage price risk,
      and a way to monitor customer feedback. Mr. Herbert advocated for the need
      to
      match physical volumes to be purchased with volumes covered by the hedge and
      testified that PGL personnel were aware that this was necessary for a hedge
      to
      be effective. (Id.
      at 44).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Additionally
      PGL could have used stored gas as a hedge for its regulated customers. Despite
      the fact that PGL claimed to use its stored gas to hedge for its regulated
      customers the evidence points to the contrary. There is no portion of stored
      gas
      set aside for PGL’s regulated service customers. Also, PGL relied on gas in
      storage and index-priced gas for its regulated customers, which is very
      unpredictable. Further, there is nothing to suggest that regulated customers
      received any price risk mitigation for gas in storage. Had PGL used the gas
      in
      storage as a hedge, the weighted average cost of gas would have been less than
      the index cost of gas during the heating season for consumers. The result is
      that, had PGL purchased all of its gas requirements at the index price, which
      is
      generally higher, regulated customers would have been better off. (Id.
      at
      44-46).

    

    Also,
      there are ways to quantify the extent to which PGL’s failure to act harmed its
      regulated customers. Mr. Herbert suggested calculating the difference between
      PGL’s actual costs and the costs, had PGL hedged. There is a significant
      differential between actual costs and hedged costs, which resulted in the
      increase of consumer costs during that 2000-2001 winter heating season.
      (Id.
      at
      47-49). Mr. Herbert cited PGL’s “Gas Supply Protection Strategy,” which
      predicted a gas shortage in 2000 and outlined the appropriate gas quantity
      to be
      hedged. (City Ex. 2.0 at 8-9). He also cited PGL witnesses who stated that
      Commission pre-approval is not required for hedging. Mr. Herbert clarified
      that
      his position is that PGL was imprudent for doing absolutely nothing at all,
      despite the market predictors and conditions. (Id.
      at
      11-12).

    

    Mr.
      Herbert also testified as to how he calculated the harm done to PGL’s customers.
      Based on information provided by PGL, he calculated an appropriate objective
      hedging response. Damages themselves work retrospectively, as they are an
      attempt to cure harm already done to customers. (City Ex. 2.0 at 17-18).

    

    Hedging
      is not necessarily about minimizing the cost of the commodity over time. Rather,
      hedging is about reducing the bills of regulated customers. This affords
      customers the ability to pay their gas bills and pay for food, medicine, and
      like items. (Id.
      at 22).

     

    He
      also
      took issue with Mr. Graves’ assertion that the year prior to one at issue was
      not significantly volatile; therefore, there was no reason to hedge. A utility
      company must constantly look at all of the market indicators. Solid hedging
      decisions must be based on a “combination of overall patterns.” A company should
      not “cherry-pick” time periods and must look at extremes of both price and
      volume volatility. 

    (Id.
      at
      32-33). 

    

    Mr.
      Herbert disagreed with Mr. Graves’ opinion that all hedging positions start in
      April. Mr. Herbert recommended that hedging be done at random intervals, in
      the
      time period from April through October, as that is the time period when
      injections and plans for the heating season are made. (City Ex. 2.0 at 26).
      The
      heating season must be of primary focus to an LDC like PGL. This is due to
      the
      likelihood of price spikes during the heating season because of increased
      demand. Mr. Herbert could think of no natural gas utility company which used
      its
      gas in storage as a hedge for requirements of regulated customers during the
      summer months. (Id.
      at
      27-28). 

    
      
         

        

        
        

      

      
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        01-0707

      

    

    The
      objective of hedging is not to speculate on future price levels. Based on Mr.
      Graves’ own exhibits, Mr. Herbert concluded that PGL personnel were aware that
      price curves were generally moving upward, sometimes, significantly. This should
      have triggered some sort of price risk management action. Even if PGL personnel
      were solely looking at price levels, as PGL contends, the skewed distribution
      of
      gas prices should have prompted caution and alerted them to the need for
      hedging. (Id.
      at
      32-33). 

    

    Mr.
      Herbert took issue with Mr. Graves’ contention that his testimony is speculative
      about what could have or should have been done. Mr. Herbert averred his
      recommendation to match hedged volumes with the expected minimum requirements
      of
      regulated customers is supported by his professional experience. Mr. Herbert
      stated that he took storage into account, but PGL did not designate a portion
      of
      its gas storage for consumer use. Also, due to PGL’s method for calculating LIFO
      pricing, the price of withdrawn gas changed constantly during the winter of
      2000-2001. PGL’s use of storage during this time period did not provide any
      hedging benefit for consumers. PGL’s use of storage for services like “park and
      loans” reduced PGL’s capability to use storage as a hedge for consumers. Also,
      consumers paid approximately $10 million more than they would have if PGL had
      simply bought gas on the higher-priced daily spot market. (City Ex. 2.0 at
      36-37). Mr. Wear’s $130 million estimate of savings through storage is simply
      the estimated nets of the costs of withdrawal and injection volumes. It ignores
      the effects of PGL’s LIFO pricing on consumers. (Id.
      at
      38-40). 

    

     

    2. Conclusions
      of Law

     

    

    
      	 	
              a.

            	
              PGL’s
                Position

            

    

    

    PGL
      argues that because the Commission has never required a utility to use financial
      hedging instruments, it cannot find its level of hedging imprudent here. Also,
      PGL points out that Dr. Rearden testified that PGL’s level of hedging for the
      reconciliation period was not imprudently low. And, Dr. Rearden never stated
      that PGL’s level of hedging from October through March of the reconciliation
      period was imprudent. (PGL Init. Brief at 32-33; PGL Reply Brief at 63).

    

    PGL
      also
      argues that because PEC is not regulated, whether PEC uses financial hedging
      instruments is not germane here. PGL points out that, if the Commission were
      to
      determine that a program using financial hedging instruments was imprudent,
      cost
      recovery could be disallowed, which is not the case for PEC. PGL maintains
      that
      during the time period in question, 20 out of 49 U.S. LDCs did not use financial
      hedging instruments. 

    

    PGL
      asserts that the extreme run-up on gas prices that occurred during the winter
      of
      2000-2001 was unprecedented and unpredictable. It reasons that it could not
      have
      known whether hedging would produce desirable results. PGL could not, therefore,
      have known whether it would win or lose using financial hedging instruments.
      (PGL. Init. Brief at 39-42). PGL also avers that how much volatility is
      unacceptable to consumers must be determined in advance. Thus, PGL contends
      that
      it could not have known how much of its gas purchases it should hedge.
      (Id.
      at 39).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    PGL
      maintains that futures contracts would not have aided it because, in most months
      before February of 2001, futures prices were expected to drop. This is true
      because futures prices are generally lower in the months that are further
      forward. (PGL Init. Brief at 40-41). PGL states that it withdrew more gas in
      total in the five winter months than it did the year before. PGL does not state
      how much of these withdrawals were actually used for consumers. (PGL Init.
      Brief
      at 43). 

    

    PGL
      avers
      that, when asserting that it should have a hedging program, the GCI witnesses
      did not take PGL’s use of storage into account, as its use of storage saved $130
      million for consumers in the winter of the reconciliation period. And, after
      the
      winter, PGL saved consumers money through its price risk program. (PGL Reply
      Brief at 61). Also, the GCI do not understand how storage is reflected in the
      gas charge through the LIFO rate. If summer replacement prices are lower than
      winter withdrawal prices, storage provides an effective hedge because consumers
      only pay the actual gas costs. (Id.
      at
      63).

    

    On
      Exceptions, PGL argues that because the Commission issued orders in its 1997
      reconciliation case, Docket No. 97-0024, only a few months before it had to
      decide whether to use and begin purchasing financial hedges for the 2000-2001
      winter, it had no obligation or responsibility to use financial tools to
      mitigate price volatility. (PGL BOE at 7-8).

    

    
      	 	
              b.

            	
              GCI’s
                Position

            

    

    

    The
      GCI
      assert that PGL was imprudent in failing to have in place an effective hedging
      program and in choosing to hedge none of its assured minimum purchases. Mr.
      Ross’ recommended minimum disallowance is in the amount of $53,166,177, which
      represents a 20% hedge of winter gas purchases. Mr. Herbert recommended a
      disallowance of $229,984,352, which is 100% of the minimum amount of gas PGL
      would need in the winter, irrespective of weather or market conditions. Mr.
      Herbert’s recommendation was based on his computation of the difference, on a
      monthly basis, between unhedged prices PGL paid for gas and the price PGL would
      have paid using Mr. Herbert’s hedging strategy. (GCI Init. Brief at 93).

    

    Both
      Mr.
      Herbert and Mr. Ross examined the circumstances at pertinent times, what options
      were available to PGL and its capabilities. Both experts concluded that because
      almost 95% of the gas charges PGL collected were attributable to commodity
      costs, consumers’ bills were almost as volatile as gas prices were in the winter
      of 2000-2001. Also, there was a 13% rise in gas price volatility over the
      previous year. 

    

    Additionally,
      at the beginning of the winter heating season, the amount of gas PGL had in
      storage was very low. Because the supply of gas was tight at that time, PGL
      left
      consumers fully exposed to market risks. Both experts concluded that PGL failed
      to have in place any effective price risk management plan. The GCI maintain
      that, while PGL manages price risk when PGL itself is exposed to this risk,
      it
      merely passes this risk on to consumers in the PGA. (Id.
      at
      83-85). The GCI assert that the only difference between the opinions of these
      two experts is in the calculation of harm to consumers. (GCI Reply Brief at
      69-71). 

    

    
      
        

        
        

      

      
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        01-0707

      

    

    The
      GCI
      point out that in the Order commencing this docket, the Commission expressly
      required PGL to describe the measures it took to insulate the PGA from
      volatility, including any hedging strategies. The GCI opine that prudence
      requires PGL to have and follow a well-defined price risk management program.
      Price risk was significant during the time period in question. However,
      according to the GCI, during the reconciliation period, PGL did not have a
      functioning price risk management plan during the winter of the reconciliation
      period. (GCI Init. Brief at 77-79). 

    

    The
      GCI
      aver that PGL had two price risk management programs in effect during the
      reconciliation period. The first plan was never used and the second plan did
      not
      become effective until April of 2001, after the winter heating season. The
      GCI
      reason that therefore, consumers had no protection from price volatility in
      the
      winter, when they needed it most. (Id.
      at
      81-82).

    

    The
      GCI
      further contend that it is not disputed that PGL personnel had the knowledge
      and
      ability to hedge the price risk exposure. Price volatility can be quantified
      and
      managed. Yet, PGL declined every option available to it, from fixed priced
      contracts for future delivery to standardized paper contracts and financial
      derivatives. 

    

    The
      GCI
      further contend that, during the time period in question, PGL’s use of storage
      did not provide consumers with a price hedge. If PGL had merely purchased gas
      on
      the spot market, instead of making the gas purchases it made, consumers would
      have paid about $10 million less for gas. (PGL Reply Brief at 71). 

    

    The
      GCI
      assert that PGL’s pricing mechanism for gas withdrawn from storage precludes any
      hedging potential from storage. PGL does not set the price consumers will pay
      for the gas it injects gas into storage; it sets the consumer price when the
      gas
      is withdrawn form storage. PGL uses a LIFO-based pricing mechanism that
      incorporates year-to-date actual costs and estimated prices for purchases
      throughout the remainder of the year; thus, prices for customers are never
      fixed
      in advance. They aver that any potential price benefit from stored gas purchased
      at a low price in the preceding injection season is excluded from a LIFO
      calculation, which uses actual and estimated reconciliation period purchase
      costs starting over on the first of October every year. (GCI Init. Brief at
      85).
      According to the GCI, Mr. Wear’s calculation of $130 million saved due to
      storage is nothing of the sort, as it is netted monthly injections and
      withdrawal volumes and costs using PGL’s average market prices. (PGL Ex. F at
      58; Tr. 986-97). 

    

    PGL
      averred that it did not use financial hedging instruments due to a lack of
      Commission guidance on the subject. The GCI maintain that the evidence indicates
      otherwise. Before the reconciliation period, (PGL’s 1999 fiscal year) PGL hedged
      using financial instruments and it did not seek Commission approval before
      doing
      so. Also, the Commission did not disallow any portion of this hedged gas supply.
      (GCI Init. Brief at 87-88), 

    

    The
      GCI
      disagree with Staff’s contention that PGL’s hedging efforts for the
      reconciliation period were not imprudent. Because the winter months are the
      period of maximum price exposure, initiating a hedging program after those
      months, here in April of 2001, could not outweigh the actual exposure of the
      high demand portion of the reconciliation period. (Id.
      at
      90-91). 

    
      
         

        

        
        

      

      
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        01-0707

      

    

    

    The
      GCI
      point out that Staff admitted that PGL’s level of hedging for October of 2000
      through March of 2001 was imprudent. (Id.
      at
      90-92, citing Tr. 1310-12). According to the GCI, Dr. Rearden’s statement cited
      by PGL, that PGL’s level of hedging was not imprudently low, lacks context. Dr.
      Rearden looked at the entire reconciliation year, including the spring of 2001,
      when PGL initiated a hedging program. PGL, however, did not hedge until this
      time, as its personnel did not utilize PGL’s previous hedging program. In the
      preceding winter, when consumers would have needed a hedging program the most,
      there was nothing. And, Dr. Rearden did not view PGL’s level of hedging for the
      winter of the reconciliation period as prudent. (GCI Reply Brief at 62-63).
      

    

    The
      GCI
      aver that PGL cannot rely on past Commission decisions to support its claim
      that
      what it did in the reconciliation period was prudent because the facts in this
      case are unique. The facts in previous Commission cases are different from
      those
      in other Commission cases. In PGL’s previous reconciliation, Ill.
      Commerce Commission, on its own Motion, v. Peoples Gas Light and Coke Co.,
      Reconciliation of Revenues Collected under Fuel and Gas Adjustment Charges
      with
      Actual Costs,
      203 Ill.
      P.U.C Lexis 822, the Commission concluded that it would not create an
      unconditional obligation to use financial hedging instruments. The GCI point
      out
      that, in the previous reconciliation, the Commission neither encouraged nor
      discouraged financial hedging, as doing so is micro-managing utility operations
      by dictating what form price risk management must take. (GCI Reply Brief at
      67).

    

    With
      regard to determining consumer tolerance for risk, the GCI assert that it was
      PGL’s responsibility to make this assessment. According to the GCI, during the
      winter of the time period in question, PGL decided that no hedging was
      necessary, which in effect, was a determination that consumers had an unlimited
      tolerance for price risk. The GCI further take issue with PGL’s assertion that
      unregulated companies like PEC are not comparable to regulated utilities. They
      assert that, in fact, regulated companies lack the economic incentive to control
      PGA costs. (Id.
      at
      71-74). 

    

    c. Staff’s
      Position

    

    Staff
      witness Dr. Rearden opined that PGL’s level of use of financial hedging
      instruments, for the entire reconciliation year, was not imprudently low.
      Hedging does not always lower prices. He reasoned that hedging can only be
      evaluated with respect to the appetite for risk that consumers have. In his
      opinion, consumers’ well-being may not be optimized by hedging programs, even
      when those programs produce lower costs. (Staff Ex. 7.00 at 74). Dr. Rearden
      pointed out that, for the reconciliation period in question, PGL lost when
      it
      did not hedge with financial instruments. In another year, however, PGL might
      not lose. If prices or volatility was predictable, futures prices would reflect
      that predictability and hedging would hold few benefits. (Id.
      at
      75).
      However, in Dr. Rearden’s opinion, PGL’s level of hedging for the winter of
      2000-2001 was imprudently low. (Tr. 1312-13). 

    

    
      
         

        

        
        

      

      
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    d. Commission
      Analysis and Conclusions

    

    In
      addition to procuring a good price for gas, there generally are two ways that
      a
      utility like PGL can mitigate the effect of higher prices in the marketplace
      on
      its PGA customers. PGL can protect against volatility in the marketplace and
      it
      can protect against the effect of higher winter gas costs. When prices will
      be
      volatile is not necessarily predictable. How volatile a market will be, and
      for
      how long, is not a known quantity. That prices will be volatile on occasion
      is
      known, as gas prices have been volatile in the past.

    

    We
      agree
      with Staff’s position and conclude that PGL’s use of financial hedging
      instruments, for the entire year, was not imprudently low. While Dr. Rearden
      testified that PGL’s level of hedging for the winter of 2000-2001 was imprudent,
      we are unable to accurately quantify a disallowance that would reflect the
      difference in costs to consumers had PGL used more aggressive hedging
      instruments. 

    

     

    IX. Further
      Observations on PGL’s Conduct

     

    

    The
      Commission believes PGL’s actions during this reconciliation period move beyond
      mere imprudence to being egregious. PGL entangled itself in a clever corporate
      web with its parent company, its affiliates and Enron designed to use PGA
      assets, assets designated to serve PGL’s ratepayers, solely for the gain of the
      entities involved. At the center of this web lay enovate, a shell of a company
      that existed only as a rest stop for profits on their way to PEC/PERC and
      Enron’s coffers. PGL’s attempts to explain its involvement not only failed, but
      actually worked against it. PGL flouted the law and Commission rules, completely
      disregarded its duty to its PGA customers and jeopardized its credibility.
      Over
      the next few years, the Commission intends to closely scrutinize PGL through
      the
      audits agreed to in the Settlement Agreement and Addendum (discussed below)
      in
      hopes that its conduct during this reconciliation is an aberration.

    

    The
      Commission notes that over four years have passed since this reconciliation
      proceeding commenced on November 7, 2001, for the October 1, 2000 through
      September 30, 2001, period in question. While the Commission believes that
      a
      proceeding’s duration must be congruent to due process assurance, we believe
      that PGL’s conduct, in exercising its due process rights, unnecessarily
      lengthened this proceeding.

    

    Moreover,
      at various times, PGL was not completely responsive to intervener requests.
      Particularly stunning is that PGL, throughout initial discovery, denied the
      existence of vital information about its alleged affiliate business dealings
      and
      about the GPAA contract that later was revealed more fully in re-opened
      discovery. Were it not for the fact that a FERC database contained pertinent
      information about Enron’s relationship with PGL and PGL’s affiliates and that
      information —mined by Staff and the GCI from an avalanche of subsequently
      tendered paper and electronic documents—provided important details on those
      relationships, this Commission may never have fully ascertained the basis for
      and the extent of these agreements and transactions that conferred profits
      to
      PGL’s corporate parent, PEC, and to Enron NA at ratepayer’s expense.

    

    
      
         

        

        
        

      

      
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    Further,
      PGL engaged in certain agreements and transactions with enovate and Enron MW
      that were designed to evade Commission detection. That PGL proceeded in these
      affiliate interest agreements and transactions without prior Commission approval
      is an astonishing disregard for and circumvention of the Public Utilities Act
      and Commission rules.

    

    When
      viewing the record in its totality, the Commission finds that PGL’s conduct is
      not only imprudent, but it also is egregious. People’s Energy and Enron
      developed a strategic partnership that diverted revenues from the regulated
      utility PGL to its unregulated parent company, PEC, and its unregulated
      subsidiaries, along with Enron NA, with no corresponding benefit to PGA
      customers that PGL serves. This strategic partnership used PGL’s PGA
      assets—including gas, contract storage, and Manlove Field operations—and PGL
      performed transactions and engaged in activities with either enovate, Enron
      MW,
      or Enron NA that increased customer gas costs while increasing profits for
      PGL’s
      parent company, PEC. In sum and substance, revenues were diverted from
      ratepayers to Peoples Energy and the unregulated affiliates and to Enron. Those
      revenues should have gone to ratepayers as an offset to the gas costs that
      they
      were actually charged.

    

    The
      Commission’s conclusion of PGL’s imprudent and egregious conduct is borne out by
      substantial evidence in seven areas as follows: One, Letters of Intent to create
      enovate, LLC, the vehicle by which PEC garnered profits from using PGL’s assets,
      and to enter into the GPAA, a five-year, no-bid contract for 66 percent of
      PGL’s
      gas supply; two, the GPAA’s contract provisions that ceded control over gas
      price and quantity (SIQ and DIQ) to Enron NA, forced customers to pay twice
      the
      pipeline transportation of gas to the Chicago citygate, and released pipeline
      capacity to Enron NA that increased consumer gas costs; three, the enovate,
      Enron MW, and HUB transaction profit sharing arrangements that were designed
      to
      increase revenues flowing to unregulated utility affiliates derived from PGA
      assets; four, Manlove Field operations use that gave third-parties preferential
      access to Manlove Field, loans of stored gas meant for consumers, certain
      off-system loans and exchanges, which required PGL to purchase replacement
      gas
      at much higher prices all at ratepayers’ expense; five, the Trunkline Deal, an
      affiliated interest contract with enovate that used Enron MW as a buffer to
      avoid Commission detection and that unnecessarily raised PGA gas costs; six,
      Transaction 19, PGL’s sale of baseload gas to Enron NA and equal buy-back from
      Enron MW at high winter daily spot prices, that unnecessarily raised PGA gas
      costs, and seven, Transaction 103, the PGL agreement for delivery of a large
      amount of gas to Enron MW at the October first of month price in exchange for
      Enron MW paying a penalty PGL owed to the Pipeline, which unnecessarily raised
      PGA costs with no benefits conferred on consumers and allowed PEC to enjoy
      50%
      of the profits because the applicable futures price was nearly double the
      pipeline penalty.

    

    The
      Commission’s finding of imprudence is not the only result of PGL’s imprudent and
      egregious conduct during this reconciliation period. The Commission’s confidence
      in PGL’s management to be forthright and fair in serving ratepayer interests and
      in dealing with this Commission is shaken. The Commission believes that its
      regulatory compact with PGL, its presumption of good faith on the part of PGL’s
      management, and PGL’s overall integrity as a corporate citizen is severely
      damaged by the instant case.

    

     

     

    
      
         

        

        
        

      

      
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    X. Other
      Issues 

     

    A. Audits

     

    1. Staff’s
      Position

     

    Staff
      believes an audit should be conducted of PGL’s management practices for several
      reasons. Staff points out that the internal audit of enovate stated that PEC
      gave enovate control over gas supply and storage functions. (Staff Ex. 9.00
      Ex.
      E). PGL entered into oral contracts to govern certain transactions discussed
      in
      prior sections of this order, instead of written contracts. Additionally, PGL
      failed to keep proper business records. Staff argues that Transaction 16/22
      is
      an example of the problem PGL had in failing to keep basic records. Transaction
      16/22 was not recorded in PGL’s Gas Management System, where PGL must record and
      categorize all of its gas dealings. Transaction 16/22, according to Staff,
      demonstrates a lack of oversight and internal controls at PGL. Staff points
      to
      other examples of lack of internal controls. The evidence provided by PGL to
      Staff did not establish that many contracts generated full value for the
      services PGL provided. Additionally, PGL allowed third-parties to make
      withdrawals from Manlove, even after those parties no longer had gas in storage
      at Manlove. 

    

    Staff
      maintains that PGL has failed to maintain adequate documentation regarding
      many
      of its transactions, including the 3PSEs and Transaction 16/22. Further, PGL’s
      extensive use of Manlove for third-party transactions demonstrates a lack of
      management controls, as, when engaging in these contracts, PGL personnel locked
      up significant capacity at Manlove during peak periods, without regard to the
      impact those transactions had on consumers’ gas costs. Finally, Staff argues
      that PGL’s extensive dealings with Enron NA, Enron MW, and its affiliate,
      enovate, call into question the ability on the part of PGL personnel to separate
      the interest of PGL from that of its affiliates. 

    

    Staff
      concludes that a management audit of PGL’s gas purchasing practices, gas storage
      operations and storage activities should be performed by a Commission-approved,
      independent party. Staff also opines that the Commission should order PGL to
      conduct internal audits of its gas purchasing practices and report those results
      to the Manager of the Commission’s Accounting Department. (Staff Ex. 5.00 at
      13-14). 

     

    Staff
      acknowledges that the new Sarbanes-Oxley Act requires companies to perform
      some
      sort of internal audit. However, if compliance with this Act would truly
      duplicate the internal audit that Staff seeks to impose, the only effort
      required by PGL would be to duplicate a Sarbanes-Oxley report and file it at
      the
      Commission. (Staff Ex. 5.00 at 14-15).

    

    
      
         

        

        
        

      

      
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        01-0707

      

    

    Staff
      posits that an external management audit would be a forward-looking evaluation
      of the internal controls needed to ensure that ratepaying consumers are
      protected when PGL personnel make purchasing and storage decisions, like
      entering into gas supply contracts, allocating company-owned storage, leasing
      storage capacity and making decisions regarding injections and withdrawals
      to or
      from storage. An annual internal audit, on the other hand, would be a historical
      evaluation of transactions and compliance with internal controls established
      by
      the management audit. Staff concludes that annual internal audits are a
      necessary follow-up to a management audit. (See, Staff Ex. 10.00 at 2-3). Staff
      also posits that by requiring internal audits, the cost of investigating issues
      would be borne by PGL, as opposed to publicly-funded agencies, like the City,
      CUB and Commission Staff. 

    

     

    2. The
      Position of the GCI

     

    

    The
      GCI
      concur with Staff. (GCI Initial Brief at 95-97). 

    

     

    3. PGL’s
      Position

     

    

    PGL
      claims that since the time period in question, it has taken steps to improve
      its
      internal controls and therefore, no management audit is necessary. (PGL Ex.
      K at
      14-15 and PGL Init. Brief at 101-02). PGL also concludes that compliance with
      recently-enacted Sarbanes-Oxley Act requires it to document and test the process
      it uses to create its financial statements. PGL cites no portion of this Act
      in
      support. It reasons that therefore, a second audit would be duplicative and
      costly. (PGL Init. Brief at 101-102). 

    

    PGL
      proposes to provide Staff information about its current gas supply and capacity
      procurement process and, if Staff wishes to initiate a proceeding, it can make
      the appropriate recommendations to the Commission. (PGL Ex. K at 14).

    

     

    4. Commission
      Analysis and Conclusions

     

    

    The
      Commission notes that the Peoples Companies agreed to include certain findings
      from the ALJPO in the Settlement Agreement and Addenduem that require a variety
      of audits similar to those proposed by Staff. PGL agreed to undertake these
      audits, therefore the Commission need not rule on this issue. 

    

     

     

    
      
         

        

        
        

      

      
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        01-0707

      

    

     

    B. Other
      Non-Monetary Issues

     

    1. Compliance
      with the USOA

     

    a. Staff’s
      Position

    

    Staff
      argues that PGL should be required to issue a report as to how it intends to
      comply with the Uniform System of Accounts (the “USOA”). Staff points out that
      Commission Regulations require PGL to keep documentation supporting its
      decisions. PGL is also required by law to keep accurate accounts and records
      of
      all transactions with associated companies. (See,
      83 Ill.
      Adm. Code 505.10; 18 CFR 201). However, during discovery, when Staff asked
      PGL
      for contracts, workpapers or calculations with respect to various transactions
      under the SOC and with enovate, such as “Rolling Thunder;” “Tidal Wave;” the “38
      Millennium Special” Staff was advised that PGL had none. Staff posits that
      enovate’s actions are not outside the scope of this proceeding; enovate had a
      financial relationship with PGL that had an impact on PGL’s PGA costs and
      revenues. Yet, the records tendered regarding enovate were not
      complete.

    

    Ms.
      Hathhorn opines that PGL merely took the word of personnel at Enron North
      America with regard to many transactions, which demonstrates a lack of controls
      in the accounting of gas and other transactions affecting the PGA. She
      recommends that this Commission order PGL to report as to how it intends to
      comply with the USOA. This report should be filed with the Commission’s Chief
      Clerk, with a copy to the Manager of the Commission’s Accounting Department
      within 60 days after the date of a final Order in this Docket. (See,
      Staff
      Ex. 9.00 at 24-27). 

    

    b. PGL’s
      Position

    

    PGL
      does
      not agree with Staff’s contention on this issue, but it does not oppose the
      recommendation to file an explanation of steps it took to ensure compliance.
      (PGL Reply Brief at 71). 

    

    c. Commission
      Analysis and Conclusions

    

    As
      Staff
      has pointed out, Commission regulations require PGL to have proof establishing
      the nature of its transactions. As has been set forth herein, this often was
      not
      accomplished here. Staff’s recommendation with regard to the USOA is merely
      requiring PGL to supply proof that its accounting is in compliance with the
      law.
      It is therefore adopted. 

    

     

     

    
      
        

        
        

      

      
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        01-0707

      

    

     

    2. Uncontested
      non-Monetary Issues

     

    

    The
      following recommendations made by Staff are not contested by PGL: 

     

    Staff
      recommends that the Commission order PGL to update its operating agreement,
      which was last approved by the Commission in docket No. 55071. (Staff Ex. 5.00
      at 20-22). On Exceptions, Staff points out that it recommended that PGL should
      be required to file this updated agreement within six months of the final order
      in this proceeding, and PGL did not object to this requirement. Also, since
      an
      operating agreement determines how costs and revenues should be allocated
      between the utility and its affiliates, an updated operating agreement should
      be
      on file before PGL files any new rate case. Therefore, Staff contends that
      PGL
      should be required to update its operating agreement within sixty days of the
      entry of a final order in this docket, or before it files its next rate case,
      whichever comes first. (Staff Init. BOE at 19)

     

    Staff’s
      point is well-taken. PGL shall file its update to its operating agreement within
      sixty days of entry of the final order in this docket, or before it files its
      next rate case, whichever comes first.

     

    Staff
      also recommends requiring PGL to account for all gas that is physically injected
      into the Manlove Storage Field by including the cost associated with maintenance
      gas in the amount transferred from purchased gas expense to the gas stored
      underground account (Account 164.1). Staff further recommends that the
      Commission require PGL to account for the portion of gas injected into the
      Manlove Storage Field in order to maintain pressure (i.e.,
      maintenance gas) as credits from Account 164.1, Gas Stored Underground, and
      as
      charges to Account 117, Gas Stored Underground (for the recoverable portion
      of
      cushion gas) or to Account 101, Gas Plant (for the non-recoverable portion
      of
      cushion gas). Staff additionally recommends that the Commission order PGL to
      revise its maintenance gas accounting procedures related to gas injected for
      the
      benefit of the North Shore Gas Company and third-parties, to require those
      entities to bear the cost of maintenance gas. Finally, Staff recommends that
      the
      Commission order PGL to submit its revised maintenance gas accounting procedures
      to the Commission’s Chief Clerk with a copy to the Manager of the Accounting
      Department within 30 days after the date a final order is entered in this
      proceeding. (Staff Ex. 10.00 at 7-9). The GCI share these recommendations.
      (GCI
      Init. Brief at 94).

     

    These
      recommendations are reasonable and in the public interest and they are
      approved.  

    

     

    X. Finding
      and Ordering Paragraphs

     

    

    
      	 	
              (1)

            	
              The
                Peoples Gas Light and Coke Company is a corporation engaged in the
                distribution of natural gas service to the public in Illinois, and,
                as
                such, it is a “public utility” within the meaning of the Public Utilities
                Act;

            

    

    

    
      	 	
              (2)

            	
              the
                Commission has jurisdiction over The Peoples Gas Light and Coke Company
                and of the subject-matter of this
                proceeding;

            

    

    

    
      
        

        
        

      

      
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        01-0707

      

    

    
      	 	
              (3)

            	
              the
                statements of fact set forth in the prefatory portion of this Order
                are
                supported by the evidence of record and are hereby adopted as findings
                of
                fact;

            

    

    

    
      	 	
              (4)

            	
              the
                Settlement Agreement (Exhibit 1) as revised by the Addendum (Exhibit
                2) is
                adopted and their terms incorporated herein as a resolution on the
                merits,
                finding that, during the reconciliation period, Peoples Gas Light
                and Coke
                Company had not acted reasonably and prudently in its purchases of
                natural
                gas and other activities that affected that amounts collected through
                Gas
                Charges in its fiscal year 2001; 

            

    

    

    
      	 	
              (5)

            	
              the
                unamortized balances at the end of Peoples Gas Light and Coke Company’s
                2001 reconciliation year show a refundable balance for the Commodity
                Gas
                Charge of $23,876,327.25; a recoverable balance of $2,969,282.01
                for the
                Non-Commodity Gas Charge and the Demand Gas Charge; and a refundable
                balance of $23, 580.60 for the Transition Surcharge, for a total
                refundable balance of $20,930,626.44; the Factor O Refund is zero;
                

            

    

    

    
      	 	
              (6)

            	
              the
                reconciliations submitted by The Peoples Gas Light and Coke Company
                of the
                costs actually incurred for the purchase of natural gas with revenues
                received for such gas for the reconciliation period beginning October
                1,
                2000, through September 30, 2001, may properly be approved;
                

            

    

    

    
      	 	
              (7)

            	
              pursuant
                to the Settlement Agreement and Addendum, a refund of $100 million
                is to
                be distributed in the manner set forth above as part of the consideration
                paid in global settlement of this docket, as well as I.C.C. Docket
                Nos.
                01-0706, 02-0726, 02-0727, 03-0704, 03-0705, 04-0682,
                04-0683;

            

    

    

    
      	 	
              (8)

            	
              The
                Peoples Gas Light and Coke Company should follow the accounting procedures
                recited above the directives contained in the incorporated parts
                of the
                Settlement Agreement and the Addendum in all future gas adjustment
                charge
                reconciliation dockets.

            

    

    

    
      	 	
              (9)

            	
              The
                Peoples Gas Light and Coke Company shall file quarterly reports with
                the
                Chief Clerk’s office detailing the progress of the Hardship Reconnection
                program. 

            

    

    

    IT
      IS
      HEREBY ORDERED that the reconciliation of revenues collected under the Peoples
      Gas Light and Coke Company’s PGA tariff with the actual cost of gas prudently
      purchased for the time period beginning October 1, 2000, through September
      30,
      2001, as is set forth herein.

    

    IT
      IS
      FURTHER ORDERED that Peoples Gas Light and Coke Company shall comply with all
      of
      the Findings of this Order;

    

    IT
      IS
      FURTHER ORDERED that, subject to the provisions of Section 10-113 of the Public
      Utilities Act and 83 Ill. Adm. Code 200.880, this Order is final; it is not
      subject to the Administrative Review Law. 

    
      
        

        
        

      

      
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        01-0707

      

    

    

    By
      Order
      of the Commission this 28th
      day of
      March, 2006.

    
 

    

    

    (SIGNED)
      CHARLES E. BOX

    

    Chairman

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
      1

    SETTLEMENT
      AGREEMENT
      AND RELEASE

    

    This
      Settlement Agreement and Release (“Agreement”) is entered into this 17
      day of
      January, 2006, between and among the PEOPLE OF THE STATE OF ILLINOIS, through
      LISA MADIGAN, ILLINOIS ATTORNEY GENERAL (the “Illinois Attorney General”) and
      the CITY OF CHICAGO (the “City of Chicago”), PEOPLES ENERGY CORPORATION, an
      Illinois Corporation, THE PEOPLES GAS, LIGHT AND COKE COMPANY, an Illinois
      Corporation (“Peoples Gas”), PEOPLES MW, LLC., a Delaware Limited Liability
      Company, PEOPLES ENERGY RESOURCES COMPANY, LLC., an Illinois Limited Liability
      Company, and NORTH SHORE GAS COMPANY, an Illinois Corporation (“North Shore
      Gas”) (Peoples Energy Corporation, Peoples Gas, Peoples MW LLC, Peoples Energy
      Resources LLC and North Shore Gas are collectively hereinafter referred to
      as
      the “Peoples Companies,” unless otherwise designated individually).

     

    WHEREAS,
      the
      Illinois Attorney General commenced an action against the Peoples Companies
      in
      the Circuit Court of Cook County, Illinois, County Division, Chancery
      Department, styled The
      People of the State of Illinois v. Peoples Energy Corp., et al.,
      No. 05
      CH 5124, and the City of Chicago commenced an action against the Peoples
      Companies in the Circuit Court of Cook County, Illinois, County Division,
      Chancery Department, styled City
      of Chicago v. The Peoples Gas Light & Coke Company, et al.,
      No. 05
      CH 5107, which two actions were consolidated (the “Litigation”);

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    WHEREAS,
      the
      Illinois Attorney General and the City of Chicago alleged that: (a) from 1999
      to
      2002, the Peoples Companies and Enron North America carried out a scheme to
      illegally divert assets from the regulated natural gas utility, Peoples Gas,
      to
      Peoples Energy Corporation and to inflate Peoples Gas’s and North Shore Gas’s
      natural gas costs and pass those inflated costs on to Illinois consumers; and
      (b) the Peoples Companies carried out this scheme through a series of fraudulent
      natural gas transactions, sham companies, illegal agreements, and
      misrepresentations to consumers. The Illinois Attorney General alleged that
      the
      Peoples Companies’ actions resulted in increased natural gas costs for Illinois
      consumers and violated the Illinois Consumer Fraud and Deceptive Business
      Practices Act (“Consumer Fraud Act”). (815 ILCS 505/1 et seq.). The City
      of
      Chicago alleged that the Peoples Companies’ actions resulted in increased
      natural gas costs for Chicago consumers and violated Municipal Code of Chicago
      Sections 4-276-470, 2-24-060 and 1-20-020. The Peoples Companies denied these
      allegations;

     

    WHEREAS,
      in the
      Litigation (a) the Illinois Attorney General seeks equitable relief against
      the
      Peoples Companies, penalties against Peoples Gas and North Shore Gas, and
      disgorgement of profits from and penalties against Peoples Energy Corporation,
      Peoples Energy Resources Company, LLC and Peoples MW, LLC for the alleged
      violations of the Consumer Fraud Act, (b) the City of Chicago seeks equitable
      and compensatory relief and penalties from Peoples Gas, Peoples Energy
      Corporation, Peoples Energy Resources Company, LLC and Peoples MW, LLC for
      the
      alleged violations of Municipal Code of Chicago Sections 4-276-470, 2-24-060
      and
      1-20-020, and (c) the Peoples Companies deny that the Illinois Attorney General
      or the City of Chicago is entitled to any of the relief requested;

     

    

    
      
        
           

          

          
          

        

        
          2

          
            

          

        

        
          
          

        

      

    

    

    WHEREAS,
      there
      is also currently pending before the Illinois Commerce Commission (the “ICC”)
      statutory reconciliation proceedings for the years 2000 through 2004 involving
      Peoples Gas (ICC Docket Nos. 00-0720, 01-0707,
      02-0727, 03-0705, 04-0683) and
      North
      Shore Gas (ICC Docket Nos. 00-0719,
      01-0706, 02-0726, 03-0704, 04-0682)
      (the
      “Reconciliation Cases”);

     

    WHEREAS,
      the
      City of Chicago and the Illinois Attorney General either have appeared or
      intervened in the Reconciliation Cases and alleged that Peoples Gas and North
      Shore Gas acted imprudently in purchasing natural gas and passed on imprudent
      gas costs resulting in unnecessarily increased gas charges to consumers in
      violation of Section 9-220(a) of the Illinois Public Utilities Act, 220 ILCS
      5/9-22(a) and
      various ICC rules, and Peoples Gas and North Shore Gas have denied these
      allegations;

    WHEREAS,
      the
      Peoples Companies, the Illinois Attorney General and the City of Chicago wish
      to
      fully adjust, compromise and settle all rights and claims they may have against
      each other by reason of the Litigation and the Reconciliation Cases;
      and

     

    WHEREAS,
      this
      Agreement does not constitute an admission by or finding against the Peoples
      Companies that any of the conduct alleged in the Litigation and the
      Reconciliation Cases was wrongful, unlawful or in violation of any law,
      regulation or rule.

     

    NOW
      THEREFORE,
      the
      Peoples Companies, the Illinois Attorney General and the City of Chicago agree
      as follows: 

    

    
      
        
           

          

          
          

        

        
          3

          
            

          

        

        
          
          

        

      

    

    

    
      	
              I.

            	
              CUSTOMER
                REFUND 

               

            

    

    A. Refund
      to Customers. Peoples
      Gas and North Shore Gas jointly agree to refund the total sum of $100 million
      to
      Peoples Gas’ and North Shore Gas’ customers in a manner consistent with the
      terms of this Agreement. 

     

    B. ICC
      Approval of Refund. The
      final
      settlement of the Reconciliation Cases is subject to approval by the ICC, which,
      as provided herein, other than the obligations contained in Sections III(B),
      IV
      and V, is a condition precedent to the terms of this Agreement.

     

    C. Payment
      of Customer Refund. The
      Customer Refund shall be paid as follows:

     

    
      	 	
              1.

            	
              By
                crediting, on a per capita basis, the bills of all North Shore Gas’ and
                Peoples Gas’ customers as follows: (a) a payment in the amount of $50
                million that shall begin within 30 days following ICC approval of
                this
                Agreement (“First Payment”); and (b) a payment in the amount of $50
                million that shall begin 12 months after the First Payment. 

               

            

    

    
      	 	
              2.

            	
              The
                refund amounts shall be clearly and conspicuously identified on all
                customers’ bills as a credit against current charges, in a manner
                acceptable to the Illinois Attorney General and the City of
                Chicago.

               

            

    

    
      	 	
              3.

            	
              In
                the event that the ICC does not approve a per capita refund, the
                Customer
                Refund shall be paid by a method that is acceptable to the ICC, provided,
                however, that the Customer Refund is $100 million and is paid in
                two $50
                million payments. 

            

    

    

    
      
        
           

          

          
          

        

        
          4

          
            

          

        

        
          
          

        

      

    

    

    D. Parties
      Cooperation to Obtain ICC Approval. All
      parties to this Agreement shall take all necessary and commercially reasonable
      actions to obtain ICC approval of the settlement of the Reconciliation Cases
      including, within five business days of all parties’ execution of this
      Agreement, the filing of a motion before the ICC requesting expedited review
      and
      disposition and approval of the settlement of the Reconciliation Cases as
      described in this Agreement. Nothing in this Agreement is intended to limit
      in
      any way the ICC’s authority to review and determine whether to approve the
      settlement of the Reconciliation Cases.

     

    E. ICC
      Approval. If
      the
      ICC fails to approve the settlement of all Reconciliation Cases, this Agreement
      (and all obligations and agreements contained herein) shall be null and void
      with the exception of those described in Sections III(B), IV and V of this
      Agreement. The Parties agree that in the event the ICC does not approve the
      $100
      million refund amount or conditions contained in Sections I(C) of this
      Agreement, the Illinois Attorney General, the City of Chicago and the Peoples
      Companies are in no way limited or prevented from pursuing the Litigation or
      the
      Reconciliation Cases or from participating, reinstating or asserting any legal
      rights, allegations, defenses, counterclaims, cross claims, appeals or any
      other
      right or assertion allowed by law, statute or regulation and that the Litigation
      and the Reconciliation Cases continue status quo ante.

    

    
      
        
           

          

          
          

        

        
          5

          
            

          

        

        
          
          

        

      

    

    

    II. CONSERVATION
      AND WEATHERIZATION PROGRAM PAYMENTS

     

    As
      described more fully below, Peoples Energy Corporation shall pay to the City
      of
      Chicago and the Illinois Attorney General, jointly, up to $5 million per year
      for six years totaling up to $30 million. All payments shall be made payable
      to
      the Illinois Attorney General and the City of Chicago, jointly, unless they
      mutually designate, in writing, payment in another way or to another party
      or
      parties. The payments shall be made as follows:

     

    
      	 	
              A.

            	
              The
                first installment of up to $5 million (“First Installment”) shall be made
                within 15 business days after the ICC approves the settlement of
                the
                Reconciliation Cases. From the First Installment, the Peoples Companies
                shall receive a credit in the amount of $675,000 towards the settlement
                of
                the case styled The
                Peoples Gas Light and Coke Company v. City of Chicago
                (No. 03 L 2212 Cir. Ct. Cook County). The City of Chicago and Illinois
                Attorney General, jointly and in their discretion, shall determine
                the use
                and expenditure of the First Installment. The Illinois Attorney General
                shall use any payments that she controls for purposes specified under
                Section 7(e) of the Consumer Fraud Act, 815 ILCS 505/7(e).
                

            

    

    

    
      
        
           

          

          
          

        

        
          6

          
            

          

        

        
          
          

        

      

    

    

    
      	 	
              B.

            	
              Peoples
                Energy Corporation shall pay the five subsequent payments of up to
                $5
                million, which amounts shall be prepaid, on each anniversary of the
                First
                Installment (the “Subsequent Payments”). The Subsequent Payments shall be
                based upon the amount of the cost for the design, implementation
                and
                administration of programs, as estimated in the sole discretion of
                the
                Illinois Attorney General and the City of Chicago (the “Estimated
                Amount”). The Estimated Amount shall be submitted by the Illinois Attorney
                General and the City of Chicago to Peoples Energy Corporation by
                written
                statements. The programs shall be for the following purposes:

               

            

    

    
      	 	 	
              1.

            	
              To
                fund a program of conservation and weatherization for low and
                moderate-income residential dwellings (the “Program”). The Program shall
                be jointly administered by City of Chicago on behalf of the City
                of
                Chicago and Illinois Attorney General on behalf of the State of Illinois
                or by any other agency, entity or representative to which the Illinois
                Attorney General and City of Chicago, in writing, mutually agree.
                The
                Program shall have the purpose of providing energy and natural gas
                conservation programs, whether residential improvements or educational
                or
                otherwise, for residents within Peoples Gas’ or North Shore Gas’ service
                areas and shall have the goal of reducing those residents’ energy usage
                and costs.

            

    

    

    
      
        
           

          

          
          

        

        
          7

          
            

          

        

        
          
          

        

      

    

    

    
      	 	 	
              2.

            	
              Failure
                to use or expend $5 million in any year after the payment of the
                First
                Installment shall in no way affect the Illinois Attorney General’s or the
                City of Chicago’s ability to request and receive funding up to the maximum
                amount of $5 million in any subsequent year or, subject to the requirement
                of this Section II(B), in any way relieve the Peoples Energy Corporation
                of its obligations to make any of the Subsequent Payments. 

               

            

    

    
      	
              III.

            	
              ADOPTION
                OF MANAGEMENT PROPOSALS

               

            

    

    
      	 	
              Peoples
                Gas and North Shore Gas will adopt the forward-looking “Management”
                proposals requested in the Joint Initial Briefs of the City of Chicago,
                the Illinois Attorney General and the Citizens Utility Board in ICC
                Docket
                Nos. 01-0706 and 01-0707. 

               

            

    

    A. These
      forward-looking “Management” proposals, the implementation of which is
      contingent upon ICC approval of the settlement of the Reconciliation Cases,
      are:

     

    
      	1.  	
              Peoples
                Gas and North Shore Gas each shall update its operating agreement,
                which
                were approved by the ICC in Docket No. 55071.

               

            

    

    
      	2.  	
              For
                a period of five years, Peoples Gas and North Shore Gas each shall
                perform
                an annual internal audit of gas purchasing and submit a copy of the
                audit
                report to the Manager of the ICC’s Accounting Department.

               

            

    

    
      	3.  	
              Peoples
                Gas and North Shore Gas each shall engage outside consultants to
                perform a
                management audit of its gas purchasing practices, gas storage operations
                and storage activities. The firm selected to perform the audit shall
                be
                independent of Peoples Gas, North Shore Gas and their affiliates,
                ICC
                Staff, the City of Chicago, the Illinois Attorney General and the
                Citizens
                Utility Board and shall be approved by the ICC. Peoples Gas and North
                Shore Gas shall submit monthly reports on the progress of the management
                audit to the Chief of the ICC’s Public Utilities Bureau, with a copy to
                the Manager of the ICC’s Accounting Department, until the management audit
                report has been submitted. Upon completion of the management audit,
                copies
                of the management audit report would be submitted to the Chief of
                the
                ICC’s Public Utilities Bureau and the Manager of the ICC’s Accounting
                Department. 

               

            

    

    
      	 	
              B.

            	
              Nothing
                in this Agreement shall require the Peoples Companies to conduct
                any
                management or financial audit of gas purchases or transactions for
                their
                1999-2004 fiscal years. Peoples Energy Corporation acknowledges that
                it is
                its Board of Directors’ responsibility to set and implement policy.
                Peoples Energy Corporation further acknowledges that its Chief Executive
                Officer reports to its Board of Directors through its Lead Director.
                The
                acknowledgments contained in this Section III(B) do not require ICC
                approval of the settlement of the Reconciliation Cases.
                

            

    

    

    
      
        
           

          

          
          

        

        
          8

          
            

          

        

        
          
          

        

      

    

    

    
      	
              IV.

            	
              RECONNECTION
                AND DEBT FORGIVENESS OF DISCONNECTED
                CUSTOMERS

            

    

    

    A. Disconnected
      Customers. The
      Peoples Companies acknowledge that approximately 12,000 past customers of
      Peoples Gas and North Shore Gas are presently not receiving gas from the Peoples
      Companies (“Disconnected Customers”). Approximately $14 million of past due
      accounts are attributable to Disconnected Customers. Peoples Gas and North
      Shore
      Gas acknowledge that certain Disconnected Customers, involving customer-occupied
      residential premises, are hardship cases (the “Hardship Cases”). The Peoples
      Companies shall cooperate with the Illinois Attorney General and the City of
      Chicago and any other entity or agency designated by the Illinois Attorney
      General and the City of Chicago to identify the Hardship Cases. 

     

    B. Reconnection
      of Hardship Cases.
       Within
      three days following identification, Peoples Gas and North Shore Gas shall
      reconnect the Hardship Cases without charge. The Peoples Companies shall
      cooperate with the Illinois Attorney General and the City of Chicago and any
      other entity or agency designated by the Illinois Attorney General and the
      City
      of Chicago to identify the Hardship Cases. Peoples Gas and North Shore Gas
      shall
      relieve and forgive all outstanding debt of the Hardship Cases. The Hardship
      Cases may be identified by either the Peoples Companies or the Illinois Attorney
      General and the City of Chicago. Upon
      determination by and notice from the Illinois Attorney General or the City
      of
      Chicago, Peoples Gas and North Shore Gas will advise credit-reporting agencies
      to remove adverse credit information from the credit reports of the customers
      who are the Hardship Cases. 

    

    
      
        
           

          

          
          

        

        
          9

          
            

          

        

        
          
          

        

      

    

    

    

    
      	 	
              C.

            	
              No
                Illinois Commerce Commission Approval. Upon execution of
                this Agreement by all of the parties, the Peoples Companies agree
                to
                fulfill the obligations described in this Section IV notwithstanding
                lack
                of ICC approval of the settlement of the Reconciliation Cases.
                

               

            

    

    
      	
              V.

            	
              PROJECTED
                BAD
                DEBT

               

            	 

    

    In
      addition to the obligations above, the Peoples Companies project absorbing,
      recording and, ultimately, writing off, approximately $52.3 million in bad
      debt
      resulting from accounts that its customers, for a variety of reasons, are unable
      to pay. If the Peoples Companies fail to absorb and record approximately $52.3
      million in bad debt for the fiscal year ending September 30, 2006 (“FY2006”),
      the Peoples Companies agree to absorb and record at least the difference between
      $52.3 million and the amount actually absorbed and recorded in FY2006 during
      the
      fiscal year ending September 30, 2007 or in any subsequent fiscal year. To
      the
      extent that this bad debt relates to the Hardship Cases, Peoples Gas and North
      Shore Gas agree not to pursue collection of those past accounts, but without
      prejudice to the collection of further amounts incurred. The Hardship Cases
      may
      be identified by either the Peoples Companies or the Illinois Attorney General
      and the City of Chicago. Upon determination by and notice from the Illinois

      Attorney General or the City of Chicago, Peoples Gas and North Shore Gas will
      advise credit-reporting agencies to remove adverse credit information from
      the
      credit reports of the customers who are the Hardship Cases.

    

    
      
        
           

          

          
          

        

        
          10

          
            

          

        

        
          
          

        

      

    

    

    VI. MISCELLANEOUS

     

    A. Effective
      Upon Execution. This
      Agreement shall be effective upon execution by all of the parties to the
      Agreement and may be executed in one or more counterparts.

     

    
      	 	
              B.

            	
              Circuit
                Court Approval and Order Entered and Recorded.
                The Peoples Companies, the Illinois Attorney General and the City
                of
                Chicago shall seek judicial approval of this Agreement and the entry
                of an
                Agreed Order staying all proceedings in the Litigation until the
                ICC
                enters an order regarding the settlement of the Reconciliation Cases.
                This
                Agreement shall be included as an exhibit to any such Agreed Order.
                The
                parties to this Agreement shall take all necessary and commercially
                reasonable actions to obtain judicial approval of this Agreement.
                Failure
                to obtain such judicial approval shall make this Agreement null and
                void.
                In the event of failure to obtain judicial approval, the Peoples
                Companies, the Illinois Attorney General and the City of Chicago
                in no way
                are limited or prevented from pursuing the Litigation or the
                Reconciliation Cases or from participating, reinstating or asserting
                any
                legal rights, allegations defenses, counterclaims, cross claims,
                appeals
                or any other right or assertion allowed them by law, statute or regulation
                and that the Litigation and the Reconciliation Cases continue status
                quo
                ante. Upon entry of an order by the ICC approving the settlement
                of the
                Reconciliation Cases, the parties shall seek entry of a consent decree
                pursuant to 735 ILCS 5/2-1009 dismissing the Litigation with
                prejudice.

            

    

    

    
      
        
           

          

          
          

        

        
          11

          
            

          

        

        
          
          

        

      

    

    

    C. Jurisdiction. 
      Notwithstanding the dismissal of the Litigation with prejudice, the Peoples
      Companies, the Illinois Attorney General and the City of Chicago agree that
      the
      Circuit Court of Cook County, Chancery Division, shall retain jurisdiction
      to
      interpret and enforce the terms of this Agreement.

     

    
      	 	
              D.

            	
              Binding
                Agreement.
                This Agreement shall be binding upon, and its benefits shall inure
                to the
                Peoples Companies and their respective heirs, representatives, successors
                and assigns, as well as the respective representatives, successors
                and
                assigns of the Illinois Attorney General and the City of Chicago.
                

               

            

    

    E. Mutual
      Release. In
      accordance with and completion of the terms herein, this Agreement is: (1)
      intended to release and discharge any and all claims that the Illinois Attorney
      General or the City of Chicago ever had, now have or claim or might have or
      claim against the Peoples Companies based upon, arising out of or relating
      to,
      in whole or in part, through the effective date of this Agreement, the
      Litigation, the Reconciliation Cases, and the subpoena served upon Peoples
      Energy Corporation by the Illinois Attorney General, dated August 25, 2005,
      and
      (2) is intended to release and discharge any and all claims that the Peoples
      Companies ever had, now have or claim or might have or claim against the
      Illinois Attorney General or the City of Chicago based upon, arising out of,
      or
      relating to, in whole or in part, through the effective date of this Agreement,
      the Litigation, the Reconciliation Cases and the subpoena served upon Peoples
      Energy Corporation by the Illinois Attorney General, dated August 25,
      2005.

    

    
      
        
           

          

          
          

        

        
          12

          
            

          

        

        
          
          

        

      

    

    

    F. Entire
      Agreement. All
      understandings and agreements heretofore made between the parties are superseded
      by and merged into this Agreement, which alone fully and completely expresses
      the agreement between the parties relating to its subject matter, and the same
      is entered into with no party relying upon any statement or representation
      not
      embodied in this Agreement. Any modification of this Agreement may be made
      only
      by an instrument in writing signed by or on behalf of the party to be bound
      by
      such modification. 

     

    G. Severability. If
      any
      portion, clause, phrase or term of this Agreement is later determined by a
      court
      of law to be invalid or unenforceable, for whatever reason, the remaining
      provisions of this Agreement will remain valid and in effect as to the parties,
      and will be unaffected by said determination other than those portions which
      are
      agreed herein to be a condition precedent.

     

    H. Authority
      to Enter Into the Agreement. The
      signatories below, except for the City of Chicago, acknowledge that they have
      the lawful authority to bind the parties for whom they are signing to the terms
      of this Agreement.

     

    I. No
      Admission of Liability. Nothing
      in this Agreement, or any acts performed or documents executed in furtherance
      of
      this Agreement, shall constitute or may be used as an admission that any party
      to this Agreement is liable to any other party or of the validity of any
      allegation or claim or defense contained in the Litigation or the Reconciliation
      Cases.

    

    
      
        
           

          

          
          

        

        
          13

          
            

          

        

        
          
          

        

      

    

    

    J. Recitals. The
      recitals at the beginning of this Agreement are, and shall be construed to
      be,
      an integral part of this Agreement.

     

    K. Headings
      and Interchangeability. The
      headings of sections contained in this Agreement are merely for convenience
      of
      reference and shall not affect the interpretation of any of the provisions
      of
      this Agreement. Whenever the context so requires, the singular shall include
      the
      plural and vice versa. All words and phrases shall be construed as masculine,
      feminine, or gender neutral, according to the context. This Agreement is deemed
      to have been drafted jointly by the parties and any uncertainty or ambiguity
      shall not be construed for or against any party as an attribution of drafting
      to
      such party.

     

    L. Governing
      Law. This
      Agreement shall be governed by, construed and enforced in accordance with the
      laws of the State of Illinois without regard to the choice of law principles
      thereof.

     

    IN
      WITNESS WHEREOF, the
      parties hereto have executed this Settlement Agreement and Release as of day
      and
      year above first written. 

     

    
      	
              THE
                PEOPLE OF THE STATE OF ILLINOIS

               

              /s/
                Paul J. Gaynor

              By:
                The Office of Illinois Attorney General

            	
              THE
                CITY OF CHICAGO

               

              By:
                /s/
                Mara S. Georges

               

              Title:
                Corporation
                Counsel

            
	
              THE
                PEOPLES COMPANIES (as
                defined in this Agreement)

               

              By:
                /s/
                Theodore R. Tetzlaff

               

              Title:
                _____________________

            	 

    

    

    
      
        
           

          

          
          

        

        
          14

          
            

          

        

        
          
          

        

      

    

    

    

    SETTLEMENT
      AGREEMENT AND RELEASE

    

    IN
      WITNESS WHEREOF, the CITIZENS UTILITY BOARD, by authorized signature herein,
      executes the Settlement Agreement entered into on January 17, 2006 between
      and
      among the PEOPLE OF THE STATE OF ILLINOIS, through LISA MADIGAN, ILLINOIS
      ATTORNEY GENERAL (the "Illinois Attorney General") and the CITY OF CHICAGO
      (the
      "City of Chicago"), PEOPLES ENERGY CORPORATION, an Illinois Corporation, THE
      PEOPLES GAS, LIGHT AND COKE COMPANY, an Illinois Corporation ("Peoples Gas"),
      PEOPLES MW, LLC., a Delaware Limited Liability Company, PEOPLES ENERGY RESOURCES
      COMPANY, LLC., an Illinois Limited Liability Company, and NORTH SHORE GAS
      COMPANY, an Illinois Corporation ("North Shore Gas") and agrees to be bound
      by
      all terms therein. A copy of said Settlement Agreement is attached
      hereto.

    

    

    THE
      CITIZENS UTILITY BOARD

    

    By:
        /s/
      David Kolata

    

    Title:
      Executive
      Director

    

    Date:
      February 27, 2006

    

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    EXHIBIT
      2

     

    Settlement
      Agreement Amendment and Addendum

    Page
      1
of 
      7

    

    Amendment
      and Addendum to January 17, 2006 Settlement

    Agreement
      among and between Peoples Energy Corporation,

    Peoples
      Gas Light and Coke Company, Peoples MW, LLC, Peoples

    Energy
      Resources Company, LLC, North Shore Gas Company, the

    City
      of Chicago, the State of Illinois and the Citizen’s Utility
      Board.

    

    

    Pursuant
      to Section VI, F of the Settlement Agreement (“Settlement Agreement”) entered
      into on January 17, 2006 between and among the PEOPLE OF THE STATE OF ILLINOIS,
      through LISA MADIGAN, ILLINOIS ATTORNEY GENERAL (the “Illinois Attorney
      General”) and the CITY OF CHICAGO (the “City of Chicago”), PEOPLES ENERGY
      CORPORATION, an Illinois Corporation, THE PEOPLES GAS, LIGHT AND COKE COMPANY,
      an Illinois Corporation (“Peoples Gas”), PEOPLES MW, LLC., a Delaware Limited
      Liability Company, PEOPLES ENERGY RESOURCES COMPANY, LLC., an Illinois Limited
      Liability Company, and NORTH SHORE GAS COMPANY, an Illinois Corporation (“North
      Shore Gas”) (Peoples Energy Corporation, Peoples Gas, Peoples MW LLC, Peoples
      Energy Resources LLC and North Shore Gas are collectively hereinafter referred
      to as the “Peoples Companies,” unless otherwise designated individually), and
      entered into on February 27, 2006 by the CITIZEN’S UTILITY BOARD (“CUB”), This
      Amendment and Addendum is intended as an Agreement to Amend the Settlement
      Agreement as follows:. 

    

    This
      Amendment and Addendum is intended to comply with the requirements of the
      Settlement Agreement, Section VI, F, requiring all modifications to the
      Settlement Agreement to be in writing.

    

    Other
      than as specifically stated below, this letter is not intended to modify or
      amend any terms of the January 17, 2006 Settlement Agreement.

    

    In
      addition to, or where otherwise noted below in modification of, the terms of
      the
      January 17, 2006 Settlement Agreement, it is hereby agreed to by the Illinois
      Attorney General, the City of Chicago, CUB, and the Peoples Companies as
      follows:

    

    Amendment
      Section A: 

    

    Peoples
      Gas and North Shore Gas’ future HUB Revenues: 

    

    Upon
      approval of the settlement agreement, Peoples Gas and North Shore Gas and all
      Peoples Companies shall account for all of their HUB revenues and third-party
      non-tariff revenues, and any other revenues referred to as HUB revenues or
      non-tariff revenues (as those terms have been used in ICC Docket 01-0707) in
      accordance with 83 Ill. Admin. Code 525.40(d)). All such revenues shall serve
      to
      offset “recoverable gas costs” to arrive at the “gas charge” as those terms
      are

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    Settlement
      Agreement Amendment and Addendum

    Page
      2
      of  7

    

    used
      in
      the Illinois Commerce Commission rules part 525.40(d) and in accordance with
      the
      Public Utilities Act. 83 Ill. Admin. Code 525.40(d); 220 ILCS 5/1-101
et.
      seq.
      The
      Peoples Gas and North Shore Gas and all Peoples Companies agree that this
      accounting of these revenues shall apply to all future Purchased Gas Adjustment
      reconciliation cases and rate cases filed by Peoples Gas and North Shore
      Gas.

    

    Amendment
      Section B: 

    

    Peoples
      Gas and North Shore Gas’ HUB Revenues addressed in dockets 05-0748 and 05-0749
      and in any fiscal year 2006 reconciliation cases regarding Peoples Gas’ and
      North Shore Gas’ Purchased Gas for the 2005/2006 Heating Season:

    

    Peoples
      Gas and North Shore Gas and all Peoples Companies agree that they will not
      oppose an adjustment for the reconciliation years 2005 and 2006 based on HUB
      revenues that have not, to date, been used to offset consumer gas charges in
      those years. 

    

    Peoples
      Gas and North Shore Gas and all Peoples Companies will account for all HUB
      revenues and third-party non-tariff revenues, and any other revenues referred
      to
      as HUB revenues or non-tariff revenues (as those terms have been used in ICC
      Docket 01-0707) for fiscal year 2005 as offsets to the Gas Charge in accordance
      with 83 Ill. Admin. Code 525.40(d) and have agreed not to oppose any offset
      of
      PGA costs addressed in Dockets 05-0748 and 05-0749. Peoples Gas and North Shore
      Gas and all Peoples Companies also agree not to oppose any HUB revenue offset
      of
      PGA costs to be addressed in any purchased gas reconciliation case regarding
      Peoples Gas and North Shore Gas that address periods after fiscal year 2005
      and
      prior to the effective date of new rates approved by the Illinois Commerce
      Commission in the rate cases that the utilities have announced they will file.
      For Dockets 05-0748 and 05-0749 Peoples Gas and North Shore Gas agree to re-file
      and amend any testimony filed in those dockets that is not consistent with
      this
      Amendment and Addendum.

    

    Amendment
      Section C:

    

    Peoples
      Companies’ Agreement to Findings 7, 8, 9, 11, 12, 14 and 15 of the ALJ Proposed
      Order Dated September 20, 2005:

    

    Peoples
      Companies hereby agree to implement prospectively findings 7,
      8, 9,
      11, 12, and 14 of the Administrative Law Judge’s Proposed Order in Docket
      01-0707, entered on September 20, 2005 (“ALJ’s Proposed Order”).

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    Settlement
      Agreement Amendment and Addendum

    Page
      3
      of  7

    

    Peoples
      Companies also agree to comply with finding 15 of the ALJ’s Proposed Order for
      the purpose of allowing the ICC to be able to consider fiscal years 1999-2004
      in
      making prospective behavioral and other recommendations, but not to suggest
      any
      further monetary adjustments beyond the refunds included in the January 17,
      2006
      Settlement Agreement. 

    

    The
      relevant findings of the ALJ’s Proposed Order are attached as Exhibit A to this
      filing.

    

    Amendment
      Section D:

    

    Refund
      To Be Paid In Manner Ordered By the Illinois Commerce
      Commission:

    

    As
      already provided in Section I, C, 3 of the January 17, 2006 Settlement
      Agreement, the Parties agree that the $100 million refund shall be paid by
      any
      method that is acceptable to the ICC. 

    

    Amendment
      Section E:

    

    Interest
      To Be Paid On Refund Amounts:

    

    Peoples
      Companies hereby agree to calculate interest on all refund payments made at
      the
      interest rate provided for in 83 Ill. Admin. Code Part 280.70(e)(1). Interest
      paid on refunds will be calculated prospectively from the date of the Illinois
      Commerce Commission order approving the Settlement Agreement until the refunds
      are paid. 

    

    

    Amendment
      Section F:

    

    Peoples
      Companies agree to forgive all outstanding bad debt for Fiscal Years 2000
      through 2005.

    

    Peoples
      Companies agree to forgive all outstanding bad debt from fiscal years 2000-2005
      existing at the time of the execution of this addendum. Bad debt shall be
      defined as those accounts which have been disconnected and on which no payment
      has been made for six months. Peoples Companies represent that this amount
      totals approximately $207 million and comprises over 250,000 customer accounts.
      Peoples Companies also represent that these amounts are currently in, or subject
      to, collection. 

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    Settlement
      Agreement Amendment and Addendum

    Page
      4
      of  7

    

    For
      both
      the Hardship cases within the projected $52.3 million debt for fiscal year
      2006
      identified in the January 17,2006 Settlement Agreement Section V and the $207
      million identified above, the Peoples Companies agree that they will not pursue,
      directly or indirectly, collection of these amounts from customers or use any
      forgiven amounts as a reason to deny gas service to any customer, and that
      they
      will communicate with the credit reporting agencies for each of these customers
      to remove the adverse credit effects of any reporting of these past due amounts
      and expunge this debt from consumers’ account records, relieving said consumers
      from the debt forever and always.

    

    Amendment
      Section G:

    

    Peoples
      Companies Not To Seek Recovery of Debt Write-Off or Forgiveness In Any Future
      Rate or Reconciliation Cases.

    

    Peoples
      Companies hereby agree that they will not seek recovery in any future rate
      or
      reconciliation cases of any amounts of debt written-off or relieved under
      Sections IV and V of the January 17, 2006 Settlement Agreement. Peoples
      Companies hereby agree that they will not seek recovery in any future rate
      or
      reconciliation cases of any amounts of debt written-off or relieved under
      Section F of this Amendment and Addendum. This agreement does not affect the
      ability of Peoples Companies to recover any future bad debt as specifically
      authorized by the ICC now or in the future. Peoples Companies hereby agree
      that
      they will not seek recovery in any future rate or reconciliation cases of any
      amounts associated with the Conservation and Weatherization Program described
      in
      Section II of the January 17, 2006 Settlement Agreement. 

    

    Amendment
      Section H:

    

    Peoples
      Companies agree to permanently enact the hardship reconnection program described
      in Section IV of the January 17, 2006 Settlement Agreement.

    

    

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    Settlement
      Agreement Amendment and Addendum

    Page
      5
      of  7

    

    

    IN
      WITNESS WHEREOF, the
      parties hereto have executed this Amendment to the Settlement Agreement and
      Release on March 6, 2006.

    

    

    

    THE
      PEOPLE OF THE STATE OF ILLINOIS

    

    /s/
      David Adams, Assistant Attorney General

    By:
      The
      Office of Illinois Attorney General

    

    

    THE
      CITY
      OF CHICAGO

    

    

    By:
      /s/
      Mara S. Georges

    

    Title:
      Corporation
      Counsel

    

    

    THE
      CITIZEN’S UTILITY BOARD

    

    By:
      /s/
      David Kolata

    

    Title:
      Executive
      Director

    

    

    THE
      PEOPLES COMPANIES (as defined in this letter above)

    

    

    By:
      /s/
      Theodore R. Tetzlaff

    

    Title:
      General
      Counsel

    

    

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    Settlement
      Agreement Amendment and Addendum

    Page
      6
      of  7

    

    Exhibit
      A to Settlement Agreement Amendment and Addendum

    

    
      	 	
              (7)
                

            	
              Peoples
                Gas Light and Coke Company shall update its operating agreement,
                which was
                approved by this Commission in Docket No.
                55071;

            

    

    
      	 	
              (8)
                

            	
              Peoples
                Gas Light and Coke Company shall account for all gas physically injected
                into Manlove Field by including the cost associated with maintenance
                gas
                in the amount transferred from purchased gas expense to the gas stored
                underground account, Account 164.1;

            

    

    
      	 	
              (9)
                

            	
              Peoples
                Gas Light and Coke Company shall account for the portion of gas injected
                into the Manlove Storage Field to maintain pressure, as credits from
                Account 164.1, Gas Stored Underground, as charges to Account 117,
                Gas
                Stored Underground, in the case of recoverable cushion gas, or to
                Account
                101, in the case of non-recoverable portions of cushion
                gas;

            

    

    

    *  *  *

    

    
      	 	
              (11)
                

            	
              Peoples
                Gas Light and Coke Company shall revise its maintenance gas accounting
                procedures related to gas injected for the benefit of the North Shore
                Gas
                Company and third-parties to require those entities to bear the cost
                of
                maintenance gas, and it shall revise its maintenance gas accounting
                procedures to ensure that all customers/consumers bear equal
                responsibility for maintenance gas;

            

    

    
      	 	
              (12)
                

            	
              Peoples
                Gas Light and Coke Company shall submit its revised maintenance gas
                accounting procedures to the Commission’s Chief Clerk with a copy to the
                Manager of the Accounting Department within 30 days after the date,
                upon
                which, a final Order is entered in this
                docket;

            

    

    

    *  *  *

    

    
      	 	
              (14)
                

            	
              Peoples
                Gas Light and Coke Company shall submit quarterly reports reflecting
                its
                use of journal entries regarding maintenance gas to the Manager of
                this
                Commission’s Accounting Department within 45 days of the end of each
                quarter, after the date of a final order is entered in this docket,
                through the quarter ending September 30,
                2009;

            

    

    
      	 	
              (15)
                

            	
              Peoples
                Gas Light and Coke Company shall engage outside consultants to perform
                a
                management audit of its gas purchasing practices, gas storage operations
                and storage activities. The firm selected to perform the management
                audit
                shall be independent of Peoples Gas Light and Coke Company, its
                affiliates, Staff, and all parties in this docket, and approved by
                this
                Commission. Monthly reporting of the progress of the conduct of the
                management audit shall be submitted to the Bureau Chief of the
                Commission’s Public Utilities Bureau, with a copy to the Manager of
                the

            

    

    

    
      
        
           

          

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    Settlement
      Agreement Amendment and Addendum

    Page
      7
      of  7

    

    Commission’s
      Accounting Department, until the management audit report has been submitted.
      Completion of this management audit shall occur no later than eighteen months
      after the date, upon which, a final order is entered in this docket. Upon
      completion, copies of the management audit reports shall be submitted to the
      Commission’s Public Utilities Bureau Chief and the Manager of the Commission’s
      Accounting Department;

    

    ALJ
      Proposed Order at 135-136.CITIGROUP MORTGAGE LOAN TRUST INC.
                                    Depositor

                             [_____________________]
                                    Servicer

                             [_____________________]
                               Trust Administrator

                                       and

                             [_____________________]
                                     Trustee

                    -----------------------------------------

                         POOLING AND SERVICING AGREEMENT
                       Dated as of [_____________________]

                    -----------------------------------------

                             [_____________________]

                         Series [_____________________]

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
ARTICLE I DEFINITIONS
<S>                     <C>

SECTION 1.01            Defined Terms.......................................................
SECTION 1.02            Allocation of Certain Interest Shortfalls...........................

ARTICLE II CONVEYANCE OF MORTGAGE LOANS; ORIGINAL ISSUANCE OF CERTIFICATES

SECTION 2.01            Conveyance of Mortgage Loans........................................
SECTION 2.02            Acceptance of the Trust Fund by the Trustee.........................
SECTION 2.03            Repurchase or Substitution of Mortgage Loans by the Seller or
                        the Depositor.......................................................
SECTION 2.04            [Reserved]..........................................................
SECTION 2.05            Representations, Warranties and Covenants of the Servicer...........
SECTION 2.06            Issuance of the Certificates........................................
SECTION 2.07            Conveyance of the REMIC Regular Interests; Acceptance of the
                        Trust REMICs by the Trustee.........................................
SECTION 2.08            Puposes and Powers of the Trust.....................................

ARTICLE III ADMINISTRATION AND SERVICING OF THE MORTGAGE LOANS

SECTION 3.01            Servicer to Act as Servicer.........................................
SECTION 3.02            Sub-Servicing Agreements Between the Servicer and Sub-Servicers.....
SECTION 3.03            Successor Sub-Servicers.............................................
SECTION 3.04            Liability of the Servicer...........................................
SECTION 3.05            No Contractual Relationship Between Sub-Servicers and Trustee,
                        Trust Administrator or Certificateholders...........................
SECTION 3.06            Assumption or Termination of Sub-Servicing Agreements by Trust
                        Administrator.......................................................
SECTION 3.07            Collection of Certain Mortgage Loan Payments........................
SECTION 3.08            Sub-Servicing Accounts..............................................
SECTION 3.09            Collection of Taxes, Assessments and Similar Items; Servicing
                        Accounts............................................................
SECTION 3.10            Collection Account and Distribution Account.........................
SECTION 3.11            Withdrawals from the Collection Account and Distribution
                        Account.............................................................
SECTION 3.12            Investment of Funds in the Collection Account and the
                        Distribution Account................................................
SECTION 3.13            [Reserved]..........................................................
SECTION 3.14            Maintenance of Hazard Insurance and Errors and Omissions and
                        Fidelity Coverage...................................................
SECTION 3.15            Enforcement of Due-On-Sale Clauses; Assumption Agreements...........
SECTION 3.16            Realization Upon Defaulted Mortgage Loans...........................
SECTION 3.17            Trustee to Cooperate; Release of Mortgage Files.....................
SECTION 3.18            Servicing Compensation..............................................
SECTION 3.19            Reports to the Trust Administrator; Collection Account
                        Statements..........................................................
SECTION 3.20            Statement as to Compliance..........................................
SECTION 3.21            Assessments of Compliance and Attestation Reports...................
SECTION 3.22            Access to Certain Documentation.....................................
SECTION 3.23            Title, Management and Disposition of REO Property...................
SECTION 3.24            Obligations of the Servicer in Respect of Prepayment Interest
                        Shortfalls..........................................................
SECTION 3.25            Obligations of the Servicer in Respect of Monthly Payments..........
SECTION 3.26            Commission Reporting................................................
SECTION 3.27            Advance Facility....................................................

ARTICLE IV PAYMENTS TO CERTIFICATEHOLDERS

SECTION 4.01            Distributions.......................................................
SECTION 4.02            Statements to Certificateholders....................................
SECTION 4.03            Remittance Reports; P&I Advances....................................
SECTION 4.04            Allocation of Extraordinary Trust Fund Expenses and Realized
                        Losses..............................................................
SECTION 4.05            Compliance with Withholding Requirements............................
SECTION 4.06            Net WAC Rate Carryover Reserve Account..............................
SECTION 4.07            Commission Reporting................................................
SECTION 4.08            Cap Account.........................................................
SECTION 4.09            [Reserved]..........................................................

ARTICLE V THE CERTIFICATES

SECTION 5.01            The Certificates....................................................
SECTION 5.02            Registration of Transfer and Exchange of Certificates...............
SECTION 5.03            Mutilated, Destroyed, Lost or Stolen Certificates...................
SECTION 5.04            Persons Deemed Owners...............................................
SECTION 5.05            Certain Available Information.......................................

ARTICLE VI THE DEPOSITOR AND THE SERVICER

SECTION 6.01            Liability of the Depositor and the Servicer.........................
SECTION 6.02            Merger or Consolidation of the Depositor or the Servicer............
SECTION 6.03            Limitation on Liability of the Depositor, the Servicer and
                        Others..............................................................
SECTION 6.04            Limitation on Resignation of the Servicer...........................
SECTION 6.05            Rights of the Depositor in Respect of the Servicer..................
SECTION 6.06            Duties of the Credit Risk Manager...................................
SECTION 6.07            Limitation Upon Liability of the Credit Risk Manager................
SECTION 6.08            Removal of the Credit Risk Manager..................................

ARTICLE VII DEFAULT

SECTION 7.01            Servicer Events of Default..........................................
SECTION 7.02            Trust Administrator or Trustee to Act; Appointment of Successor.....
SECTION 7.03            Notification to Certificateholders..................................
SECTION 7.04            Waiver of Servicer Events of Default................................

ARTICLE VIII CONCERNING THE TRUSTEE aND THE TRUST ADMINISTRATOR

SECTION 8.01            Duties of Trustee and Trust Administrator...........................
SECTION 8.02            Certain Matters Affecting the Trustee and the Trust
                        Administrator.......................................................
SECTION 8.03            Neither the Trustee nor Trust Administrator Liable for
                        Certificates or Mortgage Loans......................................
SECTION 8.04            Trustee and Trust Administrator May Own Certificates................
SECTION 8.05            Trustee's, Trust Administrator's and Custodians' Fees and
                        Expenses............................................................
SECTION 8.06            Eligibility Requirements for Trustee and Trust Administrator........
SECTION 8.07            Resignation and Removal of the Trustee and the Trust
                        Administrator.......................................................
SECTION 8.08            Successor Trustee or Trust Administrator............................
SECTION 8.09            Merger or Consolidation of Trustee or Trust Administrator...........
SECTION 8.10            Appointment of Co-Trustee or Separate Trustee.......................
SECTION 8.11            [Reserved]..........................................................
SECTION 8.12            Appointment of Office or Agency.....................................
SECTION 8.13            Representations and Warranties......................................
SECTION 8.14            [Reserved]..........................................................
SECTION 8.15            No Trustee or Trust Administrator Liability for Actions or
                        Inactions of Custodians.............................................

ARTICLE IX TERMINATION

SECTION 9.01            Termination Upon Repurchase or Liquidation of the Mortgage
                        Loans...............................................................
SECTION 9.02            Additional Termination Requirements.................................

ARTICLE X REMIC PROVISIONS

SECTION 10.01           REMIC Administration................................................
SECTION 10.02           Prohibited Transactions and Activities..............................
SECTION 10.03           Servicer, Trustee and Trust Administrator Indemnification...........

ARTICLE XI MISCELLANEOUS PROVISIONS

SECTION 11.01           Amendment...........................................................
SECTION 11.02           Recordation of Agreement; Counterparts..............................
SECTION 11.03           Limitation on Rights of Certificateholders..........................
SECTION 11.04           Governing Law.......................................................
SECTION 11.05           Notices.............................................................
SECTION 11.06           Severability of Provisions..........................................
SECTION 11.07           Notice to Rating Agencies...........................................
SECTION 11.08           Article and Section References......................................
SECTION 11.09           Grant of Security Interest..........................................
SECTION 11.10           Third Party Rights..................................................
</TABLE>

<PAGE>

Exhibits
--------

Exhibit A-1       Form of Class A-1 Certificate
Exhibit A-2       Form of Class A-2A Certificate
Exhibit A-3       Form of Class A-2B Certificate
Exhibit A-4       Form of Class A-2C Certificate
Exhibit A-5       Form of Class A-2D Certificate
Exhibit A-6       Form of Class M-1 Certificate
Exhibit A-7       Form of Class M-2 Certificate
Exhibit A-8       Form of Class M-3 Certificate
Exhibit A-9       Form of Class M-4 Certificate
Exhibit A-10      Form of Class M-5 Certificate
Exhibit A-11      Form of Class M-6 Certificate
Exhibit A-12      Form of Class M-7 Certificate
Exhibit A-13      Form of Class M-8 Certificate
Exhibit A-14      Form of Class M-9 Certificate
Exhibit A-15      Form of Class M-10 Certificate
Exhibit A-16      Form of Class M-11 Certificate
Exhibit A-17      Form of Class M-12 Certificate
Exhibit A-18      Form of Class M-13 Certificate
Exhibit A-19      Form of Class CE Certificate
Exhibit A-20      Form of Class P Certificate
Exhibit A-21      Form of Class R Certificate
Exhibit A-22      Form of Class R-X Certificate
Exhibit B         [Reserved]
Exhibit C         [Reserved]
Exhibit D         Form of Assignment Agreements
Exhibit E         Request for Release
Exhibit F-1       Form of Transferor Representation Letter and Form of
                  Transferee Representation Letter in Connection with Transfer
                  of the Private Certificates Pursuant to Rule 144A Under the
                  1933 Act
Exhibit F-2       Form of Transfer Affidavit and Agreement and Form of
                  Transferor Affidavit in Connection with Transfer of Residual
                  Certificates
Exhibit G         Form of Certification with respect to ERISA and the Code
Exhibit H-1       Form of Certification to be provided by the Depositor with
                  Form 10-K
Exhibit H-2       Form of Certification to be provided to the Depositor by the
                  Trust Administrator
Exhibit H-3       Form of Certification to be provided to the Depositor by the
                  Servicer
Exhibit I         Form of Cap Contract
Exhibit J         Form of Cap Administration Agreement

Schedule 1        Mortgage Loan Schedule
Schedule 2        Prepayment Charge Schedule

<PAGE>

         This Pooling and Servicing Agreement, is dated and effective as of
[_______________], among CITIGROUP MORTGAGE LOAN TRUST INC., as Depositor,
[_______________], as Servicer, [_______________], as Trust Administrator, and
[_______________], as Trustee.

                             PRELIMINARY STATEMENT:

         The Depositor intends to sell pass-through certificates to be issued
hereunder in multiple classes, which in the aggregate will evidence the entire
beneficial ownership interest in each REMIC (as defined herein) created
hereunder. The Trust Fund will consist of a segregated pool of assets comprised
of the Mortgage Loans and certain other related assets subject to this
Agreement.

<PAGE>

                                     REMIC I

         As provided herein, the Trust Administrator will elect to treat the
segregated pool of assets consisting of the Mortgage Loans and certain other
related assets (other than any Servicer Prepayment Charge Payment Amounts, the
Net WAC Rate Carryover Reserve Account, the Cap Account and the Cap Contract)
subject to this Agreement as a REMIC for federal income tax purposes, and such
segregated pool of assets will be designated as "REMIC I." The Class R-I
Interest will be the sole class of "residual interests" in REMIC I for purposes
of the REMIC Provisions (as defined herein). The following table irrevocably
sets forth the designation, the REMIC I Remittance Rate, the initial
Uncertificated Balance and, for purposes of satisfying Treasury regulation
Section 1.860G-1(a)(4)(iii), the "latest possible maturity date" for each of the
REMIC I Regular Interests (as defined herein). None of the REMIC I Regular
Interests will be certificated.

<TABLE>
<CAPTION>
                                         REMIC I                     Initial                  Latest Possible
         Designation                 Remittance Rate          Uncertificated Balance         Maturity Date(1)
        -------------              ------------------        ------------------------      --------------------
<S>                                        <C>                   <C>                          <C>
           I-LTAA                          (2)                   $   [_________]              [____________]
           I-LTA1                          (2)                   $   [_________]              [____________]
           I-LTA2A                         (2)                   $   [_________]              [____________]
           I-LTA2B                         (2)                   $   [_________]              [____________]
           I-LTA2C                         (2)                   $   [_________]              [____________]
           I-LTA2D                         (2)                   $   [_________]              [____________]
           I-LTM1                          (2)                   $   [_________]              [____________]
           I-LTM2                          (2)                   $   [_________]              [____________]
           I-LTM3                          (2)                   $   [_________]              [____________]
           I-LTM4                          (2)                   $   [_________]              [____________]
           I-LTM5                          (2)                   $   [_________]              [____________]
           I-LTM6                          (2)                   $   [_________]              [____________]
           I-LTM7                          (2)                   $   [_________]              [____________]
           I-LTM8                          (2)                   $   [_________]              [____________]
           I-LTM9                          (2)                   $   [_________]              [____________]
           I-LTM10                         (2)                   $   [_________]              [____________]
           I-LTM11                         (2)                   $   [_________]              [____________]
           I-LTM12                         (2)                   $   [_________]              [____________]
           I-LTM13                         (2)                   $   [_________]              [____________]
           I-LTZZ                          (2)                   $   [_________]              [____________]
            I-LTP                          (2)                   $   [_________]              [____________]
          I-LT1SUB                         (2)                   $   [_________]              [____________]
          I-LT1GRP                         (2)                   $   [_________]              [____________]
          I-LT2SUB                         (2)                   $   [_________]              [____________]
          I-LT2GRP                         (2)                   $   [_________]              [____________]
           I-LTXX                          (2)                   $   [_________]              [____________]
</TABLE>

------------
(1)  For purposes of Section 1.860G-1(a)(4)(iii) of the Treasury regulations,
     the Distribution Date immediately following the maturity date for the
     Mortgage Loan with the latest maturity date has been designated as the
     "latest possible maturity date" for each REMIC I Regular Interest.
(2)  Calculated in accordance with the definition of "REMIC I Remittance Rate"
     herein.

<PAGE>

                                    REMIC II

         As provided herein, the Trust Administrator will elect to treat the
segregated pool of assets consisting of the REMIC I Regular Interests as a REMIC
for federal income tax purposes, and such segregated pool of assets will be
designated as "REMIC II." The Class R-II Interest will evidence the sole class
of "residual interests" in REMIC II for purposes of the REMIC Provisions under
federal income tax law. The following table irrevocably sets forth the
designation, the Pass-Through Rate, the initial aggregate Certificate Principal
Balance and, for purposes of satisfying Treasury regulation Section
1.860G-1(a)(4)(iii), the "latest possible maturity date" for the indicated
Classes of Certificates and the Class CE Interest and the Class P Interest,
which are uncertificated.

<TABLE>
<CAPTION>
                                                                Initial Aggregate
                                                              Certificate Principal           Latest Possible
         Designation                Pass-Through Rate                Balance                 Maturity Date(1)
       ---------------             -------------------        ---------------------         -------------------
<S>                                    <C>                       <C>                          <C>
          Class A-1                    Variable(2)               $   [_________]              [____________]
         Class A-2A                    Variable(2)               $   [_________]              [____________]
         Class A-2B                    Variable(2)               $   [_________]              [____________]
         Class A-2C                    Variable(2)               $   [_________]              [____________]
         Class A-2D                    Variable(2)               $   [_________]              [____________]
          Class M-1                    Variable(2)               $   [_________]              [____________]
          Class M-2                    Variable(2)               $   [_________]              [____________]
          Class M-3                    Variable(2)               $   [_________]              [____________]
          Class M-4                    Variable(2)               $   [_________]              [____________]
          Class M-5                    Variable(2)               $   [_________]              [____________]
          Class M-6                    Variable(2)               $   [_________]              [____________]
          Class M-7                    Variable(2)               $   [_________]              [____________]
          Class M-8                    Variable(2)               $   [_________]              [____________]
          Class M-9                    Variable(2)               $   [_________]              [____________]
         Class M-10                    Variable(2)               $   [_________]              [____________]
         Class M-11                    Variable(2)               $   [_________]              [____________]
         Class M-12                    Variable(2)               $   [_________]              [____________]
         Class M-13                    Variable(2)               $   [_________]              [____________]
      Class CE Interest                Variable(3)               $   [_________]              [____________]
      Class P Interest                   N/A(4)                  $   [_________]              [____________]
</TABLE>
----------
(1)  For purposes of Section 1.860G-1(a)(4)(iii) of the Treasury regulations,
     the Distribution Date immediately following the maturity date for the
     Mortgage Loans with the latest maturity date has been designated as the
     "latest possible maturity date" for each Class of Certificates.
(2)  Calculated in accordance with the definition of "Pass-Through Rate" herein.
(3)  The Class CE Interest will accrue interest at their variable Pass-Through
     Rate on the Notional Amount of the Class CE Interest outstanding from time
     to time which shall equal the aggregate Uncertificated Balance of the REMIC
     I Regular Interests (other than REMIC I Regular Interest I-LTP). The Class
     CE Interest will not accrue interest on their Certificate Principal
     Balance.
(4)  The Class P Interest will not accrue interest.

<PAGE>

                                    REMIC III

         As provided herein, the Trust Administrator will elect to treat the
segregated pool of assets consisting of the Class CE Interest as a REMIC for
federal income tax purposes, and such segregated pool of assets will be
designated as "REMIC III." The Class R-III Interest will evidence the sole class
of "residual interests" in REMIC III for purposes of the REMIC Provisions under
federal income tax law. The following table irrevocably sets forth the
designation, the Pass-Through Rate, the initial aggregate Certificate Principal
Balance and, for purposes of satisfying Treasury regulation Section
1.860G-1(a)(4)(iii), the "latest possible maturity date" for the indicated Class
of Certificates.

<TABLE>
<CAPTION>
                                                                Initial Aggregate
                                                              Certificate Principal           Latest Possible
         Designation                Pass-Through Rate                Balance                 Maturity Date(1)
    Class CE Certificates              Variable(2)               $   [_________]              [____________]
   -----------------------         -------------------        ----------------------        -------------------
<S>                                 <C>                       <C>                            <C>

</TABLE>

-----------
(1)  For purposes of Section 1.860G-1(a)(4)(iii) of the Treasury regulations,
     the Distribution Date immediately following the maturity date for the
     Mortgage Loans with the latest maturity date has been designated as the
     "latest possible maturity date" for the Class CE Certificates.
(2)  The Class CE Certificates will receive [__]% of amounts received in respect
     of the Class CE Interest.

<PAGE>

                                    REMIC IV

         As provided herein, the Trust Administrator will elect to treat the
segregated pool of assets consisting of the Class P Interest as a REMIC for
federal income tax purposes, and such segregated pool of assets will be
designated as "REMIC IV." The Class R-IV Interest will evidence the sole class
of "residual interests" in REMIC IV for purposes of the REMIC Provisions under
federal income tax law. The following table irrevocably sets forth the
designation, the Pass-Through Rate, the initial aggregate Certificate Principal
Balance and, for purposes of satisfying Treasury regulation Section
1.860G-1(a)(4)(iii), the "latest possible maturity date" for the indicated
Classes of Certificates.

<TABLE>
<CAPTION>
                                                                Initial Aggregate
                                                              Certificate Principal           Latest Possible
         Designation                Pass-Through Rate                Balance                 Maturity Date(1)
    Class P Certificates               Variable(2)               $   [_________]              [____________]
   -----------------------         -------------------        ----------------------        -------------------
<S>                                 <C>                       <C>                            <C>

</TABLE>

----------
(1)  For purposes of Section 1.860G-1(a)(4)(iii) of the Treasury regulations,
     the Distribution Date immediately following the maturity date for the
     Mortgage Loans with the latest maturity date has been designated as the
     "latest possible maturity date" for the Class P Certificates.
(2)  The Class P Certificates will receive [__]% of amounts received in respect
     of the Class P Interest.

         As of the Cut-off Date, the Group I Mortgage Loans had an aggregate
Stated Principal Balance equal to $[__________] and the Group II Mortgage Loans
had an aggregate Stated Principal Balance equal to $[----------].

         In consideration of the mutual agreements herein contained, the
Depositor, the Servicer, the Trust Administrator and the Trustee agree as
follows:

<PAGE>

                                    ARTICLE I

                                   DEFINITIONS

         SECTION 1.01 Defined Terms.

         Whenever used in this Agreement, including, without limitation, in the
Preliminary Statement hereto, the following words and phrases, unless the
context otherwise requires, shall have the meanings specified in this Article.
Unless otherwise specified, all calculations described herein shall be made on
the basis of a 360-day year consisting of twelve 30-day months.

         "Adjustable-Rate Mortgage Loan": Each of the Mortgage Loans identified
on the Mortgage Loan Schedule as having a Mortgage Rate that is subject to
adjustment.

         "Adjustment Date": With respect to each Adjustable-Rate Mortgage Loan,
the first day of the month in which the Mortgage Rate of such Mortgage Loan
changes pursuant to the related Mortgage Note. The first Adjustment Date
following the Cut-off Date as to each Adjustable-Rate Mortgage Loan is set forth
in the Mortgage Loan Schedule.

         "Affiliate": With respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.

         "Agreement": This Pooling and Servicing Agreement and all amendments
hereof and supplements hereto.

         "Allocated Realized Loss Amount": With respect to any Distribution Date
and any Class of Mezzanine Certificates, (x) the sum of (i) any Realized Losses
allocated to such Class of Certificates on such Distribution Date and (ii) the
amount of any Allocated Realized Loss Amount for such Class of Certificates
remaining unpaid from the previous Distribution Date minus (y) the amount of the
increase in the Certificate Principal Balance of such Class due to the receipt
of Subsequent Recoveries as provided in Section 4.01.

         "Assignment": An assignment of Mortgage, notice of transfer or
equivalent instrument, in recordable form, which is sufficient under the laws of
the jurisdiction wherein the related Mortgaged Property is located to reflect
the record of sale of the Mortgage.

         "Assignment Agreement": Each of the agreements among the Depositor, the
Seller and the related Originator regarding the transfer of the Mortgage Loans
by the Seller to or at the direction of the Depositor, substantially in the form
of Exhibit D annexed hereto.

         "Available Distribution Amount": With respect to any Distribution Date,
an amount equal to the excess of (i) the sum of (a) the aggregate of the Monthly
Payments due during the Due Period relating to such Distribution Date and
received by the Servicer (or by a Sub-Servicer on their behalf) on or prior to
the related Determination Date, after deduction of the Servicing Fee and the
Credit Risk Manager Fee for such Distribution Date, (b) Liquidation Proceeds,
Insurance Proceeds, Principal Prepayments, proceeds from repurchases of and
substitutions for Mortgage Loans, Subsequent Recoveries and other unscheduled
payments of principal and interest in respect of the Mortgage Loans or REO
Properties received by the Servicer during the related Prepayment Period, (c)
the aggregate of any amounts on deposit in the Distribution Account representing
Compensating Interest Payments paid by the Servicer in respect of Prepayment
Interest Shortfalls relating to Principal Prepayments that occurred during the
related Prepayment Period, (d) the aggregate of any P&I Advances made by the
Servicer for such Distribution Date and (e) Prepayment Charges received and
Servicer Prepayment Charge Payment Amounts paid in respect of Mortgage Loans
with respect to which a Principal Prepayment occurred during the related
Prepayment Period and any amounts received from the Seller as contemplated in
Section 2.03(b) in respect of any Principal Prepayment that occurred during or
prior to the related Prepayment Period over (ii) the sum of (a) amounts
reimbursable to the Servicer, the Trustee, the Trust Administrator or a
Custodian pursuant to Section 6.03 or Section 8.05 or otherwise payable in
respect of Extraordinary Trust Fund Expenses, (b) amounts in respect of the
items set forth in clauses (i)(a) through (i)(d) above deposited in the
Collection Account or the Distribution Account in respect of the items set forth
in clauses (i)(a) through (i)(d) above in error, (c) without duplication, any
amounts in respect of the items set forth in clauses (i)(a) and (i)(b) permitted
hereunder to be retained by the Servicer or to be withdrawn by the Servicer from
the Collection Account pursuant to Section 3.18.

         "Balloon Mortgage Loan": A fixed-rate Mortgage Loan that provides for
the payment of the unamortized Stated Principal Balance of such Mortgage Loan in
a single payment at the maturity of such fixed-rate Mortgage Loan that is
substantially greater than the preceding monthly payment.

         "Balloon Payment": A payment of the unamortized Stated Principal
Balance of a fixed-rate Mortgage Loan in a single payment at the maturity of
such fixed-rate Mortgage Loan that is substantially greater than the preceding
Monthly Payment.

         "Bankruptcy Code": The Bankruptcy Reform Act of 1978 (Title 11 of the
United States Code), as amended.

         "Bankruptcy Loss": With respect to any Mortgage Loan, a Realized Loss
resulting from a Deficient Valuation or Debt Service Reduction.

         "Book-Entry Certificate": Any Certificate registered in the name of the
Depository or its nominee. Initially, the Book-Entry Certificates will be the
Class A Certificates and the Mezzanine Certificates.

         "Book-Entry Custodian": The custodian appointed pursuant to Section
5.01.

         "Business Day": Any day other than a Saturday, a Sunday or a day on
which banking or savings and loan institutions in the State of New York, the
State of Texas, the State of Missouri, the State of Iowa, the State of Maryland,
the State of California, the State of Arizona, or in the city in which the
Corporate Trust Office of the Trustee or the Corporate Trust Office of the Trust
Administrator is located, are authorized or obligated by law or executive order
to be closed.

         "Cap Account": The account or accounts created and maintained pursuant
to Section 4.08. The Cap Account must be an Eligible Account.

         "Cap Administration Agreement": As defined in Section 4.01.

         "Cap Administrator": [____________].

         "Cap Contract": The cap contract between the Trustee on behalf of the
Trust and the Cap Provider in the form attached hereto as Exhibit I.

         "Cap Provider": [____________]

         "Cash-out Refinancing": A Refinanced Mortgage Loan the proceeds of
which were in excess of the principal balance of any existing first mortgage on
the related Mortgaged Property and related closing costs, and were used to pay
any such existing first mortgage, related closing costs and subordinate
mortgages on the related Mortgaged Property.

         "Certificate": Any one of the Citigroup Mortgage Loan Trust Inc.,
[____________], Series [____________], issued under this Agreement.

         "Certificate Factor": With respect to any Class of Certificates as of
any Distribution Date, a fraction, expressed as a decimal carried to six places,
the numerator of which is the aggregate Certificate Principal Balance (or the
Notional Amount, in the case of the Class CE Certificates) of such Class of
Certificates on such Distribution Date (after giving effect to any distributions
of principal and allocations of Realized Losses and Extraordinary Trust Fund
Expenses in reduction of the Certificate Principal Balance (or the Notional
Amount, in the case of the Class CE Certificates) of such Class of Certificates
to be made on such Distribution Date), and the denominator of which is the
initial aggregate Certificate Principal Balance (or the Notional Amount, in the
case of the Class CE Certificates) of such Class of Certificates as of the
Closing Date.

         "Certificate Margin": With respect to the Floating Rate Certificates
and for purposes of the Marker Rate and the Maximum I-LTZZ Uncertificated
Interest Deferral Amount, the specified REMIC I Regular Interest as follows:

                                                        Certificate Margin
                                                 ------------------------------
         Class       REMIC I Regular Interest      (1) (%)           (2) (%)
       ---------     ------------------------    ----------        ------------
          A-1                 I-LTA1               [____]%           [____]%
          A-2A               I-LTA2A               [____]%           [____]%
          A-2B               I-LTA2B               [____]%           [____]%
          A-2C               I-LTA2C               [____]%           [____]%
          A-2D               I-LTA2D               [____]%           [____]%
          M-1                 I-LTM1               [____]%           [____]%
          M-2                 I-LTM1               [____]%           [____]%
          M-3                 I-LTM3               [____]%           [____]%
          M-4                 I-LTM4               [____]%           [____]%
          M-5                 I-LTM5               [____]%           [____]%
          M-6                 I-LTM6               [____]%           [____]%
          M-7                 I-LTM7               [____]%           [____]%
          M-8                 I-LTM8               [____]%           [____]%
          M-9                 I-LTM9               [____]%           [____]%
          M-10               I-LTM10               [____]%           [____]%
          M-11               I-LTM11               [____]%           [____]%
          M-12               I-LTM12               [____]%           [____]%
          M-13               I-LTM13               [____]%           [____]%

         ----------
         (1)      For each Interest Accrual Period for each Distribution Date on
                  or prior to the Optional Termination Date.

          (2)     For each other Interest Accrual Period.

         "Certificateholder" or "Holder": The Person in whose name a Certificate
is registered in the Certificate Register, except that a Disqualified
Organization or a Non-United States Person shall not be a Holder of a Residual
Certificate for any purposes hereof and, solely for the purposes of giving any
consent pursuant to this Agreement, any Certificate registered in the name of
the Depositor or the Servicer or any Affiliate thereof shall be deemed not to be
outstanding and the Voting Rights to which it is entitled shall not be taken
into account in determining whether the requisite percentage of Voting Rights
necessary to effect any such consent has been obtained, except as otherwise
provided in Section 11.01. The Trustee and the Trust Administrator may
conclusively rely upon a certificate of the Depositor or the Servicer in
determining whether a Certificate is held by an Affiliate thereof. All
references herein to "Holders" or "Certificateholders" shall reflect the rights
of Certificate Owners as they may indirectly exercise such rights through the
Depository and participating members thereof, except as otherwise specified
herein; provided, however, that the Trustee and the Trust Administrator shall be
required to recognize as a "Holder" or "Certificateholder" only the Person in
whose name a Certificate is registered in the Certificate Register.

         "Certificate Owner": With respect to a Book-Entry Certificate, the
Person who is the beneficial owner of such Certificate as reflected on the books
of the Depository or on the books of a Depository Participant or on the books of
an indirect participating brokerage firm for which a Depository Participant acts
as agent.

         "Certificate Principal Balance": With respect to each Class A
Certificate, Mezzanine Certificate or Class P Certificate as of any date of
determination, the Certificate Principal Balance of such Certificate on the
Distribution Date immediately prior to such date of determination plus any
Subsequent Recoveries added to the Certificate Principal Balance of such
Certificate pursuant to Section 4.01, minus all distributions allocable to
principal made thereon and, in the case of the Mezzanine Certificates, Realized
Losses allocated thereto on such immediately prior Distribution Date (or, in the
case of any date of determination up to and including the first Distribution
Date, the initial Certificate Principal Balance of such Certificate, as stated
on the face thereof). With respect to the Class CE Certificates as of any date
of determination, an amount equal to the Percentage Interest evidenced by such
Certificate times the excess, if any, of (A) the then aggregate Uncertificated
Balance of the REMIC I Regular Interests over (B) the then aggregate Certificate
Principal Balance of the Class A Certificates, the Mezzanine Certificates and
the Class P Certificates then outstanding.

         "Certificate Register" and "Certificate Registrar": The register
maintained pursuant to Section 5.02. [____________] will act as Certificate
Registrar, for so long as it is Trust Administrator under this Agreement.

         "Class": Collectively, all of the Certificates bearing the same class
designation.

         "Class A-1 Certificates": Any one of the Class A-1 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-1 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class A-2A Certificates": Any one of the Class A-2A Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-2 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class A-2B Certificates": Any one of the Class A-2B Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-3 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class A-2C Certificates": Any one of the Class A-2C Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-4 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class A-2D Certificates": Any one of the Class A-3C Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-5 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class A Certificates": Collectively, the Class A-1 Certificates, the
Class A-2A Certificates, the Class A-2B Certificates, the Class A-2C
Certificates and the Class A-2D Certificates.

         "Class A Principal Distribution Amount": With respect to any
Distribution Date, an amount equal to the sum of (i) the Group I Senior
Principal Distribution Amount and (ii) the Group II Senior Principal
Distribution Amount.

         "Class CE Certificate": Any one of the Class CE Certificates executed,
authenticated and delivered by the Trust Administrator, substantially in the
form annexed hereto as Exhibit A-19 and evidencing a Regular Interest in REMIC
III for purposes of the REMIC Provisions.

         "Class CE Interest": An uncertificated interest in the Trust Fund held
by the Trust Administrator on behalf of the Holders of the Class CE
Certificates, evidencing a Regular Interest in REMIC II for purposes of the
REMIC Provisions.

         "Class M-1 Certificate": Any one of the Class M-1 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-6 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-1 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class A
Principal Distribution Amount on such Distribution Date) and (ii) the
Certificate Principal Balance of the Class M-1 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-2 Certificate": Any one of the Class M-2 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-7 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-2 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class A
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date) and (iii) the
Certificate Principal Balance of the Class M-2 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-3 Certificate": Any one of the Class M-3 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-8 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-3 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class A
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date) and (iv) the
Certificate Principal Balance of the Class M-3 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-4 Certificate": Any one of the Class M-4 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-9 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-4 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class A
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date) and (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
[__]% and (ii) the aggregate Stated Principal Balance of the Mortgage Loans as
of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (B) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $[____________].

         "Class M-5 Certificate": Any one of the Class M-5 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-10 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-5 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date) and (vi) the
Certificate Principal Balance of the Class M-5 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-6 Certificate": Any one of the Class M-6 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-11 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-6 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distributions of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date) and (vii) the
Certificate Principal Balance of the Class M-6 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-7 Certificate": Any one of the Class M-7 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-12 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-7 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date), (vii) the Certificate
Principal Balance of the Class M-6 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-6
Principal Distribution Amount on such Distribution Date) and (viii) the
Certificate Principal Balance of the Class M-7 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-8 Certificate": Any one of the Class M-8 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-13 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-8 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date), (vii) the Certificate
Principal Balance of the Class M-6 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-6
Principal Distribution Amount on such Distribution Date), (viii) the Certificate
Principal Balance of the Class M-7 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-7
Principal Distribution Amount on such Distribution Date) and (viii) the
Certificate Principal Balance of the Class M-8 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-9 Certificate": Any one of the Class M-9 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-14 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-9 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date), (vii) the Certificate
Principal Balance of the Class M-6 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-6
Principal Distribution Amount on such Distribution Date), (viii) the Certificate
Principal Balance of the Class M-7 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-7
Principal Distribution Amount on such Distribution Date), (ix) the Certificate
Principal Balance of the Class M-8 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-8
Principal Distribution Amount on such Distribution Date) and (x) the Certificate
Principal Balance of the Class M-9 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
[__]% and (ii) the aggregate Stated Principal Balance of the Mortgage Loans as
of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (B) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $[____________].

         "Class M-10 Certificate": Any one of the Class M-10 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-15 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-10 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date), (vii) the Certificate
Principal Balance of the Class M-6 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-6
Principal Distribution Amount on such Distribution Date), (viii) the Certificate
Principal Balance of the Class M-7 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-7
Principal Distribution Amount on such Distribution Date), (ix) the Certificate
Principal Balance of the Class M-8 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-8
Principal Distribution Amount on such Distribution Date), (x) the Certificate
Principal Balance of the Class M-9 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-9
Principal Distribution Amount on such Distribution Date) and (xi) the
Certificate Principal Balance of the Class M-10 Certificates immediately prior
to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-11 Certificate": Any one of the Class M-11 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-16 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-11 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date), (vii) the Certificate
Principal Balance of the Class M-6 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-6
Principal Distribution Amount on such Distribution Date), (viii) the Certificate
Principal Balance of the Class M-7 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-7
Principal Distribution Amount on such Distribution Date), (ix) the Certificate
Principal Balance of the Class M-8 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-8
Principal Distribution Amount on such Distribution Date), (x) the Certificate
Principal Balance of the Class M-9 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-9
Principal Distribution Amount on such Distribution Date), (xi) the Certificate
Principal Balance of the Class M-10 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-10
Principal Distribution Amount on such Distribution Date) and (xii) the
Certificate Principal Balance of the Class M-11 Certificates immediately prior
to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[------------].

         "Class M-12 Certificate": Any one of the Class M-12 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-17 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-12 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date), (vii) the Certificate
Principal Balance of the Class M-6 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-6
Principal Distribution Amount on such Distribution Date), (viii) the Certificate
Principal Balance of the Class M-7 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-7
Principal Distribution Amount on such Distribution Date), (ix) the Certificate
Principal Balance of the Class M-8 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-8
Principal Distribution Amount on such Distribution Date), (x) the Certificate
Principal Balance of the Class M-9 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-9
Principal Distribution Amount on such Distribution Date), (xi) the Certificate
Principal Balance of the Class M-10 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-10
Principal Distribution Amount on such Distribution Date), (xii) the Certificate
Principal Balance of the Class M-11 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-11
Principal Distribution Amount on such Distribution Date) and (xiii) the
Certificate Principal Balance of the Class M-12 Certificates immediately prior
to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class M-13 Certificate": Any one of the Class M-13 Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-18 and evidencing a Regular Interest in
REMIC II for purposes of the REMIC Provisions.

         "Class M-13 Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-3
Principal Distribution Amount on such Distribution Date), (v) the Certificate
Principal Balance of the Class M-4 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-4
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-5
Principal Distribution Amount on such Distribution Date), (vii) the Certificate
Principal Balance of the Class M-6 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-6
Principal Distribution Amount on such Distribution Date), (viii) the Certificate
Principal Balance of the Class M-7 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-7
Principal Distribution Amount on such Distribution Date), (ix) the Certificate
Principal Balance of the Class M-8 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-8
Principal Distribution Amount on such Distribution Date), (x) the Certificate
Principal Balance of the Class M-9 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-9
Principal Distribution Amount on such Distribution Date), (xi) the Certificate
Principal Balance of the Class M-10 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-10
Principal Distribution Amount on such Distribution Date), (xii) the Certificate
Principal Balance of the Class M-11 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-11
Principal Distribution Amount on such Distribution Date), (xiii) the Certificate
Principal Balance of the Class M-12 Certificates immediately prior to such
Distribution Date (after taking into account the distribution of the Class M-12
Principal Distribution Amount on such Distribution Date) and (iv) the
Certificate Principal Balance of the Class M-13 Certificates immediately prior
to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately [__]% and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $[____________].

         "Class P Certificate": Any one of the Class P Certificates executed,
authenticated and delivered by the Trust Administrator, substantially in the
form annexed hereto as Exhibit A-20 and evidencing a Regular Interest in REMIC
IV for purposes of the REMIC Provisions.

         "Class P Interest": An uncertificated interest in the Trust Fund held
by the Trust Administrator on behalf of the Holders of the Class P Certificates,
evidencing a Regular Interest in REMIC II for purposes of the REMIC Provisions.

         "Class R Certificate": Any one of the Class R Certificates executed,
authenticated and delivered by the Trust Administrator, substantially in the
form annexed hereto as Exhibit A-21 and evidencing the ownership of the Class
R-I Interest and the Class R-II Interest.

         "Class R-X Certificate": Any one of the Class R-X Certificates
executed, authenticated and delivered by the Trust Administrator, substantially
in the form annexed hereto as Exhibit A-22 and evidencing the ownership of the
Class R-III Interest and the Class R-IV Interest.

         "Class R-I Interest": The uncertificated Residual Interest in REMIC I.

         "Class R-II Interest": The uncertificated Residual Interest in REMIC
II.

         "Class R-III Interest": The uncertificated Residual Interest in REMIC
III.

         "Class R-IV Interest": The uncertificated Residual Interest in REMIC
IV.

         "Closing Date": [____________].

         "Code": The Internal Revenue Code of 1986, as amended.

         "Collection Account": The account or accounts created and maintained by
the Servicer pursuant to Section 3.10(a), which shall be entitled
"[____________], as servicer for [____________], as Trustee, in trust for the
registered holders of Citigroup Mortgage Loan Trust, [____________], Series
[____________]," and which must be an Eligible Account.

         "Commission": The Securities and Exchange Commission.

         "Compensating Interest Payment": With respect to any Distribution Date
and the Mortgage Loans for which a Principal Prepayment in full or in part was
received during the related Prepayment Period, an amount equal to the lesser of
(A) the aggregate of the Prepayment Interest Shortfalls for the related
Distribution Date and (B) the aggregate Servicing Fee received in the related
Due Period.

         "Corresponding Certificate": With respect to each REMIC I Regular
Interest, the Class of Regular Certificates listed below:

       REMIC I Regular Interest             Class
       ------------------------          -------------
                I-LTA1                    Class A-1
               I-LTA2A                    Class A-2A
               I-LTA2B                    Class A-2B
               I-LTA2C                    Class A-2C
               I-LTA2D                    Class A-2D
                I-LTM1                    Class M-1
                I-LTM2                    Class M-2
                I-LTM3                    Class M-3
                I-LTM4                    Class M-4
                I-LTM5                    Class M-5
                I-LTM6                    Class M-6
                I-LTM7                    Class M-7
                I-LTM8                    Class M-8
                I-LTM9                    Class M-9
               I-LTM10                    Class M-10
               I-LTM11                    Class M-11
               I-LTM12                    Class M-12
               I-LTM13                    Class M-13
                I-LTP                      Class P

         "Corporate Trust Office": The principal corporate trust office of the
Trustee or the Trust Administrator at which at any particular time its corporate
trust business in connection with this Agreement shall be administered, which
office, with respect to the Trust Administrator, at the date of the execution of
this instrument is located at 388 Greenwich, 14th Floor, New York New York
10013, or such other address as the Trust Administrator may designate from time
to time by notice to the Certificateholders, the Depositor, the Servicer and the
Trustee and, with respect to the Trustee, at the date of the execution of this
instrument is located at [____________], Attention: [____________], or such
other address as the Trustee may designate from time to time by notice to the
Certificateholders, the Depositor, the Servicer and the Trust Administrator.

         "Credit Risk Manager": [____________], a [____________] corporation,
and its successors and assigns.

         "Credit Risk Management Agreement": The agreement, dated as of the
Closing Date, between the Credit Risk Manager and the Servicer, regarding the
loss mitigation and advisory services to be provided by the Credit Risk Manager.

         "Credit Risk Manager Fee": With respect to any Distribution Date, an
amount equal to the Credit Risk Manager Fee Rate accrued for one month on the
aggregate Stated Principal Balance of the Mortgage Loans as of the first day of
the related Due Period.

         "Credit Risk Manager Fee Rate": [__]% per annum.

         "Cumulative Realized Loss Percentage": The aggregate amount of Realized
Losses incurred since the Cut-off Date through the last day of the related Due
Period (after reduction for all Subsequent Recoveries received from the Cut-off
Date through the Prepayment Period) divided by the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.

         "Custodian": A document custodian appointed by the Trustee to perform
(or in the case of the related initial Custodian otherwise engaged to perform)
custodial duties with respect to the Mortgage Files. The initial Custodian is
[___________]. A Custodian may be the Trustee, any Affiliate of the Trustee or
an independent entity.

         "Custodial Agreement": An agreement pursuant to which a Custodian
performs custodial duties with respect to the Mortgage Files. With respect to
the related initial Custodian, the applicable agreement pursuant to which the
related initial Custodian performs its custodial duties with respect to the
Mortgage Files.

         "Cut-off Date": With respect to each Original Mortgage Loan,
[___________]. With respect to all Qualified Substitute Mortgage Loans, their
respective dates of substitution. References herein to the "Cut-off Date," when
used with respect to more than one Mortgage Loan, shall be to the respective
Cut-off Dates for such Mortgage Loans.

         "Debt Service Reduction": With respect to any Mortgage Loan, a
reduction in the scheduled Monthly Payment for such Mortgage Loan by a court of
competent jurisdiction in a proceeding under the Bankruptcy Code, except such a
reduction resulting from a Deficient Valuation.

         "Deficient Valuation": With respect to any Mortgage Loan, a valuation
of the related Mortgaged Property by a court of competent jurisdiction in an
amount less than the then outstanding Stated Principal Balance of the Mortgage
Loan, which valuation results from a proceeding initiated under the Bankruptcy
Code.

         "Definitive Certificates": As defined in Section 5.01(b).

         "Deleted Mortgage Loan": A Mortgage Loan replaced or to be replaced by
a Qualified Substitute Mortgage Loan.

         "Delinquency Percentage": As of the last day of the related Due Period,
the percentage equivalent of a fraction, the numerator of which is the aggregate
Stated Principal Balance of the Mortgage Loans that, as of the last day of the
previous calendar month, are 60 or more days delinquent, are in foreclosure,
have been converted to REO Properties or in bankruptcy (and delinquent 60 days
or more), and the denominator of which is the aggregate Stated Principal Balance
of the Mortgage Loans and REO Properties as of the last day of the previous
calendar month.

         "Depositor": Citigroup Mortgage Loan Trust Inc., a Delaware
corporation, or its successor in interest.

         "Depository": The Depository Trust Company, or any successor Depository
hereafter named. The nominee of the initial Depository, for purposes of
registering those Certificates that are to be Book-Entry Certificates, is CEDE &
Co. The Depository shall at all times be a "clearing corporation" as defined in
Section 8-102(3) of the Uniform Commercial Code of the State of New York and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended.

         "Depository Institution": Any depository institution or trust company,
including the Trustee and the Trust Administrator, that (a) is incorporated
under the laws of the United States of America or any State thereof, (b) is
subject to supervision and examination by federal or state banking authorities
and (c) has, or is a subsidiary of a holding company that has, an outstanding
unsecured commercial paper or other short-term unsecured debt obligations that
are rated in the highest rating category (P-1 by Moody's, F-1 by Fitch and A-1
by S&P) by the Rating Agencies (or a comparable rating if S&P, Moody's and Fitch
are not the Rating Agencies).

         "Depository Participant": A broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.

         "Determination Date": With respect to each Distribution Date, the 15th
day of the calendar month in which such Distribution Date occurs or, if such
15th day is not a Business Day, the Business Day immediately preceding such 15th
day.

         "Directly Operate": With respect to any REO Property, the furnishing or
rendering of services to the tenants thereof, the management or operation of
such REO Property, the holding of such REO Property primarily for sale to
customers, the performance of any construction work thereon or any use of such
REO Property in a trade or business conducted by REMIC I, other than through an
Independent Contractor; provided, however, that the Trustee (or the Servicer on
behalf of the Trustee) shall not be considered to Directly Operate an REO
Property solely because the Trustee (or the Servicer on behalf of the Trustee)
establishes rental terms, chooses tenants, enters into or renews leases, deals
with taxes and insurance, or makes decisions as to repairs or capital
expenditures with respect to such REO Property.

         "Disqualified Organization": Any of the following: (i) the United
States, any State or political subdivision thereof, any possession of the United
States, or any agency or instrumentality of any of the foregoing (other than an
instrumentality which is a corporation if all of its activities are subject to
tax and, except for Freddie Mac, a majority of its board of directors is not
selected by such governmental unit), (ii) any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (iii) any organization (other than certain farmers' cooperatives
described in Section 521 of the Code) which is exempt from the tax imposed by
Chapter 1 of the Code (including the tax imposed by Section 511 of the Code on
unrelated business taxable income), (iv) rural electric and telephone
cooperatives described in Section 1381(a)(2)(C) of the Code, (v) an "electing
large partnership" within the meaning of Section 775 of the Code and (vi) any
other Person so designated by the Trustee or Trust Administrator based upon an
Opinion of Counsel that the holding of an Ownership Interest in a Residual
Certificate by such Person may cause any REMIC or any Person having an Ownership
Interest in any Class of Certificates (other than such Person) to incur a
liability for any federal tax imposed under the Code that would not otherwise be
imposed but for the Transfer of an Ownership Interest in a Residual Certificate
to such Person. The terms "United States," "State" and "international
organization" shall have the meanings set forth in Section 7701 of the Code or
successor provisions.

         "Distribution Account": The trust account or accounts created and
maintained by the Trust Administrator pursuant to Section 3.10(b) which shall be
entitled "[___________], as Trust Administrator for [___________] as Trustee, in
trust for the registered holders of Citigroup Mortgage Loan Trust Inc.,
[___________], Series [___________]." The Distribution Account must be an
Eligible Account.

         "Distribution Date": The 25th day of any month, or if such 25th day is
not a Business Day, the Business Day immediately following such 25th day,
commencing in [___________].

         "DOL": The United States Department of Labor or any successor in
interest.

         "DOL Regulations": The regulations promulgated by the DOL at 29
C.F.R.ss.2510.3-101.

         "Due Date": With respect to each Distribution Date, the first day of
the calendar month in which such Distribution Date occurs, which is the day of
the month on which the Monthly Payment is due on a Mortgage Loan, exclusive of
any days of grace.

         "Due Period": With respect to any Distribution Date, the period
commencing on the second day of the calendar month preceding the calendar month
in which such Distribution Date occurs and ending on the related Due Date.

         "Eligible Account": Any of (i) an account or accounts maintained with a
Depository Institution, (ii) an account or accounts the deposits in which are
fully insured by the FDIC, (iii) a trust account or accounts maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company acting in its fiduciary capacity or (iv) an account
otherwise acceptable to each Rating Agency without reduction or withdrawal of
their then current ratings of the Certificates as evidenced by a letter from
each Rating Agency to the Trustee and Trust Administrator. Eligible Accounts may
bear interest.

         "ERISA": The Employee Retirement Income Security Act of 1974, as
amended.

         "Estate in Real Property": A fee simple estate in a parcel of land.

         "Excess Overcollateralized Amount": With respect to the Class A
Certificates and the Mezzanine Certificates and any Distribution Date, the
excess, if any, of (i) the Overcollateralized Amount for such Distribution Date
(calculated for this purpose only after assuming that [__]% of the Principal
Remittance Amount on such Distribution Date has been distributed) over (ii) the
Overcollateralization Target Amount for such Distribution Date.

         "Expense Adjusted Maximum Mortgage Rate": With respect to any Mortgage
Loan (or the related REO Property) as of any date of determination, a per annum
rate of interest equal to the then applicable Maximum Mortgage Rate (or Mortgage
Rate, in the case of any fixed-rate Mortgage Loan) for such Mortgage Loan minus
the sum of the (i) the Servicing Fee Rate and (ii) the Credit Risk Manager Fee
Rate.

         "Expense Adjusted Mortgage Rate": With respect to any Mortgage Loan (or
the related REO Property) as of any date of determination, a per annum rate of
interest equal to the then applicable Mortgage Rate for such Mortgage Loan minus
the sum of the (i) the Servicing Fee Rate and (ii) the Credit Risk Manager Fee
Rate.

         "Extraordinary Trust Fund Expenses": Any amounts reimbursable to the
Servicer or the Depositor pursuant to Section 6.03, any amounts payable from the
Distribution Account in respect of taxes pursuant to Section 10.01(g)(iii), any
amounts reimbursable to the Trustee, the Trust Administrator or a Custodian from
the Trust Fund pursuant to Section 2.01 or Section 8.05 and any other costs,
expenses, liabilities and losses borne by the Trust Fund (exclusive of any cost,
expense, liability or loss that is specific to a particular Mortgage Loan or REO
Property and is taken into account in calculating a Realized Loss in respect
thereof) for which the Trust Fund has not and, in the reasonable good faith
judgment of the Trust Administrator, shall not, obtain reimbursement or
indemnification from any other Person.

         "Fannie Mae": Fannie Mae, formerly known as the Federal National
Mortgage Association, or any successor thereto.

         "FDIC": Federal Deposit Insurance Corporation or any successor thereto.

         "Final Recovery Determination": With respect to any defaulted Mortgage
Loan or any REO Property (other than a Mortgage Loan or REO Property purchased
by the related Originator, the Seller, the Depositor or the Servicer pursuant to
or as contemplated by Section 2.03 or Section 9.01), a determination made by the
Servicer that all Liquidation Proceeds have been recovered. The Servicer shall
maintain records of each Final Recovery Determination made thereby.

         "Fitch": Fitch Ratings, or its successor in interest.

         "Floating Rate Certificates": The Class A Certificates and the
Mezzanine Certificates.

         "Formula Rate": With respect to any Distribution Date and each Class of
Floating Rate Certificates, the lesser of (i) One-Month LIBOR plus the related
Certificate Margin and (ii) the related Maximum Cap Rate.

         "Freddie Mac": Freddie Mac, formally known as the Federal Home Loan
Mortgage Corporation, or any successor thereto.

         "Gross Margin": With respect to each Adjustable-Rate Mortgage Loan, the
fixed percentage set forth in the related Mortgage Note that is added to the
Index on each Adjustment Date in accordance with the terms of the related
Mortgage Note used to determine the Mortgage Rate for such Adjustable-Rate
Mortgage Loan.

         "Group I Allocation Percentage": With respect to the Group I
Certificates and any Distribution Date, the percentage equivalent of a fraction,
the numerator of which is (x) the Group I Principal Remittance Amount for such
Distribution Date and the denominator of which is (y) the Principal Remittance
Amount for such Distribution Date.

         "Group I Certificates": The Class A-1 Certificates. "Group I Interest
Remittance Amount": For any Distribution Date, that portion of the Available
Distribution Amount for the related Distribution Date that represents interest
received or advanced on the Group I Mortgage Loans and Compensating Interest
Payments on the Group I Mortgage Loans (net of Servicing Fees and Credit Risk
Manager Fees).

         "Group I Mortgage Loan": A Mortgage Loan assigned to Loan Group I. All
Group I Mortgage Loans have a principal balance at origination that conforms to
Freddie Mac loan limits.

         "Group I Principal Distribution Amount": With respect to any
Distribution Date, the sum of (i) the principal portion of each Monthly Payment
due on the Group I Mortgage Loans during the related Due Period, whether or not
received on or prior to the related Determination Date; (ii) the Stated
Principal Balance of any Group I Mortgage Loan that was purchased during the
related Prepayment Period pursuant to or as contemplated by Section 2.03 or
Section 9.01 and the amount of any shortfall deposited in the Collection Account
in connection with the substitution of a Deleted Mortgage Loan pursuant to
Section 2.03 during the related Prepayment Period; (iii) the principal portion
of all other unscheduled collections (including, without limitation, Principal
Prepayments, Insurance Proceeds, Liquidation Proceeds, Subsequent Recoveries and
REO Principal Amortization) received on the Group I Mortgage Loans during the
related Prepayment Period, net of any portion thereof that represents a recovery
of principal for which an Advance was made by the Servicer pursuant to Section
4.03 in respect of a preceding Distribution Date and (iv) the Group I Allocation
Percentage of any Overcollateralization Increase Amount for such Distribution
Date minus (v) the Group I Allocation Percentage of any Overcollateralization
Reduction Amount for such Distribution Date. In no event will the Principal
Distribution Amount with respect to any Distribution Date be (x) less than zero
or (y) greater than the then outstanding aggregate Certificate Principal Balance
of the Floating Rate Certificates.

         "Group I Principal Remittance Amount": For any Distribution Date, that
portion of the Available Distribution Amount equal to the sum of the amounts set
forth in (i) through (iii) of the definition of Group I Principal Distribution
Amount.

         "Group I Senior Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the aggregate Certificate Principal Balance
of the Group I Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) approximately [__]% and (ii) the aggregate
Stated Principal Balance of the Group I Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Stated Principal Balance of the Group I Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) minus $[___________].

         "Group II Allocation Percentage": With respect to the Group II
Certificates and any Distribution Date, the percentage equivalent of a fraction,
the numerator of which is (x) the Group II Principal Remittance Amount for such
Distribution Date and the denominator of which is (y) the Principal Remittance
Amount for such Distribution Date.

         "Group II Certificates": The Class A-2A, Class A-2B, Class A-2C and
Class A-2D Certificates.

         "Group II Interest Remittance Amount": For any Distribution Date, that
portion of the Available Distribution Amount for the related Distribution Date
that represents interest received or advanced on the Group II Mortgage Loans and
Compensating Interest Payments on the Group II Mortgage Loans (net of Servicing
Fees and Credit Risk Manager Fees).

         "Group II Mortgage Loan": A Mortgage Loan assigned to Loan Group II.
All Group II Mortgage Loans have a principal balance at origination that may or
may not conform to Freddie Mac loan limits.

         "Group II Principal Distribution Amount": With respect to any
Distribution Date, the sum of (i) the principal portion of each Monthly Payment
due on the Group II Mortgage Loans during the related Due Period, whether or not
received on or prior to the related Determination Date; (ii) the Stated
Principal Balance of any Group II Mortgage Loan that was purchased during the
related Prepayment Period pursuant to or as contemplated by Section 2.03 or
Section 9.01 and the amount of any shortfall deposited in the Collection Account
in connection with the substitution of a Deleted Mortgage Loan pursuant to
Section 2.03 during the related Prepayment Period; (iii) the principal portion
of all other unscheduled collections (including, without limitation, Principal
Prepayments, Insurance Proceeds, Liquidation Proceeds, Subsequent Recoveries and
REO Principal Amortization) received on the Group II Mortgage Loans during the
related Prepayment Period, net of any portion thereof that represents a recovery
of principal for which an Advance was made by the Servicer pursuant to Section
4.03 in respect of a preceding Distribution Date and (iv) the Group II
Allocation Percentage of any Overcollateralization Increase Amount for such
Distribution Date minus (v) the Group II Allocation Percentage of any
Overcollateralization Reduction Amount for such Distribution Date. In no event
will the Principal Distribution Amount with respect to any Distribution Date be
(x) less than zero or (y) greater than the then outstanding aggregate
Certificate Principal Balance of the Floating Rate Certificates.

         "Group II Principal Remittance Amount": For any Distribution Date, that
portion of the Available Distribution Amount equal to the sum of the amounts set
forth in (i) through (iii) of the definition of Group II Principal Distribution
Amount.

         "Group II Senior Principal Distribution Amount": With respect to any
Distribution Date, the excess of (x) the aggregate Certificate Principal Balance
of the Group II Certificates immediately prior to such Distribution Date over
(y) the lesser of (A) the product of (i) approximately [__]% and (ii) the
aggregate Stated Principal Balance of the Group II Mortgage Loans as of the last
day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Stated Principal Balance of the Group II Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) minus $[_____________].

         "Highest Priority": As of any date of determination, the Class of
Mezzanine Certificates then outstanding with a Certificate Principal Balance
greater than zero, with the highest priority for payments pursuant to Section
4.01, in the following order: Class M-1, Class M-2, Class M-3, Class M-4, Class
M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class M-10, Class M-11, Class
M-12 and Class M-13 Certificates.

         "Indenture": An indenture relating to the issuance of notes secured by
the Class CE Certificates, the Class P Certificates and/or the Residual
Certificates (or any portion thereof).

         "Independent": When used with respect to any specified Person, any such
Person who (a) is in fact independent of the Depositor, the Servicer and their
respective Affiliates, (b) does not have any direct financial interest in or any
material indirect financial interest in the Depositor, the Servicer or any
Affiliate thereof, and (c) is not connected with the Depositor, the Servicer or
any Affiliate thereof as an officer, employee, promoter, underwriter, trustee,
partner, director or Person performing similar functions; provided, however,
that a Person shall not fail to be Independent of the Depositor, the Servicer or
any Affiliate thereof merely because such Person is the beneficial owner of
[__]% or less of any class of securities issued by the Depositor or the Servicer
or any Affiliate thereof, as the case may be.

         "Independent Contractor": Either (i) any Person (other than the
Servicer) that would be an "independent contractor" with respect to any REMIC
within the meaning of Section 856(d)(3) of the Code if any REMIC were a real
estate investment trust (except that the ownership tests set forth in that
section shall be considered to be met by any Person that owns, directly or
indirectly, [__]% or more of any Class of Certificates), so long as any REMIC
does not receive or derive any income from such Person and provided that the
relationship between such Person and any REMIC is at arm's length, all within
the meaning of Treasury Regulation Section 1.856-4(b)(5), or (ii) any other
Person (including the Servicer) if the Trust Administrator has received an
Opinion of Counsel for the benefit of the Trustee and the Trust Administrator to
the effect that the taking of any action in respect of any REO Property by such
Person, subject to any conditions therein specified, that is otherwise herein
contemplated to be taken by an Independent Contractor will not cause such REO
Property to cease to qualify as "foreclosure property" within the meaning of
Section 860G(a)(8) of the Code (determined without regard to the exception
applicable for purposes of Section 860D(a) of the Code), or cause any income
realized in respect of such REO Property to fail to qualify as Rents from Real
Property.

         "Index": With respect to each Adjustable-Rate Mortgage Loan and each
related Adjustment Date, the index specified in the related Mortgage Note.

         "Insurance Proceeds": Proceeds of any title policy, hazard policy or
other insurance policy covering a Mortgage Loan, to the extent such proceeds are
not to be applied to the restoration of the related Mortgaged Property or
released to the Mortgagor in accordance with the procedures that the Servicer
would follow in servicing mortgage loans held for its own account, subject to
the terms and conditions of the related Mortgage Note and Mortgage.

         "Interest Accrual Period": With respect to any Distribution Date and
the Floating Rate Certificates, the period commencing on the Distribution Date
of the month immediately preceding the month in which such Distribution Date
occurs (or, in the case of the first Distribution Date, commencing on the
Closing Date) and ending on the day preceding such Distribution Date. With
respect to any Distribution Date and the Class CE Certificates and the REMIC
Regular Interests, the one-month period ending on the last day of the calendar
month preceding the month in which such Distribution Date occurs.

         "Interest Carry Forward Amount": With respect to any Distribution Date
and the Class A Certificates or the Mezzanine Certificates, the sum of (i) the
amount, if any, by which (a) the Interest Distribution Amount for such Class of
Certificates as of the immediately preceding Distribution Date exceeded (b) the
actual amount distributed on such Class of Certificates in respect of interest
on such immediately preceding Distribution Date, (ii) the amount of any Interest
Carry Forward Amount for such Class of Certificates remaining unpaid from the
previous Distribution Date and (iii) accrued interest on the sum of (i) and (ii)
above calculated at the related Pass-Through Rate for the most recently ended
Interest Accrual Period.

         "Interest Determination Date": With respect to the Floating Rate
Certificates and for purposes of the definition of Marker Rate and Maximum
I-LTZZ Uncertificated Interest Deferral Amount, REMIC I Regular Interest I-LTA1,
REMIC I Regular Interest I-LTA2A, REMIC I Regular Interest I-LTA2B, REMIC I
Regular Interest I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular
Interest I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I Regular Interest
I-LTM3, REMIC I Regular Interest I-LTM4, REMIC I Regular Interest I-LTM5, REMIC
I Regular Interest I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular
Interest I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular Interest
I-LTM10, REMIC I Regular Interest I-LTM11, REMIC I Regular Interest I-LTM12 and
REMIC I Regular Interest I-LTM13, and any Interest Accrual Period therefor, the
second London Business Day preceding the commencement of such Interest Accrual
Period.

         "Interest Distribution Amount": With respect to any Floating Rate
Certificate and the Class CE Certificates and each Distribution Date, interest
accrued during the related Interest Accrual Period at the Pass-Through Rate for
such Certificate for such Distribution Date on the Certificate Principal
Balance, in the case of the Floating Rate Certificates, or on the Notional
Amount, in the case of the Class CE Certificates, of such Certificate
immediately prior to such Distribution Date. The Class P Certificates are not
entitled to distributions in respect of interest and, accordingly, shall not
accrue interest. All distributions of interest on the Floating Rate Certificates
shall be calculated on the basis of a 360-day year and the actual number of days
in the applicable Interest Accrual Period. All distributions of interest on the
Class CE Certificates shall be based on a 360-day year consisting of twelve
30-day months. The Interest Distribution Amount with respect to each
Distribution Date, as to any Floating Rate Certificate or the Class CE
Certificates, shall be reduced by an amount equal to the portion allocable to
such Certificate pursuant to Section 1.02 hereof of the sum of (a) the aggregate
Prepayment Interest Shortfall, if any, for such Distribution Date to the extent
not covered by payments pursuant to Section 3.24 and (b) the aggregate amount of
any Relief Act Interest Shortfall, if any, for such Distribution Date.

         "Late Collections": With respect to any Mortgage Loan, all amounts
received subsequent to the Determination Date immediately following any Due
Period, whether as late payments of Monthly Payments or as Insurance Proceeds,
Liquidation Proceeds or otherwise, which represent late payments or collections
of principal and/or interest due (without regard to any acceleration of payments
under the related Mortgage and Mortgage Note) but delinquent for such Due Period
and not previously recovered.

         "Liquidation Event": With respect to any Mortgage Loan, any of the
following events: (i) such Mortgage Loan is paid in full; (ii) a Final Recovery
Determination is made as to such Mortgage Loan; or (iii) such Mortgage Loan is
removed from any REMIC by reason of its being purchased, sold or replaced
pursuant to or as contemplated by Section 2.03 or Section 9.01. With respect to
any REO Property, either of the following events: (i) a Final Recovery
Determination is made as to such REO Property; or (ii) such REO Property is
removed from REMIC I by reason of its being purchased pursuant to Section 9.01.

         "Liquidation Proceeds": The amount (including any Insurance Proceeds or
amounts received in respect of the rental of any REO Property prior to REO
Disposition) received by the Servicer in connection with (i) the taking of all
or a part of a Mortgaged Property by exercise of the power of eminent domain or
condemnation, (ii) the liquidation of a defaulted Mortgage Loan through a
trustee's sale, foreclosure sale or otherwise, or (iii) the repurchase,
substitution or sale of a Mortgage Loan or an REO Property pursuant to or as
contemplated by Section 2.03, Section 3.23 or Section 9.01.

                  "Loan-to-Value Ratio": As of any date of determination, the
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at such date and the denominator of which
is the Value of the related Mortgaged Property.

         "Loan Group": Loan Group I or Loan Group II, as the context requires.

         "Loan Group I": The group of Mortgage Loans identified in the Mortgage
Loan Schedule as having been assigned to Loan Group I.

         "Loan Group II": The group of Mortgage Loans identified in the Mortgage
Loan Schedule as having been assigned to Loan Group II.

         "London Business Day": Any day on which banks in the City of London and
New York are open and conducting transactions in United States dollars.

         "Marker Rate": With respect to the Class CE Certificates and any
Distribution Date, a per annum rate equal to two (2) times the weighted average
of the REMIC I Remittance Rate for REMIC I Regular Interest I-LTA1, REMIC I
Regular Interest I-LTA2A, REMIC I Regular Interest I-LTA2B, REMIC I Regular
Interest I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest
I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I Regular Interest I-LTM3, REMIC
I Regular Interest I-LTM4, REMIC I Regular Interest I-LTM5, REMIC I Regular
Interest I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular Interest I-LTM10, REMIC
I Regular Interest I-LTM11, REMIC I Regular Interest I-LTM12, REMIC I Regular
Interest I-LTM13 and REMIC I Regular Interest I-LTZZ, with the rate on each such
REMIC I Regular Interest (other than REMIC I Regular Interest I-LTZZ) subject to
a cap equal to the lesser of (i) One-Month LIBOR plus the related Certificate
Margin for the related Corresponding Certificate and (ii) the related Net WAC
Pass-Through Rate for the related Corresponding Certificate for the purpose of
this calculation for such Distribution Date and with the rate on REMIC I Regular
Interest I-LTZZ subject to a cap of zero for the purpose of this calculation;
provided, however, each such cap shall be multiplied by a fraction, the
numerator of which is the actual number of days elapsed in the related Interest
Accrual Period and the denominator of which is 30.

         "Master Agreement": Any of the Master Mortgage Loan Purchase and
Interim Servicing Agreements between an Originator and the Seller.

         "Maximum Cap Rate": For any Distribution Date with respect to the Group
I Certificates, the sum of (A) a per annum rate equal to the product of (x) the
weighted average of the Expense Adjusted Net Maximum Mortgage Rates of the Group
I Mortgage Loans, weighted on the basis of the outstanding Stated Principal
Balances of the Group I Mortgage Loans as of the first day of the month
preceding the month of such Distribution Date (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (y) a fraction, the numerator of which is the
actual number of days elapsed in the related Interest Accrual Period and the
denominator of which is 30 and (B) a per annum rate equal to the product of (x)
the payment made by the Cap Provider divided by the aggregate Stated Principal
Balance of the Mortgage Loans and (y) 12.

         For any Distribution Date with respect to the Group II Certificates,
the sum of (A) a per annum rate equal to the product of (x) the weighted average
of the Expense Adjusted Net Maximum Mortgage Rates of the Group II Mortgage
Loans, weighted on the basis of the outstanding Stated Principal Balances of the
Group II Mortgage Loans as of the first day of the month preceding the month of
such Distribution Date (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (y) a fraction, the numerator of which is 30 and the denominator of
which is the actual number of days elapsed in the related Interest Accrual
Period and (B) a per annum rate equal to the product of (x) the payment made by
the Cap Provider divided by the aggregate Stated Principal Balance of the
Mortgage Loans and (y) 12.

         For any Distribution Date with respect to the Mezzanine Certificates, a
per annum rate equal to the weighted average (weighted on the basis of the
results of subtracting from the aggregate Stated Principal Balance of the
applicable Loan Group, the current Certificate Principal Balance of the related
Class A Certificates) of the weighted average of the Maximum Cap Rate for the
Group I Mortgage Loans and the Group II Mortgage Loans, in each case, weighted
on the basis of the outstanding Stated Principal Balances of the related
Mortgage Loans as of the first day of the month preceding the month of such
Distribution Date (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period).

         "Maximum I-LTZZ Uncertificated Interest Deferral Amount": With respect
to any Distribution Date, the excess of (i) accrued interest at the REMIC I
Remittance Rate applicable to REMIC I Regular Interest I-LTZZ for such
Distribution Date on a balance equal to the Uncertificated Balance of REMIC I
Regular Interest I-LTZZ minus the REMIC I Overcollateralized Amount, in each
case for such Distribution Date, over (ii) Uncertificated Interest on REMIC I
Regular Interest I-LTA1, REMIC I Regular Interest I-LTA2A, REMIC I Regular
Interest I-LTA2B, REMIC I Regular Interest I-LTA2C, REMIC I Regular Interest
I-LTA2D, REMIC I Regular Interest I-LTM1, REMIC I Regular Interest I-LTM2, REMIC
I Regular Interest I-LTM3, REMIC I Regular Interest I-LTM4, REMIC I Regular
Interest I-LTM5, REMIC I Regular Interest I-LTM6, REMIC I Regular Interest
I-LTM7, REMIC I Regular Interest I-LTM8, REMIC I Regular Interest I-LTM9, REMIC
I Regular Interest I-LTM10, REMIC I Regular Interest I-LTM11, REMIC I Regular
Interest I-LTM12 and REMIC I Regular Interest I-LTM13 for such Distribution
Date, with the rate on each such REMIC I Regular Interest subject to a cap equal
to the lesser of (i) One-Month LIBOR plus the related Certificate Margin for the
related Corresponding Certificate and (ii) the related Net WAC Pass-Through Rate
for the related Corresponding Certificate; provided, however, each cap shall be
multiplied by a fraction, the numerator of which is the actual number of days
elapsed in the related Interest Accrual Period and the denominator of which is
30.

         "Maximum Mortgage Rate": With respect to each Adjustable-Rate Mortgage
Loan, the percentage set forth in the related Mortgage Note as the maximum
Mortgage Rate thereunder.

         "MERS": Mortgage Electronic Registration Systems, Inc., a corporation
organized and existing under the laws of the State of Delaware, or any successor
thereto.

         "MERS System": The system of recording transfers of Mortgages
electronically maintained by MERS.

         "Mezzanine Certificates": Collectively, the Class M-1 Certificates, the
Class M-2 Certificates, the Class M-3 Certificates, the Class M-4 Certificates,
Class M-5 Certificates, the Class M-6 Certificates, the Class M-7 Certificates,
the Class M-8 Certificates, the Class M-9 Certificates, the Class M-10
Certificates, the Class M-11 Certificates, the Class M-12 Certificates and the
Class M-13 Certificates.

         "MIN": The Mortgage Identification Number for Mortgage Loans registered
with MERS on the MERS System.

         "Minimum Mortgage Rate": With respect to each Adjustable-Rate Mortgage
Loan, the percentage set forth in the related Mortgage Note as the minimum
Mortgage Rate thereunder.

         "MOM Loan": With respect to any Mortgage Loans registered with MERS on
the MERS(R) System, MERS acting as the mortgagee of such Mortgage Loan, solely
as nominee for the originator of such Mortgage Loan and its successors and
assigns, at the origination thereof.

         "Monthly Payment": With respect to any Mortgage Loan, the scheduled
monthly payment of principal and interest on such Mortgage Loan which is payable
by the related Mortgagor from time to time under the related Mortgage Note,
determined: (a) after giving effect to (i) any Deficient Valuation and/or Debt
Service Reduction with respect to such Mortgage Loan and (ii) any reduction in
the amount of interest collectible from the related Mortgagor pursuant to the
Relief Act; (b) without giving effect to any extension granted or agreed to by
the Servicer pursuant to Section 3.07; and (c) on the assumption that all other
amounts, if any, due under such Mortgage Loan are paid when due.

         "Moody's": Moody's Investors Service, Inc., or its successor in
interest.

         "Mortgage": The mortgage, deed of trust or other instrument creating a
first or second lien on, or first priority security interest in, a Mortgaged
Property securing a Mortgage Note.

         "Mortgage File": The mortgage documents listed in Section 2.01
pertaining to a particular Mortgage Loan and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.

         "Mortgage Loan": Each mortgage loan transferred and assigned to the
Trustee pursuant to Section 2.01 or Section 2.03(d) of this Agreement, as from
time to time held as a part of REMIC I, the Mortgage Loans so held being
identified in the Mortgage Loan Schedule.

         "Mortgage Loan Remittance Rate": With respect to any Mortgage Loan or
REO Property, as of any date of determination, the then applicable Mortgage Rate
in respect thereof net of the Servicing Fee Rate.

         "Mortgage Loan Schedule": As of any date, the list of Mortgage Loans
included in REMIC I on such date, separately identifying the Group I Mortgage
Loans and the Group II Mortgage Loans, attached hereto as Schedule 1. The
Mortgage Loan Schedule shall set forth the following information with respect to
each Mortgage Loan:

(i)      the Mortgage Loan identifying number;

(ii)     a code indicating whether the Mortgaged Property is owner-occupied;

(iii)    the type of Residential Dwelling constituting the Mortgaged Property;

(iv)     the original months to maturity;

(v)      the original date of the mortgage;

(vi)     the Loan-to-Value Ratio at origination;

(vii)    the Mortgage Rate in effect immediately following the Cut-off Date;

(viii)   the date on which the first Monthly Payment was due on the Mortgage
         Loan;

(ix)     the stated maturity date;

(x)      the amount of the Monthly Payment at origination;

(xi)     the amount of the Monthly Payment as of the Cut-off Date;

(xii)    the last Due Date on which a Monthly Payment was actually applied to
         the unpaid Stated Principal Balance;

(xiii)   the original principal amount of the Mortgage Loan;

(xiv)    the Scheduled Principal Balance of the Mortgage Loan as of the close of
         business on the Cut-off Date;

(xv)     a code indicating the purpose of the Mortgage Loan (i.e., purchase
         financing, Rate/Term Refinancing, Cash-Out Refinancing);

(xvi)    a code indicating the documentation style (i.e., full, alternative or
         reduced);

(xvii)   the Value of the Mortgaged Property;

(xviii)  the sale price of the Mortgaged Property, if applicable;

(xix)    the actual unpaid principal balance of the Mortgage Loan as of the
         Cut-off Date;

(xx)     the Servicing Fee Rate;

(xxi)    the term of the Prepayment Charge , if any;

(xxii)   the percentage of the principal balance covered by lender paid mortgage
         insurance, if any; and

(xxiii)  with respect to each Adjustable-Rate Mortgage Loan, the Adjustment
         Dates, the Gross Margin, the Maximum Mortgage Rate, the Minimum
         Mortgage Rate, the Periodic Rate Cap, the maximum first Adjustment Date
         Mortgage Rate adjustment, the first Adjustment Date immediately
         following the origination date and the rounding code (i.e., nearest
         [___]%, next highest [___]%).

         The Mortgage Loan Schedule shall set forth the following information
with respect to the Mortgage Loans by Loan Group and in the aggregate as of the
Cut-off Date: (1) the number of Mortgage Loans; (2) the current principal
balance of the Mortgage Loans; (3) the weighted average Mortgage Rate of the
Mortgage Loans; (4) the weighted average maturity of the Mortgage Loans; (5) the
Scheduled Principal Balance of the Mortgage Loans as of the close of business on
the Cut-off Date (not taking into account any Principal Prepayments received on
the Cut-off Date); and (6) the amount of the Monthly Payment as of the Cut-off
Date. The Mortgage Loan Schedule shall be amended from time to time by the
Depositor in accordance with the provisions of this Agreement. With respect to
any Qualified Substitute Mortgage Loan, Cut-off Date shall refer to the related
Cut-off Date for such Mortgage Loan, determined in accordance with the
definition of Cut-off Date herein.

         "Mortgage Note": The original executed note or other evidence of the
indebtedness of a Mortgagor under a Mortgage Loan.

         "Mortgage Pool": The pool of Mortgage Loans, identified on Schedule 1
from time to time, and any REO Properties acquired in respect thereof.

         "Mortgage Rate": With respect to each Mortgage Loan, the annual rate at
which interest accrues on such Mortgage Loan from time to time in accordance
with the provisions of the related Mortgage Note, without regard to any
reduction thereof as a result of a Debt Service Reduction or operation of the
Relief Act, which rate (i) with respect to each fixed-rate Mortgage Loan shall
remain constant at the rate set forth in the Mortgage Loan Schedule as the
Mortgage Rate in effect immediately following the Cut-off Date and (ii) with
respect to the Adjustable-Rate Mortgage Loans, (A) as of any date of
determination until the first Adjustment Date following the Cut-off Date shall
be the rate set forth in the Mortgage Loan Schedule as the Mortgage Rate in
effect immediately following the Cut-off Date and (B) as of any date of
determination thereafter shall be the rate as adjusted on the most recent
Adjustment Date equal to the sum, rounded as provided in the Mortgage Note, of
the Index, as published as of a date prior to the Adjustment Date as set forth
in the related Mortgage Note, plus the related Gross Margin; provided that the
Mortgage Rate on such Adjustable-Rate Mortgage Loan on any Adjustment Date shall
never be more than the lesser of (i) the sum of the Mortgage Rate in effect
immediately prior to the Adjustment Date plus the related Periodic Rate Cap, if
any, and (ii) the related Maximum Mortgage Rate, and shall never be less than
the greater of (i) the Mortgage Rate in effect immediately prior to the
Adjustment Date less the Periodic Rate Cap, if any, and (ii) the related Minimum
Mortgage Rate. With respect to each Mortgage Loan that becomes an REO Property,
as of any date of determination, the annual rate determined in accordance with
the immediately preceding sentence as of the date such Mortgage Loan became an
REO Property.

         "Mortgaged Property": The underlying property securing a Mortgage Loan,
including any REO Property, consisting of an Estate in Real Property improved by
a Residential Dwelling.

         "Mortgagor": The obligor on a Mortgage Note.

         "Net Monthly Excess Cashflow": With respect to any Distribution Date,
the sum of (i) any Overcollateralization Reduction Amount and (ii) the excess of
(x) the Available Distribution Amount for such Distribution Date over (y) the
sum for such Distribution Date of (A) the Senior Interest Distribution Amounts
distributable to the holders of the Class A Certificates and the Interest
Distribution Amounts distributable to the holders of the Mezzanine Certificates
and (B) the Principal Remittance Amount.

         "Net WAC Pass-Through Rate": For any Distribution Date with respect to
the Group I Certificates, a per annum rate equal to the product of (x) the
weighted average of the Expense Adjusted Net Mortgage Rates of the Group I
Mortgage Loans, weighted on the basis of the outstanding Stated Principal
Balances of the Group I Mortgage Loans as of the first day of the month
preceding the month of such Distribution Date (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (y) a fraction, the numerator of which is 30 and
the denominator of which is the actual number of days elapsed in the related
Interest Accrual Period. For federal income tax purposes, the economic
equivalent of such rate shall be expressed as the weighted average of the REMIC
I Remittance Rate on REMIC I Regular Interest I-LT1GRP, weighted on the basis of
the Uncertificated Balance of such REMIC I Regular Interest.

         For any Distribution Date with respect to the Group II Certificates, a
per annum rate equal to the product of (x) the weighted average of the Expense
Adjusted Net Mortgage Rates of the Group II Mortgage Loans, weighted on the
basis of the outstanding Stated Principal Balances of the Group II Mortgage
Loans as of the first day of the month preceding the month of such Distribution
Date (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) and (y)
a fraction, the numerator of which is 30 and the denominator of which is the
actual number of days elapsed in the related Interest Accrual Period. For
federal income tax purposes, the economic equivalent of such rate shall be
expressed as the weighted average of the REMIC I Remittance Rate on REMIC I
Regular Interest I-LT2GRP, weighted on the basis of the Uncertificated Balance
of such REMIC I Regular Interest.

         For any Distribution Date with respect to the Mezzanine Certificates, a
per annum rate equal to the weighted average (weighted on the basis of the
results of subtracting from the aggregate Stated Principal Balance of the
applicable Loan Group, the Certificate Principal Balance of the related Class A
Certificates) of (i) the weighted average of the Net WAC Pass-Through Rate for
the Group I Mortgage Loans as of the first day of the month preceding the month
of such Distribution Date (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (ii) the weighted average of the Net WAC Pass-Through Rate for the
Group II Mortgage Loans as of the first day of the month preceding the month of
such Distribution Date (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period. For federal income tax purposes, the economic equivalent of such rate
shall be expressed as the weighted average of the REMIC I Remittance Rates on
(a) REMIC I Regular Interest I-LT1SUB, subject to a cap and a floor equal to the
weighted average of the Expense Adjusted Net Mortgage Rates of the Group I
Mortgage Loans and (b) REMIC I Regular Interest I-LT2SUB, subject to a cap and a
floor equal to the weighted average of the Expense Adjusted Net Mortgage Rates
of the Group II Mortgage Loans, weighted on the basis of the Uncertificated
Balance of each such REMIC I Regular Interest.

         "Net WAC Rate Carryover Reserve Account": The Net WAC Rate Carryover
Reserve Account established and maintained pursuant to Section 4.06.

         "Net WAC Rate Carryover Amount": With respect to any Distribution Date
and any Class of Floating Rate Certificates, the sum of (A) the positive excess,
if any, of (i) the amount of interest that would have accrued on such Class of
Certificates for such Distribution Date if the Pass-Through Rate for such Class
of Certificates for such Distribution Date were calculated at the related
Formula Rate over (ii) the amount of interest accrued on such Class of
Certificates at the Net WAC Pass-Through Rate for such Distribution Date and (B)
the related Net WAC Rate Carryover Amount for the previous Distribution Date not
previously distributed together with interest accrued on such unpaid amount for
the most recently ended Interest Accrual Period at the Formula Rate for such
Class of Certificates and such Distribution Date.

         "New Lease": Any lease of REO Property entered into on behalf of REMIC
I, including any lease renewed or extended on behalf of REMIC I, if REMIC I has
the right to renegotiate the terms of such lease.

         "Nonrecoverable Advance": Any P&I Advance or Servicing Advance
previously made or proposed to be made in respect of a Mortgage Loan or REO
Property that, in the good faith business judgment of the Servicer will not or,
in the case of a proposed P&I Advance or Servicing Advance, would not be
ultimately recoverable from related late payments, Insurance Proceeds or
Liquidation Proceeds on such Mortgage Loan or REO Property as provided herein.

         "Non-United States Person": Any Person other than a United States
Person.

         "Notional Amount": With respect to the Class CE Interest and any
Distribution Date, the aggregate Uncertificated Balance of the REMIC I Regular
Interests (other than REMIC I Regular Interest I-LTP and REMIC I Regular
Interest I-LTXX) for such Distribution Date.

         "Officers' Certificate": A certificate signed by the Chairman of the
Board, the Vice Chairman of the Board, the President or a vice president
(however denominated), and by the Treasurer, the Secretary, or one of the
assistant treasurers or assistant secretaries of the Servicer, the Seller or the
Depositor, as applicable.

         "One-Month LIBOR": With respect to the Class A-1 Certificates and for
purposes of the Marker Rate and Maximum I-LTZZ Uncertificated Interest Deferral
Amount, REMIC I Remittance Rate for REMIC I Regular Interest I-LTA1, REMIC I
Regular Interest I-LTA2A, REMIC I Regular Interest I-LTA2B, REMIC I Regular
Interest I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest
I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I Regular Interest I-LTM3, REMIC
I Regular Interest I-LTM4, REMIC I Regular Interest I-LTM5, REMIC I Regular
Interest I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular Interest I-LTM10, REMIC
I Regular Interest I-LTM11, REMIC I Regular Interest I-LTM12 and REMIC I Regular
Interest I-LTM13, and any Interest Accrual Period therefor, the rate determined
by the Trust Administrator on the related Interest Determination Date on the
basis of the offered rate for one-month U.S. dollar deposits, as such rate
appears on Telerate Page 3750, Bloomberg Page BBAM or another page of these or
any other financial reporting service in general use in the financial services
industry, as of 11:00 a.m. (London time) on such Interest Determination Date;
provided that if such rate does not appear on Telerate Page 3750, the rate for
such date will be determined on the basis of the offered rates of the Reference
Banks for one-month U.S. dollar deposits, as of 11:00 a.m. (London time) on such
Interest Determination Date. In such event, the Trust Administrator will request
the principal London office of each of the Reference Banks to provide a
quotation of its rate. If on such Interest Determination Date, two or more
Reference Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 1/16%). If on
such Interest Determination Date, fewer than two Reference Banks provide such
offered quotations, One-Month LIBOR for the related Interest Accrual Period
shall be the higher of (i) LIBOR as determined on the previous Interest
Determination Date and (ii) the Reserve Interest Rate. Notwithstanding the
foregoing, if, under the priorities described above, LIBOR for an Interest
Determination Date would be based on LIBOR for the previous Interest
Determination Date for the third consecutive Interest Determination Date, the
Trust Administrator, after consultation with the Depositor, shall select an
alternative comparable index (over which the Trust Administrator has no
control), used for determining one-month Eurodollar lending rates that is
calculated and published (or otherwise made available) by an independent party.

         "Opinion of Counsel": A written opinion of counsel, who may, without
limitation, be salaried counsel for the Depositor, the Servicer or the Trust
Administrator acceptable to the Trustee, if such opinion is delivered to the
Trustee, or reasonably acceptable to the Trust Administrator, if such opinion is
delivered to the Trust Administrator, except that any opinion of counsel
relating to (a) the qualification of any Trust REMIC as a REMIC or (b)
compliance with the REMIC Provisions must be an opinion of Independent counsel.

         "Optional Termination Date": The Determination Date on which the
aggregate Stated Principal Balance of the Mortgage Loans and each REO Property
remaining in the Trust Fund is less than [__]% of the aggregate Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date.

         "Original Mortgage Loan": Any Mortgage Loans included in Trust Fund as
of the Closing Date.

         "Originator": Each of [____________________].

         "Overcollateralization Deficiency Amount": With respect to any
Distribution Date, the excess, if any, of (a) the Overcollateralization Target
Amount applicable to such Distribution Date over (b) the Overcollateralized
Amount applicable to such Distribution Date (calculated for this purpose only
after assuming that [__]% of the Principal Remittance Amount on such
Distribution Date has been distributed).

         "Overcollateralization Increase Amount": With respect to any
Distribution Date, the lesser of (a) the sum of (i) the Net Monthly Excess
Cashflow for such Distribution Date and (ii) any amounts received under the Cap
Contract for this purpose and (b) the Overcollateralization Deficiency Amount
for such Distribution Date (calculated for this purpose only after assuming that
[__]% of the Principal Remittance Amount on such Distribution Date has been
distributed).

         "Overcollateralization Reduction Amount": With respect to any
Distribution Date, an amount equal to the lesser of (a) the Principal Remittance
Amount for such Distribution Date and (b) the Excess Overcollateralized Amount.

         "Overcollateralization Target Amount": With respect to any Distribution
Date, (i) prior to the Stepdown Date, an amount equal to [__]% of the aggregate
outstanding Stated Principal Balance of the Mortgage Loans as of the Cut-off
Date, (ii) on or after the Stepdown Date provided a Trigger Event is not in
effect, the greater of (x) [__]% of the then current aggregate outstanding
Stated Principal Balance of the Mortgage Loans as of the last day of the related
Due Period and (y) [__]% of the aggregate principal balance of the mortgage
loans as of the Cut-off Date, or (iii) on or after the Stepdown Date and if a
Trigger Event is in effect, the Overcollateralization Target Amount for the
immediately preceding Distribution Date. Notwithstanding the foregoing, on and
after any Distribution Date following the reduction of the aggregate Certificate
Principal Balance of the Class A Certificates and the Mezzanine Certificates to
zero, the Overcollateralization Target Amount shall be zero.

         "Overcollateralized Amount": With respect to any Distribution Date, the
excess, if any, of (a) the aggregate Stated Principal Balances of the Mortgage
Loans and REO Properties as of the last day of the related Due Period (after
giving effect to scheduled payments of principal due during the related Due
Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) over (b) the sum of the
aggregate Certificate Principal Balance of the Class A Certificates, the
Mezzanine Certificates and the Class P Certificates after giving effect to
distributions to be made on such Distribution Date.

         "Ownership Interest": As to any Certificate, any ownership or security
interest in such Certificate, including any interest in such Certificate as the
Holder thereof and any other interest therein, whether direct or indirect, legal
or beneficial, as owner or as pledgee.

         "Pass-Through Rate": With respect to the Floating Rate Certificates and
any Distribution Date, the lesser of (x) the related Formula Rate for such
Distribution Date and (y) the related Net WAC Pass-Through Rate for such
Distribution Date.

         With respect to the Class CE Interest and any Distribution Date, a per
annum rate equal to the percentage equivalent of a fraction, the numerator of
which is (x) the sum of (i) [__]% of the interest on REMIC I Regular Interest
I-LTP and [__]% of the interest on REMIC I Regular Interest I-LTX and (ii)
interest on the Uncertificated Principal Balance of each REMIC I Regular
Interest listed in clause (y) below at a rate equal to the related REMIC I
Remittance Rate minus the Marker Rate and the denominator of which is (y) the
aggregate Uncertificated Balance of REMIC I Regular Interest I-LTA1, REMIC I
Regular Interest I-LTA2A, REMIC I Regular Interest I-LTA2B, REMIC I Regular
Interest I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest
I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I Regular Interest I-LTM3, REMIC
I Regular Interest I-LTM4, REMIC I Regular Interest I-LTM5, REMIC I Regular
Interest I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular Interest I-LTM10, REMIC
I Regular Interest I-LTM11, REMIC I Regular Interest I-LTM12, REMIC I Regular
Interest I-LTM13 and REMIC I Regular Interest I-LTZZ. With respect to the Class
CE Certificates, [__]% of the interest distributable to the Class CE Interest,
expressed as a per annum rate.

         "Percentage Interest": With respect to any Class of Certificates (other
than the Residual Certificates), the portion of the respective Class evidenced
by such Certificate, expressed as a percentage, the numerator of which is the
initial Certificate Principal Balance or Notional Amount represented by such
Certificate, and the denominator of which is the initial aggregate Certificate
Principal Balance or Notional Amount of all of the Certificates of such Class.
The Class A Certificates and the Mezzanine Certificates are issuable only in
minimum Percentage Interests corresponding to minimum initial Certificate
Principal Balances of $[____] and integral multiples of $[____] in excess
thereof. The Class P Certificates are issuable only in Percentage Interests
corresponding to initial Certificate Principal Balances of $[__] and integral
multiples thereof. The Class CE Certificates are issuable only in minimum
Percentage Interests corresponding to minimum initial Certificate Principal
Balances of $[____] and integral multiples of $[____] in excess thereof;
provided, however, that a single Certificate of each such Class of Certificates
may be issued having a Percentage Interest corresponding to the remainder of the
aggregate initial Certificate Principal Balance or Notional Amount of such Class
or to an otherwise authorized denomination for such Class plus such remainder.
With respect to any Residual Certificate, the undivided percentage ownership in
such Class evidenced by such Certificate, as set forth on the face of such
Certificate. The Residual Certificates are issuable in Percentage Interests of
[__]% and multiples thereof.

         "Periodic Rate Cap": With respect to each Adjustable-Rate Mortgage Loan
and any Adjustment Date therefor, the fixed percentage set forth in the related
Mortgage Note, which is the maximum amount by which the Mortgage Rate for such
Mortgage Loan may increase or decrease (without regard to the Maximum Mortgage
Rate or the Minimum Mortgage Rate) on such Adjustment Date from the Mortgage
Rate in effect immediately prior to such Adjustment Date.

         "Permitted Investments": Any one or more of the following obligations
or securities acquired at a purchase price of not greater than par, regardless
of whether issued by the Depositor, the Servicer, the Trustee, the Trust
Administrator or any of their respective Affiliates:

                  (i) direct obligations of, or obligations fully guaranteed as
         to timely payment of principal and interest by, the United States or
         any agency or instrumentality thereof, provided such obligations are
         backed by the full faith and credit of the United States;

                  (ii) demand and time deposits in, certificates of deposit of,
         or bankers' acceptances (which shall each have an original maturity of
         not more than 90 days and, in the case of bankers' acceptances, shall
         in no event have an original maturity of more than 365 days or a
         remaining maturity of more than 30 days) denominated in United States
         dollars and issued by, any Depository Institution;

                  (iii) repurchase obligations with respect to any security
         described in clause (i) above entered into with a Depository
         Institution (acting as principal);

                  (iv) securities bearing interest or sold at a discount that
         are issued by any corporation incorporated under the laws of the United
         States of America or any state thereof and that are rated by the Rating
         Agencies in its highest long-term unsecured rating category at the time
         of such investment or contractual commitment providing for such
         investment;

                  (v) commercial paper (including both non-interest-bearing
         discount obligations and interest-bearing obligations payable on demand
         or on a specified date not more than 30 days after the date of
         acquisition thereof) that is rated by the Rating Agencies that rate
         such securities in its highest short-term unsecured debt rating
         available at the time of such investment;

                  (vi) units of money market funds, including money market funds
         affiliated with the Trustee, the Trust Administrator or an Affiliate of
         either of them, that have been rated "AAA" by S&P, "Aaa" by Moody's and
         "AAA" by Fitch; and

                  (vii) if previously confirmed in writing to the Servicer, the
         Trustee and the Trust Administrator, any other demand, money market or
         time deposit, or any other obligation, security or investment, as may
         be acceptable to the Rating Agencies as a permitted investment of funds
         backing securities having ratings equivalent to its highest initial
         rating of the Class A Certificates;

provided, however, that no instrument described hereunder shall evidence either
the right to receive (a) only interest with respect to the obligations
underlying such instrument or (b) both principal and interest payments derived
from obligations underlying such instrument and the interest and principal
payments with respect to such instrument provide a yield to maturity at par
greater than [____]% of the yield to maturity at par of the underlying
obligations.

         "Permitted Transferee": Any Transferee of a Residual Certificate other
than a Disqualified Organization or Non-United States Person.

         "Person": Any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.

         "P&I Advance": As to any Mortgage Loan or REO Property, any advance
made by the Servicer in respect of any Distribution Date pursuant to Section
4.03.

         "Plan": Any employee benefit plan or certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and bank collective investment funds and insurance company general or
separate accounts in which such plans, accounts or arrangements are invested,
that are subject to ERISA or Section 4975 of the Code.

         "Prepayment Assumption": As defined in the Prospectus Supplement.

         "Prepayment Charge": With respect to any Prepayment Period, any
prepayment premium, penalty or charge payable by a Mortgagor in connection with
any Principal Prepayment on a Mortgage Loan pursuant to the terms of the related
Mortgage Note (other than any Servicer Prepayment Charge Payment Amount).

         "Prepayment Charge Schedule": As of any date, the list of Prepayment
Charges included in the Trust Fund on such date, attached hereto as Schedule 2
(including the prepayment charge summary attached thereto). The Prepayment
Charge Schedule shall set forth the following information with respect to each
Prepayment Charge:

                  (i) the Mortgage Loan identifying number;

                  (ii) a code indicating the type of Prepayment Charge;

                  (iii) the date on which the first Monthly Payment was due on
the related Mortgage Loan;

                  (iv) the term of the related Prepayment Charge;

                  (v) the original Stated Principal Balance of the related
Mortgage Loan; and

                  (vi) the Stated Principal Balance of the related Mortgage Loan
as of the Cut-off Date.

         "Prepayment Interest Excess": With respect to any Distribution Date,
for each Mortgage Loan that was the subject of a Principal Prepayment in full
during the portion of the related Prepayment Period occurring between the first
day of the calendar month in which such Distribution Date occurs and the 15th
day of the calendar month in which such Distribution Date occurs, an amount
equal to interest (to the extent received) at the applicable Mortgage Rate (less
the Servicing Fee) on the amount of such Principal Prepayment for the number of
days commencing on the first day of the calendar month in which such
Distribution Date occurs and ending on the last date through which interest is
collected from the related Mortgagor.

         "Prepayment Interest Shortfall": With respect to any Distribution Date,
for each Mortgage Loan that was during the related Prepayment Period the subject
of a Principal Prepayment in full or in part occurring between the first day of
the related Prepayment Period and the last day of the calendar month preceding
the calendar month in which such Distribution Date occurs, an amount equal to
interest at the applicable Mortgage Loan Remittance Rate on the amount of such
Principal Prepayment for the number of days commencing on the date on which the
prepayment is applied and ending on the last day of the calendar month preceding
the calendar month in which such Distribution Date occurs. The obligations of
the Servicer in respect of any Prepayment Interest Shortfall are set forth in
Section 3.24.

         "Prepayment Period": With respect to each Distribution Date, the period
commencing on the 16th day of the month preceding the month in which such
Distribution Date falls (or, in the case of the first Distribution Date,
commencing [_____________]) and ending on the 15th day of the calendar month in
which such Distribution Date occurs.

         "Prime Rate": The lesser of (i) the per annum rate of interest,
publicly announced from time to time by [_____________] at its principal office
in [_____________], as its prime or base lending rate (any change in such rate
of interest to be effective on the date such change is announced by
[_____________]) and (ii) the maximum rate permissible under applicable usury or
similar laws limiting interest rates.

         "Principal Prepayment": Any payment of principal made by the Mortgagor
on a Mortgage Loan which is received in advance of its scheduled Due Date and
which is not accompanied by an amount of interest representing the full amount
of scheduled interest due on any Due Date in any month or months subsequent to
the month of prepayment.

         "Principal Remittance Amount": With respect to any Distribution Date,
the sum of the (i) the Group I Principal Remittance Amount and (ii) the Group II
Principal Remittance Amount.

         "Private Certificates": Any of the Class A-1, Class M-11, Class M-12,
Class M-13, Class CE, Class P or Residual Certificates.

         "Prospectus Supplement": The Prospectus Supplement, dated
[_____________], relating to the public offering of the Group II Certificates
and the Mezzanine Certificates (other than the Class M-11, Class M-12 and Class
M-13 Certificates).

         "Purchase Price": With respect to any Mortgage Loan or REO Property to
be purchased by the Seller pursuant to or as contemplated by Section 2.03 or
Section 9.01, and as confirmed by an Officers' Certificate from the party
purchasing the Mortgage Loan to the Trustee and the Trust Administrator, an
amount equal to the sum of: (i) [__]% of the Stated Principal Balance thereof as
of the date of purchase (or such other price as provided in Section 9.01), (ii)
in the case of (x) a Mortgage Loan, accrued interest on such Stated Principal
Balance at the applicable Mortgage Loan Remittance Rate in effect from time to
time from the Due Date as to which interest was last covered by a payment by the
Mortgagor or an advance by the Servicer, which payment or advance had as of the
date of purchase been distributed pursuant to Section 4.01, through the end of
the calendar month in which the purchase is to be effected, and (y) an REO
Property, the sum of (1) accrued interest on such Stated Principal Balance at
the applicable Mortgage Loan Remittance Rate in effect from time to time from
the Due Date as to which interest was last covered by a payment by the Mortgagor
or an advance by the Servicer through the end of the calendar month immediately
preceding the calendar month in which such REO Property was acquired, plus (2)
REO Imputed Interest for such REO Property for each calendar month commencing
with the calendar month in which such REO Property was acquired and ending with
the calendar month in which such purchase is to be effected, minus the total of
all net rental income, Insurance Proceeds, Liquidation Proceeds and P&I Advances
that as of the date of purchase had been distributed as or to cover REO Imputed
Interest pursuant to Section 4.01; (iii) any unreimbursed Servicing Advances and
P&I Advances and any unpaid Servicing Fees allocable to such Mortgage Loan or
REO Property; (iv) any amounts previously withdrawn from the Collection Account
in respect of such Mortgage Loan or REO Property pursuant to Sections
3.11(a)(ix) and Section 3.16(b); and (v) in the case of a Mortgage Loan required
to be purchased pursuant to Section 2.03, expenses incurred or to be incurred by
the Trust Fund in respect of the breach or defect giving rise to the purchase
obligation including any costs and damages incurred by the Trust Fund in
connection with any violation of any predatory or abusive lending law with
respect to the related Mortgage Loan. With respect to any Mortgage Loan or REO
Property to be purchased by an Originator pursuant to or as contemplated by
Section 2.03 or Section 9.01, and as confirmed by an Officers' Certificate from
the related Originator to the Trustee and the Trust Administrator, an amount
equal to the amount set forth pursuant to the terms of the related Master
Agreement.

         "Qualified Insurer": Any insurer which meets the requirements of Fannie
Mae and Freddie Mac.

         "Qualified Substitute Mortgage Loan": A mortgage loan substituted for a
Deleted Mortgage Loan by the Seller pursuant to the terms of this Agreement
which must, on the date of such substitution, (i) have an outstanding principal
balance, after application of all scheduled payments of principal and interest
due during or prior to the month of substitution, not in excess of the Scheduled
Principal Balance of the Deleted Mortgage Loan as of the Due Date in the
calendar month during which the substitution occurs, (ii) have a Mortgage Rate
not less than (and not more than one percentage point in excess of) the Mortgage
Rate of the Deleted Mortgage Loan, (iii) be covered under a Primary Mortgage
Insurance Policy if such Qualified Substitute Mortgage Loan has a Loan-to-Value
Ratio in excess of [__]% and the Deleted Mortgage Loan was covered by a Primary
Mortgage Insurance Policy, (iv) have a remaining term to maturity not greater
than (and not more than one year less than) that of the Deleted Mortgage Loan,
(v) have the same Due Date as the Due Date on the Deleted Mortgage Loan, (x)
have a Loan-to-Value Ratio as of the date of substitution equal to or lower than
the Loan-to-Value Ratio of the Deleted Mortgage Loan as of such date, and (vi)
conform to each representation and warranty set forth in the related Assignment
Agreement applicable to the Deleted Mortgage Loan. In the event that one or more
mortgage loans are substituted for one or more Deleted Mortgage Loans, the
amounts described in clause (i) hereof shall be determined on the basis of
aggregate principal balances, the Mortgage Rates described in clause (ii) hereof
shall be determined on the basis of weighted average Mortgage Rates, the terms
described in clause (viii) shall be determined on the basis of weighted average
remaining terms to maturity, the Loan-to-Value Ratios described in clause (iv)
hereof shall be satisfied as to each such mortgage loan and, except to the
extent otherwise provided in this sentence, the representations and warranties
described in clause (vi) hereof must be satisfied as to each Qualified
Substitute Mortgage Loan or in the aggregate, as the case may be. With respect
to an Originator, a mortgage loan substituted for a Deleted Mortgage Loan
pursuant to the terms of the related Master Agreement which must, on the date of
such substitution conform to the terms set forth in the related Master
Agreement.

         "Rate/Term Refinancing": A Refinanced Mortgage Loan, the proceeds of
which are not in excess of the existing first mortgage loan on the related
Mortgaged Property and related closing costs, and were used exclusively to
satisfy the then existing first mortgage loan of the Mortgagor on the related
Mortgaged Property and to pay related closing costs.

         "Rating Agencies": S&P, Moody's and Fitch or their successors. If such
agencies or their successors are no longer in existence, the "Rating Agencies"
shall be such nationally recognized statistical rating agencies, or other
comparable Persons, designated by the Depositor, written notice of which
designation shall be given to the Trustee, the Trust Administrator and the
Servicer.

         "Realized Loss": With respect to each Mortgage Loan as to which a Final
Recovery Determination has been made, an amount (not less than zero) equal to
(i) the unpaid principal balance of such Mortgage Loan as of the commencement of
the calendar month in which the Final Recovery Determination was made, plus (ii)
accrued interest from the Due Date as to which interest was last paid by the
Mortgagor through the end of the calendar month in which such Final Recovery
Determination was made, calculated in the case of each calendar month during
such period (A) at an annual rate equal to the annual rate at which interest was
then accruing on such Mortgage Loan and (B) on a principal amount equal to the
Stated Principal Balance of such Mortgage Loan as of the close of business on
the Distribution Date during such calendar month, plus (iii) any amounts
previously withdrawn from the Collection Account in respect of such Mortgage
Loan pursuant to Section 3.11(a)(ix) and Section 3.16(b), minus (iv) the
proceeds, if any, received in respect of such Mortgage Loan prior to the date
such Final Recovery Determination was made, net of amounts that are payable
therefrom to the Servicer with respect to such Mortgage Loan pursuant to Section
3.11(a)(iii).

         With respect to any REO Property as to which a Final Recovery
Determination has been made an amount (not less than zero) equal to (i) the
unpaid principal balance of the related Mortgage Loan as of the date of
acquisition of such REO Property on behalf of any REMIC, plus (ii) accrued
interest from the Due Date as to which interest was last paid by the Mortgagor
in respect of the related Mortgage Loan through the end of the calendar month
immediately preceding the calendar month in which such REO Property was
acquired, calculated in the case of each calendar month during such period (A)
at an annual rate equal to the annual rate at which interest was then accruing
on the related Mortgage Loan and (B) on a principal amount equal to the Stated
Principal Balance of the related Mortgage Loan as of the close of business on
the Distribution Date during such calendar month, plus (iii) REO Imputed
Interest for such REO Property for each calendar month commencing with the
calendar month in which such REO Property was acquired and ending with the
calendar month that occurs during the Prepayment Period in which such Final
Recovery Determination was made, plus (iv) any amounts previously withdrawn from
the Collection Account in respect of the related Mortgage Loan pursuant to
Section 3.11(a)(ix) and Section 3.16(b), minus (v) the aggregate of all
Servicing Advances made by the Servicer in respect of such REO Property or the
related Mortgage Loan (without duplication of amounts netted out of the rental
income, Insurance Proceeds and Liquidation Proceeds described in clause (vi)
below) and any unpaid Servicing Fees for which the Servicer has been or, in
connection with such Final Recovery Determination, will be reimbursed pursuant
to Section 3.11(a)(iii) or Section 3.23 out of rental income, Insurance Proceeds
and Liquidation Proceeds received in respect of such REO Property, minus (vi)
the total of all net rental income, Insurance Proceeds and Liquidation Proceeds
received in respect of such REO Property that has been, or in connection with
such Final Recovery Determination, will be transferred to the Distribution
Account pursuant to Section 3.23.

         With respect to each Mortgage Loan which has become the subject of a
Deficient Valuation, the difference between the principal balance of the
Mortgage Loan outstanding immediately prior to such Deficient Valuation and the
principal balance of the Mortgage Loan as reduced by the Deficient Valuation.

         With respect to each Mortgage Loan which has become the subject of a
Debt Service Reduction, the portion, if any, of the reduction in each affected
Monthly Payment attributable to a reduction in the Mortgage Rate imposed by a
court of competent jurisdiction. Each such Realized Loss shall be deemed to have
been incurred on the Due Date for each affected Monthly Payment.

         "Record Date": With respect to each Distribution Date and any Floating
Rate Certificate so long as such Floating Rate Certificates is a Book-Entry
Certificate, the Business Day immediately preceding such Distribution Date. With
respect to each Distribution Date and any other Certificates, including any
Definitive Certificates, the last Business Day of the month immediately
preceding the month in which such Distribution Date occurs.

         "Refinanced Mortgage Loan": A Mortgage Loan the proceeds of which were
not used to purchase the related Mortgaged Property.

         "Regular Certificate": Any Class A Certificate, Mezzanine Certificate,
Class CE Certificate or Class P Certificate.

         "Regular Interest": A "regular interest" in a REMIC within the meaning
of Section 860G(a)(1) of the Code.

         "Relief Act": The Servicemembers Civil Relief Act, or any state law
providing for similar relief.

         "Relief Act Interest Shortfall": With respect to any Distribution Date
and any Mortgage Loan, any reduction in the amount of interest collectible on
such Mortgage Loan for the most recently ended calendar month as a result of the
application of the Relief Act.

         "REMIC": A "real estate mortgage investment conduit" within the meaning
of Section 860D of the Code.

         "REMIC I": The segregated pool of assets subject hereto, constituting
the primary trust created hereby and to be administered hereunder, with respect
to which a REMIC election is to be made, consisting of: (i) such Mortgage Loans
and Prepayment Charges related thereto as from time to time are subject to this
Agreement, together with the Mortgage Files relating thereto, and together with
all collections thereon and proceeds thereof; (ii) any REO Property, together
with all collections thereon and proceeds thereof; (iii) the Trustee's rights
with respect to the Mortgage Loans under all insurance policies required to be
maintained pursuant to this Agreement and any proceeds thereof; (iv) the
Depositor's rights under the Assignment Agreements (including any security
interest created thereby); and (v) the Collection Account (other than any
amounts representing the Servicer Prepayment Charge Payment Amount), the
Distribution Account (other than any amounts representing the Servicer
Prepayment Charge Payment Amount) and any REO Account, and such assets that are
deposited therein from time to time and any investments thereof, together with
any and all income, proceeds and payments with respect thereto. Notwithstanding
the foregoing, however, REMIC I specifically excludes all payments and other
collections of principal and interest due on the Mortgage Loans on or before the
Cut-off Date, all Prepayment Charges payable in connection with Principal
Prepayments on the Mortgage Loans made before the Cut-off Date, the Net WAC Rate
Carryover Reserve Account, the Cap Contract, the Cap Account and Servicer
Prepayment Charge Payment Amounts.

         "REMIC I Interest Loss Allocation Amount": With respect to any
Distribution Date, an amount equal to (a) the product of (i) the aggregate
Stated Principal Balance of the Mortgage Loans and REO Properties then
outstanding and (ii) the REMIC I Remittance Rate for REMIC I Regular Interest
I-LTAA minus the Marker Rate, divided by (b) 12.

         "REMIC I Marker Allocation Percentage": [__]% of any amount payable or
loss attributable from the Mortgage Loans, which shall be allocated to REMIC I
Regular Interest I-LTAA, REMIC I Regular Interest I-LTA1, REMIC I Regular
Interest I-LTA2A, REMIC I Regular Interest I-LTA2B, REMIC I Regular Interest
I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest I-LTM1,
REMIC I Regular Interest I-LTM2, REMIC I Regular Interest I-LTM3, REMIC I
Regular Interest I-LTM4, REMIC I Regular Interest I-LTM5, REMIC I Regular
Interest I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular Interest I-LTM10, REMIC
I Regular Interest I-LTM11, REMIC I Regular Interest I-LTM12, REMIC I Regular
Interest I-LTM13, REMIC I Regular Interest I-LTZZ, REMIC I Regular Interest
I-LTP and REMIC I Regular Interest I-LTX.

         "REMIC I Overcollateralized Amount": With respect to any date of
determination, (i) [__]% of the aggregate Uncertificated Balance of the REMIC I
Regular Interests minus (ii) the aggregate Uncertificated Balance of REMIC I
Regular Interest I-LTA1, REMIC I Regular Interest I-LTA2A, REMIC I Regular
Interest I-LTA2B, REMIC I Regular Interest I-LTA2C, REMIC I Regular Interest
I-LTA2D, REMIC I Regular Interest I-LTM1, REMIC I Regular Interest I-LTM2, REMIC
I Regular Interest I-LTM3, REMIC I Regular Interest I-LTM4, REMIC I Regular
Interest I-LTM5, REMIC I Regular Interest I-LTM6, REMIC I Regular Interest
I-LTM7, REMIC I Regular Interest I-LTM8, REMIC I Regular Interest I-LTM9, REMIC
I Regular Interest I-LTM10, REMIC I Regular Interest I-LTM11, REMIC I Regular
Interest I-LTM12, REMIC I Regular Interest I-LTM13, REMIC I Regular Interest
I-LTP and REMIC I Regular Interest I-LTX, in each case as of such date of
determination.

         "REMIC I Principal Loss Allocation Amount": With respect to any
Distribution Date, an amount equal to the product of (i) [__]% of the aggregate
Stated Principal Balance of the Mortgage Loans and REO Properties then
outstanding and (ii) 1 minus a fraction, the numerator of which is two times the
aggregate Uncertificated Balance of REMIC I Regular Interest I-LTA1, REMIC I
Regular Interest I-LTA2A, REMIC I Regular Interest I-LTA2B, REMIC I Regular
Interest I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest
I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I Regular Interest I-LTM3, REMIC
I Regular Interest I-LTM4, REMIC I Regular Interest I-LTM5, REMIC I Regular
Interest I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular Interest I-LTM10, REMIC
I Regular Interest I-LTM11, REMIC I Regular Interest I-LTM12 and REMIC I Regular
Interest I-LTM13 and the denominator of which is the aggregate Uncertificated
Balance of REMIC I Regular Interest I-LTA1, REMIC I Regular Interest I-LTA2A,
REMIC I Regular Interest I-LTA2B, REMIC I Regular Interest I-LTA2C, REMIC I
Regular Interest I-LTA2D, REMIC I Regular Interest I-LTM1, REMIC I Regular
Interest I-LTM2, REMIC I Regular Interest I-LTM3, REMIC I Regular Interest
I-LTM4, REMIC I Regular Interest I-LTM5, REMIC I Regular Interest I-LTM6, REMIC
I Regular Interest I-LTM7, REMIC I Regular Interest I-LTM8, REMIC I Regular
Interest I-LTM9, REMIC I Regular Interest I-LTM10, REMIC I Regular Interest
I-LTM11, REMIC I Regular Interest I-LTM12, REMIC I Regular Interest I-LTM13 and
REMIC I Regular Interest I-LTZZ.

         "REMIC I Regular Interest": Any of the separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
"regular interest" in REMIC I. Each REMIC I Regular Interest shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time or
shall otherwise be entitled to interest as set forth herein, and shall be
entitled to distributions of principal, subject to the terms and conditions
hereof, in an aggregate amount equal to its initial Uncertificated Balance as
set forth in the Preliminary Statement hereto. The REMIC I Regular Interests are
set forth in the Preliminary Statement hereto.

         "REMIC I Remittance Rate": With respect to REMIC I Regular Interest
I-LTAA, REMIC I Regular Interest I-LTA1, REMIC I Regular Interest I-LTA2A, REMIC
I Regular Interest I-LTA2B, REMIC I Regular Interest I-LTA2C, REMIC I Regular
Interest I-LTA2D, REMIC I Regular Interest I-LTM1, REMIC I Regular Interest
I-LTM2, REMIC I Regular Interest I-LTM3, REMIC I Regular Interest I-LTM4, REMIC
I Regular Interest I-LTM5, REMIC I Regular Interest I-LTM6, REMIC I Regular
Interest I-LTM7, REMIC I Regular Interest I-LTM8, REMIC I Regular Interest
I-LTM9, REMIC I Regular Interest I-LTM10, REMIC I Regular Interest I-LTM11,
REMIC I Regular Interest I-LTM12 and REMIC I Regular Interest I-LTM13, REMIC I
Regular Interest I-LTZZ, REMIC I Regular Interest I-LTP, REMIC I Regular
Interest I-LTX, REMIC I Regular Interest I-LT1SUB, REMIC I Regular Interest
I-LT2SUB and REMIC I Regular Interest I-LTXX, the weighted average of the
Expense Adjusted Net Mortgage Rates of the Mortgage Loans. With respect to REMIC
I Regular Interest I-LT1GRP, the weighted average of the Expense Adjusted Net
Mortgage Rates of the Group I Mortgage Loans and with respect REMIC I Regular
Interest I-LT2GRP, the weighted average of the Expense Adjusted Net Mortgage
Rates of the Group II Mortgage Loans.

         "REMIC I Required Overcollateralized Amount": [__]% of the
Overcollateralization Target Amount.

         "REMIC I Sub WAC Allocation Percentage": [__]% of any amount payable
from or loss attributable to the Mortgage Loans, which shall be allocated to
REMIC I Regular Interest I-LT1SUB, REMIC I Regular Interest I-LT1GRP, REMIC I
Regular Interest I-LT2SUB, REMIC I Regular Interest I-LT2GRP and REMIC I Regular
Interest I-LTXX.

         "REMIC I Subordinated Balance Ratio": The ratio between the
Uncertificated Balances of each REMIC I Regular Interest ending with the
designation "SUB,", equal to the ratio between, with respect to each such REMIC
I Regular Interest, the excess of (x) the aggregate Stated Principal Balance of
the Mortgage Loans in the related Loan Group over (y) the current Certificate
Principal Balance of Class A Certificates in the related Loan Group.

         "REMIC II": The segregated pool of assets consisting of all of the
REMIC I Regular Interests conveyed in trust to the Trustee, for the benefit of
the Class A Certificates, the Mezzanine Certificates, the Class CE Interest, the
Class P Interest and the Class R-II Interest and all amounts deposited therein,
with respect to which a separate REMIC election is to be made.

         "REMIC III": The segregated pool of assets consisting of all of the
Class CE Interest conveyed in trust to the Trust Administrator, for the benefit
of the Class CE Certificates, and the Class R-III Interest and all amounts
deposited therein, with respect to which a separate REMIC election is to be
made.

         "REMIC IV": The segregated pool of assets consisting of all of the
Class P Interest conveyed in trust to the Trust Administrator, for the benefit
of the Class P Certificates, and the Class R-IV Interest and all amounts
deposited therein, with respect to which a separate REMIC election is to be
made.

         "REMIC Provisions": Provisions of the federal income tax law relating
to real estate mortgage investment conduits, which appear at Section 860A
through 860G of the Code, and related provisions, and proposed, temporary and
final regulations and published rulings, notices and announcements promulgated
thereunder, as the foregoing may be in effect from time to time.

         "REMIC Regular Interests": The REMIC I Regular Interests, the Class CE
Interest and the Class P Interest.

         "Remittance Report": A report in form and substance acceptable to the
Trust Administrator prepared by the Servicer pursuant to Section 4.03 with such
additions, deletions and modifications as agreed to by the Trust Administrator
and the Servicer.

         "Rents from Real Property": With respect to any REO Property, gross
income of the character described in Section 856(d) of the Code as being
included in the term "rents from real property."

         "REO Account": The account or accounts maintained by the Servicer in
respect of an REO Property pursuant to Section 3.23.

         "REO Disposition": The sale or other disposition of an REO Property on
behalf of any Trust REMIC.

         "REO Imputed Interest": As to any REO Property, for any calendar month
during which such REO Property was at any time part of REMIC I, one month's
interest at the applicable Mortgage Loan Remittance Rate on the Stated Principal
Balance of such REO Property (or, in the case of the first such calendar month,
of the related Mortgage Loan if appropriate) as of the close of business on the
Distribution Date in such calendar month.

         "REO Property": A Mortgaged Property acquired by the Servicer on behalf
of the Trust Fund through foreclosure or deed-in-lieu of foreclosure, as
described in Section 3.23.

         "Request for Release": A release signed by a Servicing Officer, in the
form of Exhibit E attached hereto.

         "Residential Dwelling": Any one of the following: (i) an attached or
detached one- family dwelling, (ii) a detached two- to four-family dwelling,
(iii) a one-family dwelling unit in a Fannie Mae eligible condominium project,
or (iv) a detached one-family dwelling in a planned unit development, none of
which is a co-operative, mobile or manufactured home (as defined in 42 United
States Code, Section 5402(6)).

         "Residual Certificates": The Class R Certificates and the Class R-X
Certificates.

         "Residual Interest": The sole class of "residual interests" in a REMIC
within the meaning of Section 860G(a)(2) of the Code.

         "Responsible Officer": When used with respect to the Trust
Administrator, the President, any vice president, any assistant vice president,
the Secretary, any assistant secretary, the Treasurer, any assistant treasurer,
any trust officer or assistant trust officer, the Controller and any assistant
controller or any other officer thereof customarily performing functions similar
to those performed by any of the above designated officers and, with respect to
a particular matter relating to this Agreement, to whom such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject. When used with respect to the Trustee, any officer of the Trustee with
direct responsibility for the administration of this Agreement and, with respect
to a particular matter relating to this Agreement, to whom such matter is
referred because of such officer's knowledge of and familiarity with the
particular subject.

         "S&P" Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies, Inc., or its successors in interest.

         "Scheduled Principal Balance": With respect to any Mortgage Loan: (a)
as of the Cut-off Date, the outstanding principal balance of such Mortgage Loan
as of such date, net of the principal portion of all unpaid Monthly Payments, if
any, due on or before such date; (b) as of any Due Date subsequent to the
Cut-off Date up to and including the Due Date in the calendar month in which a
Liquidation Event occurs with respect to such Mortgage Loan, the Scheduled
Principal Balance of such Mortgage Loan as of the Cut-off Date, minus the sum of
(i) the principal portion of each Monthly Payment due on or before such Due Date
but subsequent to the Cut-off Date, whether or not received, (ii) all Principal
Prepayments received before such Due Date but after the Cut-off Date, (iii) the
principal portion of all Liquidation Proceeds and Insurance Proceeds received
before such Due Date but after the Cut-off Date, net of any portion thereof that
represents principal due (without regard to any acceleration of payments under
the related Mortgage and Mortgage Note) on a Due Date occurring on or before the
date on which such proceeds were received and (iv) any Realized Loss incurred
with respect thereto as a result of a Deficient Valuation occurring before such
Due Date, but only to the extent such Realized Loss represents a reduction in
the portion of principal of such Mortgage Loan not yet due (without regard to
any acceleration of payments under the related Mortgage and Mortgage Note) as of
the date of such Deficient Valuation; and (c) as of any Due Date subsequent to
the occurrence of a Liquidation Event with respect to such Mortgage Loan, zero.
With respect to any REO Property: (a) as of any Due Date subsequent to the date
of its acquisition on behalf of the Trust Fund up to and including the Due Date
in the calendar month in which a Liquidation Event occurs with respect to such
REO Property, an amount (not less than zero) equal to the Scheduled Principal
Balance of the related Mortgage Loan as of the Due Date in the calendar month in
which such REO Property was acquired minus the principal portion of each Monthly
Payment that would have become due on such related Mortgage Loan after such REO
Property was acquired if such Mortgage Loan had not been converted to an REO
Property; and (b) as of any Due Date subsequent to the occurrence of a
Liquidation Event with respect to such REO Property, zero.

         "Seller": Citigroup Global Markets Realty Corp. or its successor in
interest.

         "Senior Enhancement Percentage": For any Distribution Date, the
percentage equivalent of a fraction, the numerator of which is the sum of the
aggregate Certificate Principal Balance of the Mezzanine, Class CE and Class P
Certificates, calculated after taking into account distribution of the Group I
Principal Distribution Amount and the Group II Principal Distribution Amount to
the Certificates then entitled to distributions of principal on such
Distribution Date, and the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period).

         "Senior Interest Distribution Amount": With respect to any Distribution
Date and each Class of Class A Certificates, an amount equal to the sum of (i)
the Interest Distribution Amount for such Distribution Date and (ii) the
Interest Carry Forward Amount, if any, for such Distribution Date.

         "Servicer": [_______________] or any successor Servicer appointed as
herein provided, each in its capacity as a Servicer hereunder.

         "Servicer Event of Default": One or more of the events described in
Section 7.01.

         "Servicer Prepayment Charge Payment Amount": The amounts payable by the
Servicer in respect of any waived Prepayment Charges pursuant to Section 3.01.

         "Servicer Remittance Date": With respect to any Distribution Date, the
[__] day of the calendar month in which such Distribution Date occurs or, if
such [__] day is not a Business Day, the Business Day immediately following.

         "Servicing Account": The account or accounts created and maintained
pursuant to Section 3.09.

         "Servicing Advances": The reasonable "out-of-pocket" costs and expenses
incurred by the Servicer in connection with a default, delinquency or other
unanticipated event by the Servicer in the performance of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of a Mortgaged Property, (ii) any enforcement or
judicial proceedings, including foreclosures, in respect of a particular
Mortgage Loan, including any expenses incurred in relation to any such
proceedings that result from the Mortgage Loan being registered on the MERS
System, (iii) the management (including reasonable fees in connection therewith)
and liquidation of any REO Property, (iv) obtaining any legal documentation
required to be included in the Mortgage File and/or correcting any outstanding
title issues (i.e. any lien or encumbrance on the Mortgaged Property that
prevents the effective enforcement of the intended lien position) reasonably
necessary for the Servicer to perform its obligations under this Agreement and
(v) the performance of its obligations under Section 3.01, Section 3.09, Section
3.13, Section 3.14, Section 3.16 and Section 3.23. Servicing Advances shall also
include any reasonable "out-of-pocket" costs and expenses (including legal fees)
incurred by the Servicer in connection with executing and recording instruments
of satisfaction, deeds of reconveyance or Assignments of Mortgage in connection
with any foreclosure in respect of any Mortgage Loan to the extent not recovered
from the related Mortgagor or otherwise payable under this Agreement.The
Servicer shall not be required to make any Servicing Advance in respect of a
Mortgage Loan or REO Property that, in the good faith business judgment of the
Servicer, would not be ultimately recoverable from related Insurance Proceeds or
Liquidation Proceeds on such Mortgage Loan or REO Property as provided herein.
The Servicer shall not be required to make any Servicing Advance that would be a
Nonrecoverable Advance.

         "Servicing Fee": With respect to each Mortgage Loan and for any
calendar month, an amount equal to one month's interest at the Servicing Fee
Rate on the same principal amount on which interest on such Mortgage Loan
accrues for such calendar month. A portion of such Servicing Fee may be retained
by any Sub-Servicer as its servicing compensation.

         "Servicing Fee Rate": With respect to each Mortgage Loan, the rate of
[__]% per annum.

         "Servicing Officer": Any employee of the Servicer involved in, or
responsible for, the administration and servicing of the Mortgage Loans, whose
name appear on a list of Servicing Officers furnished by the Servicer to the
Trustee, the Trust Administrator and the Depositor on the Closing Date, as such
list may from time to time be amended.

         "Single Certificate": With respect to any Class of Certificates (other
than the Residual Certificates), a hypothetical Certificate of such Class
evidencing a Percentage Interest for such Class corresponding to an initial
Certificate Principal Balance or Notional Amount of $[_______]. With respect to
the Class P and the Residual Certificates, a hypothetical Certificate of such
Class evidencing a [__]% Percentage Interest in such Class.

         "Startup Day": With respect to any Trust REMIC, the day designated as
such pursuant to Section 10.01(b) hereof.

         "Stated Principal Balance": With respect to any Mortgage Loan: (a) as
of any date of determination up to but not including the Distribution Date on
which the proceeds, if any, of a Liquidation Event with respect to such Mortgage
Loan would be distributed, the Scheduled Principal Balance of such Mortgage Loan
as of the Cut-off Date, as shown in the Mortgage Loan Schedule, minus the sum of
(i) the principal portion of each Monthly Payment due on a Due Date subsequent
to the Cut-off Date, to the extent received from the Mortgagor or advanced by
the Servicer and distributed pursuant to Section 4.01 on or before such date of
determination, (ii) all Principal Prepayments received after the Cut-off Date,
to the extent distributed pursuant to Section 4.01 on or before such date of
determination, (iii) all Liquidation Proceeds and Insurance Proceeds applied by
the Servicer as recoveries of principal in accordance with the provisions of
Section 3.16, to the extent distributed pursuant to Section 4.01 on or before
such date of determination, and (iv) any Realized Loss incurred with respect
thereto as a result of a Deficient Valuation made during or prior to the
Prepayment Period for the most recent Distribution Date coinciding with or
preceding such date of determination; and (b) as of any date of determination
coinciding with or subsequent to the Distribution Date on which the proceeds, if
any, of a Liquidation Event with respect to such Mortgage Loan would be
distributed, zero. With respect to any REO Property: (a) as of any date of
determination up to but not including the Distribution Date on which the
proceeds, if any, of a Liquidation Event with respect to such REO Property would
be distributed, an amount (not less than zero) equal to the Stated Principal
Balance of the related Mortgage Loan as of the date on which such REO Property
was acquired on behalf of the Trust Fund, minus, the principal portion of
Monthly Payments that would have become due on such related Mortgage Loan after
such REO Property was acquired if such Mortgage Loan had not been converted to
an REO Property, to the extent advanced by the Servicer and distributed pursuant
to Section 4.01 on or before such date of determination; and (b) as of any date
of determination coinciding with or subsequent to the Distribution Date on which
the proceeds, if any, of a Liquidation Event with respect to such REO Property
would be distributed, zero.

         "Stayed Funds": If the Servicer is the subject of a proceeding under
the federal Bankruptcy Code and the making of any payment required to be made
under the terms of the Certificates and this Agreement is prohibited by Section
362 of the federal Bankruptcy Code, funds which are in the custody of the
Servicer, a trustee in bankruptcy or a federal bankruptcy court and should have
been the subject of such Remittance absent such prohibition.

         "Stepdown Date": The earlier to occur of (i) the first Distribution
Date on which the aggregate Certificate Principal Balance of the Class A
Certificates has been reduced to zero and (ii) the later to occur of (a) the
Distribution Date occurring in [_______________] and (b) the first Distribution
Date on which the Senior Enhancement Percentage (calculated for this purpose
only after taking into account distributions of principal on the Mortgage Loans
but prior to any distribution of the Group I Principal Distribution Amount and
the Group II Principal Distribution Amount to the Certificates then entitled to
distributions of principal on such Distribution Date) is equal to or greater
than [__]%.

         "Sub-Servicer": Any Person with which any Servicer has entered into a
Sub- Servicing Agreement and which meets the qualifications of a Sub-Servicer
pursuant to Section 3.02.

         "Sub-Servicing Account": An account established by a Sub-Servicer which
meets the requirements set forth in Section 3.08 and is otherwise acceptable to
the Servicer.

         "Sub-Servicing Agreement": The written contract between the Servicer
and a Sub-Servicer relating to servicing and administration of certain Mortgage
Loans as provided in Section 3.02.

         "Subsequent Recoveries": As of any Distribution Date, amounts received
by the Trust Fund (net of any related expenses permitted to be reimbursed to the
related Sub-Servicer or the Servicer from such amounts under the related
Sub-Servicing Agreement or hereunder) specifically related to a Mortgage Loan
that was the subject of a liquidation or an REO Disposition prior to the related
Prepayment Period that resulted in a Realized Loss.

         "Substitution Shortfall Amount": As defined in Section 2.03(d) hereof.

         "Tax Returns": The federal income tax return on Internal Revenue
Service Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return, including Schedule Q thereto, Quarterly Notice to Residual Interest
Holders of REMIC Taxable Income or Net Loss Allocation, or any successor forms,
to be filed on behalf of any Trust REMIC due to its classification as a REMIC
under the REMIC Provisions, together with any and all other information reports
or returns that may be required to be furnished to the Certificateholders or
filed with the Internal Revenue Service or any other governmental taxing
authority under any applicable provisions of federal, state or local tax laws.

         "Telerate Page 3750": The display designated as page "3750" on the Dow
Jones Telerate Capital Markets Report (or such other page as may replace page
3750 on that report for the purpose of displaying London interbank offered rates
of major banks).

         "Termination Price": As defined in Section 9.01.

         "Terminator": As defined in Section 9.01.

         "Trailing Recoveries": Any Insurance Proceeds, Liquidation Proceeds and
other payments or recoveries on a Mortgage Loan received or collected by the
Servicer after a Final Recovery Determination has been made with respect to such
Mortgage Loan or related REO Property.

         "Transfer": Any direct or indirect transfer, sale, pledge,
hypothecation, or other form of assignment of any Ownership Interest in a
Certificate.

         "Transferee": Any Person who is acquiring by Transfer any Ownership
Interest in a Certificate.

         "Transferor": Any Person who is disposing by Transfer of any Ownership
Interest in a Certificate.

         "Trigger Event": A Trigger Event is in effect on any Distribution Date
on or after the Stepdown Date if:

         (a) the Delinquency Percentage exceeds [__]% of the Senior Enhancement
Percentage for the prior Distribution Date; or

         (b) the Cumulative Realized Loss Percentage exceeds the applicable
percentages set forth below with respect to such Distribution Date:

              DISTRIBUTION DATE OCCURRING IN                    PERCENTAGE
              ---------------------------------               --------------
              [________] through [________]                        [__]%
              [________] through [________]                        [__]%
              [________] through [________]                        [__]%
              [________] through [________]                        [__]%
              [________] and thereafter                            [__]%

         "Trust Administrator": [_______________], or its successor in interest,
or any successor trust administrator appointed as herein provided.

         "Trust Fund": Collectively, all of the assets of each Trust REMIC, the
Net WAC Rate Carryover Reserve Account, the Cap Contract, distributions made to
the Trust Administrator by the Cap Administrator under the Cap Administration
Agreement and the Cap Account, Servicer Prepayment Charge Payment Amounts and
the other assets conveyed by the Depositor to the Trustee pursuant to Section
2.01.

         "Trust REMIC": Any of REMIC I, REMIC II, REMIC III and REMIC IV.

         "Trustee": [_______________], or its successor in interest, or any
successor trustee appointed as herein provided.

         "Uncertificated Balance": The amount of any REMIC Regular Interest
outstanding as of any date of determination. As of the Closing Date, the
Uncertificated Balance of each REMIC Regular Interest shall equal the amount set
forth in the Preliminary Statement hereto as its initial Uncertificated Balance.
On each Distribution Date, the Uncertificated Balance of each REMIC Regular
Interest shall be reduced by all distributions of principal made on such REMIC
Regular Interest on such Distribution Date pursuant to Section 4.01 and, if and
to the extent necessary and appropriate, shall be further reduced on such
Distribution Date by Realized Losses as provided in Section 4.04. The
Uncertificated Balance of REMIC I Regular Interest I-LTZZ shall be increased by
interest deferrals as provided in Section 4.01. With respect to the Class CE
Interest as of any date of determination, an amount equal to the excess, if any,
of (A) the then aggregate Uncertificated Principal Balance of the REMIC 1
Regular Interests over (B) the then aggregate Certificate Principal Balance of
the Floating Rate Certificates and the Class P Certificates then outstanding.
The Uncertificated Principal Balance of each REMIC Regular Interest that has an
Uncertificated Principal Balance shall never be less than zero.

         "Uncertificated Interest": With respect to any REMIC Regular Interest
for any Distribution Date, one month's interest at the REMIC I Remittance Rate
applicable to such REMIC Regular Interest for such Distribution Date, accrued on
the Uncertificated Balance thereof immediately prior to such Distribution Date.
Uncertificated Interest in respect of any REMIC Regular Interest shall accrue on
the basis of a 360-day year consisting of twelve 30-day months. Uncertificated
Interest with respect to each Distribution Date, as to any REMIC Regular
Interest, shall be reduced by an amount equal to the sum of (a) the aggregate
Prepayment Interest Shortfall, if any, for such Distribution Date to the extent
not covered by payments pursuant to Section 3.24 and (b) the aggregate amount of
any Relief Act Interest Shortfall, if any allocated, in each case, to such REMIC
Regular Interest pursuant to Section 1.02. In addition, Uncertificated Interest
with respect to each Distribution Date, as to any REMIC Regular Interest shall
be reduced by Realized Losses, if any, allocated to such REMIC Regular Interest
pursuant to Section 1.02 and Section 4.04.

         "Uninsured Cause": Any cause of damage to a Mortgaged Property such
that the complete restoration of such property is not fully reimbursable by the
hazard insurance policies required to be maintained pursuant to Section 3.14.

         "United States Person": A citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States, any State thereof or the District of Columbia
(except, in the case of a partnership, to the extent provided in regulations);
provided that, for purposes solely of the restrictions on the transfer of the
Residual Certificates, no partnership or other entity treated as a partnership
for United States federal income tax purposes shall be treated as a United
States Person unless all persons that own an interest in such partnership either
directly or through any entity that is not a corporation for United States
federal income tax purposes are required by the applicable operative agreement
to be United States Persons, or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States Persons have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which have not yet
been issued, a trust which was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under subpart E of part I of subchapter J
of chapter 1 of the Code), and which was treated as a United States person on
August 20, 1996 may elect to continue to be treated as a United States person
notwithstanding the previous sentence. The term "United States" shall have the
meaning set forth in Section 7701 of the Code.

         "Value": With respect to any Mortgaged Property, the lesser of (i) the
value thereof as determined by an appraisal made for the originator of the
Mortgage Loan at the time of origination of the Mortgage Loan and (ii) the
purchase price paid for the related Mortgaged Property by the Mortgagor with the
proceeds of the Mortgage Loan, provided, however, in the case of a Refinanced
Mortgage Loan, such value of the Mortgaged Property is based solely upon the
value determined by an appraisal made for the originator of such Refinanced
Mortgage Loan at the time of origination of such Refinanced Mortgage Loan by an
appraiser.

         "Voting Rights": The portion of the voting rights of all of the
Certificates which is allocated to any Certificate. With respect to any date of
determination, [__]% of all Voting Rights will be allocated among the holders of
the Class A Certificates, the Mezzanine Certificates and the Class CE
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates, [__]% of all Voting Rights will be
allocated to the holders of the Class P Certificates and [__]% of all Voting
Rights will be allocated among the holders of the Residual Certificates. The
Voting Rights allocated to each Class of Certificate shall be allocated among
Holders of each such Class in accordance with their respective Percentage
Interests as of the most recent Record Date.

         SECTION 1.02 Allocation of Certain Interest Shortfalls.

         For purposes of calculating the Interest Distribution Amount for the
Floating Rate Certificates and the Class CE Certificates for any Distribution
Date, the aggregate amount of any Prepayment Interest Shortfalls (to the extent
not covered by payments by the Servicer pursuant to Section 3.24) and any Relief
Act Interest Shortfalls incurred in respect of the Mortgage Loans for any
Distribution Date shall be allocated first, to the Class CE Certificates based
on, and to the extent of, one month's interest at the then applicable
Pass-Through Rate on the Notional Amount of the Class CE Certificates and,
thereafter, among the Class A Certificates and the Mezzanine Certificates on a
PRO RATA basis based on, and to the extent of, one month's interest at the then
applicable respective Pass-Through Rate on the respective Certificate Principal
Balance of each such Certificate immediately prior to such Distribution Date.

         For purposes of calculating the amount of Uncertificated Interest for
the REMIC I Regular Interests for any Distribution Date:

                  (A) The REMIC I Marker Allocation Percentage of the aggregate
amount of any Prepayment Interest Shortfalls (to the extent not covered by
payments by the Servicer pursuant to Section 3.24) and the REMIC I Marker
Allocation Percentage of any Relief Act Interest Shortfalls incurred in respect
of the Mortgage Loans for any Distribution Date shall be allocated among REMIC I
Regular Interest I-LTAA, REMIC I Regular Interest I-LTA1, REMIC I Regular
Interest I-LTA2A, REMIC I Regular Interest I-LTA2B, REMIC I Regular Interest
I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest I-LTM1,
REMIC I Regular Interest I-LTM2, REMIC I Regular Interest I-LTM3, REMIC I
Regular Interest I-LTM4, REMIC I Regular Interest I-LTM5, REMIC I Regular
Interest I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular Interest I-LTM10, REMIC
I Regular Interest I-LTM11, REMIC I Regular Interest I-LTM12, REMIC I Regular
Interest I-LTM13 and REMIC I Regular Interest I-LTZZ PRO RATA based on, and to
the extent of, one month's interest at the then applicable respective REMIC I
Remittance Rate on the respective Uncertificated Balance of each such REMIC I
Regular Interest; and

                  (B) The REMIC I Sub WAC Allocation Percentage of the aggregate
amount of any Prepayment Interest Shortfalls (to the extent not covered by
payments by the Servicer pursuant to Section 3.24) and the REMIC I Sub WAC
Allocation Percentage of any Relief Act Interest Shortfalls incurred in respect
of the Mortgage Loans for any Distribution Date shall be allocated first, to
Uncertificated Interest payable to REMIC I Regular Interest I-LT1SUB, REMIC I
Regular Interest I-LT1GRP, REMIC I Regular Interest I-LT2SUB, REMIC I Regular
Interest I-LT2GRP and REMIC I Regular Interest I-LTXX, PRO RATA based on, and to
the extent of, one month's interest at the then applicable respective REMIC I
Remittance Rate on the respective Uncertificated Balance of each such REMIC I
Regular Interest.

<PAGE>

                                   ARTICLE II

                          CONVEYANCE OF MORTGAGE LOANS;
                        ORIGINAL ISSUANCE OF CERTIFICATES

         SECTION 2.01 Conveyance of Mortgage Loans.

         The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey to the Trustee
without recourse for the benefit of the Certificateholders all the right, title
and interest of the Depositor, including any security interest therein for the
benefit of the Depositor, in and to the Mortgage Loans identified on the
Mortgage Loan Schedule, the rights of the Depositor under the Assignment
Agreements, payments made to the Trust Administrator by the Cap Administrator
under the Cap Administration Agreement and the Cap Account, and all other assets
included or to be included in REMIC I. Such assignment includes all interest and
principal received by the Depositor or the Servicer on or with respect to the
Mortgage Loans (other than payments of principal and interest due on such
Mortgage Loans on or before the Cut-off Date). The Depositor herewith delivers
to the Trustee executed copies of the Assignment Agreements, and the Trustee and
the Trust Administrator acknowledge receipt of the same on behalf of the
Certificateholders.

         In connection with such transfer and assignment, the Depositor does
hereby deliver to, and deposit with, the Trustee or a Custodian on its behalf,
the following documents or instruments (a "Mortgage File") with respect to each
Mortgage Loan so transferred and assigned:

(i)      The Mortgage Note, endorsed by manual or facsimile signature without
         recourse by the related Originator or an Affiliate of the related
         Originator in blank or to the Trustee showing a complete chain of
         endorsements from the named payee to the Trustee or from the named
         payee to the Affiliate of the related Originator and from such
         Affiliate to the Trustee;

(ii)     The original recorded Mortgage, noting the presence of the MIN of the
         Mortgage Loan, if applicable, and language indicating that the Mortgage
         Loan is a MOM Loan if the Mortgage Loan is a MOM Loan, with evidence of
         recording thereon or a copy of the Mortgage certified by the public
         recording office in those jurisdictions where the public recording
         office retains the original;

(iii)    Unless the Mortgage Loan is registered on the MERS(R) System, an
         assignment from the related Originator or an Affiliate of the related
         Originator to the Trustee in recordable form of the Mortgage which may
         be included, where permitted by local law, in a blanket assignment or
         assignments of the Mortgage to the Trustee, including any intervening
         assignments and showing a complete chain of title from the original
         mortgagee named under the Mortgage to the Person assigning the Mortgage
         Loan to the Trustee (or to MERS, noting the presence of the MIN, if the
         Mortgage Loan is registered on the MERS(R) System);

(iv)     Any original assumption, modification, buydown or conversion-to-
         fixed-interest-rate agreement applicable to the Mortgage Loan; and

(v)      The original or a copy of the title insurance policy (which may be a
         certificate or a short form policy relating to a master policy of title
         insurance) pertaining to the Mortgaged Property, or in the event such
         original title policy is unavailable, a copy of the preliminary title
         report and the lender's recording instructions, with the original to be
         delivered within 180 days of the Closing Date or an attorney's opinion
         of title in jurisdictions where such is the customary evidence of
         title.

         In instances where an original recorded Mortgage cannot be delivered by
the Depositor to the Trustee (or a Custodian on behalf of the Trustee) prior to
or concurrently with the execution and delivery of this Agreement, due to a
delay in connection with the recording of such Mortgage, the Depositor may, (a)
in lieu of delivering such original recorded Mortgage referred to in clause (ii)
above, deliver to the Trustee (or a Custodian on behalf of the Trustee) a copy
thereof, provided that the Depositor certifies that the original Mortgage has
been delivered to a title insurance company for recordation after receipt of its
policy of title insurance or binder therefor (which may be a certificate
relating to a master policy of title insurance), and (b) in lieu of delivering
the completed assignment in recordable form referred to in clause (iii) above to
the Trustee (or a Custodian on behalf of the Trustee), deliver such assignment
to the Trustee (or a Custodian on behalf of the Trustee) completed except for
recording information. In all such instances, the Depositor will deliver the
original recorded Mortgage and completed assignment (if applicable) to the
Trustee (or a Custodian on behalf of the Trustee) promptly upon receipt of such
Mortgage. In instances where an original recorded Mortgage has been lost or
misplaced, the Depositor or the related title insurance company may deliver, in
lieu of such Mortgage, a copy of such Mortgage bearing recordation information
and certified as true and correct by the office in which recordation thereof was
made. In instances where the original or a copy of the title insurance policy
referred to in clause (vi) above (which may be a certificate relating to a
master policy of title insurance) pertaining to the Mortgaged Property relating
to a Mortgage Loan cannot be delivered by the Depositor to the Trustee (or a
Custodian on behalf of the Trustee) prior to or concurrently with the execution
and delivery of this Agreement because such policy is not yet available, the
Depositor may, in lieu of delivering the original or a copy of such title
insurance referred to in clause (vi) above, deliver to the Trustee (or a
Custodian on behalf of the Trustee) a binder with respect to such policy (which
may be a certificate relating to a master policy of title insurance) and deliver
the original or a copy of such policy (which may be a certificate relating to a
master policy of title insurance) to the Trustee (or a Custodian on behalf of
the Trustee) within 180 days of the Closing Date, in instances where an original
assumption, modification, buydown or conversion-to-fixed- interest-rate
agreement cannot be delivered by the Depositor to the Trustee (or a Custodian on
behalf of the Trustee) prior to or concurrently with the execution and delivery
of this Agreement, the Depositor may, in lieu of delivering the original of such
agreement referred to in clause (iv) above, deliver a certified copy thereof.

         To the extent not already recorded, except with respect to any Mortgage
Loan for which MERS is identified on the Mortgage or on a properly recorded
assignment of the Mortgage as the mortgagee of record, the Servicer, at the
expense of the Seller shall promptly (and in no event later than five Business
Days following the later of the Closing Date and the date of receipt by the
Servicer of the recording information for a Mortgage) submit or cause to be
submitted for recording, at no expense to any Trust REMIC, in the appropriate
public office for real property records, each Assignment delivered to it
pursuant to (iii) above. In the event that any such Assignment is lost or
returned unrecorded because of a defect therein, the Servicer, at the expense of
the Seller, shall promptly prepare or cause to be prepared a substitute
Assignment or cure or cause to be cured such defect, as the case may be, and
thereafter cause each such Assignment to be duly recorded. Notwithstanding the
foregoing, but without limiting the requirement that such Assignments be in
recordable form, neither the Servicer nor the Trustee shall be required to
submit or cause to be submitted for recording any Assignment delivered to it or
a Custodian pursuant to (iii) above if such recordation shall not, as of the
Closing Date, be required by the Rating Agencies, as a condition to their
assignment on the Closing Date of their initial ratings to the Certificates, as
evidenced by the delivery by the Rating Agencies of their ratings letters on the
Closing Date; provided, however, notwithstanding the foregoing, the Servicer
shall submit each Assignment for recording, at no expense to the Trust Fund or
the Servicer, upon the earliest to occur of: (A) reasonable direction by Holders
of Certificates entitled to at least [__]% of the Voting Rights, (B) the
occurrence of a Servicer Event of Default, (C) the occurrence of a bankruptcy,
insolvency or foreclosure relating to the Seller, (D) the occurrence of a
servicing transfer as described in Section 7.02 of this Agreement and (E) with
respect to any one Assignment the occurrence of a foreclosure relating to the
Mortgagor under the related Mortgage. Notwithstanding the foregoing, if the
Seller fails to pay the cost of recording the Assignments, such expense will be
paid by the Servicer and the Servicer shall be reimbursed for such expenses by
the Trust as Servicing Advances.

         In connection with the assignment of any Mortgage Loan registered on
the MERS System, the Depositor further agrees that it will cause, within 30
Business Days after the Closing Date, the MERS System to indicate that such
Mortgage Loans have been assigned by the Depositor to the Trustee in accordance
with this Agreement for the benefit of the Certificateholders by including in
such computer files (a) the code in the field which identifies the specific
Trustee and (b) the code in the field "Pool Field" which identifies the series
of the Certificates issued in connection with such Mortgage Loans. The Depositor
further agrees that it will not, and will not permit the Servicer to, and the
Servicer agrees that it will not and will not permit a Sub-Servicer to, alter
the codes referenced in this paragraph with respect to any Mortgage Loan during
the term of this Agreement unless and until such Mortgage Loan is repurchased in
accordance with the terms of this Agreement.

         With respect to a maximum of approximately [__]% of the Original
Mortgage Loans, by outstanding principal balance of the Original Mortgage Loans
as of the Cut-off Date, if any original Mortgage Note referred to in (i) above
cannot be located, the obligations of the Depositor to deliver such documents
shall be deemed to be satisfied upon delivery to the Trustee (or a Custodian on
behalf of the Trustee) of a photocopy of such Mortgage Note, if available, with
a lost note affidavit. If any of the original Mortgage Notes for which a lost
note affidavit was delivered to the Trustee (or a Custodian on behalf of the
Trustee) is subsequently located, such original Mortgage Note shall be delivered
to the Trustee (or a Custodian on behalf of the Trustee) within three Business
Days.

The Depositor shall deliver or cause to be delivered to the Trustee (or a
Custodian on behalf of the Trustee) promptly upon receipt thereof any other
original documents constituting a part of a Mortgage File received with respect
to any Mortgage Loan, including, but not limited to, any original documents
evidencing an assumption, modification, consolidation or extension of any
Mortgage Loan. The Depositor shall deliver or cause the Seller to deliver to the
Servicer copies of all trailing documents required to be included in the
servicing file at the same time the originals or certified copies thereof are
delivered to the Trustee or Custodian, such documents including but not limited
to the mortgagee policy of title insurance and any mortgage loan documents upon
return from the recording office. The Servicer shall not be responsible for any
custodian fees or other costs incurring in obtaining such documents and the
Depositor shall cause the Servicer to be reimbursed for any such costs it may
incur in connection with performing its obligations under this Agreement.

         All original documents relating to the Mortgage Loans that are not
delivered to the Trustee (or a Custodian on behalf of the Trustee) are and shall
be held by or on behalf of the Seller, the Depositor or the Servicer, as the
case may be, in trust for the benefit of the Trustee on behalf of the
Certificateholders. In the event that any such original document is required
pursuant to the terms of this Section to be a part of a Mortgage File, such
document shall be delivered promptly to the Trustee (or a Custodian on behalf of
the Trustee). Any such original document delivered to or held by the Depositor
that is not required pursuant to the terms of this Section to be a part of a
Mortgage File, shall be delivered promptly to the Servicer.

         Wherever it is provided in this Section 2.01 that any document,
evidence or information relating to a Mortgage Loan be delivered or supplied to
the Trustee, the Depositor shall do so by delivery thereof to the Trustee or a
Custodian on behalf of the Trustee.

         The parties hereto understand and agree that it is not intended that
any Mortgage Loan be included in the Trust that is a high-cost home loan as
defined by the Homeownership and Equity Protection Act of 1994 or any other
applicable predatory or abusive lending laws.

         The Depositor hereby directs the Trustee to execute, deliver and
perform its obligations under the Cap Contract on the Closing Date and
thereafter on behalf of the Trust and the Holders of the Floating Rate
Certificates. The Seller, the Depositor, the Servicer, the Trust Administrator
and the Holders of the Floating Rate Certificates by their acceptance of such
Certificates acknowledge and agree that the Trustee shall execute, deliver and
perform the Trust Fund's obligations under the Cap Contract and shall do so
solely in its capacity as Trustee of the Trust Fund and not in its individual
capacity. The Trustee shall not have any responsibility for the contents,
adequacy or sufficiency of the Cap contract, including, without limitation, any
representations and warranties contained therein.

         SECTION 2.02 Acceptance of the Trust Fund by the Trustee.

         Subject to the provisions of Section 2.01 and subject to any exceptions
noted on an exception report delivered by or on behalf of the Trustee, the
Trustee acknowledges receipt of the documents referred to in Section 2.01 (other
than such documents described in Section 2.01(iv)) above and all other assets
included in the definition of "Trust Fund" and declares that it holds and will
hold such documents and the other documents delivered to it constituting the
Mortgage File, and that it holds or will hold all such assets and such other
assets included in the definition of "Trust Fund" in trust for the exclusive use
and benefit of all present and future Certificateholders.

         The Trustee, by execution and delivery hereof, acknowledges receipt,
subject to the review described in the succeeding sentence, of the documents and
other property referred to in Section 2.01 and declares that the Trustee (or a
Custodian on behalf of the Trustee) holds and will hold such documents and other
property, including property yet to be received in the Trust Fund, in trust,
upon the trusts herein set forth, for the benefit of all present and future
Certificateholders. The Trustee or the related Custodian on its behalf shall,
for the benefit of the Trustee and the Certificateholders, review each Mortgage
File within 90 days after execution and delivery of this Agreement, to ascertain
that all required documents have been executed, received and recorded, if
applicable, and that such documents relate to the Mortgage Loans. If in the
course of such review the Trustee or the related Custodian on its behalf finds a
document or documents constituting a part of a Mortgage File to be defective in
any material respect, the Trustee or the related Custodian on its behalf shall
promptly so notify the Depositor, the Trust Administrator, the Seller, the
Servicer and, if such notice is from the related Custodian on the Trustee's
behalf, the Trustee. In addition, upon the discovery by the Depositor, the
Servicer, the Trust Administrator or the Trustee of a breach of any of the
representations and warranties made by the related Originator or the Seller in
the related Assignment Agreement in respect of any Mortgage Loan which
materially adversely affects such Mortgage Loan or the interests of the related
Certificateholders in such Mortgage Loan, the party discovering such breach
shall give prompt written notice to the other parties.

         The Depositor and the Trustee intend that the assignment and transfer
herein contemplated constitute a sale of the Mortgage Loans, the related
Mortgage Notes and the related documents, conveying good title thereto free and
clear of any liens and encumbrances, from the Depositor to the Trustee in trust
for the benefit of the Certificateholders and that such property not be part of
the Depositor's estate or property of the Depositor in the event of any
insolvency by the Depositor. In the event that such conveyance is deemed to be,
or to be made as security for, a loan, the parties intend that the Depositor
shall be deemed to have granted and does hereby grant to the Trustee a first
priority perfected security interest in all of the Depositor's right, title and
interest in and to the Mortgage Loans, the related Mortgage Notes and the
related documents, and that this Agreement shall constitute a security agreement
under applicable law.

         The Trustee may, concurrently with the execution and delivery hereof or
at any time thereafter, enter into a custodial agreement with a Custodian
pursuant to which the Trustee appoints a Custodian to hold the Mortgage Files on
behalf of the Trustee for the benefit of the Trustee and all present and future
Certificateholders, which may provide that the related Custodian shall, on
behalf of the Trustee, conduct the review of each Mortgage File required under
the first paragraph of this Section 2.02. Initially, [___________] is appointed
as Custodian with respect to the related Mortgage Files of all the related
Mortgage Loans and, notwithstanding anything to the contrary herein, it is
understood that such initial Custodian shall be responsible for the review
contemplated in the second paragraph of this Section 2.02 and for all other
functions relating to the receipt, review, reporting and certification provided
for herein with respect to the Mortgage Files (other than ownership thereof for
the benefit of the Certificateholders and related duties and obligations set
forth herein).

         SECTION 2.03 Repurchase or Substitution of Mortgage Loans by the Seller
                      or the Depositor.

         (a) Upon discovery or receipt of notice by the Depositor, the Servicer,
the Trust Administrator or the Trustee of any materially defective document in,
or that a document is missing from, a Mortgage File or of the breach by an
Originator or the Seller of any representation, warranty or covenant under an
Assignment Agreement in respect of any Mortgage Loan which materially adversely
affects the value of such Mortgage Loan or the interest therein of the
Certificateholders, the party so discovering or receiving notice shall promptly
notify the other parties to this Agreement, and the Trustee thereupon shall
promptly notify the related Originator and the Seller of such defect, missing
document or breach and request that the related Originator deliver such missing
document or cure such defect or that the related Originator or the Seller, as
applicable, cure such breach within 90 days from the date the related Originator
or the Seller, as applicable, was notified of such missing document, defect or
breach, and if the related Originator or Seller, as applicable, does not deliver
such missing document or cure such defect or breach in all material respects
during such period, the Trustee shall enforce the obligations of the related
Originator or Seller, as applicable, under the related Assignment Agreement (i)
to repurchase such Mortgage Loan from REMIC I at the Purchase Price within 90
days after the date on which the Seller was notified (subject to Section
2.03(e)) of such missing document, defect or breach, and (ii) to indemnify the
Trust Fund in respect of such missing document, defect or breach, in the case of
each of (i) and (ii), if and to the extent that the related Originator or
Seller, as applicable, is obligated to do so under the related Assignment
Agreement. The Purchase Price for the repurchased Mortgage Loan and any
indemnification shall be remitted by the related Originator or the Seller, as
applicable, to the Servicer for deposit into the Collection Account, and the
Trust Administrator, upon receipt of written notice from the Servicer of such
deposit, shall give written notice to the Trustee and the related Custodian that
such deposit has taken place and the Trustee shall release (or cause the related
Custodian to release on its behalf) to the related Originator or the Seller, as
applicable, the related Mortgage File, and the Trustee and the Trust
Administrator shall execute and deliver such instruments of transfer or
assignment, in each case without recourse, as the related Originator or the
Seller, as applicable, shall furnish to it and as shall be necessary to vest in
the related Originator or the Seller, as applicable, any Mortgage Loan released
pursuant hereto, and the Trustee and the Trust Administrator shall have no
further responsibility with regard to such Mortgage File. In furtherance of the
foregoing, if the related Originator or the Seller, as applicable, is not a
member of MERS and repurchases a Mortgage Loan which is registered on the MERS
System, the related Originator or the Seller, as applicable, pursuant to the
related Assignment Agreement at its own expense and without any right of
reimbursement, shall cause MERS to execute and deliver an assignment of the
Mortgage in recordable form to transfer the Mortgage from MERS to the related
Originator or the Seller, as applicable, and shall cause such Mortgage to be
removed from registration on the MERS System in accordance with MERS rules and
regulations. In lieu of repurchasing any such Mortgage Loan as provided above,
if so provided in the related Assignment Agreement the related Originator or the
Seller, as applicable, may cause such Mortgage Loan to be removed from REMIC I
(in which case it shall become a Deleted Mortgage Loan) and substitute one or
more Qualified Substitute Mortgage Loans in the manner and subject to the
limitations set forth in Section 2.03(d). It is understood and agreed that the
obligation of the related Originator or the Seller, as applicable, to cure or to
repurchase (or to substitute for) any Mortgage Loan as to which a document is
missing, a material defect in a constituent document exists or as to which such
a breach has occurred and is continuing, and if and to the extent provided in
the related Assignment Agreement to perform any applicable indemnification
obligations with respect to any such omission, defect or breach, as provided in
such Assignment Agreement, shall constitute the only remedies respecting such
omission, defect or breach available to the Trustee or the Trust Administrator
on behalf of the Certificateholders.

         (b) Notwithstanding anything to the contrary in this Section 2.03, with
respect to any breach by the related Originator or the Seller, as applicable, of
any representation and warranty which breach materially and adversely affects
the value of any Prepayment Charge or the interests of the Certificateholders
therein, the Trustee shall enforce the obligation of the related Originator or
the Seller, as applicable, to remedy such breach as provided in the related
Assignment Agreement as follows: upon any Principal Prepayment with respect to
the affected Mortgage Loan, the related Originator or the Seller, as applicable,
shall pay or cause to be paid to the Purchaser the excess, if any, of (x) the
amount of such Prepayment Charge calculated as set forth in the Mortgage Loan
Schedule and (y) the amount collected from the Mortgagor in respect of such
Prepayment Charge.

         (c) Within 90 days of the earlier of discovery by the Servicer or
receipt of notice by the Depositor of the breach of any representation, warranty
or covenant of the Servicer set forth in Section 2.05 which materially and
adversely affects the interests of the Certificateholders in any Mortgage Loan,
the Servicer shall cure such breach in all material respects.

         (d) Any substitution of Qualified Substitute Mortgage Loans for Deleted
Mortgage Loans made pursuant to Section 2.03(a) must be effected prior to the
date which is two years after the Startup Day for REMIC I.

         As to any Deleted Mortgage Loan for which the related Originator or the
Seller, as applicable, substitutes a Qualified Substitute Mortgage Loan or
Loans, such substitution shall be effected by the related Originator or the
Seller, as applicable, delivering to the Trustee (or to the related Custodian on
behalf of the Trustee, as applicable), for such Qualified Substitute Mortgage
Loan or Loans, the Mortgage Note, the Mortgage, the Assignment in blank or to
the Trustee, and such other documents and agreements, with all necessary
endorsements thereon, as are required by Section 2.01, together with an
Officers' Certificate providing that each such Qualified Substitute Mortgage
Loan satisfies the definition thereof and specifying the Substitution Shortfall
Amount (as described below), if any, in connection with such substitution. The
related Custodian on its behalf and on behalf of the Trustee shall, for the
benefit of the Certificateholders, review each Mortgage File within 90 days
after execution and delivery of this Agreement, to ascertain that all required
documents have been executed, received and recorded, if applicable, and that
such documents relate to the Mortgage Loans. If in the course of such review the
Trustee or the related Custodian on its behalf finds a document or documents
constituting a part of a Mortgage File to be defective in any material respect,
the Trustee or the related Custodian on its behalf shall promptly so notify the
Depositor, the Trust Administrator, the related Originator, the Seller and the
Servicer. Monthly Payments due with respect to Qualified Substitute Mortgage
Loans in the month of substitution are not part of the Trust Fund and will be
retained by the related Originator or the Seller, as applicable. For the month
of substitution, distributions to Certificateholders will reflect the Monthly
Payment due on such Deleted Mortgage Loan on or before the Due Date in the month
of substitution, and the related Originator or the Seller, as applicable, shall
thereafter be entitled to retain all amounts subsequently received in respect of
such Deleted Mortgage Loan. The Trust Administrator shall give or cause to be
given written notice to the Trustee and the Certificateholders that such
substitution has taken place, and the Trust Administrator shall amend or cause
the related Custodian to amend the Mortgage Loan Schedule to reflect the removal
of such Deleted Mortgage Loan from the terms of this Agreement and the
substitution of the Qualified Substitute Mortgage Loan or Loans and, upon
receipt thereof, shall deliver a copy of such amended Mortgage Loan Schedule to
the Servicer. Upon such substitution, such Qualified Substitute Mortgage Loan or
Loans shall constitute part of the Mortgage Pool and shall be subject in all
respects to the terms of this Agreement and the related Assignment Agreement
(including all applicable representations and warranties thereof included in
such Assignment Agreement), in each case as of the date of substitution.

         For any month in which the related Originator or the Seller, as
applicable, substitutes one or more Qualified Substitute Mortgage Loans for one
or more Deleted Mortgage Loans, the Servicer will determine the amount (the
"Substitution Shortfall Amount"), if any, by which the aggregate Purchase Price
of all such Deleted Mortgage Loans exceeds the aggregate of, as to each such
Qualified Substitute Mortgage Loan, the Scheduled Principal Balance thereof as
of the date of substitution, together with one month's interest on such
Scheduled Principal Balance at the applicable Mortgage Loan Remittance Rate. On
the date of such substitution, the Trustee will monitor the obligation of the
related Originator or the Seller, as applicable, to deliver or cause to be
delivered, and shall request that such delivery be to the Servicer for deposit
in the Collection Account, an amount equal to the Substitution Shortfall Amount,
if any, and the Trustee (or the related Custodian on behalf of the Trustee, as
applicable), upon receipt of the related Qualified Substitute Mortgage Loan or
Loans and written notice given by the Servicer of such deposit, shall release to
the related Originator or the Seller, as applicable, the related Mortgage File
or Files and the Trustee and the Trust Administrator shall execute and deliver
such instruments of transfer or assignment, in each case without recourse, as
the related Originator or the Seller, as applicable, shall deliver to it and as
shall be necessary to vest therein any Deleted Mortgage Loan released pursuant
hereto.

         In addition, the related Originator or the Seller, as applicable, shall
obtain at its own expense and deliver to the Trustee and the Trust Administrator
an Opinion of Counsel to the effect that such substitution will not cause (a)
any federal tax to be imposed on any Trust REMIC, including without limitation,
any federal tax imposed on "prohibited transactions" under Section 860F(a)(1) of
the Code or on "contributions after the startup date" under Section 860G(d)(1)
of the Code, or (b) any Trust REMIC to fail to qualify as a REMIC at any time
that any Certificate is outstanding.

         (e) Upon discovery by the Depositor, the Servicer, the Trust
Administrator or the Trustee that any Mortgage Loan does not constitute a
"qualified mortgage" within the meaning of Section 860G(a)(3) of the Code, the
party discovering such fact shall within two Business Days give written notice
thereof to the other parties to this Agreement, and the Trustee shall give
written notice thereof to the Seller. In connection therewith, the related
Originator or the Seller, as applicable, pursuant to the related Assignment
Agreement or the Depositor pursuant to this Agreement shall repurchase or,
subject to the limitations set forth in Section 2.03(d), substitute one or more
Qualified Substitute Mortgage Loans for the affected Mortgage Loan within 90
days of the earlier of discovery or receipt of such notice with respect to such
affected Mortgage Loan. Such repurchase or substitution shall be made by (i) the
related Originator or the Seller, as applicable, if the affected Mortgage Loan's
status as a non-qualified mortgage is or results from a breach of any
representation, warranty or covenant made by the related Originator or the
Seller, as applicable, under the related Assignment Agreement or (iii) the
Depositor, if the affected Mortgage Loan's status as a non-qualified mortgage is
a breach of no representation or warranty. Any such repurchase or substitution
shall be made in the same manner as set forth in Sections 2.03(a). The Trustee
shall reconvey to the Depositor, the related Originator or the Seller, as the
case may be, the Mortgage Loan to be released pursuant hereto in the same
manner, and on the same terms and conditions, as it would a Mortgage Loan
repurchased by an Originator or the Seller for breach of a representation or
warranty.

         SECTION 2.04 [Reserved].

         SECTION 2.05 Representations, Warranties and Covenants of the Servicer.

         (a) The Servicer hereby represents, warrants and covenants to the Trust
Administrator and the Trustee, for the benefit of each of the Trustee, the Trust
Administrator, the Certificateholders and to the Depositor that as of the
Closing Date or as of such date specifically provided herein:

(i)      The Servicer is duly organized, validly existing, and in good standing
         under the laws of the jurisdiction of its formation and is duly
         authorized and qualified to transact any and all business contemplated
         by this Agreement to be conducted by the Servicer in any state in which
         a Mortgaged Property is located or is otherwise not required under
         applicable law to effect such qualification and, in any event, is in
         compliance with the doing business laws of any such State, to the
         extent necessary to ensure its ability to enforce each Mortgage Loan
         and to service the Mortgage Loans in accordance with the terms of this
         Agreement;

(ii)     The Servicer has the full power and authority to service each Mortgage
         Loan, and to execute, deliver and perform, and to enter into and
         consummate the transactions contemplated by this Agreement and has duly
         authorized by all necessary action on the part of the Servicer the
         execution, delivery and performance of this Agreement; and this
         Agreement, assuming the due authorization, execution and delivery
         thereof by the other parties hereto, constitutes a legal, valid and
         binding obligation of the Servicer, enforceable against the Servicer in
         accordance with its terms, except to the extent that (a) the
         enforceability thereof may be limited by bankruptcy, insolvency,
         moratorium, receivership and other similar laws relating to creditors'
         rights generally and (b) the remedy of specific performance and
         injunctive and other forms of equitable relief may be subject to the
         equitable defenses and to the discretion of the court before which any
         proceeding therefor may be brought;

(iii)    The execution and delivery of this Agreement by the Servicer, the
         servicing of the Mortgage Loans by the Servicer hereunder, the
         consummation of any other of the transactions herein contemplated, and
         the fulfillment of or compliance with the terms hereof are in the
         ordinary course of business of the Servicer and will not (A) result in
         a breach of any term or provision of the charter or by-laws of the
         Servicer or (B) conflict with, result in a breach, violation or
         acceleration of, or result in a default under, the terms of any other
         material agreement or instrument to which the Servicer is a party or by
         which it may be bound, or any statute, order or regulation applicable
         to the Servicer of any court, regulatory body, administrative agency or
         governmental body having jurisdiction over the Servicer; and the
         Servicer is not a party to, bound by, or in breach or violation of any
         indenture or other agreement or instrument, or subject to or in
         violation of any statute, order or regulation of any court, regulatory
         body, administrative agency or governmental body having jurisdiction
         over it, which materially and adversely affects or, to the Servicer's
         knowledge, would in the future materially and adversely affect, (x) the
         ability of the Servicer to perform its obligations under this Agreement
         or (y) the business, operations, financial condition, properties or
         assets of the Servicer taken as a whole;

(iv)     The Servicer is an approved seller/servicer for Fannie Mae or Freddie
         Mac in good standing;

(v)      No litigation is pending against the Servicer that would materially and
         adversely affect the execution, delivery or enforceability of this
         Agreement or the ability of the Servicer to service the Mortgage Loans
         or to perform any of its other obligations hereunder in accordance with
         the terms hereof;

(vi)     No consent, approval, authorization or order of any court or
         governmental agency or body is required for the execution, delivery and
         performance by the Servicer of, or compliance by the Servicer with,
         this Agreement or the consummation of the transactions contemplated by
         this Agreement, except for such consents, approvals, authorizations or
         orders, if any, that have been obtained prior to the Closing Date;

(vii)    The Servicer covenants that its computer and other systems used in
         servicing the Mortgage Loans operate in a manner such that the Servicer
         can service the Mortgage Loans in accordance with the terms of this
         Agreement;

(viii)   The Servicer has fully furnished and will continue to fully furnish, in
         accordance with the Fair Credit Reporting Act and its implementing
         regulations, accurate and complete information (e.g., favorable and
         unfavorable) on its borrower credit files to Equifax, Experian and
         Trans Union Credit Information Company or their successors (the "Credit
         Repositories") in a timely manner; and

(ix)     The Servicer (or a Sub-Servicer servicing the Mortgage Loans on its
         behalf) is a member of MERS in good standing, and will comply in all
         material respects with the rules and procedures of MERS in connection
         with the servicing of the Mortgage Loans that are registered with MERS.

         It is understood and agreed that the representations, warranties and
covenants set forth in this Section 2.05 shall survive delivery of the Mortgage
Files to the Trustee or to the related Custodian on its behalf and shall inure
to the benefit of the Trustee, the Trust Administrator, the Depositor and the
Certificateholders. Upon discovery by any of the Depositor, the Servicer, the
Trust Administrator or the Trustee of a breach of any of the foregoing
representations, warranties and covenants which materially and adversely affects
the value of any Mortgage Loan or the interests therein of the
Certificateholders, the party discovering such breach shall give prompt written
notice (but in no event later than two Business Days following such discovery)
to the Trustee and the Trust Administrator. Subject to Section 7.01, the
obligation of the Servicer set forth in Section 2.03(c) to cure breaches shall
constitute the sole remedies against the Servicer available to the
Certificateholders, the Depositor, the Trust Administrator or the Trustee on
behalf of the Certificateholders respecting a breach of the representations,
warranties and covenants contained in this Section 2.05.

         SECTION 2.06 Issuance of the Certificates.

         The Trustee acknowledges the assignment to it of the Mortgage Loans and
the delivery to it or to the related Custodian on its behalf of the Mortgage
Files, subject to the provisions of Section 2.01 and Section 2.02, together with
the assignment to it of all other assets included in REMIC I delivered on the
date hereof, receipt of which is hereby acknowledged. Concurrently with such
assignment and delivery of such assets delivered on the date hereof and in
exchange therefor, the Trust Administrator, pursuant to the written request of
the Depositor executed by an officer of the Depositor, has executed,
authenticated and delivered, to or upon the order of the Depositor, the
Certificates in authorized denominations. The interests evidenced by the
Certificates (other than the Class CE Certificates, the Class P Certificates and
the Class R-X Certificates), the Class CE Interest and the Class P Interest
constitute the entire beneficial ownership interest in REMIC II.

         SECTION 2.07 Conveyance of the REMIC Regular Interests; Acceptance of
                      the Trust REMICs by the Trustee.

         (a) The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey in trust to the
Trustee without recourse all the right, title and interest of the Depositor in
and to the assets described in the definition of REMIC I for the benefit of the
holders of the REMIC I Regular Interests (which are uncertificated) and the
Class R Certificates (in respect of the Class R-I Interest). The Trustee (or the
related Custodian on its behalf, as applicable) acknowledges receipt of the
assets described in the definition of REMIC I and declares that it holds and
will hold the same in trust for the exclusive use and benefit of the holders of
the REMIC I Regular Interests and the Class R Certificates (in respect of the
Class R-I Interest). The interests evidenced by the Class R-I Interest, together
with the REMIC I Regular Interests, constitute the entire beneficial ownership
interest in REMIC I.

         (b) The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey in trust to the
Trustee without recourse all the right, title and interest of the Depositor in
and to the REMIC I Regular Interests (which are uncertificated) for the benefit
of the Holders of the Regular Certificates (other than the Class CE Certificates
and the Class P Certificates), the Class CE Interest, the Class P Interest and
the Class R Certificates (in respect of the Class R-II Interest). The Trustee
acknowledges receipt of the REMIC I Regular Interests and declares that it holds
and will hold the same in trust for the exclusive use and benefit of the Holders
of the Regular Certificates (other than the Class CE Certificates and the Class
P Certificates), the Class CE Interest, the Class P Interest and the Class R
Certificates (in respect of the Class R-II Interest). The interests evidenced by
the Class R-II Interest, together with the Regular Certificates, the Class CE
Interest and the Class P Interest, constitute the entire beneficial ownership
interest in REMIC II.

         (c) The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey in trust to the
Trustee without recourse all the right, title and interest of the Depositor in
and to the Class CE Interest (which is uncertificated) for the benefit of the
Holders of the Class CE Certificates and the Class R-X Certificates (in respect
of the Class R-III Interest). The Trustee acknowledges receipt of the Class CE
Interest and declares that it holds and will hold the same in trust for the
exclusive use and benefit of the Holders of the Class CE Certificates and the
Class R-X Certificates (in respect of the Class R-III Interest). The interests
evidenced by the Class R-III Interest, together with the Class CE Certificates,
constitute the entire beneficial ownership interest in REMIC III.

         (d) The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey in trust to the
Trustee without recourse all the right, title and interest of the Depositor in
and to the Class P Interest (which is uncertificated) for the benefit of the
Holders of the Class P Certificates and the Class R-X Certificates (in respect
of the Class R-IV Interest). The Trustee acknowledges receipt of the Class P
Interest and declares that it holds and will hold the same in trust for the
exclusive use and benefit of the Holders of the Class P Certificates and the
Class R-X Certificates (in respect of the Class R-IV Interest). The interests
evidenced by the Class R-IV Interest, together with the Class P Certificates,
constitute the entire beneficial ownership interest in REMIC IV.

         (e) Concurrently with (i) the assignment and delivery to the Trustee of
REMIC I and the acceptance by the Trustee thereof, pursuant to Section 2.01,
Section 2.02 and subsection (a) hereof, (ii) the assignment and delivery to the
Trustee of REMIC II (including the Residual Interest therein represented by the
Class R-II Interest) and the acceptance by the Trustee thereof, pursuant to
Section 2.01, Section 2.02 and subsection (b) hereof, (iii) the assignment and
delivery to the Trustee of REMIC III (including the Residual Interest therein
represented by the Class R-III Interest) and the acceptance by the Trustee
thereof, pursuant to Section 2.01, Section 2.02 and subsection (c) hereof and
(iv) the assignment and delivery to the Trustee of REMIC IV (including the
Residual Interest therein represented by the Class IV Interest) and the
acceptance by the Trustee thereof, pursuant to Section 2.01, Section 2.02 and
subsection (d) hereof, the Trustee, pursuant to the written request of the
Depositor executed by an officer of the Depositor, has executed, authenticated
and delivered to or upon the order of the Depositor, (A) the Class R
Certificates in authorized denominations evidencing the Class R-I Interest and
the Class R-II Interest and (B) the Class R-X Certificates in authorized
denominations evidencing the Class R-III Interest and the Class R-IV Interest.

         SECTION 2.08 Puposes and Powers of the Trust.

         The purpose of the common law trust, as created hereunder, is to engage
in the following activities:

         (a) acquire and hold the Mortgage Loans and the other assets of the
Trust Fund and the proceeds therefrom;

         (b) to issue the Certificates sold to the Depositor in exchange for the
Mortgage Loans;

         (c) to make payments on the Certificates;

         (d) to engage in those activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or connected
therewith; and

         (e) subject to compliance with this Agreement, to engage in such other
activities as may be required in connection with conservation of the Trust Fund
and the making of distributions to the Certificateholders.

The Trust is hereby authorized to engage in the foregoing activities. The
Trustee shall not cause the Trust to engage in any activity other than in
connection with the foregoing or other than as required or authorized by the
terms of this Agreement while any Certificate is outstanding, and this Section
2.08 may not be amended, without the consent of the Certificateholders
evidencing [__]% or more of the aggregate Voting Rights of the Certificates.

<PAGE>

                                   ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

         SECTION 3.01 Servicer to Act as Servicer.

         The Servicer shall service and administer the Mortgage Loans on behalf
of the Trustee and in the best interests of and for the benefit of the
Certificateholders (as determined by the Servicer in its reasonable judgment) in
accordance with the terms of this Agreement and the respective Mortgage Loans
and, to the extent consistent with such terms, in the same manner in which it
services and administers similar mortgage loans for its own portfolio, giving
due consideration to customary and usual standards of practice of prudent
mortgage lenders and loan servicers administering similar mortgage loans but
without regard to:

(i)      any relationship that the Servicer, any Sub-Servicer or any Affiliate
         of the Servicer or any Sub-Servicer may have with the related
         Mortgagor;

(ii)     the ownership of any Certificate by the Servicer or any Affiliate of
         the Servicer;

(iii)    the Servicer's obligation to make P&I Advances or Servicing Advances;
         or

(iv)     the Servicer's or any Sub-Servicer's right to receive compensation for
         its services hereunder or with respect to any particular transaction.

         To the extent consistent with the foregoing, the Servicer (a) shall
seek the timely and complete recovery of principal and interest on the Mortgage
Notes and (b) shall waive (or permit a Sub-Servicer to waive) a Prepayment
Charge only under the following circumstances: (i) such waiver is standard and
customary in servicing similar Mortgage Loans and such waiver relates to a
default or a reasonably foreseeable default and would, in the reasonable
judgment of the Servicer, maximize recovery of total proceeds taking into
account the value of such Prepayment Charge and the related Mortgage Loan, (ii)
the collection of such Prepayment Charge would be in violation of applicable
laws or (iii) the amount of the Prepayment Charge set forth on the Prepayment
Charge Schedule is not consistent with the related Mortgage Note or is otherwise
unenforceable. If a Prepayment Charge is waived as permitted by meeting the
standard described in clauses (ii) or (iii) above, then, the Trustee shall make
commercially reasonable efforts to attempt to enforce the obligations of the
related Originator under the Master Agreement to pay the amount of such waived
Prepayment Charge, for the benefit of the Holders of the Class P Certificates;
provided, however, that the Trustee shall not be under any obligation to take
any action pursuant to this paragraph unless directed by the Depositor and
provided, further, the Depositor hereby agrees to assist the Trustee in
enforcing any obligations of any Originator to repurchase or substitute for a
Mortgage Loan which has breached a representation or warranty under the related
Assignment Agreement. If the Trustee makes a good faith determination as
evidenced by an officer's certificate delivered by the Trustee to the Trust
Administrator, that the Servicer's efforts are not reasonably expected to be
successful in enforcing such rights, it shall notify the Trust Administrator of
such failure and the Trust Administrator, with the cooperation of the Servicer,
shall enforce the obligation of the related Originator under the Master
Agreement to pay to the Servicer the amount of such waived Prepayment Charge. If
such Originator fails to pay the amount of such waived Prepayment Charge in
accordance with its obligations under the related Master Agreement, the Trustee,
Trust Administrator, the Servicer and the Depositor shall consult on further
actions to be taken against such Originator. Notwithstanding the foregoing, to
the extent that the Trustee and the related Originator are the same entity, the
Trust Administrator shall enforce the obligations of the related Originator
under the related Master Agreement pursuant to the terms of this paragraph.

         To the extent consistent with the foregoing, the Servicer shall also
seek to maximize the timely and complete recovery of principal and interest on
the Mortgage Notes. Subject only to the above-described servicing standards and
the terms of this Agreement and of the respective Mortgage Loans, the Servicer
shall have full power and authority, acting alone or through Sub-Servicers as
provided in Section 3.02, to do or cause to be done any and all things in
connection with such servicing and administration which it may deem necessary or
desirable. Without limiting the generality of the foregoing, the Servicer in its
own name or in the name of a Sub-Servicer is hereby authorized and empowered by
the Trustee when the Servicer believes it appropriate in its best judgment in
accordance with the servicing standards set forth above, to execute and deliver,
on behalf of the Certificateholders and the Trustee, and upon notice to the
Trustee, any and all instruments of satisfaction or cancellation, or of partial
or full release or discharge, and all other comparable instruments, with respect
to the Mortgage Loans and the Mortgaged Properties and to institute foreclosure
proceedings or obtain a deed-in-lieu of foreclosure so as to convert the
ownership of such properties, and to hold or cause to be held title to such
properties, on behalf of the Trustee and Certificateholders. The Servicer shall
service and administer the Mortgage Loans in accordance with applicable state
and federal law and shall provide to the Mortgagors any reports required to be
provided to them thereby. The Servicer shall also comply in the performance of
this Agreement with all reasonable rules and requirements of any standard hazard
insurance policy. Subject to Section 3.17, the Trustee shall execute, at the
written request of the Servicer, and furnish to the Servicer and any
Sub-Servicer such documents as are necessary or appropriate to enable the
Servicer or any Sub-Servicer to carry out their servicing and administrative
duties hereunder, and the Trustee hereby grants to the Servicer a power of
attorney to carry out such duties. The Trustee shall not be liable for the
actions of the Servicer or any Sub-Servicers under such powers of attorney.

         In accordance with the standards of the preceding paragraph, the
Servicer shall advance or cause to be advanced funds as necessary for the
purpose of effecting the timely payment of taxes and assessments on the
Mortgaged Properties, which advances shall be Servicing Advances reimbursable in
the first instance from related collections from the Mortgagors pursuant to
Section 3.09, and further as provided in Section 3.11. Any cost incurred by the
Servicer or by Sub-Servicers in effecting the timely payment of taxes and
assessments on a Mortgaged Property shall not, for the purpose of calculating
distributions to Certificateholders, be added to the unpaid principal balance of
the related Mortgage Loan, notwithstanding that the terms of such Mortgage Loan
so permit.

         The Servicer further is authorized and empowered by the Trustee, on
behalf of the Certificateholders and the Trustee, in its own name or in the name
of the Sub-Servicer, when the Servicer or the Sub-Servicer, as the case may be,
believes it is appropriate in its best judgment to register any Mortgage Loan on
the MERS System, or cause the removal from the registration of any Mortgage Loan
on the MERS System, to execute and deliver, on behalf of the Trustee and the
Certificateholders or any of them, any and all instruments of assignment and
other comparable instruments with respect to such assignment or re-recording of
a Mortgage in the name of MERS, solely as nominee for the Trustee and its
successors and assigns. Any reasonable expenses (i) incurred as a result of MERS
discontinuing or becoming unable to continue operations in connection with the
MERS System or (ii) if the affected Mortgage Loan is in default or, in the
judgment of the Servicer, such default is reasonably foreseeable, incurred in
connection with the actions described in the preceding sentence, shall be
subject to withdrawal by the Servicer from the Collection Account.

         Notwithstanding anything in this Agreement to the contrary, the
Servicer may not make any future advances with respect to a Mortgage Loan
(except as provided in Section 4.03) and the Servicer shall not (i) permit any
modification with respect to any Mortgage Loan (except with respect to a
Mortgage Loan that is in default or, in the judgment of the Servicer, such
default is reasonably foreseeable) that would change the Mortgage Rate, reduce
or increase the principal balance (except for reductions resulting from actual
payments of principal) or change the final maturity date on such Mortgage Loan
or (ii) permit any modification, waiver or amendment of any term of any Mortgage
Loan that would both (A) effect an exchange or reissuance of such Mortgage Loan
under Section 1001 of the Code (or final, temporary or proposed Treasury
regulations promulgated thereunder) and (B) cause any Trust REMIC to fail to
qualify as a REMIC under the Code or the imposition of any tax on "prohibited
transactions" or "contributions after the startup date" under the REMIC
Provisions.

         The Servicer may delegate its responsibilities under this Agreement;
provided, however, that no such delegation shall release the Servicer from the
responsibilities or liabilities arising under this Agreement.

         SECTION 3.02 Sub-Servicing Agreements Between the Servicer and
                      Sub-Servicers.

         (a) The Servicer may enter into Sub-Servicing Agreements (provided that
such agreements would not result in a withdrawal or a downgrading by the Rating
Agencies of the rating on any Class of Certificates) with Sub-Servicers, for the
servicing and administration of the Mortgage Loans; provided, however, such
sub-servicing arrangement and the terms of the related Sub-Subservicing
Agreement must provide for the servicing of Mortgage Loans in a manner
consistent with the servicing arrangement contemplated hereunder.

         (b) Each Sub-Servicer shall be (i) authorized to transact business in
the state or states in which the related Mortgaged Properties it is to service
are situated, if and to the extent required by applicable law to enable the
Sub-Servicer to perform its obligations hereunder and under the Sub-Servicing
Agreement and (ii) a Freddie Mac or Fannie Mae approved mortgage servicer. Each
Sub-Servicing Agreement must impose on the Sub-Servicer requirements conforming
to the provisions set forth in Section 3.08 and provide for servicing of the
Mortgage Loans consistent with the terms of this Agreement. The Servicer will
examine each Sub-Servicing Agreement and will be familiar with the terms
thereof. The terms of any Sub-Servicing Agreement will not be inconsistent with
any of the provisions of this Agreement. The Servicer and the Sub-Servicers may
enter into and make amendments to the Sub-Servicing Agreements or enter into
different forms of Sub-Servicing Agreements; provided, however, that any such
amendments or different forms shall be consistent with and not violate the
provisions of this Agreement, and that no such amendment or different form shall
be made or entered into which could be reasonably expected to be materially
adverse to the interests of the Certificateholders, without the consent of the
Holders of Certificates entitled to at least [__]% of the Voting Rights. Any
variation without the consent of the Holders of Certificates entitled to at
least [__]% of the Voting Rights from the provisions set forth in Section 3.08
relating to insurance or priority requirements of Sub-Servicing Accounts, or
credits and charges to the Sub- Servicing Accounts or the timing and amount of
remittances by the Sub-Servicers to the Servicer, are conclusively deemed to be
inconsistent with this Agreement and therefore prohibited. The Servicer shall
deliver to the Trustee and the Trust Administrator copies of all Sub-Servicing
Agreements, and any amendments or modifications thereof, promptly upon the
Servicer's execution and delivery of such instruments.

         (c) As part of its servicing activities hereunder, the Servicer (except
as otherwise provided in the last sentence of this paragraph), for the benefit
of the Trustee and the Certificateholders, shall enforce the obligations of each
Sub-Servicer under the related Sub-Servicing Agreement, including, without
limitation, any obligation to make advances in respect of delinquent payments as
required by a Sub-Servicing Agreement. Such enforcement, including, without
limitation, the legal prosecution of claims, termination of Sub-Servicing
Agreements, and the pursuit of other appropriate remedies, shall be in such form
and carried out to such an extent and at such time as the Servicer, in its good
faith business judgment, would require were it the owner of the related Mortgage
Loans. The Servicer shall pay the costs of such enforcement at its own expense,
and shall be reimbursed therefor only (i) from a general recovery resulting from
such enforcement, to the extent, if any, that such recovery exceeds all amounts
due in respect of the related Mortgage Loans, or (ii) from a specific recovery
of costs, expenses or attorneys' fees against the party against whom such
enforcement is directed.

         SECTION 3.03 Successor Sub-Servicers.

         The Servicer shall be entitled to terminate any Sub-Servicing Agreement
and the rights and obligations of any Sub-Servicer pursuant to any Sub-Servicing
Agreement in accordance with the terms and conditions of such Sub-Servicing
Agreement. In the event of termination of any Sub-Servicer, all servicing
obligations of such Sub-Servicer shall be assumed simultaneously by the Servicer
without any act or deed on the part of such Sub-Servicer or the Servicer, and
the Servicer either shall service directly the related Mortgage Loans or shall
enter into a Sub-Servicing Agreement with a successor Sub-Servicer which
qualifies under Section 3.02.

         Any Sub-Servicing Agreement shall include the provision that such
agreement may be immediately terminated by the Trustee or the Trust
Administrator without fee, in accordance with the terms of this Agreement, in
the event that the Servicer shall, for any reason, no longer be the Servicer
(including termination due to a Servicer Event of Default).

         SECTION 3.04 Liability of the Servicer.

         Notwithstanding any Sub-Servicing Agreement, any of the provisions of
this Agreement relating to agreements or arrangements between the Servicer and a
Sub-Servicer or reference to actions taken through a Sub-Servicer or otherwise,
the Servicer shall remain obligated and primarily liable to the Trustee and the
Certificateholders for the servicing and administering of the Mortgage Loans in
accordance with the provisions of Section 3.01 without diminution of such
obligation or liability by virtue of such Sub-Servicing Agreements or
arrangements or by virtue of indemnification from the Sub-Servicer and to the
same extent and under the same terms and conditions as if the Servicer alone
were servicing and administering the Mortgage Loans. The Servicer shall be
entitled to enter into any agreement with a Sub- Servicer for indemnification of
the Servicer by such Sub-Servicer and nothing contained in this Agreement shall
be deemed to limit or modify such indemnification.

         SECTION 3.05 No Contractual Relationship Between Sub-Servicers and
                      Trustee, Trust Administrator or Certificateholders.

         Any Sub-Servicing Agreement that may be entered into and any
transactions or services relating to the Mortgage Loans involving a Sub-Servicer
in its capacity as such shall be deemed to be between the Sub-Servicer and the
Servicer alone, and the Trustee, the Trust Administrator and the
Certificateholders shall not be deemed parties thereto and shall have no claims,
rights, obligations, duties or liabilities with respect to the Sub-Servicer
except as set forth in Section 3.06. The Servicer shall be solely liable for all
fees owed by it to any Sub-Servicer, irrespective of whether the Servicer's
compensation pursuant to this Agreement is sufficient to pay such fees.

         SECTION 3.06 Assumption or Termination of Sub-Servicing Agreements by
                      Trust Administrator.

         In the event the Servicer shall for any reason no longer be the
servicer (including by reason of the occurrence of a Servicer Event of Default),
the Trust Administrator or its designee shall thereupon assume all of the rights
and obligations of the Servicer under each Sub-Servicing Agreement that the
Servicer may have entered into, unless the Trust Administrator elects to
terminate any Sub-Servicing Agreement in accordance with its terms as provided
in Section 3.03. Upon such assumption, the Trust Administrator, its designee or
the successor servicer for the Trust Administrator appointed pursuant to Section
7.02 shall be deemed, subject to Section 3.03, to have assumed all of the
Servicer's interest therein and to have replaced the Servicer as a party to each
Sub-Servicing Agreement to the same extent as if each Sub-Servicing Agreement
had been assigned to the assuming party, except that (i) the Servicer shall not
thereby be relieved of any liability or obligations under any Sub-Servicing
Agreement and (ii) none of the Trust Administrator, its designee or any
successor Servicer shall be deemed to have assumed any liability or obligation
of the Servicer that arose before it ceased to be the Servicer.

         The Servicer at its expense shall, upon request of the Trust
Administrator, deliver to the assuming party all documents and records relating
to each Sub-Servicing Agreement and the Mortgage Loans then being serviced and
an accounting of amounts collected and held by or on behalf of it, and otherwise
use its best efforts to effect the orderly and efficient transfer of the Sub-
Servicing Agreements to the assuming party.

         SECTION 3.07 Collection of Certain Mortgage Loan Payments.

         The Servicer shall make reasonable efforts to collect all payments
called for under the terms and provisions of the Mortgage Loans, and shall, to
the extent such procedures shall be consistent with this Agreement and the terms
and provisions of any applicable insurance policies, follow such collection
procedures as it would follow with respect to mortgage loans comparable to the
Mortgage Loans and held for its own account. Consistent with the foregoing and
the servicing standards set forth in Section 3.01, the Servicer may in its
discretion (i) waive any late payment charge or, if applicable, penalty interest
or (ii) extend the due dates for Monthly Payments due on a Mortgage Note for a
period of not greater than 180 days; provided that any extension pursuant to
clause (ii) above shall not affect the amortization schedule of any Mortgage
Loan for purposes of any computation hereunder, except as provided below. In the
event of any such arrangement pursuant to clause (ii) above, the Servicer shall
make timely advances on such Mortgage Loan during such extension pursuant to
Section 4.03 and in accordance with the amortization schedule of such Mortgage
Loan without modification thereof by reason of such arrangements.
Notwithstanding the foregoing, in the event that any Mortgage Loan is in default
or, in the judgment of the Servicer, such default is reasonably foreseeable, the
Servicer, consistent with the standards set forth in Section 3.01, may waive,
modify or vary any term of such Mortgage Loan (including modifications that
change the Mortgage Rate, forgive the payment of principal or interest or extend
the final maturity date of such Mortgage Loan), accept payment from the related
Mortgagor of an amount less than the Stated Principal Balance in final
satisfaction of such Mortgage Loan (such payment, a "Short Pay-off") or consent
to the postponement of strict compliance with any such term or otherwise grant
indulgence to any Mortgagor, if in the Servicer's determination such waiver,
modification, postponement or indulgence is not materially adverse to the
interests of the Certificateholders (taking into account any estimated Realized
Loss that might result absent such action).

         SECTION 3.08 Sub-Servicing Accounts.

         In those cases where a Sub-Servicer is servicing a Mortgage Loan
pursuant to a Sub-Servicing Agreement, the Sub-Servicer will be required to
establish and maintain one or more accounts (collectively, the "Sub-Servicing
Account"). The Sub-Servicing Account shall be an Eligible Account and shall
comply with all requirements of this Agreement relating to the Collection
Account. The Sub-Servicer shall deposit in the Sub-Servicing Account, in no
event more than two Business Days after the Sub-Servicer's receipt thereof, all
proceeds of Mortgage Loans received by the Sub-Servicer less its servicing
compensation to the extent permitted by the Sub-Servicing Agreement. The
Sub-Servicer shall thereafter remit such proceeds to the Servicer for deposit in
the Collection Account not later than two Business Days after the deposit of
such amounts in the Sub-Servicing Account. For purposes of this Agreement, the
Servicer shall be deemed to have received payments on the Mortgage Loans when
the Sub-Servicer receives such payments.

         SECTION 3.09 Collection of Taxes, Assessments and Similar Items;
                 Servicing Accounts.

         The Servicer shall establish and maintain (or cause a Sub-Servicer to
establish and maintain) one or more accounts (the "Servicing Accounts"), into
which all collections from the Mortgagors (or related advances from
Sub-Servicers) for the payment of ground rents, taxes, assessments, fire and
hazard insurance premiums, Primary Mortgage Insurance Premiums, water charges,
sewer rents and comparable items for the account of the Mortgagors ("Escrow
Payments") shall be deposited and retained. Servicing Accounts shall be Eligible
Accounts. The Servicer shall deposit in the clearing account (which account must
be an Eligible Account) in which it customarily deposits payments and
collections on mortgage loans in connection with its mortgage loan servicing
activities on a daily basis, and in no event more than two Business Days after
the Servicer's receipt thereof, all Escrow Payments collected on account of the
Mortgage Loans and shall thereafter deposit such Escrow Payments in the
Servicing Accounts, in no event more than one Business Day after the deposit of
such funds in the clearing account, for the purpose of effecting the payment of
any such items as required under the terms of this Agreement. Each Sub-Servicer
shall deposit in the escrow account established under the Sub-Servicing
Agreement, in no event more than two Business Days after the Sub-Servicer's
receipt thereof, all Escrow Payments collected on account of the Mortgage Loans,
for the purpose of effecting the payment of any such items as required under the
terms of this Agreement. Withdrawals of amounts from a Servicing Account may be
made only to (i) effect payment of Escrow Payments; (ii) reimburse the Servicer
(or a Sub-Servicer to the extent provided in the related Sub-Servicing
Agreement) out of related collections for any advances made pursuant to Section
3.01 (with respect to taxes and assessments) and Section 3.14 (with respect to
hazard insurance); (iii) refund to Mortgagors any sums as may be determined to
be overages; (iv) pay interest, if required and as described below, to
Mortgagors on balances in the Servicing Account; (v) clear and terminate the
Servicing Account at the termination of the Servicer's obligations and
responsibilities in respect of the Mortgage Loans under this Agreement in
accordance with Article IX; or (vi) recover amounts deposited in error. As part
of its servicing duties, the Servicer or Sub-Servicers shall pay to the
Mortgagors interest on funds in Servicing Accounts, to the extent required by
law and, to the extent that interest earned on funds in the Servicing Accounts
is insufficient, to pay such interest from its or their own funds, without any
reimbursement therefor. To the extent that a Mortgage does not provide for
Escrow Payments, the Servicer shall determine whether any such payments are made
by the Mortgagor in a manner and at a time that avoids the loss of the Mortgaged
Property due to a tax sale or the foreclosure of a tax lien. The Servicer
assumes full responsibility for the payment of all such bills and shall effect
payments of all such bills irrespective of the Mortgagor's faithful performance
in the payment of same or the making of the Escrow Payments and shall make
advances from its own funds to effect such payments.

         SECTION 3.10 Collection Account and Distribution Account.

         (a) On behalf of the Trust Fund, the Servicer shall establish and
maintain one or more separate, segregated trust accounts (such account or
accounts, the "Collection Account"), held in trust for the benefit of the Trust
Administrator, the Trustee and the Certificateholders. On behalf of the Trust
Fund, the Servicer shall deposit or cause to be deposited in the clearing
account (which account must be an Eligible Account) in which it customarily
deposits payments and collections on mortgage loans in connection with its
mortgage loan servicing activities on a daily basis, and in no event more than
two Business Days after the Servicer's receipt thereof, and shall thereafter
deposit in the Collection Account, in no event more than one Business Day after
the deposit of such funds into the clearing account, as and when received or as
otherwise required hereunder, the following payments and collections received or
made by it from and after the Cut-off Date (other than in respect of principal
or interest on the related Mortgage Loans due on or before the Cut-off Date), or
payments (other than Principal Prepayments) received by it on or prior to the
Cut-off Date but allocable to a Due Period subsequent thereto:

(i)      all payments on account of principal, including Principal Prepayments
         (but not Prepayment Charges), on the Mortgage Loans;

(ii)     all payments on account of interest (net of the related Servicing Fee
         and any Prepayment Interest Excess) on each Mortgage Loan;

(iii)    all Insurance Proceeds, Trailing Recoveries and Liquidation Proceeds
         (other than proceeds collected in respect of any particular REO
         Property and amounts paid by the Servicer in connection with a purchase
         of Mortgage Loans and REO Properties pursuant to Section 9.01);

(iv)     any amounts required to be deposited pursuant to Section 3.12 in
         connection with any losses realized on Permitted Investments with
         respect to funds held in the Collection Account;

(v)      any amounts required to be deposited by the Servicer pursuant to the
         second paragraph of Section 3.14(a) in respect of any blanket policy
         deductibles;

(vi)     all proceeds of any Mortgage Loan repurchased or purchased in
         accordance with Section 2.03 or Section 9.01;

(vii)    all amounts required to be deposited in connection with shortfalls in
         principal amount of Qualified Substitute Mortgage Loans pursuant to
         Section 2.03; and

(viii)   all Prepayment Charges collected by the Servicer and any Servicer
         Prepayment Charge Payment Amounts in connection with the Principal
         Prepayment of any of the Mortgage Loans.

         For purposes of the immediately preceding sentence, the Cut-off Date
with respect to any Qualified Substitute Mortgage Loan shall be deemed to be the
date of substitution.

         The foregoing requirements for deposit in the Collection Accounts shall
be exclusive, it being understood and agreed that, without limiting the
generality of the foregoing, payments in the nature of late payment charges or
assumption fees (other than Prepayment Charges) need not be deposited by the
Servicer in the Collection Account. In the event the Servicer shall deposit in
the Collection Account any amount not required to be deposited therein, it may
at any time withdraw such amount from the Collection Account, any provision
herein to the contrary notwithstanding.

         (b) On behalf of the Trust Fund, the Trust Administrator, as agent for
the Trustee, shall establish and maintain one or more separate, segregated trust
accounts (such account or accounts, the "Distribution Account"), held in trust
for the benefit of the Certificateholders. On behalf of the Trust Fund, the
Servicer shall deliver to the Trust Administrator in immediately available funds
for deposit in the Distribution Account on or before 4:00 p.m. New York time (i)
on the Servicer Remittance Date, that portion of the Available Distribution
Amount (calculated without regard to the subtraction therefrom of the Credit
Risk Manager Fee) for the related Distribution Date then on deposit in the
Collection Account, the amount of all Prepayment Charges collected during the
applicable Prepayment Period by the Servicer and Servicer Prepayment Charge
Payment Amounts in connection with the Principal Prepayment of any of the
Mortgage Loans then on deposit in the Collection Account and (ii) on each
Business Day as of the commencement of which the balance on deposit in the
Collection Account exceeds $[_______] following any withdrawals pursuant to the
next succeeding sentence, the amount of such excess, but only if the Collection
Account constitutes an Eligible Account solely pursuant to clause (ii) of the
definition of "Eligible Account." If the balance on deposit in the Collection
Account exceeds $[_______] as of the commencement of business on any Business
Day and the Collection Account constitutes an Eligible Account solely pursuant
to clause (ii) of the definition of "Eligible Account," the Servicer shall, on
or before 4:00 p.m. New York time on such Business Day, withdraw from the
Collection Account any and all amounts payable or reimbursable to the Depositor,
the Servicer, the Trustee, the Trust Administrator, the Seller or any
Sub-Servicer pursuant to Section 3.11 and shall pay such amounts to the Persons
entitled thereto.

         (c) Funds in the Collection Account and the Distribution Account may be
invested in Permitted Investments in accordance with the provisions set forth in
Section 3.12. The Servicer shall give notice to the Trustee, the Trust
Administrator and the Depositor of the location of the Collection Account
maintained by it when established and prior to any change thereof. The Trust
Administrator shall give notice to the Servicer, the Trustee and the Depositor
of the location of the Distribution Account when established and prior to any
change thereof.

         (d) Funds held in the Collection Account at any time may be delivered
by the Servicer to the Trust Administrator for deposit in an account (which may
be the Distribution Account and must satisfy the standards for the Distribution
Account as set forth in the definition thereof) and for all purposes of this
Agreement shall be deemed to be a part of the Collection Account; provided,
however, that the Trust Administrator shall have the sole authority to withdraw
any funds held pursuant to this subsection (d). In the event the Servicer shall
deliver to the Trust Administrator for deposit in the Distribution Account any
amount not required to be deposited therein, it may at any time request that the
Trust Administrator withdraw such amount from the Distribution Account and remit
to it any such amount, any provision herein to the contrary notwithstanding. In
addition, the Servicer shall deliver to the Trust Administrator from time to
time for deposit, and upon written notification from the Servicer, the Trust
Administrator shall so deposit, in the Distribution Account:

(i)      any P&I Advances, as required pursuant to Section 4.03;

(ii)     any amounts required to be deposited pursuant to Section 3.23(d) or (f)
         in connection with any REO Property;

(iii)    any amounts to be paid by the Servicer in connection with a purchase of
         Mortgage Loans and REO Properties pursuant to Section 9.01;

(iv)     any amounts required to be deposited pursuant to Section 3.24 in
         connection with any Prepayment Interest Shortfalls; and

(v)      any Stayed Funds, as soon as permitted by the federal bankruptcy court
         having jurisdiction in such matters.

         (e) Promptly upon receipt of any Stayed Funds, whether from the
Servicer, a trustee in bankruptcy, or federal bankruptcy court or other source,
the Trust Administrator shall deposit such funds in the Distribution Account,
subject to withdrawal thereof as permitted hereunder.

         (f) The Servicer shall deposit in the Collection Account any amounts
required to be deposited pursuant to Section 3.12(b) in connection with losses
realized on Permitted Investments with respect to funds held in the Collection
Account.

         SECTION 3.11 Withdrawals from the Collection Account and Distribution
                      Account.

         (a) The Servicer shall, from time to time, make withdrawals from the
Collection Account for any of the following purposes or as described in Section
4.03:

(i)      to remit to the Trust Administrator for deposit in the Distribution
         Account the amounts required to be so remitted pursuant to Section
         3.10(b) or permitted to be so remitted pursuant to the first sentence
         of Section 3.10(d);

(ii)     subject to Section 3.16(d), to reimburse the Servicer for P&I Advances,
         but only to the extent of amounts received which represent Late
         Collections (net of the related Servicing Fees) of Monthly Payments on
         Mortgage Loans with respect to which such P&I Advances were made in
         accordance with the provisions of Section 4.03;

(iii)    subject to Section 3.16(d), to pay the Servicer or any Sub-Servicer (A)
         any unpaid Servicing Fees, (B) any unreimbursed Servicing Advances with
         respect to each Mortgage Loan, but only to the extent of any
         Liquidation Proceeds, Insurance Proceeds or other amounts as may be
         collected by the Servicer from a Mortgagor, or otherwise received with
         respect to such Mortgage Loan and (C) without limiting any right of
         withdrawal set forth in clause (vi) below, any Servicing Advances made
         with respect to a Mortgage Loan that, following the final liquidation
         of a Mortgage Loan are Nonrecoverable Advances, but only to the extent
         that Late Collections, Liquidation Proceeds and Insurance Proceeds
         received with respect to such Mortgage Loan are insufficient to
         reimburse the Servicer or any Sub-Servicer for such Servicing Advances;

(iv)     to pay to the Servicer as servicing compensation (in addition to the
         Servicing Fee) on the Servicer Remittance Date any interest or
         investment income earned on funds deposited in the Collection Account;

(v)      to pay to the Servicer, the Depositor or the Seller, as the case may
         be, with respect to each Mortgage Loan that has previously been
         purchased or replaced pursuant to Section 2.03 all amounts received
         thereon subsequent to the date of purchase or substitution, as the case
         may be;

(vi)     to reimburse the Servicer for any P&I Advance or Servicing Advance
         previously made which the Servicer has determined to be a
         Nonrecoverable Advance in accordance with the provisions of Section
         4.03;

(vii)    to reimburse the Servicer or the Depositor for expenses incurred by or
         reimbursable to the Servicer or the Depositor, as the case may be,
         pursuant to Section 6.03;

(viii)   to reimburse the Servicer, the Trust Administrator or the Trustee, as
         the case may be, for expenses reasonably incurred in respect of the
         breach or defect giving rise to the purchase obligation under Section
         2.03 or Section 2.04 of this Agreement that were included in the
         Purchase Price of the Mortgage Loan, including any expenses arising out
         of the enforcement of the purchase obligation;

(ix)     to pay, or to reimburse the Servicer for advances in respect of
         expenses incurred in connection with any Mortgage Loan pursuant to
         Section 3.16(b); and

(x)      to clear and terminate the Collection Account pursuant to Section 9.01.

         The Servicer shall keep and maintain separate accounting, on a Mortgage
Loan by Mortgage Loan basis, for the purpose of justifying any withdrawal from
the Collection Account, to the extent held by or on behalf of it, pursuant to
subclauses (ii), (iii), (iv), (v), (vi), (viii) and (ix) above. The Servicer
shall provide written notification to the Trustee and the Trust Administrator,
on or prior to the next succeeding Servicer Remittance Date, upon making any
withdrawals from the Collection Account pursuant to subclause (vii) above.
Reconciliations will be prepared by the Servicer for the Collection Account
within 30 calendar days after the bank statement cut-off date. All items
requiring reconciliation will be resolved within 90 calendar days of their
original identification.

         (b) The Trust Administrator shall, from time to time, make withdrawals
from the Distribution Account, for any of the following purposes, without
priority:

(i)      to make distributions to the Cap Account in accordance with Section
         4.08;

(ii)     to make distributions to Certificateholders in accordance with Section
         4.01;

(iii)    to pay to itself any interest income earned on funds deposited in the
         Distribution Account pursuant to Section 3.12(c);

(iv)     to reimburse the Trust Administrator or the Trustee pursuant to Section
         7.02;

(v)      to pay any amounts in respect of taxes pursuant to 10.01(g)(iii);

(vi)     to pay any Extraordinary Trust Fund Expenses;

(vii)    to reimburse the Trust Administrator or the Trustee for any P&I Advance
         made by it under Section 7.01 (if not reimbursed by the Servicer) to
         the same extent the Servicer would be entitled to reimbursement under
         Section 3.11(a);

(viii)   to pay the Credit Risk Manager the Credit Risk Manager Fee; and

(ix)     to clear and terminate the Distribution Account pursuant to Section
         9.01.

         SECTION 3.12 Investment of Funds in the Collection Account and the
                      Distribution Account.

         (a) The Servicer may direct any depository institution maintaining the
Collection Account (for purposes of this Section 3.12, an "Investment Account"),
and the Trust Administrator may at the direction of the Depositor direct any
depository institution maintaining the Distribution Account (for purposes of
this Section 3.12, also an "Investment Account"), to hold the funds in such
Investment Account uninvested or to invest the funds in such Investment Account
in one or more Permitted Investments specified in such instruction bearing
interest or sold at a discount, and maturing, unless payable on demand, (i) no
later than the Business Day immediately preceding the date on which such funds
are required to be withdrawn from such account pursuant to this Agreement, if a
Person other than the Trust Administrator is the obligor thereon, and (ii) no
later than the date on which such funds are required to be withdrawn from such
account pursuant to this Agreement, if the Trust Administrator is the obligor
thereon. All such Permitted Investments shall be held to maturity, unless
payable on demand. Any investment of funds in an Investment Account shall be
made in the name of the Trust Administrator (in its capacity as such) or in the
name of a nominee of the Trust Administrator. The Trust Administrator shall be
entitled to sole possession (except with respect to investment direction of
funds held in the Collection Account and the Distribution Account and any income
and gain realized thereon) over each such investment, and any certificate or
other instrument evidencing any such investment shall be delivered directly to
the Trust Administrator or its agent, together with any document of transfer
necessary to transfer title to such investment to the Trust Administrator or its
nominee. In the event amounts on deposit in an Investment Account are at any
time invested in a Permitted Investment payable on demand, the Trust
Administrator shall:

                  (x) consistent with any notice required to be given
         thereunder, demand that payment thereon be made on the last day such
         Permitted Investment may otherwise mature hereunder in an amount equal
         to the lesser of (1) all amounts then payable thereunder and (2) the
         amount required to be withdrawn on such date; and

                  (y) demand payment of all amounts due thereunder promptly upon
         determination by a Responsible Officer of the Trust Administrator that
         such Permitted Investment would not constitute a Permitted Investment
         in respect of funds thereafter on deposit in the Investment Account.

         (b) All income and gain realized from the investment of funds deposited
in the Collection Account held by or on behalf of the Servicer, shall be for the
benefit of the Servicer and shall be subject to its withdrawal in accordance
with Section 3.11. The Servicer shall deposit in the Collection Account the
amount of any loss of principal incurred in respect of any such Permitted
Investment made with funds in such accounts immediately upon realization of such
loss.

         (c) All income and gain realized from the investment of funds deposited
in the Distribution Account held by or on behalf of the Trust Administrator,
shall be for the benefit of the Trust Administrator and shall be subject to its
withdrawal at any time. The Trust Administrator shall deposit in the
Distribution Account the amount of any loss of principal incurred in respect of
any such Permitted Investment made with funds in such accounts immediately upon
realization of such loss.

         (d) Except as otherwise expressly provided in this Agreement, if any
default occurs in the making of a payment due under any Permitted Investment, or
if a default occurs in any other performance required under any Permitted
Investment, the Trust Administrator may and, subject to Section 8.01 and Section
8.02(a)(v), upon the request of the Holders of Certificates representing more
than [__]% of the Voting Rights allocated to any Class of Certificates, shall
take such action as may be appropriate to enforce such payment or performance,
including the institution and prosecution of appropriate proceedings.

         SECTION 3.13 [Reserved].

         SECTION 3.14 Maintenance of Hazard Insurance and Errors and Omissions
                      and Fidelity Coverage.

         (a) The Servicer shall cause to be maintained for each Mortgage Loan
fire insurance with extended coverage on the related Mortgaged Property in an
amount which is at least equal to the least of (i) the current principal balance
of such Mortgage Loan, (ii) the amount necessary to fully compensate for any
damage or loss to the improvements that are a part of such property on a
replacement cost basis and (iii) the maximum insurable value of the improvements
which are a part of such Mortgaged Property, in each case in an amount not less
than such amount as is necessary to avoid the application of any coinsurance
clause contained in the related hazard insurance policy. The Servicer shall also
cause to be maintained fire insurance with extended coverage on each REO
Property in an amount which is at least equal to the lesser of (i) the maximum
insurable value of the improvements which are a part of such property and (ii)
the outstanding principal balance of the related Mortgage Loan at the time it
became an REO Property, plus accrued interest at the Mortgage Rate and related
Servicing Advances. The Servicer will comply in the performance of this
Agreement with all reasonable rules and requirements of each insurer under any
such hazard policies. Any amounts to be collected by the Servicer under any such
policies (other than amounts to be applied to the restoration or repair of the
property subject to the related Mortgage or amounts to be released to the
Mortgagor in accordance with the procedures that the Servicer would follow in
servicing loans held for its own account, subject to the terms and conditions of
the related Mortgage and Mortgage Note) shall be deposited in the Collection
Account, subject to withdrawal pursuant to Section 3.11, if received in respect
of a Mortgage Loan, or in the REO Account, subject to withdrawal pursuant to
Section 3.23, if received in respect of an REO Property. Any cost incurred by
the Servicer in maintaining any such insurance shall not, for the purpose of
calculating distributions to Certificateholders, be added to the unpaid
principal balance of the related Mortgage Loan, notwithstanding that the terms
of such Mortgage Loan so permit. It is understood and agreed that no earthquake
or other additional insurance is to be required of any Mortgagor other than
pursuant to such applicable laws and regulations as shall at any time be in
force and as shall require such additional insurance. If the Mortgaged Property
or REO Property is at any time in an area identified in the Federal Register by
the Federal Emergency Management Agency as having special flood hazards, the
Servicer will cause to be maintained a flood insurance policy in respect
thereof. Such flood insurance shall be in an amount equal to the lesser of (i)
the unpaid principal balance of the related Mortgage Loan and (ii) the maximum
amount of such insurance available for the related Mortgaged Property under the
national flood insurance program (assuming that the area in which such Mortgaged
Property is located is participating in such program).

         In the event that the Servicer shall obtain and maintain a blanket
policy with an insurer having a General Policy Rating of A:X or better in Best's
Key Rating Guide (or such other rating that is comparable to such rating)
insuring against hazard losses on all of the Mortgage Loans, it shall
conclusively be deemed to have satisfied its obligations as set forth in the
first two sentences of this Section 3.14, it being understood and agreed that
such policy may contain a deductible clause, in which case the Servicer shall,
in the event that there shall not have been maintained on the related Mortgaged
Property or REO Property a policy complying with the first two sentences of this
Section 3.14, and there shall have been one or more losses which would have been
covered by such policy, deposit to the Collection Account from its own funds the
amount not otherwise payable under the blanket policy because of such deductible
clause. In connection with its activities as administrator and servicer of the
Mortgage Loans, the Servicer agrees to prepare and present, on behalf of itself,
the Trustee and the Certificateholders, claims under any such blanket policy in
a timely fashion in accordance with the terms of such policy.

         (b) The Servicer shall keep in force during the term of this Agreement
a policy or policies of insurance covering errors and omissions for failure in
the performance of the Servicer's obligations under this Agreement, which policy
or policies shall be in such form and amount that would meet the requirements of
Fannie Mae or Freddie Mac if it were the purchaser of the Mortgage Loans, unless
the Servicer has obtained a waiver of such requirements from Fannie Mae or
Freddie Mac. The Servicer shall also maintain a fidelity bond in the form and
amount that would meet the requirements of Fannie Mae or Freddie Mac, unless the
Servicer has obtained a waiver of such requirements from Fannie Mae or Freddie
Mac. The Servicer shall provide the Trustee and the Trust Administrator (upon
the Trustee's or the Trust Administrator's reasonable request) with copies of
any such insurance policies and fidelity bond. The Servicer shall be deemed to
have complied with this provision if an Affiliate of the Servicer has such
errors and omissions and fidelity bond coverage and, by the terms of such
insurance policy or fidelity bond, the coverage afforded thereunder extends to
the Servicer. Any such errors and omissions policy and fidelity bond shall by
its terms not be cancelable without thirty days' prior written notice to the
Trustee and the Trust Administrator. The Servicer shall also cause each
Sub-Servicer to maintain a policy of insurance covering errors and omissions and
a fidelity bond which would meet such requirements.

         SECTION 3.15 Enforcement of Due-On-Sale Clauses; Assumption Agreements.

         The Servicer will, to the extent it has knowledge of any conveyance or
prospective conveyance of any Mortgaged Property by any Mortgagor (whether by
absolute conveyance or by contract of sale, and whether or not the Mortgagor
remains or is to remain liable under the Mortgage Note and/or the Mortgage),
exercise its rights to accelerate the maturity of such Mortgage Loan under the
"due-on-sale" clause, if any, applicable thereto; provided, however, that the
Servicer shall not exercise any such rights if prohibited by law from doing so.
If the Servicer reasonably believes it is unable under applicable law to enforce
such "due-on-sale" clause, or if any of the other conditions set forth in the
proviso to the preceding sentence apply, the Servicer will enter into an
assumption and modification agreement from or with the person to whom such
property has been conveyed or is proposed to be conveyed, pursuant to which such
person becomes liable under the Mortgage Note and, to the extent permitted by
applicable state law, the Mortgagor remains liable thereon. The Servicer is also
authorized to enter into a substitution of liability agreement with such person,
pursuant to which the original Mortgagor is released from liability and such
person is substituted as the Mortgagor and becomes liable under the Mortgage
Note, provided that no such substitution shall be effective unless such person
satisfies the underwriting criteria of the Servicer. In connection with any
assumption or substitution, the Servicer shall apply such underwriting standards
and follow such practices and procedures as shall be normal and usual in its
general mortgage servicing activities and as it applies to other mortgage loans
owned solely by it. The Servicer shall not take or enter into any assumption and
modification agreement, however, unless (to the extent practicable in the
circumstances) it shall have received confirmation, in writing, of the continued
effectiveness of any applicable hazard insurance policy, or a new policy meeting
the requirements of this Section is obtained. Any fee collected by the Servicer
in respect of an assumption or substitution of liability agreement will be
retained by the Servicer as additional servicing compensation. In connection
with any such assumption, no material term of the Mortgage Note (including but
not limited to the related Mortgage Rate and the amount of the Monthly Payment)
may be amended or modified, except as otherwise required pursuant to the terms
thereof. The Servicer shall notify the Trustee and the Trust Administrator that
any such substitution or assumption agreement has been completed by forwarding
to the related Custodian (with a copy to the Trustee and the Trust
Administrator) the executed original of such substitution or assumption
agreement, which document shall be added to the related Mortgage File and shall,
for all purposes, be considered a part of such Mortgage File to the same extent
as all other documents and instruments constituting a part thereof.

         Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Mortgage Loan by operation of law or by the terms of the Mortgage Note or any
assumption which the Servicer may be restricted by law from preventing, for any
reason whatever. For purposes of this Section 3.15, the term "assumption" is
deemed to also include a sale (of the Mortgaged Property) subject to the
Mortgage that is not accompanied by an assumption or substitution of liability
agreement.

         SECTION 3.16 Realization Upon Defaulted Mortgage Loans.

         (a) The Servicer shall, consistent with the servicing standard set
forth in Section 3.01, foreclose upon or otherwise comparably convert the
ownership of properties securing such of the Mortgage Loans as come into and
continue in default and as to which no satisfactory arrangements can be made for
collection of delinquent payments pursuant to Section 3.07. The Servicer shall
be responsible for all costs and expenses incurred by it in any such
proceedings; provided, however, that such costs and expenses will be recoverable
as Servicing Advances by the Servicer as contemplated in Section 3.11 and
Section 3.23. The foregoing is subject to the provision that, in any case in
which Mortgaged Property shall have suffered damage from an Uninsured Cause, the
Servicer shall not be required to expend its own funds toward the restoration of
such property unless it shall determine in its discretion that such restoration
will increase the proceeds of liquidation of the related Mortgage Loan after
reimbursement to itself for such expenses.

         (b) Notwithstanding the foregoing provisions of this Section 3.16 or
any other provision of this Agreement, with respect to any Mortgage Loan as to
which the Servicer has received actual notice of, or has actual knowledge of,
the presence of any toxic or hazardous substance on the related Mortgaged
Property, the Servicer shall not, on behalf of the Trustee, either (i) obtain
title to such Mortgaged Property as a result of or in lieu of foreclosure or
otherwise, or (ii) otherwise acquire possession of, or take any other action
with respect to, such Mortgaged Property, if, as a result of any such action,
the Trustee, the Trust Fund, the Trust Administrator, the Servicer or the
Certificateholders would be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or "operator" of such
Mortgaged Property within the meaning of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time to time,
or any comparable law, unless the Servicer has also previously determined, based
on its reasonable judgment and a report prepared by a Person who regularly
conducts environmental audits using customary industry standards, that:

                           (1) such Mortgaged Property is in compliance with
                  applicable environmental laws or, if not, that it would be in
                  the best economic interest of the Trust Fund to take such
                  actions as are necessary to bring the Mortgaged Property into
                  compliance therewith; and

                           (2) there are no circumstances present at such
                  Mortgaged Property relating to the use, management or disposal
                  of any hazardous substances, hazardous materials, hazardous
                  wastes, or petroleum-based materials for which investigation,
                  testing, monitoring, containment, clean-up or remediation
                  could be required under any federal, state or local law or
                  regulation, or that if any such materials are present for
                  which such action could be required, that it would be in the
                  best economic interest of the Trust Fund to take such actions
                  with respect to the affected Mortgaged Property.

         The cost of the environmental audit report contemplated by this Section
3.23 shall be advanced by the Servicer, subject to the Servicer's right to be
reimbursed therefor from the Collection Account as provided in Section
3.11(a)(ix), such right of reimbursement being prior to the rights of
Certificateholders to receive any amount in the Collection Account received in
respect of the affected Mortgage Loan or other Mortgage Loans.

         If the Servicer determines, as described above, that it is in the best
economic interest of the Trust Fund to take such actions as are necessary to
bring any such Mortgaged Property into compliance with applicable environmental
laws, or to take such action with respect to the containment, clean-up or
remediation of hazardous substances, hazardous materials, hazardous wastes or
petroleum-based materials affecting any such Mortgaged Property, then the
Servicer shall take such action as it deems to be in the best economic interest
of the Trust Fund. The cost of any such compliance, containment, cleanup or
remediation shall be advanced by the Servicer, subject to the Servicer's right
to be reimbursed therefor from the Collection Account as provided in Section
3.11(a)(ix), such right of reimbursement being prior to the rights of
Certificateholders to receive any amount in the Collection Account received in
respect of the affected Mortgage Loan or other Mortgage Loans.

         (c) [Reserved].

         (d) Proceeds received in connection with any Final Recovery
Determination, as well as any recovery resulting from a partial collection of
Insurance Proceeds or Liquidation Proceeds, in respect of any Mortgage Loan,
will be applied in the following order of priority: first, to reimburse the
Servicer or any Sub-Servicer for any related unreimbursed Servicing Advances and
P&I Advances, pursuant to Section 3.11(a)(ii) or (a)(iii)(B); second, to accrued
and unpaid interest on the Mortgage Loan, to the date of the Final Recovery
Determination, or to the Due Date prior to the Distribution Date on which such
amounts are to be distributed if not in connection with a Final Recovery
Determination; and third, as a recovery of principal of the Mortgage Loan. If
the amount of the recovery so allocated to interest is less than the full amount
of accrued and unpaid interest due on such Mortgage Loan, the amount of such
recovery will be allocated by the Servicer as follows: first, to unpaid
Servicing Fees; and second, to the balance of the interest then due and owing.
The portion of the recovery so allocated to unpaid Servicing Fees shall be
reimbursed to the Servicer or any Sub-Servicer pursuant to Section
3.11(a)(iii)(A).

         SECTION 3.17 Trustee to Cooperate; Release of Mortgage Files.

         (a) Upon the payment in full of any Mortgage Loan, or the receipt by
the Servicer of a notification that payment in full shall be escrowed in a
manner customary for such purposes, the Servicer will immediately notify the
related Custodian, on behalf of the Trustee, by a Request for Release in the
form of Exhibit E (which certification shall include a statement to the effect
that all amounts received or to be received in connection with such payment
which are required to be deposited in the Collection Account pursuant to Section
3.10 have been or will be so deposited) of a Servicing Officer and shall request
that the related Custodian, on behalf of the Trustee, deliver to it the Mortgage
File. Upon receipt of such certification and request, the related Custodian, on
behalf of the Trustee, shall promptly release the related Mortgage File to the
Servicer, and the Servicer is authorized to cause the removal from the
registration on the MERS(R) System of any such Mortgage, if applicable, and to
execute and deliver, on behalf of the Trustee and the Certificateholders or any
of them, any and all instruments of satisfaction or cancellation or of partial
or full release. No expenses incurred in connection with any instrument of
satisfaction or deed of reconveyance shall be chargeable to the Collection
Account or the Distribution Account.

         The Trustee (or a Custodian on its behalf) shall, at the written
request and expense of any Certificateholder, provide a written report to such
Certificateholder of all Mortgage Files released to the Servicer for servicing
purposes.

         (b) From time to time and as appropriate for the servicing or
foreclosure of any Mortgage Loan, including, for this purpose, collection under
any insurance policy relating to the Mortgage Loans, the related Custodian, on
behalf of the Trustee, shall, upon request of the Servicer and delivery to the
related Custodian and the Trustee of a Request for Release in the form of
Exhibit E, release the related Mortgage File to the Servicer, and the related
Custodian, on behalf of the Trustee, shall, at the direction of the Servicer,
execute such documents as shall be necessary to the prosecution of any such
proceedings. Such Request for Release shall obligate the Servicer to return each
and every document previously requested from the Mortgage File to the related
Custodian when the need therefor by the Servicer no longer exists, unless the
Mortgage Loan has been liquidated and the Liquidation Proceeds relating to the
Mortgage Loan have been deposited in the Collection Account or the Mortgage File
or such document has been delivered to an attorney, or to a public trustee or
other public official as required by law, for purposes of initiating or pursuing
legal action or other proceedings for the foreclosure of the Mortgaged Property
either judicially or non-judicially, and the Servicer has delivered to the
related Custodian, on behalf of the Trustee, a certificate of a Servicing
Officer certifying as to the name and address of the Person to which such
Mortgage File or such document was delivered and the purpose or purposes of such
delivery. Upon receipt of a certificate of a Servicing Officer stating that such
Mortgage Loan was liquidated and that all amounts received or to be received in
connection with such liquidation that are required to be deposited into the
Collection Account have been so deposited, or that such Mortgage Loan has become
an REO Property, a copy of the Request for Release shall be released by the
related Custodian, on behalf of the Trustee, to the Servicer.

         (c) Upon written certification of a Servicing Officer, the Trustee
shall execute and deliver to the Servicer any court pleadings, requests for
trustee's sale or other documents reasonably necessary to the foreclosure or
trustee's sale in respect of a Mortgaged Property or to any legal action brought
to obtain judgment against any Mortgagor on the Mortgage Note or Mortgage or to
obtain a deficiency judgment, or to enforce any other remedies or rights
provided by the Mortgage Note or Mortgage or otherwise available at law or in
equity. Each such certification shall include a request that such pleadings or
documents be executed by the Trustee and a statement as to the reason such
documents or pleadings are required and that the execution and delivery thereof
by the Trustee will not invalidate or otherwise affect the lien of the Mortgage,
except for the termination of such a lien upon completion of the foreclosure or
trustee's sale.

         SECTION 3.18 Servicing Compensation.

         As compensation for the activities of the Servicer hereunder, the
Servicer shall be entitled to the Servicing Fee with respect to each Mortgage
Loan payable solely from payments of interest in respect of such Mortgage Loan,
subject to Section 3.24. In addition, the Servicer shall be entitled to recover
unpaid Servicing Fees out of Insurance Proceeds or Liquidation Proceeds to the
extent permitted by Section 3.11(a)(iii)(A) and out of amounts derived from the
operation and sale of an REO Property to the extent permitted by Section 3.23.
The right to receive the Servicing Fee may not be transferred in whole or in
part except in connection with the transfer of all of the Servicer's
responsibilities and obligations under this Agreement.

         Additional servicing compensation in the form of assumption fees, late
payment charges and other similar fees and charges (other than Prepayment
Charges) shall be retained by the Servicer (subject to Section 3.24) only to the
extent such fees or charges are received by the Servicer. The Servicer shall
also be entitled pursuant to Section 3.11(a)(iv) to withdraw from the Collection
Account, and pursuant to Section 3.23(b) to withdraw from any REO Account, as
additional servicing compensation, interest or other income earned on deposits
therein, subject to Section 3.12 and Section 3.24. The Servicer shall be
required to pay all expenses incurred by it in connection with its servicing
activities hereunder (including premiums for the insurance required by Section
3.14, to the extent such premiums are not paid by the related Mortgagors or by a
Sub-Servicer, servicing compensation of each Sub-Servicer, and to the extent
provided herein in Section 8.05, the fees and expenses of the Trustee and the
Trust Administrator) and shall not be entitled to reimbursement therefor except
as specifically provided herein.

         SECTION 3.19 Reports to the Trust Administrator; Collection Account
                      Statements.

         Not later than fifteen days after each Distribution Date, the Servicer
shall forward to the Trust Administrator and the Trustee, upon the request of
the Trust Administrator or the Trustee, a statement prepared by the Servicer
setting forth the status of the Collection Account as of the close of business
on the last day of the calendar month relating to such Distribution Date and
showing, for the period covered by such statement, the aggregate amount of
deposits into and withdrawals from the Collection Account of each category of
deposit specified in Section 3.10(a) and each category of withdrawal specified
in Section 3.11. Such statement may be in the form of the then current Fannie
Mae Monthly Accounting Report for its Guaranteed Mortgage Pass-Through Program
with appropriate additions and changes, and shall also include information as to
the aggregate of the outstanding principal balances of all of the Mortgage Loans
as of the last day of the calendar month immediately preceding such Distribution
Date. Copies of such statement shall be provided by the Trust Administrator to
any Certificateholder and to any Person identified to the Trust Administrator as
a prospective transferee of a Certificate, upon the request and at the expense
of the requesting party, provided such statement is delivered by the Servicer to
the Trust Administrator.

         SECTION 3.20 Statement as to Compliance.

         The Servicer shall deliver to the Trustee, the Trust Administrator, the
Depositor and the Rating Agencies on or before March 15 of each year, commencing
in 2007, an officer's certificate (an "Annual Statement of Compliance"),
certifying that with respect to the period ending December 31st of the prior
year: (i) the Servicer or such Servicing Officer, as applicable, has reviewed
the activities of the Servicer during the preceding calendar year or portion
thereof and its performance under this Agreement or other applicable servicing
agreement and (ii) to the best of the Servicer's or such Servicing Officer's, as
applicable, knowledge, based on such review, the Servicer has performed and
fulfilled its duties, responsibilities and obligations under this Agreement or
other applicable servicing agreement in all material respects throughout such
year, or, if there has been a failure to fullfill of any such duties,
responsibilities or obligations, in any material respect, specifying each such
failure known to such Servicing Officer and the nature and status of cure
provisions thereof. Copies of any such statement shall be provided by the Trust
Administrator to any Certificateholder and to any Person identified to the Trust
Administrator as a prospective transferee of a Certificate, upon request at the
expense of the requesting party, provided such statement is delivered by the
Servicer to the Trust Administrator. In addition to the foregoing, the Servicer
will, to the extent reasonable, give any other servicing information required by
the Securities and Exchange Commission pursuant to applicable law. The Servicer
shall indemnify and hold harmless the Depositor and its officers, directors and
Affiliates from and against any actual losses, damages, penalties, fines,
forfeitures, reasonable and necessary legal fees and related costs, judgments
and other costs and expenses that such Person may sustain based upon a breach of
the Servicer's obligations under this Section 3.20. Such Annual Statement of
Compliance shall contain no restrictions or limitations on its use. In the event
that the Servicer has delegated any servicing responsibilities with respect to
the Mortgage Loans serviced by it to a Sub-Servicer, the Servicer shall deliver
an officer's certificate of the Sub-Servicer as described above as to each
Sub-Servicer as and when required with respect to the Servicer.

         If the Servicer cannot deliver the Annual Statement of Compliance by
March 15th of such year, the Trustee, at its sole option, may permit a cure
period for the related Servicer to deliver such Annual Statement of Compliance,
but in no event later than March 30th of such year.

         Failure of the Servicer to timely comply with this Section 3.20 shall
be deemed an Servicer Event of Termination, automatically, without notice and
without any cure period, and the Trustee may, in addition to whatever rights the
Trustee may have under this Agreement and at law or equity or to damages,
including injunctive relief and specific performance, terminate all the rights
and obligations of the Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof without compensating the Servicer for the same.
This paragraph shall supercede any other provision in this Agreement or any
other agreement to the contrary.

         SECTION 3.21 Assessments of Compliance and Attestation Reports.

         On and after January 1, 2006, each of the Servicer and the Trustee
shall service and administer the Mortgage Loans in accordance with all
applicable requirements of the Servicing Criteria (as set forth in Exhibit
[__]). Each of the Servicer and the Trustee shall deliver to the Depositor (and,
in the case of the Servicer, the Trustee) on or before March 15th of each
calendar year beginning in 2007, a report (an "Assessment of Compliance")
reasonably satisfactory to the Depositor regarding the Servicer's and Trustee's
assessment of compliance with the applicable Servicing Criteria during the
preceding calendar year as required by Rules 13a-18 and 15d-18 of the Exchange
Act and Item 1122 of Regulation AB, which as of the date hereof, require a
report by an authorized officer of the Servicer or the Trustee that contains the
following:

         (a) A statement by such officer of its responsibility for assessing
compliance with the Servicing Criteria applicable to the Servicer or the
Trustee;

         (b) A statement by such officer that such officer used the Servicing
Criteria to assess compliance with the Servicing Criteria applicable to the
Servicer or the Trustee;

         (c) An assessment by such officer of the Servicer's or Trustee's
compliance with the applicable Servicing Criteria for the period consisting of
the preceding calendar year, including disclosure of any material instance of
noncompliance with respect thereto during such period, which assessment shall be
based on the activities it performs with respect to asset-backed securities
transactions taken as a whole involving the Servicer or the Trustee, as
applicable, that are backed by the same asset type as the Mortgage Loans;

         (d) A statement that a registered public accounting firm has issued an
attestation report on the Servicer's or Trustee's Assessment of Compliance for
the period consisting of the preceding calendar year; and

         (e) A statement as to which of the Servicing Criteria, if any, are not
applicable to the Servicer or Trustee, which statement shall be based on the
activities it performs with respect to asset-backed securities transactions
taken as a whole involving the Servicer or Trustee, that are backed by the same
asset type as the Mortgage Loans.

         Such report at a minimum shall address each of the Servicing Criteria
specified on a certification substantially in the form of Exhibit [___] hereto
delivered to the Depositor (and, in the case of the Servicer, the Trustee)
concurrently with the execution of this Agreement.

         On or before March 15th of each calendar year beginning in 2007, each
of the Servicer and the Trustee shall furnish to the Depositor (and, in the case
of the Servicer, the Trustee) a report (an "Attestation Report") by a registered
public accounting firm that attests to, and reports on, the Assessment of
Compliance made by the Servicer or the Trustee, as applicable, as required by
Rules 13a-18 and 15d-18 of the Exchange Act and Item 1122(b) of Regulation AB,
which Attestation Report must be made in accordance with standards for
attestation reports issued or adopted by the Public Company Accounting Oversight
Board.

         Each of the Servicer and the Trustee shall cause any servicer, and each
subcontractor determined by the Servicer or the Trustee, as applicable, to be
"participating in the servicing function" within the meaning of Item 1122 of
Regulation AB, to deliver to the Depositor (and, in the case of the Servicer,
the Trustee) an assessment of compliance and accountants' attestation.

         If the Servicer or the Trustee cannot deliver the related Assessment of
Compliance or Attestation Report by March 15th of such year, the Depositor, at
its sole option, may permit a cure period for the Servicer or the Trustee, as
applicable, to deliver such Assessment of Compliance or Attestation Report, but
in no event later than March 30th of such year.

         Failure of the Servicer to timely comply with this Section 3.21 shall
be deemed a Servicer Event of Termination, automatically, without notice and
without any cure period, and the Trustee may, in addition to whatever rights the
Trustee may have under this Agreement and at law or equity or to damages,
including injunctive relief and specific performance, terminate all the rights
and obligations of the Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof without compensating the Servicer for the same.
This paragraph shall supercede any other provision in this Agreement or any
other agreement to the contrary.

         SECTION 3.22 Access to Certain Documentation.

         The Servicer shall provide to the Office of the Controller of the
Currency, the Office of Thrift Supervision, the FDIC, and any other federal or
state banking or insurance regulatory authority that may exercise authority over
any Certificateholder, access to the documentation regarding the Mortgage Loans
required by applicable laws and regulations. Such access shall be afforded
without charge, but only upon reasonable request and during normal business
hours at the offices of the Servicer designated by it. Payments on the Mortgage
Loans, including any Principal Prepayments in full, made in accordance with the
related Mortgage File will be entered into the Servicer's set of records no more
than two Business Days after receipt, and allocated to principal or interest as
specified in the related Mortgage File. In addition, access to the documentation
regarding the Mortgage Loans required by applicable laws and regulations will be
provided to such Certificateholder, the Trustee, the Trust Administrator and to
any Person identified to the Servicer as a prospective transferee of a
Certificate subject to the execution of a confidentiality agreement in form and
substance satisfactory to the servicer, upon reasonable request during normal
business hours at the offices of the Servicer designated by it at the expense of
the Person requesting such access. Nothing in this Section 3.22 shall derogate
from the obligation of any such party to observe any applicable law prohibiting
disclosure of information regarding the Mortgagors and the failure of any such
party to provide access as provided in this Section as a result of such
obligation shall not constitute a breach of this Section 3.22.

         SECTION 3.23 Title, Management and Disposition of REO Property.

         (a) The deed or certificate of sale of any REO Property shall be taken
in the name of the Trustee, or its nominee, in trust for the benefit of the
Certificateholders. The Servicer, on behalf of the Trust Fund, shall either sell
any REO Property before the close of the third taxable year following the year
the Trust Fund acquires ownership of such REO Property for purposes of Section
860G(a)(8) of the Code or request from the Internal Revenue Service, no later
than 60 days before the day on which the above three-year grace period would
otherwise expire, an extension of the above three-year grace period, unless the
Servicer shall have delivered to the Trustee, the Trust Administrator and the
Depositor an Opinion of Counsel, addressed to the Trustee, the Trust
Administrator and the Depositor, to the effect that the holding by the Trust
Fund of such REO Property subsequent to the close of the third taxable year
after its acquisition will not result in the imposition on the Trust Fund of
taxes on "prohibited transactions" thereof, as defined in Section 860F of the
Code, or cause any Trust REMIC to fail to qualify as a REMIC under Federal law
at any time that any Certificates are outstanding. The Servicer shall manage,
conserve, protect and operate each REO Property for the Certificateholders
solely for the purpose of its prompt disposition and sale in a manner which does
not cause such REO Property to fail to qualify as "foreclosure property" within
the meaning of Section 860G(a)(8) of the Code or result in the receipt by any
Trust REMIC of any "income from non-permitted assets" within the meaning of
Section 860F(a)(2)(B) of the Code, or any "net income from foreclosure property"
which is subject to taxation under the REMIC Provisions.

         (b) The Servicer shall segregate and hold all funds collected and
received in connection with the operation of any REO Property separate and apart
from its own funds and general assets and shall establish and maintain with
respect to REO Properties an account held in trust for the Trustee for the
benefit of the Certificateholders (the "REO Account"), which shall be an
Eligible Account. The Servicer shall be permitted to allow the Collection
Account to serve as the REO Account, subject to separate ledgers for each REO
Property. The Servicer shall be entitled to retain or withdraw any interest
income paid on funds deposited in the REO Account.

         (c) The Servicer shall have full power and authority, subject only to
the specific requirements and prohibitions of this Agreement, to do any and all
things in connection with any REO Property as are consistent with the manner in
which the Servicer manages and operates similar property owned by the Servicer
or any of its Affiliates, all on such terms and for such period as the Servicer
deems to be in the best interests of Certificateholders. In connection
therewith, the Servicer shall deposit, or cause to be deposited in the clearing
account (which account must be an Eligible Account) in which it customarily
deposits payments and collections on mortgage loans in connection with its
mortgage loan servicing activities on a daily basis, and in no event more than
two Business Days after the Servicer's receipt thereof, and shall thereafter
deposit in the REO Account, in no event more than one Business Day after the
deposit of such funds into the clearing account, all revenues received by it
with respect to an REO Property and shall withdraw therefrom funds necessary for
the proper operation, management and maintenance of such REO Property including,
without limitation:

(i)      all insurance premiums due and payable in respect of such REO Property;

(ii)     all real estate taxes and assessments in respect of such REO Property
         that may result in the imposition of a lien thereon; and

(iii)    all costs and expenses necessary to maintain such REO Property.

         To the extent that amounts on deposit in the REO Account with respect
to an REO Property are insufficient for the purposes set forth in clauses (i)
through (iii) above with respect to such REO Property, the Servicer shall
advance from its own funds such amount as is necessary for such purposes if, but
only if, the Servicer would make such advances if the Servicer owned the REO
Property and if in the Servicer's judgment, the payment of such amounts will be
recoverable from the rental or sale of the REO Property.

         Notwithstanding the foregoing, none of the Servicer, the Trust
Administrator or the Trustee shall:

(i)      authorize the Trust Fund to enter into, renew or extend any New Lease
         with respect to any REO Property, if the New Lease by its terms will
         give rise to any income that does not constitute Rents from Real
         Property;

(ii)     authorize any amount to be received or accrued under any New Lease
         other than amounts that will constitute Rents from Real Property;

(iii)    authorize any construction on any REO Property, other than the
         completion of a building or other improvement thereon, and then only if
         more than ten percent of the construction of such building or other
         improvement was completed before default on the related Mortgage Loan
         became imminent, all within the meaning of Section 856(e)(4)(B) of the
         Code; or

(iv)     authorize any Person to Directly Operate any REO Property on any date
         more than 90 days after its date of acquisition by the Trust Fund;

unless, in any such case, the Servicer has obtained an Opinion of Counsel,
provided to the Trust Administrator and the Trustee, to the effect that such
action will not cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code at any time that
it is held by the Trust Fund, in which case the Servicer may take such actions
as are specified in such Opinion of Counsel.

         The Servicer may contract with any Independent Contractor for the
operation and management of any REO Property, provided that:

(i)      the terms and conditions of any such contract shall not be inconsistent
         herewith;

(ii)     any such contract shall require, or shall be administered to require,
         that the Independent Contractor pay all costs and expenses incurred in
         connection with the operation and management of such REO Property,
         including those listed above and remit all related revenues (net of
         such costs and expenses) to the Servicer as soon as practicable, but in
         no event later than thirty days following the receipt thereof by such
         Independent Contractor;

(iii)    none of the provisions of this Section 3.23(c) relating to any such
         contract or to actions taken through any such Independent Contractor
         shall be deemed to relieve the Servicer of any of its duties and
         obligations to the Trustee on behalf of the Certificateholders with
         respect to the operation and management of any such REO Property; and

(iv)     the Servicer shall be obligated with respect thereto to the same extent
         as if it alone were performing all duties and obligations in connection
         with the operation and management of such REO Property.

         The Servicer shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties and
obligations hereunder for indemnification of the Servicer by such Independent
Contractor, and nothing in this Agreement shall be deemed to limit or modify
such indemnification. The Servicer shall be solely liable for all fees owed by
it to any such Independent Contractor, irrespective of whether the Servicer's
compensation pursuant to Section 3.18 is sufficient to pay such fees.

         (d) In addition to the withdrawals permitted under Section 3.23(c), the
Servicer may from time to time make withdrawals from the REO Account for any REO
Property: (i) to pay itself or any Sub-Servicer unpaid Servicing Fees in respect
of the related Mortgage Loan; and (ii) to reimburse itself or any Sub-Servicer
for unreimbursed Servicing Advances and P&I Advances made in respect of such REO
Property or the related Mortgage Loan. Any income from the related REO Property
received during any calendar months prior to a Final Recovery Determination, net
of any withdrawals made pursuant to Section 3.23(c) or this Section 3.23(d),
shall be withdrawn by the Servicer from each REO Account maintained by it and
remitted to the Trust Administrator for deposit into the Distribution Account in
accordance with Section 3.10(d)(ii) on the Servicer Remittance Date relating to
a Final Recovery Determination with respect to such Mortgage Loan, for
distribution on the related Distribution Date in accordance with Section 4.01.

         (e) Subject to the time constraints set forth in Section 3.23(a), and
further subject to obtaining the approval of the insurer under any related
Primary Mortgage Insurance Policy (if and to the extent that such approvals are
necessary to make claims under such policies in respect of the affected REO
Property), each REO Disposition shall be carried out by the Servicer at such
price and upon such terms and conditions as the Servicer shall deem necessary or
advisable, as shall be normal and usual in its general servicing activities for
similar properties.

         (f) The proceeds from the REO Disposition, net of any amount required
by law to be remitted to the Mortgagor under the related Mortgage Loan and net
of any payment or reimbursement to the Servicer or any Sub-Servicer as provided
above, shall be remitted to the Trust Administrator for deposit in the
Distribution Account in accordance with Section 3.10(d)(ii) on the Servicer
Remittance Date in the month following the receipt thereof for distribution on
the related Distribution Date in accordance with Section 4.01. Any REO
Disposition shall be for cash only (unless changes in the REMIC Provisions made
subsequent to the Startup Day allow a sale for other consideration).

         (g) The Servicer shall file information returns with respect to the
receipt of mortgage interest received in a trade or business, reports of
foreclosures and abandonments of any Mortgaged Property and cancellation of
indebtedness income with respect to any Mortgaged Property as required by
Sections 6050H, 6050J and 6050P of the Code, respectively. Such reports shall be
in form and substance sufficient to meet the reporting requirements imposed by
such Sections 6050H, 6050J and 6050P of the Code.

         SECTION 3.24 Obligations of the Servicer in Respect of Prepayment
                      Interest Shortfalls.

         The Servicer shall deliver to the Trust Administrator for deposit into
the Distribution Account on or before 4:00 p.m. New York time on the Servicer
Remittance Date from its own funds (or from a Sub-Servicer's own funds received
by the Servicer in respect of Compensating Interest) an amount equal to the
lesser of (i) the aggregate of the Prepayment Interest Shortfalls for the
related Distribution Date resulting from full or partial Principal Prepayments
during the related Prepayment Period and (ii) the applicable Compensating
Interest Payment.

         SECTION 3.25 Obligations of the Servicer in Respect of Monthly
                      Payments.

         In the event that a shortfall in any collection on or liability with
respect to any Mortgage Loan results from or is attributable to adjustments to
Mortgage Rates, Monthly Payments or Stated Principal Balances that were made by
the Servicer in a manner not consistent with the terms of the related Mortgage
Note and this Agreement, the Servicer, upon discovery or receipt of notice
thereof, immediately shall deliver to the Trust Administrator for deposit in the
Distribution Account from its own funds the amount of any such shortfall and
shall indemnify and hold harmless the Trust Fund, the Trustee, the Trust
Administrator, the Depositor and any successor servicer in respect of any such
liability. Such indemnities shall survive the termination or discharge of this
Agreement. If amounts paid by the Servicer with respect to any Mortgage Loan
pursuant to this Section 3.25 are subsequently recovered from the related
Mortgagor, the Servicer shall be permitted to reimburse itself for such amounts
paid by it pursuant to this Section 3.25 from such recoveries.

         SECTION 3.26 Commission Reporting.

         (a) (i) The Trust Administrator and the Servicer shall reasonably
cooperate with the Depositor in connection with the Trust's satisfying the
reporting requirements under the Exchange Act. Within 15 days after each
Distribution Date, the Trust Administrator shall, in accordance with industry
standards, file with the Commission via the Electronic Data Gathering and
Retrieval System ("EDGAR"), a Distribution Report on Form 10-D, signed by the
Depositor, with a copy of the monthly statement to be furnished by the Trust
Administrator to the Certificateholders for such Distribution Date and detailing
all data elements specified in Item 1121(a) of Regulation AB as part of the
monthly statement or otherwise as part of the Form 10-D; provided that the Trust
Administrator shall have received no later than four Business Days prior to the
date such Distribution Report on Form 10-D is required to be filed, all
information required to be provided to the Trust Administrator as described in
Section 4.07(a)(iv). The information required to be filed on Form 10-D is as set
forth in Exhibit C. The Trust Administrator shall not be responsible for
determing what information is required to be filed on Form 10-D or for any
filing that is not made on a timely basis in accordance with Regulation AB in
the event that such information is not delivered to the Trust Administrator on
or prior to the fourth Business Day prior to the applicable filing deadline.

                  (ii) The Trust Administrator will prepare and file Current
Reports on Form 8-K in respect of the Trust, signed by the Depositor, as and
when required; provided, that, the Trust Administrator shall have received no
later than four Business Days prior to the filing deadline for such Current
Report, all information, data, and exhibits required to be provided or filed
with such Current Report and required to be provided to the Trust Administrator
as described in Section 4.07(a)(iv) below. The Depositor shall prepare or cause
to be prepared and file the Current Report on Form 8-K attaching this Agreement
as an exhibit. The information required to be filed on Form 8-K is as set forth
in Exhibit C. The Trust Administrator shall not be responsible for determing
what information is required to be filed on Form 8-K or for any filing that is
not made on a timely basis in accordance with Regulation AB in the event that
such information is not delivered to the Trust Adminsitrator on or prior to the
fourth Business Day prior to the applicable filing deadline.

                  (iii) No later than January 30, 2007, the Trust Administrator
shall, in accordance with industry standards, file a Form 15 Suspension Notice
with respect to the Trust Fund, if applicable. Prior to (x) March 15, 2007 and
(y) unless and until a Form 15 Suspension Notice shall have been filed, prior to
March 15th of each year thereafter, the Servicer shall provide the Trust
Administrator with an Annual Compliance Statement, together with a copy of the
Assessment of Compliance and Attestation Report to be delivered by the Servicer
pursuant to Sections 3.21 and 3.22 (including with respect to any Sub-Servicer
or subcontractor, if required to be filed). Prior to (x) March 31, 2007 and (y)
unless and until a Form 15 Suspension Notice shall have been filed, March 31st
of each year thereafter, the Trust Administrator shall, subject to subsection
(d) below, file a Form 10-K, in substance as required by applicable law or
applicable Commission staff's interpretations and conforming to industry
standards, with respect to the Trust Fund. Such Form 10-K shall include the
Assessment of Compliance, Attestation Report, Annual Compliance Statements and
other documentation provided by the Servicer pursuant to Sections 3.20 and 3.21
(including with respect to any Sub-Servicer or subcontractor, if required to be
filed) and with respect to the Trust Administrator, and the Form 10-K
certification in the form attached hereto as Exhibit H-1 (the "Certification")
signed by the senior officer of the Depositor in charge of securitization;
provided that the Trust Administrator shall have received no later than March
25th of each calendar year prior to the filing deadline for the Form 10-K all
information, data and exhibits required to be provided or filed with such Form
10-K and required to be provided to the Trust Administrator as described in
clause (a)(iv) below. If they are not so timely delivered, the Trust
Administrator shall file an amended Form 10-K including such documents as
exhibits reasonably promptly after they are delivered to the Trust
Administrator. The information required to be filed on Form 10-K is as set forth
in Exhibit C. The Trust Administrator shall not be responsible for determing
what information is required to be filed on Form 10-K or for any filing that is
not made on a timely basis in accordance with Regulation AB in the event that
such information is not delivered to the Trust Adminsitrator on or prior to the
fourth Business Day prior to the applicable filing deadline.

                  (iv) As to each item of information required to be included in
any Form 10-D, Form 8-K or Form 10-K, the Trust Administrator's obligation to
include the information in the applicable report is subject to receipt from the
entity that is indicated in Exhibit B as the responsible party for providing
that information, if other than the Trust Administrator, as and when required as
described above. The Depositor hereby agrees to notify and provide to the Trust
Administrator all information that is required to be included in any Form 10-D,
Form 8-K or Form 10-K, with respect to which that entity is indicated in Exhibit
B as the responsible party for providing that information. The Servicer shall be
responsible for determining the pool concentration applicable to any
Sub-Servicer at any time, for purposes of disclosure as required by Items 1117
and 1119 of Regulation AB. The Depositor shall be responsible for determining
the pool concentration applicable to any originator at any time, for purposes of
disclosure as required by Items 1117 and 1119 of Regulation AB. In addition, in
the event that affiliations among the parties to this transaction, other than as
disclosed in the Prospectus Supplement under the heading "AFFILIATIONS AND
RELATED TRANSACTIONS", are required to be reported on Form 10-K, the Depositor
shall notify the Trust Administrator of such requirement by no later than March
1st of each year in which a Form 10-K is filed.

         (b) In addition, (x) the Trust Administrator shall sign a certification
(in the form attached hereto as Exhibit H-2) for the benefit of the Depositor
and its officers, directors and Affiliates regarding certain aspects of the
Certification (the "Trust Administrator Certification"); provided, however, that
the Trust Administrator shall not undertake an analysis of the Attestation
Report attached as an exhibit to the Form 10-K, and (y) the Servicer shall sign
a certification (in the related form attached hereto as Exhibit H-3) for the
benefit of the Depositor, the Trust Administrator and their officers, directors
and Affiliates regarding certain aspects of the Certification (the "Servicer
Certification"). The Servicer Certification shall be delivered to the Depositor
and the Trust Administrator no later than March 15th or if such day is not a
Business Day, the preceding Business Day, each year (subject to Section
4.07(a)).

         In addition, (A) the Trust Administrator shall indemnify and hold
harmless the Depositor and its officers, directors and Affiliates from and
against any actual losses, damages, penalties, fines, forfeitures, reasonable
and necessary legal fees and related costs, judgments and other costs and
expenses arising out of third party claims based upon (i) a breach of the Trust
Administrator's obligations under this Section 4.07 or (ii) any material
misstatement or omission contained in the Trust Administrator Certification, the
Annual Statement of Compliance delivered by the Trust Administrator pursuant to
Section 3.20 or the Assessment of Compliance delivered by the Trust
Administrator pursuant to Section 3.21 and (B) the Servicer shall indemnify and
hold harmless the Depositor, the Trust Administrator and their respective
officers, directors and Affiliates from and against any actual losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments and other costs and expenses that such Person may sustain
arising out of third party claims based upon (i) a breach of such Servicer's
obligations under this Section 4.07, (ii) any material misstatement or omission
contained in the Servicer's Certification, the Annual Statement of Compliance
provided by the Servicer pursuant to Section 3.20, the Assessment of Compliance
provided by the Servicer pursuant to Section 3.21 or (iii) any information
correctly derived by the Trust Administrator and included in a Form 10-D or Form
10-K from information provided to the Trust Administrator by the Servicer under
this Agreement. If the indemnification provided for herein is unavailable or
insufficient to hold harmless the Depositor, then (i) the Trust Administrator
agrees that it shall contribute to the amount paid or payable by the Depositor
as a result of the losses, claims, damages or liabilities of the Depositor in
such proportion as is appropriate to reflect the relative fault of the Depositor
on the one hand and the Trust Administrator on the other and (ii) the Servicer
agrees that it shall contribute to the amount paid or payable by the Depositor
as a result of the losses, claims, damages or liabilities of the Depositor in
such proportion as is appropriate to reflect the relative fault of the Depositor
on the one hand and the Servicer on the other. Notwithstanding the foregoing, in
no event shall the Trust Administrator be liable for any consequential, indirect
or punitive damages.

         SECTION 3.27 Advance Facility.

         (a) Either (i) the Servicer or (ii) the Trust Administrator, on behalf
of the Trust Fund, with the consent of and at the direction of the Servicer, is
hereby authorized to enter into a facility with any Person which provides that
such Person (an "Advancing Person") may fund P&I Advances and/or Servicing
Advances to the Trust Fund under this Agreement, although no such facility shall
reduce or otherwise affect the Servicer's obligation to fund such P&I Advances
and/or Servicing Advances. If the Servicer enters into such an Advance Facility
pursuant to this Section 3.26, upon reasonable request of the Advancing Person,
the Trust Administrator shall execute a letter of acknowledgment, confirming its
receipt of notice of the existence of such Advance Facility. If the Trust
Administrator enters into such an Advance Facility pursuant to this Section
3.26, the Servicer shall also be a party to such Advance Facility. To the extent
that an Advancing Person funds any P&I Advance or any Servicing Advance and
provides the Trust Administrator with notice acknowledged by the Servicer that
such Advancing Person is entitled to reimbursement, such Advancing Person shall
be entitled to receive reimbursement pursuant to this Agreement for such amount
to the extent provided in Section 3.26(b). Such notice from the Advancing Person
must specify the amount of the reimbursement, the Section of this Agreement that
permits the applicable P&I Advance or Servicing Advance to be reimbursed and the
section(s) of the Advance Facility that entitle the Advancing Person to request
reimbursement from the Trust Administrator, rather than the Servicer, and
include the Servicer's acknowledgment thereto or proof of an Event of Default
under the Advance Facility. The Trust Administrator shall have no duty or
liability with respect to any calculation of any reimbursement to be paid to an
Advancing Person and shall be entitled to rely without independent investigation
on the Advancing Person's notice provided pursuant to this Section 3.26. An
Advancing Person whose obligations hereunder are limited to the funding of P&I
Advances and/or Servicing Advances shall not be required to meet the
qualifications of a Servicer or a Sub-Servicer pursuant to Section 3.02 hereof
and will not be deemed to be a Sub-Servicer under this Agreement.

         (b) If an advancing facility is entered into, then the Servicer shall
not be permitted to reimburse itself therefor under Section 3.11(a)(ii), Section
3.11(a)(iii) and Section 3.11(a)(vi) prior to the remittance to the Trust Fund,
but instead the Servicer shall include such amounts in the applicable remittance
to the Trust Administrator made pursuant to Section 3.11(a). The Trust
Administrator is hereby authorized to pay to the Advancing Person,
reimbursements for P&I Advances and Servicing Advances from the Distribution
Account to the same extent the Servicer would have been permitted to reimburse
itself for such P&I Advances and/or Servicing Advances in accordance with
Section 3.11(a)(ii), Section 3.11(a)(iii) and Section 3.11(a)(vi), as the case
may be, had the Servicer itself funded such P&I Advance or Servicing Advance.
The Trust Administrator is hereby authorized to pay directly to the Advancing
Person such portion of the Servicing Fee as the parties to any advancing
facility agree in writing.

         (c) All P&I Advances and Servicing Advances made pursuant to the terms
of this Agreement shall be deemed made and shall be reimbursed on a "first
in-first out" (FIFO) basis.

         (d) Any amendment to this Section 3.26 or to any other provision of
this Agreement that may be necessary or appropriate to effect the terms of an
Advance Facility as described generally in this Section 3.26, including
amendments to add provisions relating to a successor servicer, may be entered
into by the Trustee, the Trust Administrator and the Servicer without the
consent of any Certificateholder, notwithstanding anything to the contrary in
this Agreement.

<PAGE>

                                   ARTICLE IV

                         PAYMENTS TO CERTIFICATEHOLDERS

         SECTION 4.01 Distributions.

         (a) (1) On each Distribution Date, the Trust Administrator shall,
first, withdraw from the Distribution Account an amount equal to the Credit Risk
Manager Fee for such Distribution Date and shall pay such amount to the Credit
Risk Manager and, second, withdraw from the Distribution Account an amount equal
to the Available Distribution Amount for such Distribution Date and shall
distribute the following amounts, in the following order of priority:

(I)         On each Distribution Date, the Group I Interest Remittance Amount
            shall be distributed to the Certificateholders in the following
            order of priority:

         (i)      to the Holders of the Group I Certificates, the Senior
                  Interest Distribution Amount related to such Certificates; and

         (ii)     concurrently, to the Holders of each Class of Group II
                  Certificates, on a PRO RATA basis based on the entitlement of
                  each such Class, the Senior Interest Distribution Amount for
                  each such Class, remaining undistributed after the
                  distribution of the Group II Interest Remittance Amount, as
                  set forth in Section 4.01(a)(1)(II)(i) below.

(II)     On each Distribution Date, the Group II Interest Remittance Amount
         shall be distributed to the Certificateholders in the following order
         of priority:

         (i)      concurrently, to the Holders of each Class of Group II
                  Certificates, on a PRO RATA basis based on the entitlement of
                  each such Class, the Senior Interest Distribution Amount
                  related to such Certificates; and

         (ii)     to the Holders of the Group I Certificates, the Senior
                  Interest Distribution Amount related to such Certificates,
                  remaining undistributed after the distribution of the Group I
                  Interest Remittance Amount, as set forth in Section
                  4.01(a)(1)(I)(i) above.

(III)    On each Distribution Date, following the distributions made pursuant to
         Section 4.01(a)(1)(I) and (II) above, any remaining Group I Interest
         Remittance Amount and Group II Interest Remittance Amount will be
         distributed sequentially to the Class M-1, Class M-2, Class M-3, Class
         M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class M-10,
         Class M-11, Class M-12 and Class M-13 Certificates, in that order, in
         an amount equal to the Interest Distribution Amount for each such
         Class.

         (2)(I) On each Distribution Date (a) prior to the Stepdown Date or (b)
on which a Trigger Event is in effect, the Group I Principal Distribution Amount
shall be distributed in the following order of priority:

         (i)      to the Holders of the Group I Certificates, until the
                  Certificate Principal Balance of such Class has been reduced
                  to zero; and

         (ii)     to the Holders of the Group II Certificates (allocated among
                  the Classes of Group II Certificates in the priority described
                  in Section 4.01(a)(4) below), after taking into account the
                  distribution of the Group II Principal Distribution Amount, as
                  described in Section 4.01(a)(2)(II)(i) below, until the
                  Certificate Principal Balances of such Classes have been
                  reduced to zero.

(II)     On each Distribution Date (a) prior to the Stepdown Date or (b) on
         which a Trigger Event is in effect, the Group II Principal Distribution
         Amount shall be distributed in the following order of priority:

         (i)      to the Holders of the Group II Certificates (allocated among
                  the Classes of Group II Certificates in the priority described
                  in Section 4.01(a)(4) below), until the Certificate Principal
                  Balances of such Classes have been reduced to zero; and

         (ii)     to the Holders of the Group I Certificates, after taking into
                  account the distribution of the Group I Principal Distribution
                  Amount, as described in Section 4.01(a)(2)(I)(i) above, until
                  the Certificate Principal Balance of such Class has been
                  reduced to zero.

(III)    On each Distribution Date (a) prior to the Stepdown Date or (b) on
         which a Trigger Event is in effect, the sum of the Group I Principal
         Distribution Amount and the Group II Principal Distribution Amount
         remaining undistributed for such Distribution Date shall be distributed
         sequentially to the Class M-1, Class M-2, Class M-3, Class M-4, Class
         M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class M-10, Class
         M-11, Class M-12 and Class M-13 Certificates, in that order, in each
         case, until the Certificate Principal Balance of such Class has been
         reduced to zero.

(IV)     On each Distribution Date (a) on or after the Stepdown Date and (b) on
         which a Trigger Event is not in effect, the Group I Principal
         Distribution Amount shall be distributed in the following order of
         priority:

         (i)      to the Holders of the Group I Certificates, the Group I Senior
                  Principal Distribution Amount, until the Certificate Principal
                  Balance of such Class has been reduced to zero; and

         (ii)     to the Holders of the Group II Certificates (allocated among
                  the Classes of Group II Certificates in the priority described
                  in Section 4.01(a)(4) below), after taking into account the
                  distribution of the Group II Principal Distribution Amount, as
                  described in Section 4.01(a)(2)(V)(i) below, up to an amount
                  equal to the Group II Senior Principal Distribution Amount
                  remaining undistributed, until the Certificate Principal
                  Balances of such Classes have been reduced to zero.

(V)      On each Distribution Date (a) on or after the Stepdown Date and (b) on
         which a Trigger Event is not in effect, the Group II Principal
         Distribution Amount shall be distributed in the following order of
         priority:

         (i)      to the Holders of the Group II Certificates (allocated among
                  the Classes of Group II Certificates in the priority described
                  in Section 4.01(a)(4) below), the Group II Senior Principal
                  Distribution Amount, until the Certificate Principal Balances
                  of such Classes have been reduced to zero; and

         (ii)     to the Holders of the Group I Certificates, after taking into
                  account the distribution of the Group I Principal Distribution
                  Amount, as described in Section 4.01(a)(2)(IV)(i) above, up to
                  an amount equal to the Group I Senior Principal Distribution
                  Amount remaining undistributed, until the Certificate
                  Principal Balance of such Class has been reduced to zero.

(VI)     On each Distribution Date (a) on or after the Stepdown Date and (b) on
         which a Trigger Event is not in effect, the sum of the Group I
         Principal Distribution Amount and the Group II Principal Distribution
         Amount remaining undistributed for such Distribution Date shall be
         distributed in the following order of priority:

         (i)      to the Holders of the Class M-1 Certificates, the Class M-1
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (ii)     to the Holders of the Class M-2 Certificates, the Class M-2
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (iii)    to the Holders of the Class M-3 Certificates, the Class M-3
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (iv)     to the Holders of the Class M-4 Certificates, the Class M-4
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (v)      to the Holders of the Class M-5 Certificates, the Class M-5
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (vi)     to the Holders of the Class M-6 Certificates, the Class M-6
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (vii)    to the Holders of the Class M-7 Certificates, the Class M-7
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (viii)   to the Holders of the Class M-8 Certificates, the Class M-8
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (ix)     to the Holders of the Class M-9 Certificates, the Class M-9
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (x)      to the Holders of the Class M-10 Certificates, the Class M-10
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (xi)     to the Holders of the Class M-11 Certificates, the Class M-11
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero;

         (xii)    to the Holders of the Class M-12 Certificates, the Class M-12
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero; and

         (xiii)   to the Holders of the Class M-13 Certificates, the Class M-13
                  Principal Distribution Amount, until the Certificate Principal
                  Balance thereof has been reduced to zero.

                  (3) On each Distribution Date, the Net Monthly Excess Cashflow
shall be distributed by the Trust Administrator as follows:

         (i)      to the Holders of the Class or Classes of Certificates then
                  entitled to receive distributions in respect of principal, as
                  part of the Principal Distribution Amount in an amount equal
                  to the Overcollateralization Increase Amount for the
                  Certificates, without taking into account amounts, if any,
                  received under the cap contract, distributable as part of the
                  Group I Principal Distribution Amount and the Group II
                  Principal Distribution Amount;

         (ii)     sequentially, to the Holders of the Class M-1, Class M-2,
                  Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class
                  M-8, Class M-9, Class M-10, Class M-11, Class M-12 and Class
                  M-13 Certificates in that order, in each case, in an amount
                  equal to the Interest Carry Forward Amount allocable to such
                  Class of Certificates;

         (iii)    sequentially to the Holders of the Class M-1, Class M-2, Class
                  M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8,
                  Class M-9, Class M-10, Class M-11, Class M-12 and Class M-13
                  Certificates, in that order, in each case up to the related
                  Allocated Realized Loss Amount related to each such Class of
                  Certificates for such Distribution Date;

         (iv)     to the Net WAC Rate Carryover Reserve Account, any Net WAC
                  Rate Carryover Amounts for the Floating Rate Certificates,
                  without taking into account amount, if any, received under the
                  cap contract for such Distribution Date;

         (v)      to the Holders of the Class CE Certificates, (a) the Interest
                  Distribution Amount and any Overcollateralization Reduction
                  Amount for such Distribution Date and (b) on any Distribution
                  Date on which the aggregate Certificate Principal Balance of
                  the Floating Rate Certificates have been reduced to zero, any
                  remaining amounts in reduction of the Certificate Principal
                  Balance of the Class CE Certificates, until the Certificate
                  Principal Balance thereof has been reduced to zero; and

         (vi)     to the Holders of the Class R Certificates, any remaining
                  amounts; provided that if such Distribution Date is the
                  Distribution Date immediately following the expiration of the
                  latest Prepayment Charge term on a Mortgage Loan as identified
                  on the Mortgage Loan Schedule or any Distribution Date
                  thereafter, then any such remaining amounts will be
                  distributed first, to the Holders of the Class P Certificates,
                  until the Certificate Principal Balance thereof has been
                  reduced to zero; and second, to the Holders of the Class R
                  Certificates.

                  (4) With respect to the Group II Certificates, all principal
distributions will be distributed sequentially, to the Class A-2A, Class A-2B,
Class A-2C and Class A-2D Certificates, in that order, until the respective
Certificate Principal Balance of each such Class has been reduced to zero, with
the exception that on any Distribution Date on which the aggregate Certificate
Principal Balance of the Mezzanine Certificates and the Class CE Certificates
has been reduced to zero, principal distributions will be allocated
concurrently, to the Class A-2A, Class A-2B, Class A-2C and Class A-2D
Certificates, on a pro rata basis based on the Certificate Principal Balances of
each such Class, until their respective Certificate Principal Balances have been
reduced to zero.

                   (5) On each Distribution Date, after making the distributions
of the Available Distribution Amount as set forth above, the Trust Administrator
will withdraw from the Net WAC Rate Carryover Reserve Account, to the extent of
amounts remaining on deposit therein, the amount of any Net WAC Rate Carryover
Amount for such Distribution Date and distribute such amount in the following
order of priority:

         (i)      concurrently, to the Class A Certificates, on a pro rata basis
                  based on the Certificate Principal Balance for each such Class
                  prior to any distributions of principal on such Distribution
                  Date and then on a PRO RATA basis based on any remaining Net
                  WAC Rate Carryover Amount for each such Class; and

         (ii)     sequentially, to the Class M-1, Class M-2, Class M-3, Class
                  M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9,
                  Class M-10, Class M-11, Class M-12 and Class M-13
                  Certificates, in that order, the related Net WAC Rate
                  Carryover Amount.

                  (6) On each Distribution Date, after making the distributions
of the Available Distribution Amount, Net Montly Excess Cashflow and amounts on
the deposit in the Net WAC Rate Carryover Reserve Account as set forth above,
the Trust Administrator, in its capacity as Cap Administrator, shall distribute
the amount on deposit in the Cap Account as follows:

         (i)      concurrently, to each Class of Class A Certificates, the
                  related Senior Interest Distribution Amount remaining
                  undistributed after the distributions of the Group I Interest
                  Remittance Amount and the Group II Interest Remittance Amount,
                  on a PRO RATA basis based on such respective remaining Senior
                  Interest Distribution Amount;

         (ii)     to the Holders of the Class or Classes of Certificates then
                  entitled to receive distributions in respect of principal, in
                  an amount equal to the difference between (x) the
                  Overcollateralization Deficiency Amount, if any, and (y) the
                  amount distributed pursuant to Section 4.01(d)(i) of this
                  Agreement;

         (iii)    sequentially, to the Class M-1, Class M-2, Class M-3, Class
                  M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9,
                  Class M-10, Class M-11, Class M-12 and Class M-13
                  Certificates, in that order, the related Interest Distribution
                  Amount and Interest Carry Forward Amount, to the extent
                  remaining undistributed after the distributions of the Group I
                  Interest Remittance Amount, the Group II Interest Remittance
                  Amount and the Net Monthly Excess Cashflow;

         (iv)     sequentially to the Class M-1, Class M-2, Class M-3, Class
                  M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9,
                  Class M-10 and Class M-11, Class M-12 and Class M-13
                  Certificates, in that order, in each case up to the related
                  Allocated Realized Loss Amount related to such Certificates
                  for such Distribution Date remaining undistributed after
                  distribution of the Net Monthly Excess Cashflow;

         (v)      concurrently, to each Class of Class A Certificates, the
                  related Net WAC Rate Carryover Amount remaining unpaid after
                  distributions from the Net WAC Rate Carryover Reserve Account,
                  on a PRO RATA basis based on such respective remaining Net WAC
                  Rate Carryover Amounts; and

         (vi)     sequentially, to the Class M-1, Class M-2, Class M-3, Class
                  M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9,
                  Class M-10, Class M-11, Class M-12 and Class M-13
                  Certificates, in that order, the related Net WAC Rate
                  Carryover Amount remaining unpaid after distributions from the
                  Net WAC Rate Carryover Reserve Account.

                  (7) On each Distribution Date, the following amounts, in the
following order of priority, shall be distributed by REMIC I to REMIC II on
account of the REMIC I Regular Interests or withdrawn from the Distribution
Account and distributed to the holders of the Class R-I Interest, as the case
may be:

         (i)      to Holders of REMIC Regular Interest I-LTAA, REMIC I Regular
                  Interest I-LTA1, REMIC I Regular Interest I-LTA2A, REMIC I
                  Regular Interest I-LTA2B, REMIC I Regular Interest I-LTA2C,
                  REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest
                  I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I Regular
                  Interest I-LTM3, REMIC I Regular Interest I-LTM4, REMIC I
                  Regular Interest I-LTM5, REMIC I Regular Interest I-LTM6,
                  REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
                  I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular
                  Interest I-LTM10, REMIC I Regular Interest I-LTM11, REMIC I
                  Regular Interest I-LTM12, REMIC I Regular Interest I-LTM13,
                  REMIC I Regular Interest I-LTZZ REMIC I Regular Interest I-LTP
                  and REMIC I Regular Interest I-LTX, in an amount equal to (A)
                  the Uncertificated Interest for such Distribution Date, plus
                  (B) any amounts in respect thereof remaining unpaid from
                  previous Distribution Dates. Amounts payable as Uncertificated
                  Interest in respect of REMIC I Regular Interest I-LTZZ shall
                  be reduced when the sum of the REMIC I Overcollateralized
                  Amount is less than the REMIC I Required Overcollateralized
                  Amount, by the lesser of (x) the amount of such difference and
                  (y) the Maximum I-LTZZ Uncertificated Interest Deferral Amount
                  and such amounts will be payable to the Holders of REMIC I
                  Regular Interest I-LTA1, REMIC I Regular Interest I-LTA2A,
                  REMIC I Regular Interest I-LTA2B, REMIC I Regular Interest
                  I-LTA2C, REMIC I Regular Interest I-LTA2D, REMIC I Regular
                  Interest I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I
                  Regular Interest I-LTM3, REMIC I Regular Interest I-LTM4,
                  REMIC I Regular Interest I-LTM5, REMIC I Regular Interest
                  I-LTM6, REMIC I Regular Interest I-LTM7, REMIC I Regular
                  Interest I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I
                  Regular Interest I-LTM10, REMIC I Regular Interest I-LTM11,
                  REMIC I Regular Interest I-LTM12 and REMIC I Regular Interest
                  I-LTM13, in the same proportion as the Overcollateralization
                  Increase Amount is allocated to the Corresponding Certificates
                  and the Uncertificated Balance of REMIC I Regular Interest
                  I-LTZZ shall be increased by such amount;

         (ii)     to Holders of REMIC I Regular Interest I-LT1SUB, REMIC I
                  Regular Interest I-LT1GRP, REMIC I Regular Interest I-LT2SUB,
                  REMIC I Regular Interest I-LT2GRP and REMIC I Regular Interest
                  I-LTXX, PRO RATA, in an amount equal to (A) the Uncertificated
                  Interest for such Distribution Date, plus (B) any amounts in
                  respect thereof remaining unpaid from previous Distribution
                  Dates;

         (iii)    to the Holders of REMIC I Regular Interests, in an amount
                  equal to the remainder of the REMIC I Marker Allocation
                  Percentage of the Available Distribution Amount for such
                  Distribution Date after the distributions made pursuant to
                  clause (i) above, allocated as follows:

                           (a) [__]% of such remainder (less the amount payable
                  in clause (v) below) to the Holders of REMIC I Regular
                  Interest I-LTAA, until the Uncertificated Balance of such
                  REMIC I Regular Interest is reduced to zero;

                           (b) [__]% of such remainder (less the amount payable
                  in clause (v) below) first, to the Holders of REMIC I Regular
                  Interest I-LTA1, REMIC I Regular Interest I-LTA2A, REMIC I
                  Regular Interest I-LTA2B, REMIC I Regular Interest I-LTA2C,
                  REMIC I Regular Interest I-LTA2D, REMIC I Regular Interest
                  I-LTM1, REMIC I Regular Interest I-LTM2, REMIC I Regular
                  Interest I-LTM3, REMIC I Regular Interest I-LTM4, REMIC I
                  Regular Interest I-LTM5, REMIC I Regular Interest I-LTM6,
                  REMIC I Regular Interest I-LTM7, REMIC I Regular Interest
                  I-LTM8, REMIC I Regular Interest I-LTM9, REMIC I Regular
                  Interest I-LTM10, REMIC I Regular Interest I-LTM11, REMIC I
                  Regular Interest I-LTM12 and REMIC I Regular Interest I-LTM13,
                  and in the same proportion as principal payments are allocated
                  to the Corresponding Certificates, until the Uncertificated
                  Balances of such REMIC I Regular Interests are reduced to zero
                  and second, to the Holders of REMIC I Regular Interest I-LTZZ,
                  until the Uncertificated Balance of such REMIC I Regular
                  Interest is reduced to zero; then

                           (c) to the Holders of REMIC I Regular Interest I-LTP,
                  on the Distribution Date immediately following the expiration
                  of the latest Prepayment Charge as identified on the
                  Prepayment Charge Schedule or any Distribution Date thereafter
                  until $[__] has been distributed pursuant to this clause; and

                           (d) to the Holders of REMIC I Regular Interest I-LTX
                  upon termination of the Trust pursuant to Article IX hereof;
                  and

         (iv)     to the Holders of REMIC I Regular Interests, in an amount
                  equal to the remainder of the REMIC I Sub WAC Allocation
                  Percentage of Available Funds for such Distribution Date after
                  the distributions made pursuant to clause (ii) above, and such
                  that distributions of principal shall be deemed to be made to
                  the REMIC I Regular Interests first, so as to keep the
                  Uncertificated Balance of each REMIC I Regular Interest ending
                  with the designation "GRP" equal to [__]% of the aggregate
                  Stated Principal Balance of the Mortgage Loans in the related
                  Loan Group; second, to each REMIC I Regular Interest ending
                  with the designation "SUB," so that the Uncertificated Balance
                  of each such REMIC I Regular Interest is equal to [__]% of the
                  excess of (x) the aggregate Stated Principal Balance of the
                  Mortgage Loans in the related Loan Group over (y) the current
                  Certificate Principal Balance of the Class A Certificate in
                  the related Loan Group (except that if any such excess is a
                  larger number than in the preceding distribution period, the
                  least amount of principal shall be distributed to such REMIC I
                  Regular Interests such that the REMIC I Subordinated Balance
                  Ratio is maintained); and third, any remaining principal to
                  REMIC I Regular Interest I-LTXX.

         (v)      any remaining amount to the Holders of the Class R
                  Certificates (as Holder of the Class R-I Interest).

         (b) On each Distribution Date, the Trust Administrator shall withdraw
any amounts then on deposit in the Distribution Account that represent
Prepayment Charges collected by the Servicer or any Sub-Servicer in connection
with the Principal Prepayment of any of the Mortgage Loans or any Servicer
Prepayment Charge Payment Amount and shall distribute such amounts to the
Holders of the Class P Certificates. Such distributions shall not be applied to
reduce the Certificate Principal Balance of the Class P Certificates.

         Following the foregoing distributions, an amount equal to the amount of
Subsequent Recoveries shall be applied to increase the Certificate Principal
Balance of the Class of Certificates with the Highest Priority up to the extent
of such Realized Losses previously allocated to that Class of Certificates
pursuant to Section 4.04. An amount equal to the amount of any remaining
Subsequent Recoveries shall be applied to increase the Certificate Principal
Balance of the Class of Certificates with the next Highest Priority, up to the
amount of such Realized Losses previously allocated to that Class of
Certificates pursuant to Section 4.04. Holders of such Certificates will not be
entitled to any distribution in respect of interest on the amount of such
increases for any Interest Accrual Period preceding the Distribution Date on
which such increase occurs. Any such increases shall be applied to the
Certificate Principal Balance of each Certificate of such Class in accordance
with its respective Percentage Interest.

         (c) All distributions made with respect to each Class of Certificates
on each Distribution Date shall be allocated PRO RATA among the outstanding
Certificates in such Class based on their respective Percentage Interests.
Payments in respect of each Class of Certificates on each Distribution Date will
be made to the Holders of the respective Class of record on the related Record
Date (except as otherwise provided in Section 4.01(e) or Section 9.01 respecting
the final distribution on such Class), based on the aggregate Percentage
Interest represented by their respective Certificates, and shall be made by wire
transfer of immediately available funds to the account of any such Holder at a
bank or other entity having appropriate facilities therefor, if such Holder
shall have so notified the Trust Administrator in writing at least five Business
Days prior to the Record Date immediately prior to such Distribution Date and
with respect to any Class of Certificates other than the Residual Certificates
is the registered owner of Certificates having an initial aggregate Certificate
Principal Balance that is in excess of the lesser of (i) $[_______] or (ii)
two-thirds of the initial Certificate Principal Balance of such Class of
Certificates, or otherwise by check mailed by first class mail to the address of
such Holder appearing in the Certificate Register. The final distribution on
each Certificate will be made in like manner, but only upon presentment and
surrender of such Certificate at the Corporate Trust Office of the Trust
Administrator or such other location specified in the notice to
Certificateholders of such final distribution.

         Each distribution with respect to a Book-Entry Certificate shall be
paid to the Depository, as Holder thereof, and the Depository shall be
responsible for crediting the amount of such distribution to the accounts of its
Depository Participants in accordance with its normal procedures. Each
Depository Participant shall be responsible for disbursing such distribution to
the Certificate Owners that it represents and to each indirect participating
brokerage firm (a "brokerage firm" or "indirect participating firm") for which
it acts as agent. Each brokerage firm shall be responsible for disbursing funds
to the Certificate Owners that it represents. None of the Trustee, the Trust
Administrator, the Depositor or the Servicer shall have any responsibility
therefor except as otherwise provided by this Agreement or applicable law.

         (d) The rights of the Certificateholders to receive distributions in
respect of the Certificates, and all interests of the Certificateholders in such
distributions, shall be as set forth in this Agreement. None of the Holders of
any Class of Certificates, the Depositor, the Trustee, the Trust Administrator
or the Servicer shall in any way be responsible or liable to the Holders of any
other Class of Certificates in respect of amounts properly previously
distributed on the Certificates.

         (e) Except as otherwise provided in Section 9.01, whenever the Trust
Administrator expects that the final distribution with respect to any Class of
Certificates will be made on the next Distribution Date, the Trust Administrator
shall, no later than five days after the latest related Determination Date, mail
on such date to each Holder of such Class of Certificates a notice to the effect
that:

(i)      the Trust Administrator expects that the final distribution with
         respect to such Class of Certificates will be made on such Distribution
         Date, but only upon presentation and surrender of such Certificates at
         the office of the Trust Administrator therein specified, and

(ii)     no interest shall accrue on such Certificates from and after the end of
         the related Interest Accrual Period.

(iii)    Any funds not distributed to any Holder or Holders of Certificates of
         such Class on such Distribution Date because of the failure of such
         Holder or Holders to tender their Certificates shall, on such date, be
         set aside and held in trust by the Trust Administrator and credited to
         the account of the appropriate non-tendering Holder or Holders. If any
         Certificates as to which notice has been given pursuant to this Section
         4.01(e) shall not have been surrendered for cancellation within six
         months after the time specified in such notice, the Trust Administrator
         shall mail a second notice to the remaining non-tendering
         Certificateholders to surrender their Certificates for cancellation in
         order to receive the final distribution with respect thereto. If within
         one year after the second notice all such Certificates shall not have
         been surrendered for cancellation, the Trust Administrator shall,
         directly or through an agent, mail a final notice to remaining
         non-tendering Certificateholders concerning surrender of their
         Certificates and shall continue to hold any remaining funds for the
         benefit of non-tendering Certificateholders. The costs and expenses of
         maintaining the funds in trust and of contacting such
         Certificateholders shall be paid out of the assets remaining in such
         trust fund. If within one year after the final notice any such
         Certificates shall not have been surrendered for cancellation, the
         Trust Administrator shall pay to Citigroup Global Markets Inc. all such
         amounts, and all rights of non-tendering Certificateholders in or to
         such amounts shall thereupon cease. No interest shall accrue or be
         payable to any Certificateholder on any amount held in trust by the
         Trust Administrator as a result of such Certificateholder's failure to
         surrender its Certificate(s) for final payment thereof in accordance
         with this Section 4.01(e).

         (f) Notwithstanding anything to the contrary herein, (i) in no event
shall the Certificate Principal Balance of a Class A Certificate or a Mezzanine
Certificate be reduced more than once in respect of any particular amount
allocated to such Certificate in respect of Realized Losses pursuant to Section
4.04 and (ii) in no event shall the Uncertificated Balance of a REMIC Regular
Interest be reduced more than once in respect of any particular amount both (a)
allocated to such REMIC Regular Interest in respect of Realized Losses pursuant
to Section 4.04 and (b) distributed on such REMIC Regular Interest in reduction
of the Uncertificated Balance thereof pursuant to this Section 4.01.

         SECTION 4.02 Statements to Certificateholders.

         On each Distribution Date, the Trust Administrator shall prepare and
make available on its website to each Holder of the Regular Certificates and the
Cap Provider, a statement as to the distributions made on such Distribution Date
setting forth:

(i)      the amount of the distribution made on such Distribution Date to the
         Holders of Certificates of each such Class allocable to principal and
         the amount of the distribution made on such Distribution Date to the
         Holders of the Class P Certificates allocable to Prepayment Charges and
         the Certificate Principal Balances of the Regular Certificates before
         and after any distributions of principal;

(ii)     the amount of the distribution made on such Distribution Date to the
         Holders of Certificates of each such Class allocable to interest;

(iii)    the aggregate amount of servicing compensation received by the Servicer
         during the related Due Period and such other customary information as
         the Trust Administrator deems necessary or desirable, or which a
         Certificateholder reasonably requests, to enable Certificateholders to
         prepare their tax returns;

(iv)     the aggregate amount of P&I Advances for such Distribution Date;

(v)      the aggregate Stated Principal Balance of the Mortgage Loans and any
         REO Properties at the close of business on such Distribution Date;

(vi)     the number, aggregate principal balance, weighted average remaining
         term to maturity and weighted average Mortgage Rate of the Mortgage
         Loans as of the related Due Date;

(vii)    the number and aggregate unpaid principal balance of Mortgage Loans in
         respect of which (1) one Monthly Payment is Delinquent, (2) two Monthly
         Payments are Delinquent, (3) three Monthly Payments are Delinquent and
         (4) foreclosure proceedings have begun;

(viii)   with respect to any Mortgage Loan that became an REO Property during
         the preceding calendar month, the loan number of such Mortgage Loan,
         the unpaid principal balance and the Stated Principal Balance of such
         Mortgage Loan as of the date it became an REO Property;

(ix)     the book value and the Stated Principal Balance of any REO Property as
         of the close of business on the last Business Day of the calendar month
         preceding the Distribution Date;

(x)      the aggregate amount of Principal Prepayments made during the related
         Prepayment Period;

(xi)     the aggregate amount of Realized Losses incurred during the related
         Prepayment Period (or, in the case of Bankruptcy Losses allocable to
         interest, during the related Due Period), separately identifying
         whether such Realized Losses constituted Bankruptcy Losses;

(xii)    the aggregate amount of Extraordinary Trust Fund Expenses withdrawn
         from the Collection Account or the Distribution Account for such
         Distribution Date;

(xiii)   the aggregate Certificate Principal Balance of each such Class of
         Certificates, after giving effect to the distributions, and allocations
         of Realized Losses and Extraordinary Trust Fund Expenses, made on such
         Distribution Date, separately identifying any reduction thereof due to
         allocations of Realized Losses and Extraordinary Trust Fund Expenses;

(xiv)    the Certificate Factor for each such Class of Certificates applicable
         to such Distribution Date;

(xv)     the Interest Distribution Amount in respect of each such Class of
         Certificates for such Distribution Date (separately identifying any
         reductions in the case of Subordinate Certificates resulting from the
         allocation of Realized Losses allocable to interest and Extraordinary
         Trust Fund Expenses on such Distribution Date) and the respective
         portions thereof, if any, remaining unpaid following the distributions
         made in respect of such Certificates on such Distribution Date;

(xvi)    the aggregate amount of any Prepayment Interest Shortfalls for such
         Distribution Date, to the extent not covered by payments by the
         Servicer pursuant to Section 3.24;

(xvii)   the aggregate amount of Relief Act Interest Shortfalls for such
         Distribution Date;

(xviii)  [(a) the Delinquency Percentage, the numerator and the denominator used
         to calculate the Delinquency Percentage and whether the Delinquency
         Percentage exceeds the level set forth in clause (a) of the definition
         of Trigger Event, (b) the Cumulative Realized Loss Percentage, the
         numerator and the denominator used to calculate the Cumulative Realized
         Loss Percentage and whether the Cumultaive Realized Loss Percentage
         exceeds the level set forth in clause (b) of the definition of Trigger
         Event];

(xix)    the total cashflows received and the general sources thereof;

(xx)     with respect to any Mortgage Loan as to which foreclosure proceedings
         have been concluded, the loan number and unpaid principal balance of
         such Mortgage Loan as of the date of such conclusion of foreclosure
         proceedings;

(xxi)    with respect to Mortgage Loans as to which a Final Liquidation has
         occurred, the number of Mortgage Loans, the unpaid principal balance of
         such Mortgage Loans as of the date of such Final Liquidation and the
         amount of proceeds (including Liquidation Proceeds and Insurance
         Proceeds) collected in respect of such Mortgage Loans;

(xxii)   any Allocated Realized Loss Amount with respect to each Class of
         Certificates for such Distribution Date;

(xxiii)  the amounts deposited into the Net WAC Rate Carryover Reserve Account
         for such Distribution Date, the amounts withdrawn from such account and
         distributed to each Class of Certificates, and the amounts remaining on
         deposit in such account after all deposits into and withdrawals from
         such account on such Distribution Date;

(xxiv)   the Net WAC Rate Carryover Amounts for each Class of Certificates, if
         any, for such Distribution Date and the amounts remaining unpaid after
         reimbursements therefor on such Distribution Date;

(xxv)    if applicable, material modifications, extensions or waivers to
         Mortgage Loan terms, fees, penalties or payments during the preceding
         calendar month or that have become material over time;

(xxvi)   the applicable Record Dates, Accrual Periods and Determination Dates
         for calculating distributions for such Distribution Date;

(xxvii)  the fees and expenses accrued and paid on such Distribution Date and to
         whom such fees and expenses were paid;

(xxviii) material breaches of representations and warranties regarding the
         Mortgage Loans.

         In the case of information furnished pursuant to subclauses (i) through
(iii) above, the amounts shall be expressed as a dollar amount per Single
Certificate of the relevant Class.

         Within a reasonable period of time after the end of each calendar year,
the Trust Administrator shall forward to each Person (with a copy to the
Trustee) who at any time during the calendar year was a Holder of a Regular
Certificate a statement containing the information set forth in subclauses (i)
through (iii) above, aggregated for such calendar year or applicable portion
thereof during which such person was a Certificateholder. Such obligation of the
Trust Administrator shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Trust
Administrator pursuant to any requirements of the Code as from time to time are
in force.

         On each Distribution Date, the Trust Administrator shall make available
to the Depositor, each Holder of a Residual Certificate, the Trustee, the
Servicer and the Credit Risk Manager, a copy of the reports forwarded to the
Regular Certificateholders on such Distribution Date and a statement setting
forth the amounts, if any, actually distributed with respect to the Residual
Certificates, respectively, on such Distribution Date.

         Within a reasonable period of time after the end of each calendar year,
the Trust Administrator shall forward to each Person (with a copy to the
Trustee) who at any time during the calendar year was a Holder of a Residual
Certificate a statement setting forth the amount, if any, actually distributed
with respect to the Residual Certificates, as appropriate, aggregated for such
calendar year or applicable portion thereof during which such Person was a
Certificateholder. Such obligation of the Trust Administrator shall be deemed to
have been satisfied to the extent that substantially comparable information
shall be provided by the Trust Administrator to such Holders pursuant to the
rules and regulations of the Code as are in force from time to time.

         Upon request, the Trust Administrator shall forward to each
Certificateholder, during the term of this Agreement, such periodic, special, or
other reports or information, whether or not provided for herein, as shall be
reasonable with respect to the Certificateholder, or otherwise with respect to
the purposes of this Agreement, all such reports or information to be provided
at the expense of the Certificateholder in accordance with such reasonable and
explicit instructions and directions as the Certificateholder may provide. For
purposes of this Section 4.02, the Trust Administrator's duties are limited to
the extent that the Trust Administrator receives timely reports as required from
the Servicer.

         On each Distribution Date, the Trust Administrator shall provide
Bloomberg Financial Markets, L.P. ("Bloomberg") on its website (1) CUSIP level
factors for each class of Certificates as of such Distribution Date and (2) the
number and aggregate unpaid principal balance of Mortgage Loans that are (a)
delinquent 30 to 59 days, (b) delinquent 60 to 89 days, (c) delinquent 90 or
more days in each case, as of the last day of the preceding calendar month, (d)
as to which foreclosure proceedings have been commenced and (e) with respect to
which the related Mortgagor has filed for protection under applicable bankruptcy
laws, with respect to whom bankruptcy proceedings are pending or with respect to
whom bankruptcy protection is in force, in each case using a format and media
mutually acceptable to the Trust Administrator and Bloomberg.

         SECTION 4.03 Remittance Reports; P&I Advances.

         (a) By the third Business Day following each Determination Date, the
Servicer shall deliver to the Trust Administrator by telecopy (or by such other
means as the Servicer, the Trust Administrator and the Trustee may agree from
time to time) a Remittance Report with respect to the related Distribution Date.
Such Remittance Report will include (i) the amount of P&I Advances to be made by
the Servicer in respect of the related Distribution Date, the aggregate amount
of P&I Advances outstanding after giving effect to such P&I Advances, and the
aggregate amount of nonrecoverable P&I Advances in respect of such Distribution
Date and (ii) such other information with respect to the Mortgage Loans as the
Trust Administrator may reasonably require to perform the calculations necessary
for the Trust Administrator to make the distributions contemplated by Section
4.01 and for the Trust Administrator to prepare the statements to
Certificateholders contemplated by Section 4.02. The Servicer shall make a good
faith effort to deliver any such additional information to the Trust
Administrator within two Business Days of any such request, provided that in no
event shall the Servicer be required to provide any such additional information
to the Trust Administrator to the extent the Trust Administrator makes such
request prior to the third Business Day following the Determination Date.
Neither the Trustee nor the Trust Administrator shall be responsible to
recompute, recalculate or verify any information provided to it by the Servicer.

         (b) The amount of P&I Advances to be made by the Servicer for any
Distribution Date shall equal, subject to Section 4.03(d), the sum of (i) the
aggregate amount of Monthly Payments (with each interest portion thereof net of
the related Servicing Fee), due on the related Due Date in respect of the
Mortgage Loans, which Monthly Payments were delinquent as of the close of
business on the related Determination Date; provided however, that with respect
to any Balloon Mortgage Loan that is delinquent on its maturity date, the
Servicer will not be required to advance the related Balloon Payment but will be
required to continue to make Advances in accordance with this Section 4.03(b)
with respect to such Balloon Mortgage Loan in an amount equal to an assumed
scheduled interest that would otherwise be due based on the original
amortization schedule for that Balloon Mortgage Loan (with each interest portion
thereof net of the related Servicing Fee) and (ii) with respect to each REO
Property, which REO Property was acquired during or prior to the related
Prepayment Period and as to which such REO Property an REO Disposition did not
occur during the related Prepayment Period, an amount equal to the Monthly
Payments (with each interest portion thereof net of the related Servicing Fee)
that would have been due on the related Due Date in respect of the related
Mortgage Loans.

         On or before 4:00 p.m. New York time on the Servicer Remittance Date,
the Servicer shall remit in immediately available funds to the Trust
Administrator for deposit in the Distribution Account an amount equal to the
aggregate amount of P&I Advances, if any, to be made in respect of the Mortgage
Loans and REO Properties for the related Distribution Date either (i) from its
own funds or, if received from a Sub-Servicer, from funds remitted by a
Sub-Servicer in payment of required P&I Advances or (ii) from the Collection
Account, to the extent of funds held therein for future distribution (in which
case, it will cause to be made an appropriate entry in the records of Collection
Account that amounts held for future distribution have been, as permitted by
this Section 4.03, used by the Servicer in discharge of any such P&I Advance) or
(iii) in the form of any combination of (i) and (ii) aggregating the total
amount of P&I Advances to be made by the Servicer with respect to the Mortgage
Loans and REO Properties. Any amounts held for future distribution and so used
shall be appropriately reflected in the Servicer's records and replaced by the
Servicer by deposit in the Collection Account on or before any future Servicer
Remittance Date to the extent that the Available Distribution Amount for the
related Distribution Date (determined without regard to P&I Advances to be made
on the Servicer Remittance Date) shall be less than the total amount that would
be distributed to the Classes of Certificateholders pursuant to Section 4.01 on
such Distribution Date if such amounts held for future distributions had not
been so used to make P&I Advances. The Trust Administrator will provide notice
to the Servicer by telecopy by the close of business on any Servicer Remittance
Date in the event that the amount remitted by the Servicer to the Trust
Administrator on such Servicer Remittance Date is less than the P&I Advances
required to be made by the Servicer for the related Distribution Date.

         (c) The obligation of the Servicer to make such P&I Advances is
mandatory, notwithstanding any other provision of this Agreement but subject to
(d) below, and, with respect to any Mortgage Loan or REO Property, shall
continue until a Final Recovery Determination in connection therewith or the
removal thereof from REMIC I pursuant to any applicable provision of this
Agreement, except as otherwise provided in this Section.

         (d) Notwithstanding anything herein to the contrary, no P&I Advance or
Servicing Advance shall be required to be made hereunder by the Servicer if such
P&I Advance or Servicing Advance would, if made, constitute a Nonrecoverable
Advance. The determination by the Servicer that it has made a Nonrecoverable
Advance or that any proposed P&I Advance or Servicing Advance, if made, would
constitute a Nonrecoverable Advance, shall be evidenced by an Officers'
Certificate of the Servicer delivered to the Depositor, the Trust Administrator,
the Credit Risk Manager and the Trustee.

         (e) If the Servicer shall fail to make any P&I Advance on any Servicer
Remittance Date required to be made from its own funds pursuant to this Section
4.03, then the Trust Administrator as successor servicer, by not later than 1:00
p.m. on the related Distribution Date, shall make such P&I advance from its own
funds by depositing the amount of such advance into the Distribution Account,
and the Trust Administrator shall include the amount so advanced by the Trust
Administrator in the Available Distribution Amount distributed on such
Distribution Date.

         SECTION 4.04 Allocation of Extraordinary Trust Fund Expenses and
                      Realized Losses.

         (a) Prior to each Distribution Date, the Servicer shall determine as to
each Mortgage Loan and REO Property: (i) the total amount of Realized Losses, if
any, incurred in connection with any Final Recovery Determinations made during
the related Prepayment Period; (ii) whether and the extent to which such
Realized Losses constituted Bankruptcy Losses; and (iii) the respective portions
of such Realized Losses allocable to interest and allocable to principal. Prior
to each Distribution Date, the Servicer shall also determine as to each Mortgage
Loan: (A) the total amount of Realized Losses, if any, incurred in connection
with any Deficient Valuations made during the related Prepayment Period; and (B)
the total amount of Realized Losses, if any, incurred in connection with Debt
Service Reductions in respect of Monthly Payments due during the related Due
Period. The information described in the two preceding sentences that is to be
supplied by the Servicer shall be either included in the related Remittance
Report or evidenced by an Officers' Certificate delivered to the Trust
Administrator and the Trustee by the Servicer prior to the Determination Date
immediately following the end of (x) in the case of Bankruptcy Losses allocable
to interest, the Due Period during which any such Realized Loss was incurred,
and (y) in the case of all other Realized Losses, the Prepayment Period during
which any such Realized Loss was incurred.

         (b) All Realized Losses on the Mortgage Loans shall be allocated by the
Trust Administrator on each Distribution Date as follows: first, to the Interest
Distribution Amount for the Class CE Certificates for the related Interest
Accrual Period; second, to payments received under the cap contract, third, to
the Class CE Certificates, until the Certificate Principal Balance thereof has
been reduced to zero; fourth, to the Class M-13 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero, fifth, to the
Class M-12 Certificates, until the Certificate Principal Balance thereof has
been reduced to zero, sixth, to the Class M-11 Certificates until the
Certificate Principal Balance thereof has been reduced to zero; seventh, to the
Class M-10 Certificates, until the Certificate Principal Balance thereof has
been reduced to zero; eighth, to the Class M-9 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; ninth, to the
Class M-8 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; tenth, to the Class M-7 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; eleventh, to the Class M-6
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero; twelfth, to the Class M-5 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; thirteenth, to the Class M-4
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero; fourteenth, to the Class M-3 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; fifteenth, to the Class M-2
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero and sixteenth, to the Class M-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero.

         All Realized Losses to be allocated to the Certificate Principal
Balances of all Classes on any Distribution Date shall be so allocated after the
actual distributions to be made on such date as provided above. All references
above to the Certificate Principal Balance of any Class of Certificates shall be
to the Certificate Principal Balance of such Class immediately prior to the
relevant Distribution Date, before reduction thereof by any Realized Losses, in
each case to be allocated to such Class of Certificates, on such Distribution
Date.

         Any allocation of Realized Losses to a Mezzanine Certificate on any
Distribution Date shall be made by reducing the Certificate Principal Balance
thereof by the amount so allocated and any allocation of Realized Losses to a
Class CE Certificates shall be made by reducing the amount otherwise payable in
respect thereof pursuant to Section 4.01(a)(3). No allocations of any Realized
Losses shall be made to the Certificate Principal Balances of the Class A
Certificates or the Class P Certificates.

         (c) The REMIC I Marker Allocation Percentage of all Realized Losses on
the Mortgage Loans shall be allocated by the Trust Administrator on each
Distribution Date to the following REMIC I Regular Interests in the specified
percentages, as follows: first, to Uncertificated Interest payable to the REMIC
I Regular Interest I-LTAA and REMIC I Regular Interest I-LTZZ up to an aggregate
amount equal to the REMIC I Interest Loss Allocation Amount, [__]% and [__]%,
respectively; second, to the Uncertificated Balances of the REMIC I Regular
Interest I-LTAA and REMIC I Regular Interest I-LTZZ up to an aggregate amount
equal to the REMIC I Principal Loss Allocation Amount, [__]% and [__]%,
respectively; third, to the Uncertificated Balances of REMIC I Regular Interest
I-LTAA, REMIC I Regular Interest I-LTM13 and REMIC I Regular Interest I-LTZZ,
[__]%,[__]% and [__]%, respectively, until the Uncertificated Balance of REMIC I
Regular Interest I-LTM13 has been reduced to zero; fourth, to the Uncertificated
Balances of REMIC I Regular Interest I-LTAA, REMIC I Regular Interest I-LTM12
and REMIC I Regular Interest I-LTZZ, [__]%,[__]% and [__]%, respectively, until
the Uncertificated Balance of REMIC I Regular Interest I-LTM12 has been reduced
to zero; fifth, to the Uncertificated Balances of REMIC I Regular Interest
I-LTAA, REMIC I Regular Interest I-LTM11 and REMIC I Regular Interest I-LTZZ,
[__]%,[__]% and [__]%, respectively, until the Uncertificated Balance of REMIC I
Regular Interest I-LTM11 has been reduced to zero; sixth, to the Uncertificated
Balances of REMIC I Regular Interest I-LTAA, REMIC I Regular Interest I-LTM10
and REMIC I Regular Interest I-LTZZ, [__]%,[__]% and [__]%, respectively, until
the Uncertificated Balance of REMIC I Regular Interest I-LTM10 has been reduced
to zero; seventh, to the Uncertificated Balances of REMIC I Regular Interest
I-LTAA, REMIC I Regular Interest I-LTM9 and REMIC I Regular Interest I-LTZZ,
[__]%,[__]% and [__]%, respectively, until the Uncertificated Balance of REMIC I
Regular Interest I-LTM9 has been reduced to zero; eighth, to the Uncertificated
Balances of REMIC I Regular Interest I-LTAA, REMIC I Regular Interest I-LTM8 and
REMIC I Regular Interest I-LTZZ, [__]%,[__]% and [__]%, respectively, until the
Uncertificated Balance of REMIC I Regular Interest I-LTM8 has been reduced to
zero; ninth, to the Uncertificated Balances of REMIC I Regular Interest I-LTAA,
REMIC I Regular Interest I-LTM7 and REMIC I Regular Interest I-LTZZ, [__]%,[__]%
and [__]%, respectively, until the Uncertificated Balance of REMIC I Regular
Interest I-LTM7 has been reduced to zero; tenth, to the Uncertificated Balances
of REMIC I Regular Interest I-LTAA, REMIC I Regular Interest I-LTM6 and REMIC I
Regular Interest I-LTZZ, [__]%,[__]% and [__]%, respectively, until the
Uncertificated Balance of REMIC I Regular Interest I-LTM6 has been reduced to
zero; eleventh, to the Uncertificated Balances of REMIC I Regular Interest
I-LTAA, REMIC I Regular Interest I-LTM5 and REMIC I Regular Interest I-LTZZ,
[__]%,[__]% and [__]%, respectively, until the Uncertificated Balance of REMIC I
Regular Interest I-LTM5 has been reduced to zero; twelfth, to the Uncertificated
Balances of REMIC I Regular Interest I-LTAA, REMIC I Regular Interest I-LTM4 and
REMIC I Regular Interest I-LTZZ, [__]%,[__]% and [__]%, respectively, until the
Uncertificated Balance of REMIC I Regular Interest I-LTM4 has been reduced to
zero; thirteenth, to the Uncertificated Balances of REMIC I Regular Interest
I-LTAA, REMIC I Regular Interest I-LTM3 and REMIC I Regular Interest I-LTZZ,
[__]%,[__]% and [__]%, respectively, until the Uncertificated Balance of REMIC I
Regular Interest I-LTM3 has been reduced to zero; fourteenth, to the
Uncertificated Balances of REMIC I Regular Interest I-LTAA, REMIC I Regular
Interest I-LTM2 and REMIC I Regular Interest I-LTZZ, [__]%,[__]% and [__]%,
respectively, until the Uncertificated Balance of REMIC I Regular Interest
I-LTM2 has been reduced to zero and fifteenth, to the Uncertificated Balances of
REMIC I Regular Interest I-LTAA, REMIC I Regular Interest I-LTM1 and REMIC I
Regular Interest I-LTZZ, [__]%,[__]% and [__]%, respectively, until the
Uncertificated Balance of REMIC I Regular Interest I-LTM1 has been reduced to
zero.

         The REMIC I Sub WAC Allocation Percentage of all Realized Losses shall
be applied after all distributions have been made on each Distribution Date
first, so as to keep the Uncertificated Balance of each REMIC I Regular Interest
ending with the designation "GRP" equal to [__]% of the aggregate Stated
Principal Balance of the Mortgage Loans in the related Loan Group; second, to
each REMIC I Regular Interest ending with the designation "SUB," so that the
Uncertificated Balance of each such REMIC I Regular Interest is equal to [__]%
of the excess of (x) the aggregate Stated Principal Balance of the Mortgage
Loans in the related Loan Group over (y) the current Certificate Principal
Balance of the Class A Certificate in the related Loan Group (except that if any
such excess is a larger number than in the preceding distribution period, the
least amount of Realized Losses shall be applied to such REMIC I Regular
Interests such that the REMIC I Subordinated Balance Ratio is maintained); and
third, any remaining Realized Losses shall be allocated to REMIC I Regular
Interest I-LTXX.

         SECTION 4.05 Compliance with Withholding Requirements.

         Notwithstanding any other provision of this Agreement, the Trust
Administrator shall comply with all federal withholding requirements respecting
payments to Certificateholders of interest or original issue discount that the
Trust Administrator reasonably believes are applicable under the Code. The
consent of Certificateholders shall not be required for such withholding. In the
event the Trust Administrator does withhold any amount from interest or original
issue discount payments or advances thereof to any Certificateholder pursuant to
federal withholding requirements, the Trust Administrator shall indicate the
amount withheld to such Certificateholders.

         SECTION 4.06 Net WAC Rate Carryover Reserve Account.

         (a) No later than the Closing Date, the Trust Administrator shall
establish and maintain a separate, segregated trust account titled, "Net WAC
Rate Carryover Reserve Account, [___________], as Trust Administrator, in trust
for the registered holders of Citigroup Mortgage Loan Trust, [___________],
Series [___________]."

         (b) On each Distribution Date, the Trust Administrator has been
directed by the Class CE Certificateholders to, and therefore shall, deposit
into the Net WAC Rate Carryover Reserve Account, any Net WAC Rate Carryover
Amounts for such Distribution Date, rather than distributing such amounts to the
Class CE Certificateholders. On each such Distribution Date, the Trust
Administrator shall hold all such amounts for the benefit of the Holders of the
Floating Rate Certificates, and shall distribute the aggregate Net WAC Rate
Carryover Amount, if any, for such Distribution Date from the Net WAC Rate
Carryover Reserve Account to the Holders of the Floating Rate Certificates in
the amounts and priorities set forth in Section 4.01(g).

         On each Distribution Date, after the payment of any Net WAC Rate
Carryover Amounts on the Floating Rate Certificates, any amounts remaining in
the Net WAC Rate Carryover Reserve Account, shall be payable to the Trust
Administrator as additional compensation to it, subject to the immediately
following paragraph.

         (c) For federal and state income tax purposes, the Class CE
Certificateholders shall be deemed to be the owners of the Net WAC Rate
Carryover Reserve Account and all amounts deposited into the Net WAC Rate
Carryover Reserve Account shall be treated as amounts distributed by REMIC II to
the Holder of the Class CE Interest and by REMIC III to the Holder of the Class
CE Certificates. Upon the termination of the Trust Fund, or the payment in full
of the Floating Rate Certificates, all amounts remaining on deposit in the Net
WAC Rate Carryover Reserve Account shall be released by the Trust Fund and
distributed to the Class CE Certificateholders or their designees. The Net WAC
Rate Carryover Reserve Account shall be part of the Trust Fund but not part of
any Trust REMIC and any payments to the Holders of the Floating Rate
Certificates of Net WAC Rate Carryover Amounts will not be payments with respect
to a "regular interest" in a REMIC within the meaning of Code Section
860(G)(a)(1).

         (d) By accepting a Class CE Certificate, each Class CE
Certificateholder hereby agrees to direct the Trust Administrator, and the Trust
Administrator is hereby is directed, to deposit into the Net WAC Rate Carryover
Reserve Account the amounts described above on each Distribution Date rather
than distributing such amounts to the Class CE Certificateholders. By accepting
a Class CE Certificate, each Class CE Certificateholder further agrees that such
direction is given for good and valuable consideration, the receipt and
sufficiency of which is acknowledged by such acceptance.

         (e) All amounts on deposit in the Net WAC Rate Carryover Reserve
Account shall remain uninvested.

         (f) For federal tax return and information reporting, the right of the
Holders of the Floating Rate Certificates to receive payments from the Net WAC
Rate Carryover Reserve Account in respect of any Net WAC Rate Carryover Amount
shall be assigned a value of zero.

         SECTION 4.07 [Reserved].

         SECTION 4.08 Cap Account

         (a) No later than the Closing Date, the Cap Administrator shall
establish and maintain with itself, as agent for the Trust Administrator, a
separate, segregated trust account titled, "Cap Account, [___________], as Cap
Administrator, in trust for the Cap Provider and the registered holders of
Citigroup Mortgage Loan Trust Inc., [___________]s, Series [___________]." Such
account shall be an Eligible Account and amounts therein shall be held
uninvested.

         (b) On each Distribution Date, prior to any distribution to any
Certificate, the Trust Administrator shall deposit into the Cap Account amounts
received by the Trust Administrator from the Cap Administrator, for distribution
in accordance with Section 4.01(a)(6) above, pursuant to the Cap Administration
Agreement, dated as of the Closing Date (the "Cap Administration Agreement"),
among [___________] in its capacity as Trust Administrator and Cap Administrator
and Citigroup Global Markets Realty Corp. (in substantially the form attached
hereto as Exhibit N).

         (c) For federal income tax purposes, the Cap Account shall be owned by
the majority Holder of the Class CE Certificates.

         (d) For federal and state income tax purposes, the Class CE
Certificateholders shall be deemed to be the owners of the Cap Account. Upon the
termination of the Trust Fund, or the payment in full of the Floating Rate
Certificates, all amounts remaining on deposit in the Cap Account shall be
released by the Trust Fund and distributed to the Class CE Certificateholders or
their designees. The Cap Account shall be part of the Trust Fund but not part of
any Trust REMIC and any payments to the Holders of the Floating Rate
Certificates of Net WAC Rate Carryover Amounts will not be payments with respect
to a "regular interest" in a REMIC within the meaning of Code Section
860(G)(a)(1).

         By accepting a Class CE Certificate, each Class CE Certificateholder
hereby agrees to direct the Trust Administrator, and the Trust Administrator is
hereby directed, to deposit into the Cap Account the amounts described above on
each Distribution Date.

         SECTION 4.09 [Reserved]

<PAGE>

                                    ARTICLE V

                                THE CERTIFICATES

         SECTION 5.01 The Certificates.

         (a) The Certificates in the aggregate will represent the entire
beneficial ownership interest in the Mortgage Loans and all other assets
included in the Trust Fund. At the Closing Date, the aggregate Certificate
Principal Balance of the Certificates will equal the aggregate Stated Principal
Balance of the Mortgage Loans.

         The Certificates will be substantially in the forms annexed hereto as
Exhibits A-1 through A-6. The Certificates of each Class will be issuable in
registered form only, in denominations of authorized Percentage Interests as
described in the definition thereof. Each Certificate will share ratably in all
rights of the related Class.

         Upon original issue, the Certificates shall be executed, authenticated
and delivered by the Trust Administrator to or upon the order of the Depositor.
The Certificates shall be executed and attested by manual or facsimile signature
on behalf of the Trust Administrator by an authorized signatory. Certificates
bearing the manual or facsimile signatures of individuals who were at any time
the proper officers of the Trust Administrator shall bind the Trust
Administrator, notwithstanding that such individuals or any of them have ceased
to hold such offices prior to the execution, authentication and delivery of such
Certificates or did not hold such offices at the date of such Certificates. No
Certificate shall be entitled to any benefit under this Agreement or be valid
for any purpose, unless there appears on such Certificate a certificate of
authentication substantially in the form provided herein executed by the Trust
Administrator by manual signature, and such certificate of authentication shall
be conclusive evidence, and the only evidence, that such Certificate has been
duly authenticated and delivered hereunder. All Certificates shall be dated the
date of their authentication.

         (b) The Book-Entry Certificates shall initially be issued as one or
more Certificates held by Book-Entry Custodian or, if appointed to hold such
Certificates as provided below, the Depository and registered in the name of the
Depository or its nominee and, except as provided below, registration of such
Certificates may not be transferred by the Trust Administrator except to another
Depository that agrees to hold such Certificates for the respective Certificate
Owners with Ownership Interests therein. The Certificate Owners shall hold their
respective Ownership Interests in and to such Certificates through the
book-entry facilities of the Depository and, except as provided below, shall not
be entitled to definitive, fully registered Certificates ("Definitive
Certificates") in respect of such Ownership Interests. All transfers by
Certificate Owners of their respective Ownership Interests in the Book-Entry
Certificates shall be made in accordance with the procedures established by the
Depository Participant or brokerage firm representing such Certificate Owner.
Each Depository Participant shall only transfer the Ownership Interests in the
Book-Entry Certificates of Certificate Owners it represents or of brokerage
firms for which it acts as agent in accordance with the Depository's normal
procedures. The Trust Administrator is hereby initially appointed as the
Book-Entry Custodian and hereby agrees to act as such in accordance herewith and
in accordance with the agreement that it has with the Depository authorizing it
to act as such. The Book-Entry Custodian may, and if it is no longer qualified
to act as such, the Book-Entry Custodian shall, appoint, by a written instrument
delivered to the Depositor, the Servicer and the Trust Administrator and any
other transfer agent (including the Depository or any successor Depository) to
act as Book-Entry Custodian under such conditions as the predecessor Book-Entry
Custodian and the Depository or any successor Depository may prescribe, provided
that the predecessor Book-Entry Custodian shall not be relieved of any of its
duties or responsibilities by reason of any such appointment of other than the
Depository. If the Trust Administrator resigns or is removed in accordance with
the terms hereof, the successor Trust Administrator or, if it so elects, the
Depository shall immediately succeed to its predecessor's duties as Book-Entry
Custodian. The Depositor shall have the right to inspect, and to obtain copies
of, any Certificates held as Book-Entry Certificates by the Book-Entry
Custodian.

         The Trustee, the Trust Administrator, the Servicer and the Depositor
may for all purposes (including the making of payments due on the Book-Entry
Certificates) deal with the Depository as the authorized representative of the
Certificate Owners with respect to the Book-Entry Certificates for the purposes
of exercising the rights of Certificateholders hereunder. The rights of
Certificate Owners with respect to the Book-Entry Certificates shall be limited
to those established by law and agreements between such Certificate Owners and
the Depository Participants and brokerage firms representing such Certificate
Owners. Multiple requests and directions from, and votes of, the Depository as
Holder of the Book-Entry Certificates with respect to any particular matter
shall not be deemed inconsistent if they are made with respect to different
Certificate Owners. The Trust Administrator may establish a reasonable record
date in connection with solicitations of consents from or voting by
Certificateholders and shall give notice to the Depository of such record date.

         If (i)(A) the Depositor advises the Trust Administrator in writing that
the Depository is no longer willing or able to properly discharge its
responsibilities as Depository, and (B) the Depositor is unable to locate a
qualified successor or (ii) after the occurrence of a Servicer Event of Default,
Certificate Owners representing in the aggregate not less than [__]% of the
Ownership Interests of the Book-Entry Certificates advise the Trust
Administrator through the Depository, in writing, that the continuation of a
book-entry system through the Depository is no longer in the best interests of
the Certificate Owners, the Trust Administrator shall notify all Certificate
Owners, through the Depository, of the occurrence of any such event and of the
availability of Definitive Certificates to Certificate Owners requesting the
same. Upon surrender to the Trust Administrator of the Book- Entry Certificates
by the Book-Entry Custodian or the Depository, as applicable, accompanied by
registration instructions from the Depository for registration of transfer, the
Trust Administrator shall issue the Definitive Certificates. Such Definitive
Certificates will be issued in minimum denominations of $[_______], except that
any beneficial ownership that was represented by a Book-Entry Certificate in an
amount less than $[_______] immediately prior to the issuance of a Definitive
Certificate shall be issued in a minimum denomination equal to the amount
represented by such Book-Entry Certificate. None of the Depositor, the Servicer,
the Trust Administrator nor the Trustee shall be liable for any delay in the
delivery of such instructions and may conclusively rely on, and shall be
protected in relying on, such instructions. Upon the issuance of Definitive
Certificates all references herein to obligations imposed upon or to be
performed by the Depository shall be deemed to be imposed upon and performed by
the Trust Administrator, to the extent applicable with respect to such
Definitive Certificates, and the Trust Administrator shall recognize the Holders
of the Definitive Certificates as Certificateholders hereunder.

         SECTION 5.02 Registration of Transfer and Exchange of Certificates.

         (a) The Trust Administrator shall cause to be kept at one of the
offices or agencies to be appointed by the Trust Administrator in accordance
with the provisions of Section 8.12 a Certificate Register for the Certificates
in which, subject to such reasonable regulations as it may prescribe, the Trust
Administrator shall provide for the registration of Certificates and of
transfers and exchanges of Certificates as herein provided.

         (b) No transfer of any Private Certificate shall be made unless that
transfer is made pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "1933 Act"), and effective registration
or qualification under applicable state securities laws, or is made in a
transaction that does not require such registration or qualification. In the
event that such a transfer of a Private Certificate is to be made without
registration or qualification (other than in connection with (i) the initial
transfer of any such Certificate by the Depositor to an Affiliate of the
Depositor or, in the case of the Residual Certificates, the first transfer by an
Affiliate of the Depositor, (ii) the transfer of any such Class CE, Class P or
Residual Certificate to the issuer under the Indenture or the indenture trustee
or indenture trustee administrator under the Indenture or (iii) a transfer of
any such Class CE, Class P or Residual Certificate from the issuer under the
Indenture or the indenture trustee or indenture trustee administrator under the
Indenture to the Depositor or an Affiliate of the Depositor), the Trustee shall
require receipt of: (i) if such transfer is purportedly being made in reliance
upon Rule 144A under the 1933 Act, written certifications from the
Certificateholder desiring to effect the transfer and from such
Certificateholder's prospective transferee, substantially in the forms attached
hereto as Exhibit F-1; and (ii) in all other cases, an Opinion of Counsel
satisfactory to it that such transfer may be made without such registration
(which Opinion of Counsel shall not be an expense of the Trust Fund or of the
Depositor, the Trustee, the Trust Administrator, the Servicer, in its capacity
as such, or any Sub-Servicer), together with copies of the written
certification(s) of the Certificateholder desiring to effect the transfer and/or
such Certificateholder's prospective transferee upon which such Opinion of
Counsel is based, if any. None of the Depositor, the Trust Administrator or the
Trustee is obligated to register or qualify any such Certificates under the 1933
Act or any other securities laws or to take any action not otherwise required
under this Agreement to permit the transfer of such Certificates without
registration or qualification. Any Certificateholder desiring to effect the
transfer of any such Certificate shall, and does hereby agree to, indemnify the
Trustee, the Trust Administrator, the Depositor and the Servicer against any
liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.

         Notwithstanding the foregoing, in the event of any such transfer of any
Ownership Interest in any Private Certificate that is a Book-Entry Certificate,
except with respect to the initial transfer of any such Ownership Interest by
the Depositor, such transfer shall be required to be made in reliance upon Rule
144A under the 1933 Act, and the transferee will be deemed to have made each of
the transferee representations and warranties set forth Exhibit F-1 hereto in
respect of such interest as if it was evidenced by a Definitive Certificate. The
Certificate Owner of any such Ownership Interest in any such Book-Entry
Certificate desiring to effect such transfer shall, and does hereby agree to,
indemnify the Trustee and the Depositor against any liability that may result if
the transfer is not so exempt or is not made in accordance with such federal and
state laws.

         Notwithstanding the foregoing, no certification or Opinion of Counsel
described in this Section 5.02(b) will be required in connection with the
transfer, on the Closing Date, of any Residual Certificate by the Depositor to
an "accredited investor" within the meaning of Rule 501(d) of the 1933 Act.

         No transfer of a Private Certificate or any interest therein shall be
made to any Plan subject to ERISA or Section 4975 of the Code, any Person
acting, directly or indirectly, on behalf of any such Plan or any Person
acquiring such Certificates with "Plan Assets" of a Plan within the meaning of
the Department of Labor regulation promulgated at 29 C.F.R.ss. 2510.3-101 ("Plan
Assets"), as certified by such transferee in the form of Exhibit G, unless, (i)
in the case of a Class CE Certificate, a Class P Certificate or Residual
Certificate, the Trust Administrator is provided with an Opinion of Counsel on
which the Trust Administrator, the Depositor, the Trustee and the Servicer may
rely, to the effect that the purchase of such Certificates is permissible under
ERISA and the Code, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Depositor, the Servicer, the Trustee, the Trust Administrator or the Trust Fund
to any obligation or liability (including obligations or liabilities under ERISA
or Section 4975 of the Code) in addition to those undertaken in this Agreement,
which Opinion of Counsel shall not be an expense of the Depositor, the Servicer,
the Trustee, the Trust Administrator or the Trust Fund or (ii) in the case of a
Class M-11 Certificate, Class M-12 Certificate or Class M-13 Certificate, (1)
such Person is an insurance company, (2) the source of funds used to acquire or
hold the Certificate or interest therein is an "insurance company general
account," as such term is defined in Prohibited Transaction Class Exemption
("PTCE") 95-60 and (3) the conditions in Sections I and III of PTCE 95-60 have
been satisfied. Neither a certification nor an Opinion of Counsel will be
required in connection with (i) the initial transfer of any such Certificate by
the Depositor to an Affiliate of the Depositor or, in the case of the Residual
Certificates, the first transfer by an Affiliate of the Depositor, (ii) the
transfer of any such Class CE, Class P or Residual Certificate to the issuer
under the Indenture or the indenture trustee under the Indenture or (iii) a
transfer of any such Class CE, Class P or Residual Certificate from the issuer
under the Indenture or the indenture trustee under the Indenture to the
Depositor or an Affiliate of the Depositor (in which case, the Depositor or any
Affiliate thereof shall have deemed to have represented that such Affiliate is
not a Plan or a Person investing Plan Assets) and the Trust Administrator shall
be entitled to conclusively rely upon a representation (which, upon the request
of the Trust Administrator, shall be a written representation) from the
Depositor of the status of such transferee as an affiliate of the Depositor.

         Each beneficial owner of a Mezzanine Certificate (other than a Class
M-11 Certificate, Class M-12 Certificate or Class M-13 Certificate) or any
interest therein shall be deemed to have represented, by virtue of its
acquisition or holding of that certificate or interest therein, that either (i)
it is not a Plan investor, (ii) it has acquired and is holding such Mezzanine
Certificate in reliance on the Underwriters' Exemption, and that it understands
that there are certain conditions to the availability of the Underwriters'
Exemption, including that such Mezzanine Certificate must be rated, at the time
of purchase, not lower than "BBB-" (or its equivalent) by S&P, Moody's or Fitch
and the Certificates are so rated or (iii) (1) it is an insurance company, (2)
the source of funds used to acquire or hold the Certificate or interest therein
is an "insurance company general account," as such term is defined in PTCE
95-60, and (3) the conditions in Sections I and III of PTCE 95-60 have been
satisfied.

         If any Private Certificate or Mezzanine Certificate or any interest
therein is acquired or held in violation of the provisions of the preceding two
paragraphs, the next preceding permitted beneficial owner will be treated as the
beneficial owner of that Certificate retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition or
holding of any such Certificate or interest therein was effected in violation of
the provisions of the preceding two paragraphs shall indemnify and hold harmless
the Depositor, the Servicer, the Trustee, the Trust Administrator and the Trust
Fund from and against any and all liabilities, claims, costs or expenses
incurred by those parties as a result of that acquisition or holding.

         (c) (i) Each Person who has or who acquires any Ownership Interest in a
Residual Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions and to
have irrevocably authorized the Trust Administrator or its designee under clause
(iii)(A) below to deliver payments to a Person other than such Person and to
negotiate the terms of any mandatory sale under clause (iii)(B) below and to
execute all instruments of Transfer and to do all other things necessary in
connection with any such sale. The rights of each Person acquiring any Ownership
Interest in a Residual Certificate are expressly subject to the following
provisions:

         (A)      Each Person holding or acquiring any Ownership Interest in a
                  Residual Certificate shall be a Permitted Transferee and shall
                  promptly notify the Trust Administrator of any change or
                  impending change in its status as a Permitted Transferee.

         (B)      In connection with any proposed Transfer of any Ownership
                  Interest in a Residual Certificate, the Trust Administrator
                  shall require delivery to it and shall not register the
                  Transfer of any Residual Certificate until its receipt of an
                  affidavit and agreement (a "Transfer Affidavit and
                  Agreement"), in the form attached hereto as Exhibit F-2, from
                  the proposed Transferee, in form and substance satisfactory to
                  the Trust Administrator, representing and warranting, among
                  other things, that such Transferee is a Permitted Transferee,
                  that it is not acquiring its Ownership Interest in the
                  Residual Certificate that is the subject of the proposed
                  Transfer as a nominee, trustee or agent for any Person that is
                  not a Permitted Transferee, that for so long as it retains its
                  Ownership Interest in a Residual Certificate, it will endeavor
                  to remain a Permitted Transferee, and that it has reviewed the
                  provisions of this Section 5.02(d) and agrees to be bound by
                  them.

         (C)      Notwithstanding the delivery of a Transfer Affidavit and
                  Agreement by a proposed Transferee under clause (B) above, if
                  a Responsible Officer of the Trust Administrator who is
                  assigned to this transaction has actual knowledge that the
                  proposed Transferee is not a Permitted Transferee, no Transfer
                  of an Ownership Interest in a Residual Certificate to such
                  proposed Transferee shall be effected.

         (D)      Each Person holding or acquiring any Ownership Interest in a
                  Residual Certificate shall agree (x) to require a Transfer
                  Affidavit and Agreement from any other Person to whom such
                  Person attempts to transfer its Ownership Interest in a
                  Residual Certificate and (y) not to transfer its Ownership
                  Interest unless it provides a transferor affidavit (a
                  "Transferor Affidavit"), in the form attached hereto as
                  Exhibit F-2, to the Trust Administrator stating that, among
                  other things, it has no actual knowledge that such other
                  Person is not a Permitted Transferee.

         (E)      Each Person holding or acquiring an Ownership Interest in a
                  Residual Certificate, by purchasing an Ownership Interest in
                  such Certificate, agrees to give the Trust Administrator
                  written notice that it is a "pass-through interest holder"
                  within the meaning of temporary Treasury regulation Section
                  1.67- 3T(a)(2)(i)(A) immediately upon acquiring an Ownership
                  Interest in a Residual Certificate, if it is, or is holding an
                  Ownership Interest in a Residual Certificate on behalf of, a
                  "pass-through interest holder."

(ii)     The Trust Administrator will register the Transfer of any Residual
         Certificate only if it shall have received the Transfer Affidavit and
         Agreement and all of such other documents as shall have been reasonably
         required by the Trust Administrator as a condition to such
         registration. In addition, no Transfer of a Residual Certificate shall
         be made unless the Trust Administrator shall have received a
         representation letter from the Transferee of such Certificate to the
         effect that such Transferee is a Permitted Transferee.

(iii)    (A) If any purported Transferee shall become a Holder of a Residual
         Certificate in violation of the provisions of this Section 5.02(d),
         then the last preceding Permitted Transferee shall be restored, to the
         extent permitted by law, to all rights as Holder thereof retroactive to
         the date of registration of such Transfer of such Residual Certificate.
         The Trust Administrator shall be under no liability to any Person for
         any registration of Transfer of a Residual Certificate that is in fact
         not permitted by this Section 5.02(d) or for making any payments due on
         such Certificate to the Holder thereof or for taking any other action
         with respect to such Holder under the provisions of this Agreement.

         (B)      If any purported Transferee shall become a Holder of a
                  Residual Certificate in violation of the restrictions in this
                  Section 5.02(d) and to the extent that the retroactive
                  restoration of the rights of the Holder of such Residual
                  Certificate as described in clause (iii)(A) above shall be
                  invalid, illegal or unenforceable, then the Trust
                  Administrator shall have the right, without notice to the
                  Holder or any prior Holder of such Residual Certificate, to
                  sell such Residual Certificate to a purchaser selected by the
                  Trust Administrator on such terms as the Trust Administrator
                  may choose. Such purported Transferee shall promptly endorse
                  and deliver each Residual Certificate in accordance with the
                  instructions of the Trust Administrator. Such purchaser may be
                  the Trust Administrator itself or any Affiliate of the Trust
                  Administrator. The proceeds of such sale, net of the
                  commissions (which may include commissions payable to the
                  Trust Administrator or its Affiliates), expenses and taxes
                  due, if any, will be remitted by the Trust Administrator to
                  such purported Transferee. The terms and conditions of any
                  sale under this clause (iii)(B) shall be determined in the
                  sole discretion of the Trust Administrator, and the Trust
                  Administrator shall not be liable to any Person having an
                  Ownership Interest in a Residual Certificate as a result of
                  its exercise of such discretion.

(iv)     The Trust Administrator shall make available to the Internal Revenue
         Service and those Persons specified by the REMIC Provisions all
         information necessary to compute any tax imposed (A) as a result of the
         Transfer of an Ownership Interest in a Residual Certificate to any
         Person who is a Disqualified Organization, including the information
         described in Treasury regulations sections 1.860D-1(b)(5) and
         1.860E-2(a)(5) with respect to the "excess inclusions" of such Residual
         Certificate and (B) as a result of any regulated investment company,
         real estate investment trust, common trust fund, partnership, trust,
         estate or organization described in Section 1381 of the Code that holds
         an Ownership Interest in a Residual Certificate having as among its
         record holders at any time any Person which is a Disqualified
         Organization. Reasonable compensation for providing such information
         may be accepted by the Trust Administrator.

(v)      The provisions of this Section 5.02(d) set forth prior to this
         subsection (v) may be modified, added to or eliminated, provided that
         there shall have been delivered to the Trust Administrator at the
         expense of the party seeking to modify, add to or eliminate any such
         provision the following:

         (A)      written notification from the Rating Agencies to the effect
                  that the modification, addition to or elimination of such
                  provisions will not cause the Rating Agencies to downgrade its
                  then-current ratings of any Class of Certificates; and

         (B)      an Opinion of Counsel, in form and substance satisfactory to
                  the Trust Administrator, to the effect that such modification
                  of, addition to or elimination of such provisions will not
                  cause any Trust REMIC to cease to qualify as a REMIC and will
                  not cause (x) any Trust REMIC to be subject to an entity-level
                  tax caused by the Transfer of any Residual Certificate to a
                  Person that is not a Permitted Transferee or (y) a Person
                  other than the prospective transferee to be subject to a
                  REMIC-tax caused by the Transfer of a Residual Certificate to
                  a Person that is not a Permitted Transferee.

         (d) Subject to the preceding subsections, upon surrender for
registration of transfer of any Certificate at any office or agency of the Trust
Administrator maintained for such purpose pursuant to Section 8.12, the Trust
Administrator shall execute, authenticate and deliver, in the name of the
designated Transferee or Transferees, one or more new Certificates of the same
Class of a like aggregate Percentage Interest.

         (e) At the option of the Holder thereof, any Certificate may be
exchanged for other Certificates of the same Class with authorized denominations
and a like aggregate Percentage Interest, upon surrender of such Certificate to
be exchanged at any office or agency of the Trust Administrator maintained for
such purpose pursuant to Section 8.12. Whenever any Certificates are so
surrendered for exchange, upon notice from the Trust Administrator, the Trust
Administrator shall execute, authenticate and deliver, the Certificates which
the Certificateholder making the exchange is entitled to receive. Every
Certificate presented or surrendered for transfer or exchange shall (if so
required by the Trust Administrator) be duly endorsed by, or be accompanied by a
written instrument of transfer in the form satisfactory to the Trust
Administrator duly executed by, the Holder thereof or his attorney duly
authorized in writing. In addition, (i) with respect to each Class R
Certificate, the Holder thereof may exchange, in the manner described above,
such Class R Certificate for two separate Certificates, each representing such
Holder's respective Percentage Interest in the Class R-I Interest and the Class
R-II Interest that was evidenced by the Class R Certificate being exchanged and
(ii) with respect to each Class R-X Certificate, the Holder thereof may
exchange, in the manner described above, such Class R-X Certificate for two
separate Certificates, each representing such Holder's respective Percentage
Interest in the Class R-III Interest and the Class R-IV Interest, respectively,
in each case that was evidenced by the Class R-X Certificate being exchanged.

         (f) No service charge to the Certificateholders shall be made for any
transfer or exchange of Certificates, but the Trust Administrator may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Certificates.

         (g) All Certificates surrendered for transfer and exchange shall be
canceled and destroyed by the Trust Administrator in accordance with its
customary procedures.

         SECTION 5.03 Mutilated, Destroyed, Lost or Stolen Certificates.

         If (i) any mutilated Certificate is surrendered to the Trust
Administrator, or the Trust Administrator receive evidence to its satisfaction
of the destruction, loss or theft of any Certificate, and (ii) there is
delivered to the Trustee and the Trust Administrator such security or indemnity
as may be required by them to save each of them harmless, then, in the absence
of actual knowledge by the Trust Administrator that such Certificate has been
acquired by a bona fide purchaser, the Trust Administrator shall execute,
authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Certificate, a new Certificate of the same Class and
of like denomination and Percentage Interest. Upon the issuance of any new
Certificate under this Section, the Trust Administrator may require the payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto and any other expenses (including the fees and
expenses of the Trust Administrator) connected therewith. Any replacement
Certificate issued pursuant to this Section shall constitute complete and
indefeasible evidence of ownership in the applicable REMIC created hereunder, as
if originally issued, whether or not the lost, stolen or destroyed Certificate
shall be found at any time.

         SECTION 5.04 Persons Deemed Owners.

         The Depositor, the Servicer, the Trustee, the Trust Administrator and
any agent of any of them may treat the Person in whose name any Certificate is
registered as the owner of such Certificate for the purpose of receiving
distributions pursuant to Section 4.01 and for all other purposes whatsoever,
and none of the Depositor, the Servicer, the Trustee, the Trust Administrator or
any agent of any of them shall be affected by notice to the contrary.

         SECTION 5.05 Certain Available Information.

         The Trust Administrator shall maintain at its Corporate Trust Office
and shall make available free of charge during normal business hours for review
by any Holder of a Certificate or any Person identified to the Trust
Administrator as a prospective transferee of a Certificate, originals or copies
of the following items: (A) this Agreement and any amendments hereof entered
into pursuant to Section 11.01, (B) all monthly statements required to be
delivered to Certificateholders of the relevant Class pursuant to Section 4.02
since the Closing Date, and all other notices, reports, statements and written
communications delivered to the Certificateholders of the relevant Class
pursuant to this Agreement since the Closing Date, (C) all certifications
delivered by a Responsible Officer of the Trust Administrator since the Closing
Date pursuant to Section 10.01(h), (D) any and all Officers' Certificates
delivered to the Trust Administrator by the Servicer since the Closing Date to
evidence such Servicer's determination that any P&I Advance or Servicing Advance
was, or if made, would be a Nonrecoverable Advance and (E) any and all Officers'
Certificates delivered to the Trust Administrator by the Servicer since the
Closing Date pursuant to Section 4.04(a). Copies and mailing of any and all of
the foregoing items will be available from the Trust Administrator upon request
at the expense of the person requesting the same.

<PAGE>

                                   ARTICLE VI

                         THE DEPOSITOR AND THE SERVICER

         SECTION 6.01 Liability of the Depositor and the Servicer.

         The Servicer shall be liable in accordance herewith only to the extent
of the obligations specifically imposed by this Agreement and undertaken
hereunder by the Servicer herein. The Depositor shall be liable in accordance
herewith only to the extent of the obligations specifically imposed by this
Agreement and undertaken hereunder by the Depositor herein.

         SECTION 6.02 Merger or Consolidation of the Depositor or the Servicer.

         Subject to the following paragraph, the Depositor will keep in full
effect its existence, rights and franchises as a corporation under the laws of
the jurisdiction of its incorporation. Subject to the following paragraph, the
Servicer will keep in full effect its existence, rights and franchises as a
corporation under the laws of the jurisdiction of its incorporation and its
qualification as an approved conventional seller/servicer for Fannie Mae or
Freddie Mac in good standing. The Depositor and the Servicer each will obtain
and preserve its qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of this Agreement, the Certificates or any of the
Mortgage Loans and to perform its respective duties under this Agreement.

         The Depositor or the Servicer may be merged or consolidated with or
into any Person, or transfer all or substantially all of its assets to any
Person, in which case any Person resulting from any merger or consolidation to
which the Depositor or the Servicer shall be a party, or any Person succeeding
to the business of the Depositor or the Servicer, shall be the successor of the
Depositor or the Servicer, as the case may be, hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding; provided, however, that
the successor or surviving Person to the Servicer shall be qualified to service
mortgage loans on behalf of Fannie Mae or Freddie Mac; and provided further that
the Rating Agencies' ratings of the Class A Certificates and the Mezzanine
Certificates in effect immediately prior to such merger or consolidation will
not be qualified, reduced or withdrawn as a result thereof (as evidenced by a
letter to such effect from the Rating Agencies).

         SECTION 6.03 Limitation on Liability of the Depositor, the Servicer and
                      Others.

         None of the Depositor, the Servicer (and any Sub-Servicer) or any of
the directors, officers, employees or agents of the Depositor or the Servicer
(and any Sub-Servicer) shall be under any liability to the Trust Fund or the
Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to this Agreement or the related Sub-Servicing
Agreement, as applicable, or for errors in judgment; provided, however, that
this provision shall not protect the Depositor, the Servicer (and any
Sub-Servicer) or any such person against any breach of warranties,
representations or covenants made herein, or against any specific liability
imposed on the Servicer (and any Sub-Servicer) pursuant hereto or the related
Sub-Servicing Agreement, as applicable, or against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in the performance of duties or by reason of reckless disregard of obligations
and duties hereunder or the related Sub-Servicing Agreement, as applicable. The
Depositor, the Servicer (and any Sub-Servicer) and any director, officer,
employee or agent of the Depositor or the Servicer may rely in good faith on any
document of any kind which, PRIMA FACIE, is properly executed and submitted by
any Person respecting any matters arising hereunder or the related Sub-Servicing
Agreement, as applicable. The Depositor, the Servicer (and any Sub-Servicer) and
any director, officer, employee or agent of the Depositor or the Servicer (and
any Sub-Servicer) shall be indemnified and held harmless by the Trust Fund
against (i) any loss, liability or expense incurred in connection with any legal
action relating to this Agreement or the Certificates (except as any such loss,
liability or expense shall be otherwise reimbursable pursuant to this Agreement)
or any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or negligence in the performance of duties hereunder or the related
Sub-Servicing Agreement, as applicable, or by reason of reckless disregard of
obligations and duties hereunder or the related Sub-Servicing Agreement, as
applicable, and (ii) any breach of a representation or warranty regarding the
Mortgage Loans. None of the Depositor or the Servicer (and any Sub-Servicer)
shall be under any obligation to appear in, prosecute or defend any legal action
unless such action is related to its respective duties under this Agreement or
the related Sub-Servicing Agreement, as applicable, and, in its opinion, does
not involve it in any expense or liability; provided, however, that each of the
Depositor and the Servicer (and any Sub-Servicer) may in its discretion
undertake any such action which it may deem necessary or desirable with respect
to this Agreement or the related Sub-Servicing Agreement, as applicable, and the
rights and duties of the parties hereto or to the related Sub-Servicing
Agreement, as applicable, and the interests of the Certificateholders hereunder.
In such event, unless the Depositor or the Servicer (and any Sub-Servicer) acts
without the consent of Holders of Certificates entitled to at least [__]% of the
Voting Rights (which consent shall not be necessary in the case of litigation or
other legal action by either to enforce their respective rights or defend
themselves hereunder or the related Sub-Servicing Agreement, as applicable), the
legal expenses and costs of such action and any liability resulting therefrom
(except any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties hereunder or
by reason of reckless disregard of obligations and duties hereunder or the
related Sub-Servicing Agreement, as applicable) shall be expenses, costs and
liabilities of the Trust Fund, and the Depositor (subject to the limitations set
forth above) and the Servicer (and any Sub-Servicer) shall be entitled to be
reimbursed therefor from the Collection Account as and to the extent provided in
Section 3.11 or from the corresponding custodial account established under the
related Sub-Servicing Agreement, any such right of reimbursement being prior to
the rights of the Certificateholders to receive any amount in the Collection
Account.

         SECTION 6.04 Limitation on Resignation of the Servicer.

         The Servicer shall not resign from the obligations and duties hereby
imposed on it except (i) upon determination that its duties hereunder are no
longer permissible under applicable law or (ii) with the written consent of the
Trustee and the Trust Administrator, which consent may not be unreasonably
withheld, with written confirmation from the Rating Agencies (which confirmation
shall be furnished to the Depositor, the Trustee and the Trust Administrator)
that such resignation will not cause the Rating Agencies to reduce the then
current rating of the Class A Certificates and provided that a qualified
successor has agreed to assume the duties and obligations of the Servicer
hereunder. Any such determination pursuant to clause (i) of the preceding
sentence permitting the resignation of the Servicer shall be evidenced by an
Opinion of Counsel to such effect obtained at the expense of the Servicer and
delivered to the Trustee and the Trust Administrator. No resignation of the
Servicer shall become effective until the Trust Administrator or the Trustee, as
applicable, in accordance with Section 7.02 hereof, or a successor servicer
shall have assumed the Servicer's responsibilities, duties, liabilities (other
than those liabilities arising prior to the appointment of such successor) and
obligations under this Agreement.

         Except as expressly provided herein, the Servicer shall not assign or
transfer any of its rights, benefits or privileges hereunder to any other
Person, nor delegate to or subcontract with, nor authorize or appoint any other
Person to perform any of the duties, covenants or obligations to be performed by
the Servicer hereunder. If, pursuant to any provision hereof, the duties of the
Servicer are transferred to a successor servicer, the entire amount of the
Servicing Fee and other compensation payable to the Servicer pursuant hereto
shall thereafter be payable to such successor servicer.

         The Trustee and the Depositor hereby specifically consent to the pledge
and assignment by the Servicer of all of the Servicer's right, title and
interest in, to and under this Agreement to a lender and if a Servicer Event of
Termination occurs, agree that the Servicer or its designee may appoint the
successor servicer, provided that at the time of such appointment, such
successor meets the requirements of a successor Servicer pursuant to Section
7.02(a) hereof and agrees to be subject to the terms of this Agreement. If,
pursuant to any provision hereof, the duties of the Servicer are transferred to
a successor servicer, the entire amount of the Servicing Fee and other
compensation payable to the Servicer pursuant hereto shall thereafter be payable
to such successor servicer.

         SECTION 6.05 Rights of the Depositor in Respect of the Servicer.

         The Servicer shall afford (and any Sub-Servicing Agreement shall
provide that each Sub-Servicer shall afford) the Depositor, the Trustee and the
Trust Administrator, upon reasonable notice, during normal business hours,
access to all records maintained by the Servicer (and any such Sub-Servicer) in
respect of the Servicer's rights and obligations hereunder and access to
officers of the Servicer (and those of any such Sub-Servicer) responsible for
such obligations. Upon request, the Servicer shall furnish to the Depositor, the
Trustee and the Trust Administrator its (and any such Sub-Servicer's) most
recent financial statements of the parent company of the Servicer and such other
information relating to the Servicer's capacity to perform its obligations under
this Agreement that it possesses. To the extent such information is not
otherwise available to the public, the Depositor, the Trustee and the Trust
Administrator shall not disseminate any information obtained pursuant to the
preceding two sentences without the Servicer's written consent, except as
required pursuant to this Agreement or to the extent that it is appropriate to
do so (i) in working with legal counsel, auditors, taxing authorities or other
governmental agencies, rating agencies or reinsurers or (ii) pursuant to any
law, rule, regulation, order, judgment, writ, injunction or decree of any court
or governmental authority having jurisdiction over the Depositor, the Trustee,
the Trust Administrator or the Trust Fund, and in either case, the Depositor,
the Trustee or the Trust Administrator, as the case may be, shall use its best
efforts to assure the confidentiality of any such disseminated non-public
information. The Depositor may, but is not obligated to, enforce the obligations
of the Servicer under this Agreement and may, but is not obligated to, perform,
or cause a designee to perform, any defaulted obligation of the Servicer under
this Agreement or exercise the rights of any of the Servicer under this
Agreement; provided that the Servicer shall not be relieved of any of its
obligations under this Agreement by virtue of such performance by the Depositor
or its designee. The Depositor shall not have any responsibility or liability
for any action or failure to act by the Servicer and is not obligated to
supervise the performance of the Servicer under this Agreement or otherwise.

         SECTION 6.06 Duties of the Credit Risk Manager.

         For and on behalf of the Trust, the Credit Risk Manager will provide
reports and recommendations concerning certain delinquent and defaulted Mortgage
Loans, and as to the collection of any Prepayment Charges with respect to the
Mortgage Loans. Such reports and recommendations will be based upon information
provided to the Credit Risk Manager pursuant to the respective Credit Risk
Management Agreement, and the Credit Risk Manager shall look solely to the
Servicer for all information and data (including loss and delinquency
information and data) relating to the servicing of the related Mortgage Loans.
Upon any termination of the Credit Risk Manager or the appointment of a
successor Credit Risk Manager, the Depositor shall give written notice thereof
to the Servicer, the Trustee, the Trust Administrator and each Rating Agency.
Notwithstanding the foregoing, the termination of the Credit Risk Manager
pursuant to this Section shall not become effective until the appointment of a
successor Credit Risk Manager.

         SECTION 6.07 Limitation Upon Liability of the Credit Risk Manager.

         Neither the Credit Risk Manager, nor any of its directors, officers,
employees, or agents shall be under any liability to the Trustee, the
Certificateholders, the Trust Administrator or the Depositor for any action
taken or for refraining from the taking of any action made in good faith
pursuant to this Agreement, in reliance upon information provided by the
Servicer under the related Credit Risk Management Agreement, or for errors in
judgment; provided, however, that this provision shall not protect the Credit
Risk Manager or any such person against liability that would otherwise be
imposed by reason of willful malfeasance or bad faith in its performance of its
duties. The Credit Risk Manager and any director, officer, employee, or agent of
the Credit Risk Manager may rely in good faith on any document of any kind PRIMA
FACIE properly executed and submitted by any Person respecting any matters
arising hereunder, and may rely in good faith upon the accuracy of information
furnished by the Servicer pursuant to the applicable Credit Risk Management
Agreement in the performance of its duties thereunder and hereunder.

         SECTION 6.08 Removal of the Credit Risk Manager.

         The Credit Risk Manager may be removed as Credit Risk Manager by
Certificateholders holding not less than [__]% of the Voting Rights in the Trust
Fund, in the exercise of its or their sole discretion. The Certificateholders
shall provide written notice of the Credit Risk Manager's removal to the Trust
Administrator. Upon receipt of such notice, the Trust Administrator shall
provide written notice to the Credit Risk Manager of its removal, which shall be
effective upon receipt of such notice by the Credit Risk Manager.

<PAGE>

                                   ARTICLE VII

                                     DEFAULT

         SECTION 7.01 Servicer Events of Default.

         With respect to the Servicer, individually, if any one of the following
events ("Servicer Event of Default") shall occur and be continuing:

(i)      any failure by the Servicer to remit to the Trust Administrator for
         distribution to the Certificateholders any payment (other than a P&I
         Advance required to be made from its own funds on any Servicer
         Remittance Date pursuant to Section 4.03) required to be made under the
         terms of the Certificates and this Agreement which continues unremedied
         for a period of one Business Day after the date upon which written
         notice of such failure, requiring the same to be remedied, shall have
         been given to the Servicer by the Depositor, the Trust Administrator or
         the Trustee (in which case notice shall be provided by telecopy), or to
         the Servicer, the Depositor, the Trust Administrator and the Trustee by
         the Holders of Certificates entitled to at least [__]% of the Voting
         Rights; or

(ii)     any failure on the part of the Servicer duly to observe or perform in
         any material respect any of the covenants or agreements on the part of
         the Servicer contained in the Certificates or in this Agreement which
         continues unremedied for a period of 30 days after the earlier of (i)
         the date on which written notice of such failure, requiring the same to
         be remedied, shall have been given to the Servicer by the Depositor,
         the Trust Administrator or the Trustee, or to the Servicer, the
         Depositor, the Trust Administrator and the Trustee by the Holders of
         Certificates entitled to at least [__]% of the Voting Rights and (ii)
         actual knowledge of such failure by a Servicing Officer of the
         Servicer; or

(iii)    a decree or order of a court or agency or supervisory authority having
         jurisdiction in the premises in an involuntary case under any present
         or future federal or state bankruptcy, insolvency or similar law or the
         appointment of a conservator or receiver or liquidator in any
         insolvency, readjustment of debt, marshalling of assets and liabilities
         or similar proceeding, or for the winding-up or liquidation of its
         affairs, shall have been entered against the Servicer and if such
         proceeding is being contested by the Servicer in good faith such decree
         or order shall have remained in force undischarged or unstayed for a
         period of 60 consecutive days or results in the entry of an order for
         relief or any such adjudication or appointment; or

(iv)     the Servicer shall consent to the appointment of a conservator or
         receiver or liquidator in any insolvency, readjustment of debt,
         marshalling of assets and liabilities or similar proceedings of or
         relating to the Servicer or of or relating to all or substantially all
         of its property; or

(v)      the Servicer shall admit in writing its inability to pay its debts
         generally as they become due, file a petition to take advantage of any
         applicable insolvency or reorganization statute, make an assignment for
         the benefit of its creditors, or voluntarily suspend payment of its
         obligations; or

(vi)     any failure of the Servicer to make, or of the Trust Administrator to
         make on behalf of the Servicer, any P&I Advance on any Servicer
         Remittance Date required to be made from its own funds pursuant to
         Section 4.03 which continued unremedied for a period of one Business
         Day after the date upon which written notice of such failure (which
         notice the Trust Administrator must provide by 3:00 p.m. New York time
         on the Business Day following the Servicer Remittance Date), requiring
         the same to be remedied, shall have been given to the Servicer by the
         Trust Administrator.

         If a Servicer Event of Default described in clauses (i) through (v) of
this Section shall occur, then, and in each and every such case, so long as such
Servicer Event of Default shall not have been remedied, the Depositor or the
Trustee may, and at the written direction of the Holders of Certificates
entitled to at least [__]% of Voting Rights, the Trustee shall, by notice in
writing to the Servicer (and to the Depositor and the Trust Administrator if
given by the Trustee or to the Trustee and the Trust Administrator if given by
the Depositor), terminate all of the rights and obligations of the Servicer in
its capacity as a Servicer under this Agreement, to the extent permitted by law,
and in and to the Mortgage Loans and the proceeds thereof. If a Servicer Event
of Default described in clause (vi) hereof shall occur and shall not have been
remedied during the applicable time period set forth in clause (vi) above, the
Trust Administrator shall, by notice in writing to the Servicer and the
Depositor, terminate all of the rights and obligations of the Servicer in its
capacity as a Servicer under this Agreement and in and to the Mortgage Loans and
the proceeds thereof. On or after the receipt by the Servicer of such written
notice, all authority and power of the Servicer under this Agreement, whether
with respect to the Certificates (other than as a Holder of any Certificate) or
the Mortgage Loans or otherwise, shall pass to and be vested in the Trust
Administrator pursuant to and under this Section and, without limitation, the
Trust Administrator is hereby authorized and empowered, as attorney-in-fact or
otherwise, to execute and deliver on behalf of and at the expense of the
Servicer, 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
notice of termination, whether to complete the transfer and endorsement or
assignment of the Mortgage Loans and related documents, or otherwise. The
Servicer agrees, at its sole cost and expense, promptly (and in any event no
later than ten Business Days subsequent to such notice) to provide the Trust
Administrator with all documents and records requested by it to enable it to
assume the Servicer's functions under this Agreement, and to cooperate with the
Trust Administrator in effecting the termination of the Servicer's
responsibilities and rights under this Agreement, including, without limitation,
the transfer within one Business Day to the Trust Administrator for
administration by it of all cash amounts which at the time shall be or should
have been credited by the Servicer to the Collection Account held by or on
behalf of the Servicer, the Distribution Account or any REO Account or Servicing
Account held by or on behalf of the Servicer or thereafter be received with
respect to the Mortgage Loans or any REO Property serviced by the Servicer
(provided, however, that the Servicer shall continue to be entitled to receive
all amounts accrued or owing to it under this Agreement on or prior to the date
of such termination, whether in respect of P&I Advances or otherwise, and shall
continue to be entitled to the benefits of Section 6.03, notwithstanding any
such termination, with respect to events occurring prior to such termination).
For purposes of this Section 7.01, the Trustee and the Trust Administrator shall
not be deemed to have knowledge of a Servicer Event of Default unless a
Responsible Officer of the Trustee or the Trust Administrator, as the case may
be, assigned to and working in the Trustee's or the Trust Administrator's
Corporate Trust Office, as applicable, has actual knowledge thereof or unless
written notice of any event which is in fact such a Servicer Event of Default is
received by the Trustee or the Trust Administrator, as applicable, and such
notice references the Certificates, the Trust Fund or this Agreement.

         SECTION 7.02 Trust Administrator or Trustee to Act; Appointment of
                      Successor.

         (a) On and after the time the Servicer receives a notice of
termination, the Trust Administrator (and in the event the Trust Administrator
fails in its obligation, the Trustee) shall be the successor in all respects to
the Servicer in its capacity as Servicer under this Agreement, the Servicer
shall not have the right to withdraw any funds from the Collection Account
without the consent of the Trust Administrator or the Trustee, as applicable,
and the transactions set forth or provided for herein and shall be subject to
all the responsibilities, duties and liabilities relating thereto and arising
thereafter placed on the Servicer (except for any representations or warranties
of the Servicer under this Agreement, the responsibilities, duties and
liabilities contained in Section 2.03(c) and its obligation to deposit amounts
in respect of losses pursuant to Section 3.12) by the terms and provisions
hereof including, without limitation, the Servicer's obligations to make P&I
Advances pursuant to Section 4.03; provided, however, that if the Trust
Administrator or the Trustee, as applicable, is prohibited by law or regulation
from obligating itself to make advances regarding delinquent mortgage loans,
then the Trust Administrator or the Trustee, as applicable, shall not be
obligated to make P&I Advances pursuant to Section 4.03; and provided further,
that any failure to perform such duties or responsibilities caused by the
Servicer's failure to provide information required by Section 7.01 shall not be
considered a default by the Trust Administrator or the Trustee, as applicable,
as successor to the Servicer hereunder. As compensation therefor, the Trust
Administrator or the Trustee, as applicable, shall be entitled to the Servicing
Fees and all funds relating to the Mortgage Loans to which the Servicer would
have been entitled if it had continued to act hereunder (other than amounts
which were due or would become due to the Servicer prior to its termination or
resignation). Notwithstanding the above, the Trust Administrator or the Trustee,
as applicable, may, if it shall be unwilling to so act, or shall, if it is
unable to so act or if it is prohibited by law from making advances regarding
delinquent mortgage loans, or if the Holders of Certificates entitled to at
least [__]% of the Voting Rights so request in writing to the Trust
Administrator or the Trustee, as applicable, promptly appoint or petition a
court of competent jurisdiction to appoint, an established mortgage loan
servicing institution acceptable to the Rating Agencies and having a net worth
of not less than $[_______] as the successor to the Servicer under this
Agreement in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer under this Agreement. No appointment of a
successor Servicer under this Agreement shall be effective until the assumption
by the successor of all of the Servicer's responsibilities, duties and
liabilities hereunder. In connection with such appointment and assumption
described herein, the Trust Administrator or the Trustee, as applicable, may
make such arrangements for the compensation of such successor out of payments on
Mortgage Loans as it and such successor shall agree; provided, however, that no
such compensation shall be in excess of that permitted the Servicer as such
hereunder. The Depositor, the Trust Administrator, the Trustee and such
successor shall take such action, consistent with this Agreement, as shall be
necessary to effectuate any such succession. Pending appointment of a successor
to the Servicer under this Agreement, the Trust Administrator or the Trustee, as
applicable, shall act in such capacity as hereinabove provided.

         (b) In connection with the termination or resignation of the Servicer
hereunder, either (i) the successor servicer, including the Trust Administrator
or the Trustee, as applicable, if the Trust Administrator or the Trustee, as
applicable, is acting as successor Servicer, shall represent and warrant that it
is a member of MERS in good standing and shall agree to comply in all material
respects with the rules and procedures of MERS in connection with the servicing
of the Mortgage Loans that are registered with MERS, in which case the
predecessor Servicer shall cooperate with the successor Servicer in causing MERS
to revise its records to reflect the transfer of servicing to the successor
Servicer as necessary under MERS' rules and regulations, or (ii) the predecessor
Servicer shall cooperate with the successor Servicer in causing MERS to execute
and deliver an assignment of Mortgage in recordable form to transfer the
Mortgage from MERS to the Trust Administrator or the Trustee, as applicable, and
to execute and deliver such other notices, documents and other instruments as
may be necessary or desirable to effect a transfer of such Mortgage Loan or
servicing of such Mortgage Loan on the MERS(R) System to the successor Servicer.
The predecessor Servicer shall file or cause to be filed any such assignment in
the appropriate recording office. The predecessor Servicer shall bear any and
all fees of MERS, costs of preparing any assignments of Mortgage, and fees and
costs of filing any assignments of Mortgage that may be required under this
Section 7.02(b).

         (c) Notwithstanding any provision in this Agreement to the contrary,
for a period of 30 days following the date on which the Servicer shall have
received a notice of a Servicer Event of Termination pursuant to Section 7.01,
the terminated Servicer or its designee may appoint a successor servicer that
satisfies the eligibility criteria of a successor servicer set forth above, with
the consent of the Depositor or its Affiliate (such consent not to be
unreasonably withheld); provided that such successor servicer agrees to fully
effect the servicing transfer within 90 days following the termination of the
Servicer and to make all Advances that would otherwise be made by the successor
servicer under Section 7.01 as of the date of such appointment, and to reimburse
the terminated Servicer for any unreimbursed Advances and Servicing Advances it
has made and any reimbursable expenses that they may have incurred in connection
with this Section 7.02(c). Any proceeds received in connection with the
appointment of such successor servicer shall be the property of the terminated
Servicer or its designee. Notwithstanding the foregoing, in the event of a
Servicer Event of Termination pursuant to Section 7.01(vi), either (i) the
Servicer shall remit the amount of the required Advance by 10:00 a.m. New York
time on the Business Day following the Servicer Remittance Date with respect to
each Distribution Date during such 30-day period until it appoints a successor
servicer during such 30-day period pursuant to this Section 7.02 (c) or (ii) by
10:00 a.m. New York time on the Business Day following the Servicer Remittance
Date, the Servicer shall have appointed a successor servicer that satisfies the
eligibility criteria of a successor servicer set forth above, with the consent
of the Depositor or its Affiliate (such consent not to be unreasonably withheld)
and that has remitted the amount of the required Advance to the Trustee. If the
Servicer fails to adhere to the requirements set forth in the immediately
preceding sentence, the Trustee shall be the successor in all respects to the
Servicer in its capacity as Servicer under this Agreement and shall immediately
assume the Servicer's obligations to make Advances, subject to Section 7.02(a)

         SECTION 7.03 Notification to Certificateholders.

         (a) Upon any termination of a Servicer pursuant to Section 7.01 above
or any appointment of a successor to a Servicer pursuant to Section 7.02 above,
the Trust Administrator shall give prompt written notice thereof to
Certificateholders at their respective addresses appearing in the Certificate
Register.

         (b) Not later than the later of 60 days after the occurrence of any
event, which constitutes or which, with notice or lapse of time or both, would
constitute a Servicer Event of Default or five days after a Responsible Officer
of the Trust Administrator becomes aware of the occurrence of such an event, the
Trust Administrator shall transmit by mail to all Holders of Certificates notice
of each such occurrence, unless such default or Servicer Event of Default shall
have been cured or waived.

         SECTION 7.04 Waiver of Servicer Events of Default.

         Subject to Section 11.09(d), the Holders representing at least [__]% of
the Voting Rights evidenced by all Classes of Certificates affected by any
default or Servicer Event of Default hereunder may waive such default or
Servicer Event of Default; provided, however, that a default or Servicer Event
of Default under clause (i) or (vi) of Section 7.01 may be waived only by all of
the Holders of the Regular Certificates. Upon any such waiver of a default or
Servicer Event of Default, such default or Servicer Event of Default shall cease
to exist and shall be deemed to have been remedied for every purpose hereunder.
No such waiver shall extend to any subsequent or other default or Servicer Event
of Default or impair any right consequent thereon except to the extent expressly
so waived.

<PAGE>

                                  ARTICLE VIII

               CONCERNING THE TRUSTEE AND THE TRUST ADMINISTRATOR

         SECTION 8.01 Duties of Trustee and Trust Administrator.

         Each of the Trustee and the Trust Administrator, prior to the
occurrence of a Servicer Event of Default and after the curing of all Servicer
Events of Default which may have occurred, undertakes to perform such duties and
only such duties as are specifically set forth in this Agreement. During a
Servicer Event of Default, each of the Trustee and the Trust Administrator shall
exercise such of the rights and powers vested in it by this Agreement, and use
the same degree of care and skill in their exercise as a prudent person would
exercise or use under the circumstances in the conduct of such person's own
affairs. Any permissive right of the Trustee or the Trust Administrator
enumerated in this Agreement shall not be construed as a duty.

         Each of the Trustee and the Trust Administrator, upon receipt of all
resolutions, certificates, statements, opinions, reports, documents, orders or
other instruments furnished to it, which are specifically required to be
furnished pursuant to any provision of this Agreement, shall examine them to
determine whether they conform to the requirements of this Agreement; provided,
however, that neither the Trustee nor the Trust Administrator will be
responsible for the accuracy or content of any such resolutions, certificates,
statements, opinions, reports, documents or other instruments. If any such
instrument is found not to conform to the requirements of this Agreement in a
material manner, it shall take such action as it deems appropriate to have the
instrument corrected, and if the instrument is not corrected to its
satisfaction, it will provide notice thereof to the Certificateholders.

         No provision of this Agreement shall be construed to relieve the
Trustee or the Trust Administrator from liability for its own negligent action,
its own negligent failure to act or its own misconduct; provided, however, that:

(i)      Prior to the occurrence of a Servicer Event of Default, and after the
         curing of all such Servicer Events of Default which may have occurred,
         the duties and obligations of each of the Trustee and the Trust
         Administrator shall be determined solely by the express provisions of
         this Agreement, neither the Trustee nor the Trust Administrator shall
         be liable except for the performance of such duties and obligations as
         are specifically set forth in this Agreement, no implied covenants or
         obligations shall be read into this Agreement against the Trustee or
         the Trust Administrator and, in the absence of bad faith on the part of
         the Trustee or the Trust Administrator, as applicable, the Trustee or
         the Trust Administrator, as the case may be, may conclusively rely, as
         to the truth of the statements and the correctness of the opinions
         expressed therein, upon any certificates or opinions furnished to the
         Trustee or the Trust Administrator, as the case may be, that conform to
         the requirements of this Agreement;

(ii)     Neither the Trustee nor the Trust Administrator shall be personally
         liable for any error of judgment made in good faith by a Responsible
         Officer or Responsible Officers of it unless it shall be proved that it
         was negligent in ascertaining the pertinent facts;

(iii)    Neither the Trustee nor the Trust Administrator shall be personally
         liable with respect to any action taken, suffered or omitted to be
         taken by it in good faith in accordance with the direction of the
         Holders of Certificates entitled to at least [__]% of the Voting Rights
         relating to the time, method and place of conducting any proceeding for
         any remedy available to the it or exercising any trust or power
         conferred upon it, under this Agreement; and

(iv)     Neither the Trustee nor the Trust Administrator shall be required to
         take notice or be deemed to have notice or knowledge of any default
         unless a Responsible Officer of the Trustee or the Trust Administrator,
         as the case may be, shall have received written notice thereof or a
         Responsible Officer shall have actual knowledge thereof. In the absence
         of receipt of such notice or actual knowledge, the Trustee or Trust
         Administrator, as applicable, may conclusively assume there is no
         default.

         Neither the Trustee nor the Trust Administrator shall be required to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, in each case not including expenses, disbursements and
advances incurred or made by the Trustee or the Trust Administrator, as
applicable, including the compensation and the expenses and disbursements of its
agents and counsel, in the ordinary course of the Trustee's or the Trust
Administrator's, as the case may be, performance in accordance with the
provisions of this Agreement, if there is reasonable ground for believing that
the repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it. With respect to the Trustee and the Trust
Administrator, none of the provisions contained in this Agreement shall in any
event require the Trustee or the Trust Administrator, as the case may be, to
perform, or be responsible for the manner of performance of, any of the
obligations of the Servicer under this Agreement, except during such time, if
any, as the Trustee or the Trust Administrator, as applicable, shall be the
successor to, and be vested with the rights, duties, powers and privileges of,
the Servicer in accordance with the terms of this Agreement.

         SECTION 8.02 Certain Matters Affecting the Trustee and the Trust
                      Administrator.

         (a) Except as otherwise provided in Section 8.01:

(i)      Each of the Trustee and the Trust Administrator and any director,
         officer, employee or agent of the Trustee or the Trust Administrator,
         as the case may be, may request and conclusively rely upon and shall be
         fully protected in acting or refraining from acting upon any
         resolution, Officers' Certificate, certificate of auditors or any other
         certificate, statement, instrument, opinion, report, notice, request,
         consent, order, appraisal, bond or other paper or document reasonably
         believed by it to be genuine and to have been signed or presented by
         the proper party or parties;

(ii)     Each of the Trustee and the Trust Administrator, as the case may be,
         may consult with counsel of its selection and any Opinion of Counsel
         shall be full and complete authorization and protection in respect of
         any action taken or suffered or omitted by it hereunder in good faith
         and in accordance with such Opinion of Counsel;

(iii)    Neither the Trustee nor the Trust Administrator shall be under any
         obligation to exercise any of the trusts or powers vested in it by this
         Agreement or to institute, conduct or defend any litigation hereunder
         or in relation hereto at the request, order or direction of any of the
         Certificateholders, pursuant to the provisions of this Agreement,
         unless such Certificateholders shall have offered to the Trustee or the
         Trust Administrator, as applicable, security or indemnity satisfactory
         to it against the costs, expenses and liabilities which may be incurred
         therein or thereby; the right of the Trustee or the Trust Administrator
         to perform any discretionary act enumerated in this Agreement shall not
         be construed as a duty, and neither the Trustee nor the Trust
         Administrator shall be answerable for other than its negligence or
         willful misconduct in the performance of any such act; nothing
         contained herein shall, however, relieve the Trust Administrator or the
         Trustee of the obligation, upon the occurrence of a Servicer Event of
         Default (which has not been cured or waived), to exercise such of the
         rights and powers vested in it by this Agreement, and to use the same
         degree of care and skill in their exercise as a prudent person would
         exercise or use under the circumstances in the conduct of such person's
         own affairs;

(iv)     Neither the Trustee nor the Trust Administrator shall be personally
         liable for any action taken, suffered or omitted by it in good faith
         and believed by it to be authorized or within the discretion or rights
         or powers conferred upon it by this Agreement;

(v)      Prior to the occurrence of a Servicer Event of Default hereunder, and
         after the curing of all Servicer Events of Default which may have
         occurred, neither the Trustee nor the Trust Administrator shall be
         bound to make any investigation into the facts or matters stated in any
         resolution, certificate, statement, instrument, opinion, report,
         notice, request, consent, order, approval, bond or other paper or
         document, unless requested in writing to do so by the Holders of
         Certificates entitled to at least [__]% of the Voting Rights; provided,
         however, that if the payment within a reasonable time to the Trustee or
         the Trust Administrator, as applicable, of the costs, expenses or
         liabilities likely to be incurred by it in the making of such
         investigation is, in the opinion of the Trustee or the Trust
         Administrator, as applicable, not reasonably assured to the Trustee or
         the Trust Administrator, as applicable, by such Certificateholders, the
         Trustee or the Trust Administrator, as applicable, may require
         indemnity satisfactory to it against such cost, expense, or liability
         from such Certificateholders as a condition to taking any such action;

(vi)     Each of the Trustee and the Trust Administrator may execute any of the
         trusts or powers hereunder or perform any duties hereunder either
         directly or by or through agents or attorneys and neither the Trustee
         nor the Trust Administrator shall be responsible for any misconduct or
         negligence on the part of any agent or attorney appointed with due
         care;

(vii)    Neither the Trustee nor the Trust Administrator shall be personally
         liable for any loss resulting from the investment of funds held in the
         Collection Account at the direction of the Servicer pursuant to Section
         3.12; and

(viii)   Any request or direction of the Depositor, the Servicer or the
         Certificateholders mentioned herein shall be sufficiently evidenced in
         writing.

         (b) All rights of action under this Agreement or under any of the
Certificates, enforceable by the Trustee or the Trust Administrator, may be
enforced by it without the possession of any of the Certificates, or the
production thereof at the trial or other proceeding relating thereto, and any
such suit, action or proceeding instituted by the Trustee or the Trust
Administrator shall be brought in its name for the benefit of all the Holders of
such Certificates, subject to the provisions of this Agreement.

         SECTION 8.03 Neither the Trustee nor Trust Administrator Liable for
                      Certificates or Mortgage Loans.

         The recitals contained herein and in the Certificates (other than the
signature of the Trust Administrator, on behalf of the Trustee, the
authentication of the Trust Administrator on the Certificates, the
acknowledgments of the Trustee and the Trust Administrator contained in Article
II and the representations and warranties of the Trustee and the Trust
Administrator in Section 8.12) shall be taken as the statements of the Depositor
and neither the Trustee nor the Trust Administrator assumes any responsibility
for their correctness. Neither the Trustee nor the Trust Administrator makes any
representations or warranties as to the validity or sufficiency of this
Agreement (other than as specifically set forth in Section 8.12) or of the
Certificates (other than the signature of the Trust Administrator and
authentication of the Trust Administrator on the Certificates) or of any
Mortgage Loan or related document or of MERS or the MERS System. Neither the
Trustee nor the Trust Administrator shall be accountable for the use or
application by the Depositor of any of the Certificates or of the proceeds of
such Certificates, or for the use or application of any funds paid to the
Depositor or the Servicer in respect of the Mortgage Loans or deposited in or
withdrawn from the Collection Account by the Servicer.

         SECTION 8.04 Trustee and Trust Administrator May Own Certificates.

         Each of the Trustee and the Trust Administrator in its individual
capacity or any other capacity may become the owner or pledgee of Certificates
with the same rights it would have if it were not the Trustee or the Trust
Administrator, as applicable.

         SECTION 8.05 Trustee's, Trust Administrator's and Custodians' Fees and
                      Expenses.

         (a) The Trust Administrator shall withdraw from the Distribution
Account on each Distribution Date and pay to itself any income and gain realized
from the investment of funds deposited in the Distribution Account. The
Trustee's fees will be paid by the Trust Administrator pursuant to a separate
agreement between the Trustee and the Trust Administrator, and such compensation
will not be an expense of the Trust. Each of the Trustee, the Trust
Administrator, a Custodian and any director, officer, employee or agent of any
of them, as applicable, shall be indemnified by the Trust Fund and held harmless
against any loss, liability or expense (not including expenses, disbursements
and advances incurred or made by the Trustee, the Trust Administrator or a
Custodian, as applicable, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the
Trustee's, the Trust Administrator's or a Custodian's, as the case may be,
performance in accordance with the provisions of this Agreement) incurred by the
Trustee, the Trust Administrator or a Custodian, as applicable, in connection
with any claim or legal action or any pending or threatened claim or legal
action arising out of or in connection with the acceptance or administration of
its obligations and duties under this Agreement (or, in the case of a Custodian,
under the applicable Custodial Agreement), other than any loss, liability or
expense (i) resulting from any breach of any Servicer's obligations in
connection with this Agreement for which the Servicer shall indemnify the
Trustee and the Trust Administrator pursuant to Section 8.05(b) and Section
10.03 (and in the case of the Trustee, resulting from any breach of the Trust
Administrator's obligations in connection with this Agreement for which the
Trust Administrator shall indemnify the Trustee pursuant to Section 10.03(a) and
in the case of the Trust Administrator, resulting from any breach of the
Trustee's obligations in connection with this Agreement for which the Trustee
shall indemnify the Trust Administrator pursuant to Section 10.03(c)), (ii) that
constitutes a specific liability of the Trustee or the Trust Administrator, as
applicable, pursuant to Section 10.01(g) or (iii) any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of duties hereunder or by reason of reckless disregard of
obligations and duties hereunder (or, in the case of a Custodian, under the
applicable Custodial Agreement) or as a result of a breach of the Trustee's or
the Trust Administrator's obligations under Article X hereof (or, in the case of
a Custodian, as a result of a breach of such Custodian's obligations under the
related Custodial Agreement). Any amounts payable to the Trustee, the Trust
Administrator, a Custodian, or any director, officer, employee or agent of any
of them in respect of the indemnification provided by this paragraph (a), or
pursuant to any other right of reimbursement from the Trust Fund that the
Trustee, the Trust Administrator, a Custodian or any director, officer, employee
or agent of any of them may have hereunder in its capacity as such, may be
withdrawn by the Trust Administrator for payment to the applicable indemnified
Person from the Distribution Account at any time.

         (b) The Servicer agrees to indemnify the Trustee, the Trust
Administrator and any Custodian from, and hold each harmless against, any loss,
liability or expense resulting from a breach of the Servicer's obligations and
duties under this Agreement. Such indemnity shall survive the termination or
discharge of this Agreement and the resignation or removal of the Trustee, the
Trust Administrator or such Custodian, as the case may be. Any payment hereunder
made by the Servicer to the Trustee, the Trust Administrator or such Custodian
shall be from the Servicer's own funds, without reimbursement from the Trust
Fund therefor.

         SECTION 8.06 Eligibility Requirements for Trustee and Trust
                      Administrator.

         Each of the Trustee and the Trust Administrator hereunder shall at all
times be a corporation or an association organized and doing business under the
laws of any state or the United States of America, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $[_______] and subject to supervision or examination by federal or state
authority. In case at any time the Trustee or the Trust Administrator shall
cease to be eligible in accordance with the provisions of this Section, the
Trustee or the Trust Administrator, as the case may be, shall resign immediately
in the manner and with the effect specified in Section 8.07.

         SECTION 8.07 Resignation and Removal of the Trustee and the Trust
                      Administrator.

         Either of the Trustee or the Trust Administrator may at any time resign
and be discharged from the trust hereby created by giving written notice thereof
to the Depositor, the Servicer and the Certificateholders and, if the Trustee is
resigning, to the Trust Administrator, or, if the Trust Administrator is
resigning, to the Trustee. Upon receiving such notice of resignation, the
Depositor shall promptly appoint a successor trustee or trust administrator
(which may be the same Person in the event both the Trustee and the Trust
Administrator resign or are removed) by written instrument, in duplicate, which
instrument shall be delivered to the resigning Trustee or Trust Administrator
and to the successor trustee or trust administrator, as applicable. A copy of
such instrument shall be delivered to the Certificateholders, the Trustee or
Trust Administrator, as applicable, and the Servicer by the Depositor. If no
successor trustee or trust administrator shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee or Trust Administrator, as applicable, may
petition any court of competent jurisdiction for the appointment of a successor
trustee or trust administrator, as applicable.

         If at any time the Trustee or the Trust Administrator shall cease to be
eligible in accordance with the provisions of Section 8.06 and shall fail to
resign after written request therefor by the Depositor (or in the case of the
Trust Administrator, the Trustee), or if at any time the Trustee or the Trust
Administrator shall become incapable of acting, or shall be adjudged bankrupt or
insolvent, or a receiver of the Trustee or the Trust Administrator or of its
property shall be appointed, or any public officer shall take charge or control
of the Trustee or the Trust Administrator or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation, then the Depositor (or
in the case of the Trust Administrator, the Trustee) may remove the Trustee or
the Trust Administrator, as applicable, and appoint a successor trustee or trust
administrator (which may be the same Person in the event both the Trustee and
the Trust Administrator resign or are removed) by written instrument, in
duplicate, which instrument shall be delivered to the Trustee or Trust
Administrator so removed and to the successor trustee or trust administrator. A
copy of such instrument shall be delivered to the Certificateholders, the
Trustee or the Trust Administrator, as applicable, and the Servicer by the
Depositor.

         The Holders of Certificates entitled to at least [__]% of the Voting
Rights may at any time remove the Trustee or the Trust Administrator and appoint
a successor trustee or trust administrator by written instrument or instruments,
in triplicate, signed by such Holders or their attorneys-in-fact duly
authorized, one complete set of which instruments shall be delivered to the
Depositor, one complete set to the Trustee or the Trust Administrator, as the
case may be, so removed and one complete set to the successor so appointed. A
copy of such instrument shall be delivered to the Certificateholders and the
Servicer by the Depositor.

         If no successor Trust Administrator shall have been appointed and shall
have accepted appointment within 60 days after the Trust Administrator ceases to
be the Trust Administrator pursuant to this Section 8.07, then the Trustee shall
perform the duties of the Trust Administrator pursuant to this Agreement. The
Trustee shall notify the Rating Agencies of any change of Trust Administrator.

         Any resignation or removal of the Trustee or the Trust Administrator
and appointment of a successor trustee or trust administrator, as the case may
be, pursuant to any of the provisions of this Section shall not become effective
until acceptance of appointment by the successor trustee or trust administrator
as provided in Section 8.08. Notwithstanding the foregoing, in the event the
Trust Administrator advises the Trustee that it is unable to continue to perform
its obligations pursuant to the terms of this Agreement prior to the appointment
of a successor, the Trustee shall be obligated to perform such obligations until
a new trust administrator is appointed. Such performance shall be without
prejudice to any claim by a party hereto or beneficiary hereof resulting from
the Trust Administrator's breach of its obligations hereunder. As compensation
therefor, the Trustee shall be entitled to all fees the Trust Administrator
would have been entitled to if it had continued to act hereunder.

         SECTION 8.08 Successor Trustee or Trust Administrator.

         Any successor trustee or trust administrator appointed as provided in
Section 8.07 shall execute, acknowledge and deliver to the Depositor, the
Trustee or the Trust Administrator, as applicable, and to its predecessor
trustee or trust administrator an instrument accepting such appointment
hereunder, and thereupon the resignation or removal of the predecessor trustee
or trust administrator shall become effective and such successor trustee or
trust administrator, without any further act, deed or conveyance, shall become
fully vested with all the rights, powers, duties and obligations of its
predecessor hereunder, with the like effect as if originally named as trustee or
trust administrator herein. The predecessor trustee or trust administrator shall
deliver to the successor trustee or trust administrator all Mortgage Files and
related documents and statements, as well as all moneys, held by it hereunder
and the Depositor and the predecessor trustee or trust administrator shall
execute and deliver such instruments and do such other things as may reasonably
be required for more fully and certainly vesting and confirming in the successor
trustee or trust administrator all such rights, powers, duties and obligations.

         No successor trustee or trust administrator shall accept appointment as
provided in this Section unless at the time of such acceptance such successor
trustee or trust administrator shall be eligible under the provisions of Section
8.06 and the appointment of such successor trustee or trust administrator shall
not result in a downgrading of any Class of Certificates by the Rating Agencies,
as evidenced by a letter from the Rating Agencies.

         Upon acceptance of appointment by a successor trustee or trust
administrator as provided in this Section, the Depositor shall mail notice of
the succession of such trustee or trust administrator hereunder to all Holders
of Certificates at their addresses as shown in the Certificate Register. If the
Depositor fails to mail such notice within 10 days after acceptance of
appointment by the successor trustee or trust administrator, the successor
trustee or trust administrator shall cause such notice to be mailed at the
expense of the Depositor.

         SECTION 8.09 Merger or Consolidation of Trustee or Trust Administrator.

         Any corporation or association into which either the Trustee or the
Trust Administrator may be merged or converted or with which it may be
consolidated or any corporation or association resulting from any merger,
conversion or consolidation to which the Trustee or the Trust Administrator, as
the case may be, shall be a party, or any corporation or association succeeding
to the business of the Trustee or the Trust Administrator, as applicable, shall
be the successor of the Trustee or the Trust Administrator, as the case may be,
hereunder, provided such corporation or association shall be eligible under the
provisions of Section 8.06, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding.

         SECTION 8.10 Appointment of Co-Trustee or Separate Trustee.

         Notwithstanding any other provisions hereof, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any part
of REMIC I or property securing the same may at the time be located, the
Servicer and the Trustee acting jointly shall have the power and shall execute
and deliver all instruments to appoint one or more Persons approved by the
Trustee to act as co-trustee or co-trustees, jointly with the Trustee, or
separate trustee or separate trustees, of all or any part of REMIC I, and to
vest in such Person or Persons, in such capacity, such title to REMIC I, or any
part thereof, and, subject to the other provisions of this Section 8.10, such
powers, duties, obligations, rights and trusts as the Servicer and the Trustee
may consider necessary or desirable. If the Servicer shall not have joined in
such appointment within 15 days after the receipt by it of a request to do so,
or in case a Servicer Event of Default shall have occurred and be continuing,
the Trustee alone shall have the power to make such appointment. No co-trustee
or separate trustee hereunder shall be required to meet the terms of eligibility
as a successor trustee under Section 8.06 hereunder and no notice to Holders of
Certificates of the appointment of co-trustee(s) or separate trustee(s) shall be
required under Section 8.08 hereof.

         In the case of any appointment of a co-trustee or separate trustee
pursuant to this Section 8.10 all rights, powers, duties and obligations
conferred or imposed upon the Trustee shall be conferred or imposed upon and
exercised or performed by the Trustee and such separate trustee or co-trustee
jointly, except to the extent that under any law of any jurisdiction in which
any particular act or acts are to be performed by the Trustee (whether as
Trustee hereunder or as successor to the Servicer hereunder), the Trustee shall
be incompetent or unqualified to perform such act or acts, in which event such
rights, powers, duties and obligations (including the holding of title to REMIC
I or any portion thereof in any such jurisdiction) shall be exercised and
performed by such separate trustee or co-trustee at the direction of the
Trustee.

         Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article VIII. Each separate trustee and co-trustee, upon its acceptance
of the trust conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee.

         Any separate trustee or co-trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor trustee.

         SECTION 8.11 [Reserved].

         SECTION 8.12 Appointment of Office or Agency.

         The Trust Administrator will appoint an office or agency in the City of
New York where the Certificates may be surrendered for registration of transfer
or exchange, and presented for final distribution, and where notices and demands
to or upon the Trust Administrator in respect of the Certificates and this
Agreement may be served.

         SECTION 8.13 Representations and Warranties.

         Each of the Trustee and the Trust Administrator hereby represents and
warrants to the Servicer, the Depositor and the Trustee and the Trust
Administrator, as applicable, as of the Closing Date, that:

(i)      It is a national banking association duly organized, validly existing
         and in good standing under the laws of the United States of America.

(ii)     The execution and delivery of this Agreement by it, and the performance
         and compliance with the terms of this Agreement by it, will not violate
         its articles of association or bylaws or constitute a default (or an
         event which, with notice or lapse of time, or both, would constitute a
         default) under, or result in the breach of, any material agreement or
         other instrument to which it is a party or which is applicable to it or
         any of its assets.

(iii)    It has the full power and authority to enter into and consummate all
         transactions contemplated by this Agreement, has duly authorized the
         execution, delivery and performance of this Agreement, and has duly
         executed and delivered this Agreement.

(iv)     This Agreement, assuming due authorization, execution and delivery by
         the other parties hereto, constitutes a valid, legal and binding
         obligation of it, enforceable against it in accordance with the terms
         hereof, subject to (A) applicable bankruptcy, insolvency, receivership,
         reorganization, moratorium and other laws affecting the enforcement of
         creditors' rights generally, and (B) general principles of equity,
         regardless of whether such enforcement is considered in a proceeding in
         equity or at law.

(v)      It is not in violation of, and its execution and delivery of this
         Agreement and its performance and compliance with the terms of this
         Agreement will not constitute a violation of, any law, any order or
         decree of any court or arbiter, or any order, regulation or demand of
         any federal, state or local governmental or regulatory authority, which
         violation, in its good faith and reasonable judgment, is likely to
         affect materially and adversely either the ability of the it to perform
         its obligations under this Agreement or the financial condition of it.

(vi)     No litigation is pending or, to the best of its knowledge, threatened
         against it which would prohibit it from entering into this Agreement
         or, in its good faith reasonable judgment, is likely to materially and
         adversely affect either the ability of it to perform its obligations
         under this Agreement or the financial condition of it.

         SECTION 8.14 [Reserved].

         SECTION 8.15 No Trustee or Trust Administrator Liability for Actions or
                      Inactions of Custodians.

         Notwithstanding anything to the contrary herein, in no event shall the
Trustee pr the Trust Administrator be liable to any party hereto or to any third
party for the performance of any custody-related functions with respect to which
the applicable Custodian shall fail to take action on behalf of the Trustee or
Trust Administrator, as the case may be, or, with respect to which the
performance of custody-related functions pursuant to the terms of the custodial
agreement with the applicable Custodian shall fail to satisfy all the related
requirements under this Agreement.

<PAGE>

                                   ARTICLE IX

                                   TERMINATION

         SECTION 9.01 Termination Upon Repurchase or Liquidation of the Mortgage
                      Loans.

         (a) Subject to Section 9.02, the respective obligations and
responsibilities under this Agreement of the Depositor, the Servicer, the
Trustee and the Trust Administrator with respect to the Mortgage Loans (other
than the obligations of the Servicer to the Trustee and the Trust Administrator
pursuant to Section 8.05 and of the Servicer to provide for and the Trust
Administrator to make payments in respect of the REMIC I Regular Interests and
the Classes of Certificates as hereinafter set forth) shall terminate upon
payment to the Certificateholders and the deposit of all amounts held by or on
behalf of the Trustee or the Trust Administrator and required hereunder to be so
paid or deposited on the Distribution Date coinciding with or following the
earlier to occur of (i) the purchase by the Terminator (on a servicing retained
basis) of all Mortgage Loans and each related REO Property remaining in REMIC I
and (ii) the final payment or other liquidation (or any advance with respect
thereto) of the last Mortgage Loan or related REO Property remaining in REMIC I;
provided, however, that in no event shall the trust created hereby continue
beyond the earlier of (a) the expiration of 21 years from the death of the last
survivor of the descendants of Joseph P. Kennedy, the late ambassador of the
United States to the Court of St. James, living on the date hereof and (b) the
Latest Possible Maturity Date (as defined in the Preliminary Statement).

         Subject to Section 3.10 hereof, the purchase by the Terminator of all
Mortgage Loans and each REO Property remaining in REMIC I shall be at a price
equal to the greater of (i) the Stated Principal Balance of the Mortgage Loans
and the appraised value of any REO Properties (such appraisal to be conducted by
an appraiser mutually agreed upon by the Servicer and the Trust Administrator)
and (ii) the fair market value of the Mortgage Loans and the REO Properties (as
determined by the Servicer, with the consent of the Trust Administrator as of
the close of business on the third Business Day next preceding the date upon
which notice of any such termination is furnished to the related
Certificateholders pursuant to Section 9.01(c)), in each case plus accrued and
unpaid interest thereon at the weighted average of the Mortgage Rates through
the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances allocable to such Mortgage Loans and REO
Properties (the "Termination Price"); provided, however, such option may only be
exercised if the Termination Price is sufficient to result in the payment of all
interest accrued on, as well as amounts necessary to retire the principal
balance of, each class of notes issued pursuant to the Indenture.

         (b) The Servicer shall have the right (the party exercising such right,
the "Terminator"), to purchase all of the Mortgage Loans and each REO Property
remaining in REMIC I pursuant to clause (i) of the preceding paragraph no later
than the Determination Date in the month immediately preceding the Distribution
Date on which the Certificates will be retired; provided, however, that the
Terminator may elect to purchase all of the Mortgage Loans and each REO Property
remaining in REMIC I pursuant to clause (i) above only if the aggregate Stated
Principal Balance of the Mortgage Loans and each REO Property remaining in the
Trust Fund at the time of such election is reduced to less than [__]% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the Cut-off Date.
By acceptance of a Residual Certificate, the Holders of the Residual
Certificates agree, in connection with any termination hereunder, to assign and
transfer any amounts in excess of par, and to the extent received in respect of
such termination, to pay any such amounts to the Holders of the Class CE
Certificates.

         (c) Notice of the liquidation of any Certificates shall be given
promptly by the Trust Administrator by letter to the related Certificateholders
mailed (a) in the event such notice is given in connection with the purchase of
the Mortgage Loans and each related REO Property remaining in REMIC I by the
Terminator, not earlier than the 15th day and not later than the 25th day of the
month next preceding the month of the final distribution on the related
Certificates or (b) otherwise during the month of such final distribution on or
before the Determination Date in such month, in each case specifying (i) the
Distribution Date upon which REMIC I will terminate and final payment of the
Certificates and will be made upon presentation and surrender of the
Certificates at the office of the Trust Administrator therein designated, (ii)
the amount of any such final payment, (iii) that no interest shall accrue in
respect of the Certificates from and after the Interest Accrual Period relating
to the final Distribution Date therefor and (iv) that the Record Date otherwise
applicable to such Distribution Date is not applicable, payments being made only
upon presentation and surrender of the Certificates at the office of the Trust
Administrator. In the event such notice is given in connection with the purchase
of all of the Mortgage Loans and each REO Property remaining in REMIC I by the
Terminator, the Terminator shall deliver to the Trust Administrator for deposit
in the Distribution Account not later than the last Business Day of the month
next preceding the month in which such distribution will be made an amount in
immediately available funds equal to the Termination Price. Upon certification
to the Trust Administrator by a Servicing Officer of the making of such final
deposit, the Trust Administrator shall promptly release or cause to be released
to the related Terminator the Mortgage Files for the remaining Mortgage Loans
and the Trust Administrator shall execute all assignments, endorsements and
other instruments delivered to it which are necessary to effectuate such
transfer.

         (d) Upon receipt of notice by the Trust Administrator of the
presentation of the Certificates by the Certificateholders on the related final
Distribution Date to the Trust Administrator, the Trust Administrator shall
distribute to each Certificateholder so presenting and surrendering its
Certificates the amount otherwise distributable on such Distribution Date in
accordance with Section 4.01 in respect of the Certificates so presented and
surrendered. Any funds not distributed to any Holder or Holders of Certificates
being retired on such Distribution Date because of the failure of such Holder or
Holders to tender their Certificates shall, on such date, be set aside and held
in trust by the Trust Administrator and credited to the account of the
appropriate non-tendering Holder or Holders. If any Certificates as to which
notice has been given pursuant to this Section 9.01 shall not have been
surrendered for cancellation within six months after the time specified in such
notice, the Trust Administrator shall mail a second notice to the remaining
non-tendering Certificateholders to surrender their Certificates for
cancellation in order to receive the final distribution with respect thereto. If
within one year after the second notice all such Certificates shall not have
been surrendered for cancellation, the Trust Administrator shall, directly or
through an agent, mail a final notice to remaining related non-tendering
Certificateholders concerning surrender of their Certificates. The costs and
expenses of maintaining the funds in trust and of contacting such
Certificateholders shall be paid out of the assets remaining in the trust funds.
If within one year after the final notice any such Certificates shall not have
been surrendered for cancellation, the Trust Administrator shall pay to
Citigroup Global Markets Inc. all such amounts, and all rights of non-tendering
Certificateholders in or to such amounts shall thereupon cease. No interest
shall accrue or be payable to any Certificateholder on any amount held in trust
by the Trust Administrator as a result of such Certificateholder's failure to
surrender its Certificate(s) for final payment thereof in accordance with this
Section 9.01.

         Immediately following the deposit of funds in trust hereunder in
respect of each of the Certificates the Trust Fund shall terminate.

         SECTION 9.02 Additional Termination Requirements.

         (a) In the event that the Terminator purchases all the Mortgage Loans
and each REO Property, REMIC I shall be terminated, in each case in accordance
with the following additional requirements (or in connection with the final
payment on or other liquidation of the last Mortgage Loan or REO Property
remaining in REMIC I, the additional requirement specified in clause (i) below):

(i)      The Trust Administrator shall specify the first day in the 90-day
         liquidation period in a statement attached to REMIC I's final Tax
         Return pursuant to Treasury regulation Section 1.860F-1, and such
         termination shall satisfy all requirements of a qualified liquidation
         under Section 860F of the Code and any regulations thereunder, as
         evidenced by an Opinion of Counsel obtained at the expense of the
         Servicer;

(ii)     During such 90-day liquidation period, and at or prior to the time of
         making of the final payment on the Certificates, the Trust
         Administrator shall sell all of the assets of REMIC I to the Terminator
         for cash; and

(iii)    At the time of the making of the final payment on the related
         Certificates, the Trust Administrator shall distribute or credit, or
         cause to be distributed or credited, to the Holders of the Class R
         Certificates all cash on hand in REMIC I (other than cash retained to
         meet claims), and REMIC I shall terminate at that time.

         (b) At the expense of the Terminator (or in the event of termination
under Section 9.01(a)(ii), at the expense of the Servicer), the Trust
Administrator shall prepare or cause to be prepared the documentation required
in connection with the adoption of a plan of liquidation of REMIC I pursuant to
this Section 9.02.

         (c) By their acceptance of Certificates, the Holders thereof hereby
agree to authorize the Trust Administrator to specify the 90-day liquidation
period for REMIC I which authorization shall be binding upon all successor
Certificateholders.

<PAGE>

                                    ARTICLE X

                                REMIC PROVISIONS

         SECTION 10.01 REMIC Administration.

         (a) The Trust Administrator shall elect to treat each REMIC created
hereunder as a REMIC under the Code and, if necessary, under applicable state
law. Such election will be made by the Trust Administrator on behalf of the
Trustee on Form 1066 or other appropriate federal tax or information return or
any appropriate state return for the taxable year ending on the last day of the
calendar year in which the Certificates are issued. For the purposes of the
REMIC election in respect of REMIC I, the REMIC I Regular Interests shall be
designated as the Regular Interests in REMIC I and the Class R-I Interest shall
be designated as the Residual Interest in REMIC I. The Floating Rate
Certificates, the Class CE Interest and the Class P Interest shall be designated
as the Regular Interests in REMIC II and the Class R-II Interest shall be
designated as the Residual Interest in REMIC II. The Class CE Certificates shall
be designated as the Regular Interests in REMIC III and the Class R-III Interest
shall be designated as the Residual Interest in REMIC III. The Class P
Certificates shall be designated as the Regular Interests in REMIC IV and the
Class R-IV Interest shall be designated as the Residual Interest in REMIC IV.
Neither the Trustee nor the Trust Administrator shall permit the creation of any
"interests" in any Trust REMIC (within the meaning of Section 860G of the Code)
other than the REMIC Regular Interests and the interests represented by the
Certificates.

         (b) The Closing Date is hereby designated as the "Startup Day" of each
Trust REMIC created hereunder within the meaning of Section 860G(a)(9) of the
Code.

         (c) The Trust Administrator shall pay any and all expenses relating to
any tax audit of the Trust Fund (including, but not limited to, any professional
fees or any administrative or judicial proceedings with respect to any Trust
REMIC that involve the Internal Revenue Service or state tax authorities), and
shall be entitled to reimbursement from the Trust therefor to the extent
permitted under Section 8.05. The Trust Administrator, as agent for any Trust
REMIC's tax matters person, shall (i) act on behalf of the Trust Fund in
relation to any tax matter or controversy involving any Trust REMIC and (ii)
represent the Trust Fund in any administrative or judicial proceeding relating
to an examination or audit by any governmental taxing authority with respect
thereto. The holder of the largest Percentage Interest of the Residual
Certificates shall be designated, in the manner provided under Treasury
regulations section 1.860F-4(d) and Treasury regulations section
301.6231(a)(7)-1, as the tax matters person of the related REMIC created
hereunder. By its acceptance thereof, the holder of the largest Percentage
Interest of the Residual Certificates hereby agrees to irrevocably appoint the
Trust Administrator or an Affiliate as its agent to perform all of the duties of
the tax matters person for the Trust Fund.

         (d) The Trust Administrator shall prepare and the Trustee at the
direction of the Trust Administrator shall sign and the Trust Administrator
shall file all of the Tax Returns in respect of the REMIC created hereunder. The
expenses of preparing and filing such returns shall be borne by the Trust
Administrator without any right of reimbursement therefor. The Servicer shall
provide on a timely basis to the Trust Administrator or its designee such
information with respect to the assets of the Trust Fund as is in its possession
and reasonably required by the Trust Administrator to enable it to perform its
obligations under this Article.

         (e) The Trust Administrator shall perform on behalf of any Trust REMIC
all reporting and other tax compliance duties that are the responsibility of the
REMIC under the Code, the REMIC Provisions or other compliance guidance issued
by the Internal Revenue Service or any state or local taxing authority including
the filing of Form 8811 with the Internal Revenue Service within 30 days
following the Closing Date. Among its other duties, as required by the Code, the
REMIC Provisions or other such compliance guidance, the Trust Administrator
shall provide (i) to any Transferor of a Residual Certificate such information
as is necessary for the application of any tax relating to the transfer of a
Residual Certificate to any Person who is not a Permitted Transferee, (ii) to
the Certificateholders such information or reports as are required by the Code
or the REMIC Provisions including reports relating to interest, original issue
discount and market discount or premium (using the Prepayment Assumption as
required) and (iii) to the Internal Revenue Service the name, title, address and
telephone number of the person who will serve as the representative of any Trust
REMIC. The Servicer shall provide on a timely basis to the Trust Administrator
such information with respect to the assets of the Trust Fund, including,
without limitation, the Mortgage Loans, as is in its possession and reasonably
required by the Trust Administrator to enable it to perform its obligations
under this subsection. In addition, the Depositor shall provide or cause to be
provided to the Trust Administrator, within ten (10) days after the Closing
Date, all information or data that the Trust Administrator reasonably determines
to be relevant for tax purposes as to the valuations and issue prices of the
Certificates, including, without limitation, the price, yield, Prepayment
Assumption and projected cash flow of the Certificates.

         (f) The Servicer, the Trustee and the Trust Administrator shall take
such action and shall cause any Trust REMIC to take such action as shall be
necessary to create or maintain the status thereof as a REMIC under the REMIC
Provisions. The Servicer, the Trustee and the Trust Administrator shall not take
any action, cause the Trust Fund to take any action or fail to take (or fail to
cause to be taken) any action that, under the REMIC Provisions, if taken or not
taken, as the case may be, could (i) endanger the status of any Trust REMIC as a
REMIC or (ii) result in the imposition of a tax upon the Trust Fund (including
but not limited to the tax on prohibited transactions as defined in Section
860F(a)(2) of the Code and the tax on contributions to a REMIC set forth in
Section 860G(d) of the Code) (either such event, an "Adverse REMIC Event")
unless the Trustee and the Trust Administrator have received an Opinion of
Counsel, addressed to the Trustee and the Trust Administrator (at the expense of
the party seeking to take such action but in no event at the expense of the
Trust Administrator or the Trustee) to the effect that the contemplated action
will not, with respect to any Trust REMIC, endanger such status or result in the
imposition of such a tax, nor shall the Servicer take or fail to take any action
(whether or not authorized hereunder) as to which the Trustee or the Trust
Administrator has advised it in writing that it has received an Opinion of
Counsel to the effect that an Adverse REMIC Event could occur with respect to
such action. In addition, prior to taking any action with respect to any Trust
REMIC or its assets, or causing any Trust REMIC to take any action, which is not
contemplated under the terms of this Agreement, the Servicer will consult with
the Trustee and the Trust Administrator or their designee, in writing, with
respect to whether such action could cause an Adverse REMIC Event to occur with
respect to any Trust REMIC, and the Servicer shall not take any such action or
cause any Trust REMIC to take any such action as to which the Trustee or the
Trust Administrator has advised it in writing that an Adverse REMIC Event could
occur. The Trust Administrator and the Trustee may consult with counsel to make
such written advice, and the cost of same shall be borne by the party seeking to
take the action not permitted by this Agreement, but in no event shall such cost
be an expense of the Trustee or the Trust Administrator. At all times as may be
required by the Code, the Trust Administrator, the Trustee or Servicer will
ensure that substantially all of the assets of any Trust REMIC will consist of
"qualified mortgages" as defined in Section 860G(a)(3) of the Code and
"permitted investments" as defined in Section 860G(a)(5) of the Code.

         (g) In the event that any tax is imposed on "prohibited transactions"
of the REMIC created hereunder as defined in Section 860F(a)(2) of the Code, on
the "net income from foreclosure property" of the REMIC as defined in Section
860G(c) of the Code, on any contributions to the REMIC after the Startup Day
therefor pursuant to Section 860G(d) of the Code, or any other tax is imposed by
the Code or any applicable provisions of state or local tax laws, such tax shall
be charged (i) to the Trust Administrator pursuant to Section 10.03 hereof, if
such tax arises out of or results from a breach by the Trust Administrator of
any of its obligations under this Article X, (ii) to the Trustee pursuant to
Section 10.03 hereof, if such tax arises out of or results from a breach by the
Trustee of any of its obligations under this Article X, (iii) to the Servicer
pursuant to Section 10.03 hereof, if such tax arises out of or results from a
breach by the Servicer of any of its obligations under Article III or this
Article X, or otherwise (iv) against amounts on deposit in the Distribution
Account and shall be paid by withdrawal therefrom.

         (h) [Reserved].

         (i) The Trust Administrator shall, for federal income tax purposes,
maintain books and records with respect to any Trust REMIC on a calendar year
and on an accrual basis.

         (j) Following the Startup Day, the Servicer, the Trustee and the Trust
Administrator shall not accept any contributions of assets to any Trust REMIC
other than in connection with any Qualified Substitute Mortgage Loan delivered
in accordance with Section 2.03 unless it shall have received an Opinion of
Counsel to the effect that the inclusion of such assets in the Trust Fund will
not cause the REMIC to fail to qualify as a REMIC at any time that any
Certificates are outstanding or subject the REMIC to any tax under the REMIC
Provisions or other applicable provisions of federal, state and local law or
ordinances.

         (k) None of the Trustee, the Trust Administrator or the Servicer shall
enter into any arrangement by which any Trust REMIC will receive a fee or other
compensation for services nor permit either such REMIC to receive any income
from assets other than "qualified mortgages" as defined in Section 860G(a)(3) of
the Code or "permitted investments" as defined in Section 860G(a)(5) of the
Code.

         SECTION 10.02 Prohibited Transactions and Activities.

         None of the Depositor, the Servicer, the Trust Administrator or the
Trustee shall sell, dispose of or substitute for any of the Mortgage Loans
(except in connection with (i) the foreclosure of a Mortgage Loan, including but
not limited to, the acquisition or sale of a Mortgaged Property acquired by deed
in lieu of foreclosure, (ii) the bankruptcy of any Trust REMIC, (iii) the
termination of any Trust REMIC pursuant to Article IX of this Agreement, (iv) a
substitution pursuant to Article II of this Agreement or (v) a purchase of
Mortgage Loans pursuant to Article II or III of this Agreement), nor acquire any
assets for any Trust REMIC (other than REO Property acquired in respect of a
defaulted Mortgage Loan), nor sell or dispose of any investments in the
Collection Account or the Distribution Account for gain, nor accept any
contributions to any Trust REMIC after the Closing Date (other than a Qualified
Substitute Mortgage Loan delivered in accordance with Section 2.03), unless it
has received an Opinion of Counsel, addressed to the Trustee and the Trust
Administrator (at the expense of the party seeking to cause such sale,
disposition, substitution, acquisition or contribution but in no event at the
expense of the Trustee or the Trust Administrator) that such sale, disposition,
substitution, acquisition or contribution will not (a) affect adversely the
status of any Trust REMIC as a REMIC or (b) cause any Trust REMIC to be subject
to a tax on "prohibited transactions" or "contributions" pursuant to the REMIC
Provisions.

         SECTION 10.03 Servicer, Trustee and Trust Administrator
Indemnification.

         (a) The Trust Administrator agrees to indemnify the Trust Fund, the
Depositor, the Servicer and the Trustee for any taxes and costs including,
without limitation, any reasonable attorneys fees imposed on or incurred by the
Trust Fund, the Depositor, the Servicer or the Trustee as a result of a breach
of the Trust Administrator's covenants set forth in this Article X.

         (b) The Servicer agrees to indemnify the Trust Fund, the Depositor, the
Trust Administrator and the Trustee for any taxes and costs including, without
limitation, any reasonable attorneys' fees imposed on or incurred by the Trust
Fund, the Depositor, the Trust Administrator or the Trustee, as a result of a
breach of the Servicer's covenants set forth in Article III or this Article X.

         (c) The Trustee agrees to indemnify the Trust Fund, the Depositor, the
Trust Administrator and the Servicer for any taxes and costs including, without
limitation, any reasonable attorneys' fees imposed on or incurred by the Trust
Fund, the Depositor, the Trust Administrator or the Servicer, as a result of a
breach of the Trustee's covenants set forth in this Article X.

<PAGE>

                                   ARTICLE XI

                            MISCELLANEOUS PROVISIONS

         SECTION 11.01 Amendment.

         This Agreement may be amended from time to time by the Depositor, the
Servicer, the Trustee and the Trust Administrator without the consent of any of
the Certificateholders, (i) to cure any ambiguity or defect, (ii) to correct,
modify or supplement any provisions herein (including to give effect to the
expectations of Certificateholders) or (iii) to make any other provisions with
respect to matters or questions arising under this Agreement which shall not be
inconsistent with the provisions of this Agreement, provided that such action
shall not, as evidenced by either (a) an Opinion of Counsel delivered to the
Trustee and the Trust Administrator, adversely affect in any material respect
the interests of any Certificateholder or (b) written notice to the Depositor,
the Servicer, the Trustee and the Trust Administrator from the Rating Agencies
that such action will not result in the reduction or withdrawal of the rating of
any outstanding Class of Certificates with respect to which it is a Rating
Agency). No amendment shall be deemed to adversely affect in any material
respect the interests of any Certificateholder who shall have consented thereto,
and no Opinion of Counsel or Rating Agency confirmation shall be required to
address the effect of any such amendment on any such consenting
Certificateholder.

         This Agreement may also be amended from time to time by the Depositor,
the Servicer, the Trustee and the Trust Administrator with the consent of the
Holders of Certificates entitled to at least [__]% of the Voting Rights 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 Cap Provider or Holders of Certificates; provided, however, that no such
amendment shall (i) reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed on any
Certificate without the consent of the Holder of such Certificate, (ii)
adversely affect in any material respect the interests of the Cap Provider or
Holders of any Class of Certificates (as evidenced by either (i) an Opinion of
Counsel delivered to the Trustee and Trust Administrator or (ii) written notice
to the Depositor, the Servicer, the Trustee and the Trust Administrator from the
Rating Agencies that such action will not result in the reduction or withdrawal
of the rating of any outstanding Class of Certificates with respect to which it
is a Rating Agency) in a manner, other than as described in (i), without the
consent of the Holders of Certificates of such Class evidencing at least [__]%
of the Voting Rights allocated to such Class, or (iii) modify the consents
required by the immediately preceding clauses (i) and (ii) without the consent
of the Holders of all Certificates then outstanding. Notwithstanding any other
provision of this Agreement, for purposes of the giving or withholding of
consents pursuant to this Section 11.01, Certificates registered in the name of
the Depositor or the Servicer or any Affiliate thereof shall be entitled to
Voting Rights with respect to matters affecting such Certificates.

         Notwithstanding any contrary provision of this Agreement, neither the
Trustee nor the Trust Administrator shall consent to any amendment to this
Agreement unless it shall have first received an Opinion of Counsel to the
effect that such amendment will not result in the imposition of any tax on any
Trust REMIC pursuant to the REMIC Provisions or cause any Trust REMIC to fail to
qualify as a REMIC at any time that any Certificates are outstanding.

         Prior to executing any amendment pursuant to this Section, the Trustee
and the Trust Administrator shall be entitled to receive an Opinion of Counsel
(provided by the Person requesting such amendment) to the effect that such
amendment is authorized or permitted by this Agreement.

         Notwithstanding any of the other provisions of this Section 11.01, none
of the Depositor, the Servicer or the Trustee shall enter into any amendment to
Section 4.01(e), Section 4.08 or Section 11.10 of this Agreement without the
prior written consent of the Cap Provider.

         Promptly after the execution of any such amendment the Trust
Administrator shall furnish a copy of such amendment to each Certificateholder.

         It shall not be necessary for the consent of Certificateholders under
this Section 11.01 to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent shall approve the substance thereof. The
manner of obtaining such consents and of evidencing the authorization of the
execution thereof by Certificateholders shall be subject to such reasonable
regulations as the Trust Administrator may prescribe.

         The cost of any Opinion of Counsel to be delivered pursuant to this
Section 11.01 shall be borne by the Person seeking the related amendment, but in
no event shall such Opinion of Counsel be an expense of the Trustee or the Trust
Administrator.

         Notwithstanding the foregoing, each of the Trustee and Trust
Administrator may, but shall not be obligated to enter into any amendment
pursuant to this Section that affects its rights, duties and immunities under
this Agreement or otherwise.

         SECTION 11.02 Recordation of Agreement; Counterparts.

         To the extent permitted by applicable law, this Agreement is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other appropriate
public recording office or elsewhere, such recordation to be effected by the
Servicer at the expense of the Certificateholders, but only upon direction of
Certificateholders accompanied by an Opinion of Counsel to the effect that such
recordation materially and beneficially affects the interests of the
Certificateholders.

         For the purpose of facilitating the recordation of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.

         SECTION 11.03 Limitation on Rights of Certificateholders.

         The death or incapacity of any Certificateholder shall not operate to
terminate this Agreement or the Trust Fund, nor entitle such Certificateholder's
legal representatives or heirs to claim an accounting or to take any action or
proceeding in any court for a partition or winding up of the Trust Fund, nor
otherwise affect the rights, obligations and liabilities of the parties hereto
or any of them.

         No Certificateholder shall have any right to vote (except as expressly
provided for herein) or in any manner otherwise control the operation and
management of the Trust Fund, or the obligations of the parties hereto, nor
shall anything herein set forth, or contained in the terms of any of the
Certificates, be construed so as to constitute the Certificateholders from time
to time as partners or members of an association; nor shall any
Certificateholder be under any liability to any third person by reason of any
action taken by the parties to this Agreement pursuant to any provision hereof.

         No Certificateholder shall have any right by virtue of any provision of
this Agreement to institute any suit, action or proceeding in equity or at law
upon or under or with respect to this Agreement, unless (i) such Holder
previously shall have given to the Trustee and Trust Administrator a written
notice of default and of the continuance thereof, as hereinbefore provided, and
(ii) the Holders of Certificates entitled to at least [__]% of the Voting Rights
shall have made written request upon the Trustee and the Trust Administrator to
institute such action, suit or proceeding in its own name as Trustee or Trust
Administrator hereunder and shall have offered to the Trustee or the Trust
Administrator, as applicable, such indemnity satisfactory to it against the
costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee or the Trust Administrator, for 15 days after its receipt of such
notice, request and offer of indemnity, shall have neglected or refused to
institute any such action, suit or proceeding. It is understood and intended,
and expressly covenanted by each Certificateholder with every other
Certificateholder, the Trustee and the Trust Administrator, that no one or more
Holders of Certificates shall have any right in any manner whatsoever by virtue
of any provision of this Agreement to affect, disturb or prejudice the rights of
the Holders of any other of such Certificates, or to obtain or seek to obtain
priority over or preference to any other such Holder, or to enforce any right
under this Agreement, except in the manner herein provided and for the equal,
ratable and common benefit of all Certificateholders. For the protection and
enforcement of the provisions of this Section, each and every Certificateholder,
the Trustee and the Trust Administrator shall be entitled to such relief as can
be given either at law or in equity.

         SECTION 11.04 Governing Law.

         This Agreement shall be construed in accordance with the laws of the
State of New York and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with such laws.

         SECTION 11.05 Notices.

         All directions, demands and notices hereunder shall be sent (i) via
facsimile (with confirmation of receipt) or (ii) in writing and shall be deemed
to have been duly given when received if personally delivered at or mailed by
first class mail, postage prepaid, or by express delivery service or delivered
in any other manner specified herein, to (a) in the case of the Depositor, 390
Greenwich Street, New York, New York 10013, Attention: Mortgage Finance Group
(telecopy number (212) 723-8604), or such other address or telecopy number as
may hereafter be furnished to the Servicer, the Trust Administrator and the
Trustee in writing by the Depositor, (b) in the case of [_______________],
[_______________], Attention: [_______________] (telecopy number:
[_______________]), or such other address or telecopy number as may hereafter be
furnished to the Trustee, the Trust Administrator and the Depositor in writing
by the Servicer, (c) in the case of the Trust Administrator, [_______________],
Attention: [_______________] (telecopy number [_______________]), or such other
address or telecopy number as may hereafter be furnished to the Trustee, the
Servicer and the Depositor in writing by the Trust Administrator and (d) in the
case of the Trustee, [_______________], Attention: [_______________] (telecopy
number [_______________]), or such other address or telecopy number as may
hereafter be furnished to the Servicer, the Trust Administrator and the
Depositor in writing by the Trustee. Any notice required or permitted to be
given to a Certificateholder shall be given by first class mail, postage
prepaid, at the address of such Holder as shown in the Certificate Register. Any
notice so mailed within the time prescribed in this Agreement shall be
conclusively presumed to have been duly given when mailed, whether or not the
Certificateholder receives such notice. A copy of any notice required to be
telecopied hereunder also shall be mailed to the appropriate party in the manner
set forth above.

         SECTION 11.06 Severability of Provisions.

         If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way affect the validity or enforceability of the other provisions of this
Agreement or of the Certificates or the rights of the Holders thereof.

         SECTION 11.07 Notice to Rating Agencies.

         The Trust Administrator shall use its best efforts promptly to provide
notice to the Rating Agencies, and the Servicer shall use its best efforts
promptly to provide notice to the Trust Administrator, with respect to each of
the following of which the Trust Administrator or the Servicer, as applicable,
has actual knowledge:

                  1. Any material change or amendment to this Agreement;

                  2. The occurrence of any Servicer Event of Default that has
not been cured or waived;

                  3. The resignation or termination of any Servicer, the Trust
Administrator or the Trustee;

                  4. The repurchase or substitution of Mortgage Loans pursuant
to or as contemplated by Section 2.03;

                  5. The final payment to the Holders of any Class of
Certificates;

                  6. Any change in the location of the Collection Account or the
Distribution Account;

                  7. Any event that would result in the inability of the Trust
Administrator or the Trustee, as applicable, were it to succeed as Servicer, to
make advances regarding delinquent Mortgage Loans; and

                  8. The filing of any claim under the Servicer's blanket bond
and errors and omissions insurance policy required by Section 3.14 or the
cancellation or material modification of coverage under any such instrument.

         In addition, the Trust Administrator shall make available to the Rating
Agencies copies of each report to Certificateholders described in Section 4.02
and the Servicer, as required pursuant to Section 3.20 and Section 3.21, shall
promptly furnish to the Rating Agencies copies of the following:

                  1. Each annual statement as to compliance described in Section
3.20; and

                  2. Each annual independent public accountants' servicing
report described in Section 3.21.

         Any such notice pursuant to this Section 11.07 shall be in writing and
shall be deemed to have been duly given if personally delivered at or mailed by
first class mail, postage prepaid, or by express delivery service to Fitch
Ratings, One State Street Plaza, New York, New York 10004, to Standard & Poor's
Ratings Services, a division of the McGraw-Hill Companies, Inc., 55 Water
Street, New York, New York 10041 and to Moody's at 99 Church Street, New York,
New York 10007 or such other addresses as the Rating Agencies may designate in
writing to the parties hereto.

         SECTION 11.08 Article and Section References.

         All article and section references used in this Agreement, unless
otherwise provided, are to articles and sections in this Agreement.

         SECTION 11.09 Grant of Security Interest.

         It is the express intent of the parties hereto that the conveyance of
the Mortgage Loans by the Depositor to the Trustee be, and be construed as, a
sale of the Mortgage Loans by the Depositor and not a pledge of the Mortgage
Loans by the Depositor to secure a debt or other obligation of the Depositor.
However, in the event that, notwithstanding the aforementioned intent of the
parties, the Mortgage Loans are held to be property of the Depositor, then, (a)
it is the express intent of the parties that such conveyance be deemed a pledge
of the Mortgage Loans by the Depositor to the Trustee to secure a debt or other
obligation of the Depositor and (b)(1) this Agreement shall also be deemed to be
a security agreement within the meaning of Articles 8 and 9 of the Uniform
Commercial Code as in effect from time to time in the State of New York; (2) the
conveyance provided for in Section 2.01 hereof shall be deemed to be a grant by
the Depositor to the Trustee of a security interest in all of the Depositor's
right, title and interest in and to the Mortgage Loans and all amounts payable
to the holders of the Mortgage Loans in accordance with the terms thereof and
all proceeds of the conversion, voluntary or involuntary, of the foregoing into
cash, instruments, securities or other property, including without limitation
all amounts, other than investment earnings, from time to time held or invested
in the Collection Account and the Distribution Account, whether in the form of
cash, instruments, securities or other property; (3) the obligations secured by
such security agreement shall be deemed to be all of the Depositor's obligations
under this Agreement, including the obligation to provide to the
Certificateholders the benefits of this Agreement relating to the Mortgage Loans
and the Trust Fund; and (4) notifications to persons holding such property, and
acknowledgments, receipts or confirmations from persons holding such property,
shall be deemed notifications to, or acknowledgments, receipts or confirmations
from, financial intermediaries, bailees or agents (as applicable) of the Trustee
for the purpose of perfecting such security interest under applicable law.
Accordingly, the Depositor hereby grants to the Trustee a security interest in
the Mortgage Loans and all other property described in clause (2) of the
preceding sentence, for the purpose of securing to the Trustee the performance
by the Depositor of the obligations described in clause (3) of the preceding
sentence. Notwithstanding the foregoing, the parties hereto intend the
conveyance pursuant to Section 2.01 to be a true, absolute and unconditional
sale of the Mortgage Loans and assets constituting the Trust Fund by the
Depositor to the Trustee.

         SECTION 11.10 Third Party Rights.

         The Cap Provider shall be deemed a third-party beneficiary of this
Agreement to the same extent as if it were a party hereto, and shall have the
right to enforce the provisions of this Agreement.

<PAGE>

         IN WITNESS WHEREOF, the Depositor, the Servicer, the Trust
Administrator and the Trustee have caused their names to be signed hereto by
their respective officers thereunto duly authorized, in each case as of the day
and year first above written.

                                            CITIGROUP MORTGAGE LOAN TRUST INC.,
                                            as Depositor

                                            By:
                                               ---------------------------------
                                            Name:
                                            Title:

                                            [_______________],
                                            as a Servicer

                                            By:
                                               ---------------------------------
                                            Name:
                                            Title:

                                            [_______________],
                                            as Trust Administrator

                                            By:
                                               ---------------------------------
                                            Name:
                                            Title:

                                            [_______________],
                                            not in its individual capacity
                                            but solely as Trustee

                                            By:
                                               ---------------------------------
                                            Name:
                                            Title:

<PAGE>

STATE OF NEW YORK   )
                    ) ss.:
COUNTY OF NEW YORK  )

         On the ____ day of [______________], before me, a notary public in and
for said State, personally appeared __________________, known to me to be a
__________________ of Citigroup Mortgage Loan Trust Inc., one of the
corporations that executed the within instrument, and also known to me to be the
person who executed it on behalf of said corporation, and acknowledged to me
that such corporation executed the within instrument.

         IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.

                                                 -------------------------
                                                      Notary Public

[Notarial Seal]

<PAGE>

STATE OF ______________)
                       ) ss.:
COUNTY OF ___________  )

         On the ____ day of [______________], before me, a notary public in and
for said State, personally appeared _________________, known to me to be a
________________ of [______________], one of the entities that executed the
within instrument, and also known to me to be the person who executed it on
behalf of said corporation, and acknowledged to me that such corporation
executed the within instrument.

         IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.

                                                 -------------------------
                                                      Notary Public

[Notarial Seal]

<PAGE>

STATE OF NEW YORK   )
                    ) ss.:
COUNTY OF NEW YORK  )

         On the ____ day of [______________], before me, a notary public in and
for said State, personally appeared _________________, known to me to be a
________________ of [______________], one of the entities that executed the
within instrument, and also known to me to be the person who executed it on
behalf of said corporation, and acknowledged to me that such corporation
executed the within instrument.

         IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.

                                                 -------------------------
                                                      Notary Public

[Notarial Seal]

<PAGE>

STATE OF ____________   )
                        ) ss.:
COUNTY OF ___________   )

         On the ____ day of [______________], before me, a notary public in and
for said State, personally appeared _________________, known to me to be a
________________ of [______________], one of the entities that executed the
within instrument, and also known to me to be the person who executed it on
behalf of said corporation, and acknowledged to me that such entity executed the
within instrument.

         IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.

                                                 -------------------------
                                                      Notary Public

[Notarial Seal]

<PAGE>

                                   EXHIBIT A-1

                        FORM OF CLASS A-[__] CERTIFICATE

         UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
         THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
         TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR
         PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE &
         CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
         REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH
         OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC),
         ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
         TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE
         & CO., HAS AN INTEREST HEREIN.

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS
         THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
         INTERNAL REVENUE CODE OF 1986 (THE "CODE").

Series [____]                            Aggregate Certificate Principal Balance
                                         of the Class A-[__] Certificates as of
                                         the Issue Date: $[________].00

Pass-Through Rate: Variable              Denomination: $[________].00

Cut-off Date and date of Pooling and     Servicer:  [___________]
Servicing Agreement: [___________]

First Distribution Date: [__________]    Trust Administrator:  [___________]

No. 1                                    Trustee: [_________]

                                         Issue Date: [___________]

                                         CUSIP: [___________]

         DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
         CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
         OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE
         LESS THAN THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS
         CERTIFICATE.

<PAGE>

                      ASSET-BACKED PASS-THROUGH CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family, fixed-rate
and adjustable-rate, first lien and second lien mortgage loans (the "Mortgage
Loans") formed and sold by

                                [_______________]

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         [_________], THE SERVICER, THE TRUST ADMINISTRATOR, THE TRUSTEE OR ANY
         OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS CERTIFICATE NOR THE
         UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY AGENCY OR
         INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that Cede & Co. is the registered owner of a Percentage
Interest (obtained by dividing the denomination of this Certificate by the
aggregate Certificate Principal Balance of the Class A-[__] Certificates as of
the Issue Date) in that certain beneficial ownership interest evidenced by all
the Class A-[__] Certificates in the REMIC created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among
[_________] (hereinafter called the "Depositor," which term includes any
successor entity under the Agreement), the Servicer, the Trust Administrator and
the Trustee, a summary of certain of the pertinent provisions of which is set
forth hereafter. To the extent not defined herein, the capitalized terms used
herein have the meanings assigned in the Agreement. This Certificate is issued
under and is subject to the terms, provisions and conditions of the Agreement,
to which Agreement the Holder of this Certificate by virtue of the acceptance
hereof assents and by which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the Record Date, in an amount equal to the product
of the Percentage Interest evidenced by this Certificate and the amount required
to be distributed to the Holders of Class A-[__] Certificates on such
Distribution Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by the Trust Administrator by wire transfer in
immediately available funds to the account of the Person entitled thereto if
such Person shall have so notified the Trust Administrator in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date or otherwise by check mailed by first class mail to the
address of the Person entitled thereto, as such name and address shall appear on
the Certificate Register. Notwithstanding the above, the final distribution on
this Certificate will be made after due notice by the Trust Administrator of the
pendency of such distribution and only upon presentation and surrender of this
Certificate at the office or agency appointed by the Trust Administrator for
that purpose as provided in the Agreement.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset-Backed Pass-Through Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing the
Percentage Interest specified above in the Class of Certificates to which the
Certificate belongs.

         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Servicer, the Trust Administrator and the Trustee and the rights
of the Certificateholders, under the Agreement at any time by the Depositor, the
Servicer, the Trust Administrator and the Trustee with the consent of the
Holders of Certificates entitled to at least 66% of the Voting Rights. Any such
consent by the Holder of this Certificate shall be conclusive and binding on
such Holder and upon all future Holders of this Certificate and of any
Certificate issued upon the transfer hereof or in exchange herefor or in lieu
hereof whether or not notation of such consent is made upon this Certificate.
The Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Certificates.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trust Administrator as provided in the
Agreement, duly endorsed by, or accompanied by an assignment in the form below
or other written instrument of transfer in form satisfactory to the Trust
Administrator duly executed by, the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of the same
Class in authorized denominations evidencing the same aggregate Percentage
Interest will be issued to the designated transferee or transferees.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, the Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange
of Certificates, but the Trust Administrator may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         The Depositor, the Servicer, the Trust Administrator the Trustee and
any agent of the Depositor, the Servicer, the Trust Administrator or the Trustee
may treat the Person in whose name this Certificate is registered as the owner
hereof for all purposes, and none of the Depositor, the Servicer, the Trust
Administrator, the Trustee nor any such agent shall be affected by notice to the
contrary.

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by the Trust Administrator and required to be paid to them pursuant to the
Agreement following the earlier of (i) the final payment or other liquidation
(or any advance with respect thereto) of the last Mortgage Loan and REO Property
remaining in the REMIC and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from the REMIC of
all the Mortgage Loans and all property acquired in respect of such Mortgage
Loans. The Agreement permits, but does not require, the party designated in the
Agreement to purchase from the REMIC all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date.

         The recitals contained herein shall be taken as statements of the
Depositor, and the Trustee assumes no responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Trust Administrator, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.

<PAGE>

         IN WITNESS WHEREOF, the Trust Administrator has caused this Certificate
to be duly executed.

Dated: [_________] ___, [___]

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Officer

                          CERTIFICATE OF AUTHENTICATION

         This is one of the Certificates referred to in the within-mentioned
Agreement.

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Signatory

<PAGE>

                                  ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

TEN COM - as tenants in common                   UNIF GIFT MIN ACT - Custodian
                                                                     ---------
TEN ENT - as tenants by the entireties           (Cust) (Minor) under
                                                 Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
     if survivorship and not as                  -------------------
     tenants in common                                 (State)

         Additional abbreviations may also be used though not in the above list.

                                   ASSIGNMENT

         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto _______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
                       Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Pass-Through Certificates and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Trustee to issue a new Certificate of a like
Percentage Interest and Class to the above named assignee and deliver such
Certificate to the following address:
________________________________________________________________________________
______________________________________________________________________________ .

Dated:                                     -------------------------------------
                                           Signature by or on behalf of assignor

                                           -------------------------------------
                                           Signature Guaranteed

<PAGE>

                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to _________________________________________________
________________________________________________________________ for the account
of _______________________________, account numbe______________________________,
or, if mailed by check, to______________________________________________________
______________________________________________________________________________ .

Applicable statements should be mailed to_______________________________________
______________________________________________________________________________ .

         This information is provided by ______________________________________,
the assignee named above, or ____________________________________, as its agent.

<PAGE>

                                   EXHIBIT A-5

                         FORM OF CLASS [__] CERTIFICATE

   UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
   DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR
   ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
   CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
   NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
   IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
   AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF
   FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
   REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

   SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
   INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
   DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE
   OF 1986 (THE "CODE").

   THIS CERTIFICATE IS SUBORDINATE TO THE CLASS A CERTIFICATES TO THE EXTENT
   DESCRIBED IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN.

   NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT PLAN OR OTHER
   RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT
   OF 1974, AS AMENDED, OR THE CODE WILL BE REGISTERED EXCEPT IN COMPLIANCE WITH
   THE PROCEDURES.

Series [____]                            Aggregate Certificate Principal Balance
                                         of the Class [__] Certificates as of
                                         the Issue Date: $[________].00

Pass-Through Rate: Variable              Denomination: $[________].00

Cut-off Date and date of Pooling and     Servicer:  [___________]
Servicing Agreement: [___________]

First Distribution Date: [__________]    Trust Administrator:  [___________]

No. 1                                    Trustee: [_________]

                                         Issue Date: [___________]

                                         CUSIP: [___________]

   DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
   CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
   OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE LESS THAN
   THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS CERTIFICATE.

<PAGE>

                      ASSET-BACKED PASS-THROUGH CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family, fixed-rate
and adjustable-rate, first lien and second lien mortgage loans (the "Mortgage
Loans") formed and sold by

                                  [___________]

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         [_________], THE SERVICER, THE TRUST ADMINISTRATOR, THE TRUSTEE OR ANY
         OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS CERTIFICATE NOR THE
         UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY AGENCY OR
         INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that Cede & Co. is the registered owner of a Percentage
Interest (obtained by dividing the denomination of this Certificate by the
aggregate Certificate Principal Balance of the Class [__] Certificates as of the
Issue Date) in that certain beneficial ownership interest evidenced by all the
Class [__] Certificates in the REMIC created pursuant to a Pooling and Servicing
Agreement, dated as specified above (the "Agreement"), among [_________]
(hereinafter called the "Depositor," which term includes any successor entity
under the Agreement), the Servicer, the Trust Administrator and the Trustee, a
summary of certain of the pertinent provisions of which is set forth hereafter.
To the extent not defined herein, the capitalized terms used herein have the
meanings assigned in the Agreement. This Certificate is issued under and is
subject to the terms, provisions and conditions of the Agreement, to which
Agreement the Holder of this Certificate by virtue of the acceptance hereof
assents and by which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the Record Date, in an amount equal to the product
of the Percentage Interest evidenced by this Certificate and the amount required
to be distributed to the Holders of Class [__] Certificates on such Distribution
Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by the Trust Administrator by wire transfer in
immediately available funds to the account of the Person entitled thereto if
such Person shall have so notified the Trust Administrator in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date or otherwise by check mailed by first class mail to the
address of the Person entitled thereto, as such name and address shall appear on
the Certificate Register. Notwithstanding the above, the final distribution on
this Certificate will be made after due notice by the Trust Administrator of the
pendency of such distribution and only upon presentation and surrender of this
Certificate at the office or agency appointed by the Trust Administrator for
that purpose as provided in the Agreement.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset-Backed Pass-Through Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing the
Percentage Interest specified above in the Class of Certificates to which the
Certificate belongs.

         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Servicer, the Trust Administrator and the Trustee and the rights
of the Certificateholders, under the Agreement at any time by the Depositor, the
Servicer, the Trust Administrator and the Trustee with the consent of the
Holders of Certificates entitled to at least 66% of the Voting Rights. Any such
consent by the Holder of this Certificate shall be conclusive and binding on
such Holder and upon all future Holders of this Certificate and of any
Certificate issued upon the transfer hereof or in exchange herefor or in lieu
hereof whether or not notation of such consent is made upon this Certificate.
The Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Certificates.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trust Administrator as provided in the
Agreement, duly endorsed by, or accompanied by an assignment in the form below
or other written instrument of transfer in form satisfactory to the Trust
Administrator duly executed by, the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of the same
Class in authorized denominations evidencing the same aggregate Percentage
Interest will be issued to the designated transferee or transferees.

         No transfer of this Certificate to a Plan subject to ERISA or section
4975 of the Code, any Person acting, directly or indirectly, on behalf of any
such Plan or any Person using "Plan Assets" to acquire this Certificate shall be
made except in accordance with Section 5.02(b) of the Agreement.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, the Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange
of Certificates, but the Trust Administrator may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         The Depositor, the Servicer, the Trust Administrator, the Trustee and
any agent of the Depositor, the Servicer, the Trust Administrator or the Trustee
may treat the Person in whose name this Certificate is registered as the owner
hereof for all purposes, and none of the Depositor, the Servicer, the Trust
Administrator, the Trustee nor any such agent shall be affected by notice to the
contrary.

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by the Trust Administrator and required to be paid to them pursuant to the
Agreement following the earlier of (i) the final payment or other liquidation
(or any advance with respect thereto) of the last Mortgage Loan and REO Property
remaining in the REMIC and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from the REMIC of
all the Mortgage Loans and all property acquired in respect of such Mortgage
Loans. The Agreement permits, but does not require, the party designated in the
Agreement to purchase from the REMIC all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date.

         The recitals contained herein shall be taken as statements of the
Depositor, and the Trustee assumes no responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Trust Administrator, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.

<PAGE>

         IN WITNESS WHEREOF, the Trust Administrator has caused this Certificate
to be duly executed.

Dated: [_________] ___, [___]

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Officer

                          CERTIFICATE OF AUTHENTICATION

         This is one of the Certificates referred to in the within-mentioned
Agreement.

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Signatory

<PAGE>

                                  ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

TEN COM - as tenants in common                   UNIF GIFT MIN ACT - Custodian
                                                                     ---------
TEN ENT - as tenants by the entireties           (Cust) (Minor) under
                                                 Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
     if survivorship and not as                  -------------------
     tenants in common                                 (State)

         Additional abbreviations may also be used though not in the above list.

                                   ASSIGNMENT

         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto _______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
                       Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Pass-Through Certificates and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Trustee to issue a new Certificate of a like
Percentage Interest and Class to the above named assignee and deliver such
Certificate to the following address:
________________________________________________________________________________
______________________________________________________________________________ .

Dated:                                     -------------------------------------
                                           Signature by or on behalf of assignor

                                           -------------------------------------
                                           Signature Guaranteed

<PAGE>

                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to _________________________________________________
________________________________________________________________ for the account
of _______________________________, account numbe______________________________,
or, if mailed by check, to______________________________________________________
______________________________________________________________________________ .

Applicable statements should be mailed to_______________________________________
______________________________________________________________________________ .

         This information is provided by ______________________________________,
the assignee named above, or ____________________________________, as its agent.

<PAGE>

                                  EXHIBIT A-17

                          FORM OF CLASS CE CERTIFICATE

   SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
   INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
   DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE
   OF 1986 (THE "CODE").

   THIS CERTIFICATE IS SUBORDINATE TO THE CLASS A CERTIFICATES AND THE MEZZANINE
   CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING AND SERVICING AGREEMENT
   REFERRED TO HEREIN.

   THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
   ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
   RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS
   OR IS SOLD OR TRANSFERRED IN TRANSACTIONS THAT ARE EXEMPT FROM REGISTRATION
   UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN
   ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT.

   NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT PLAN OR OTHER
   RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT
   OF 1974, AS AMENDED, OR THE CODE WILL BE REGISTERED EXCEPT IN COMPLIANCE WITH
   THE PROCEDURES DESCRIBED HEREIN.

Series: [____]                           Aggregate Certificate Principal Balance
                                         of the Class CE Certificates as of the
                                         Issue Date: $[_________]

Pass-Through Rate: Variable              Denomination: $[_________]

Cut-off Date and date of Pooling and     Servicer:  [___________]
Servicing  Agreement: [___________]

First Distribution Date: [__________]    Trust Administrator: [___________]

No. 1                                    Trustee: [_________]

Aggregate Notional Amount of the Class   Issue Date: [___________]

CE Certificates as of the Issue Date: $[_________]

   THE OUTSTANDING CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT HEREOF AT
   ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ABOVE AS THE INITIAL CERTIFICATE
   PRINCIPAL BALANCE OR NOTIONAL AMOUNT, AS THE CASE MAY BE, OF THIS
   CERTIFICATE.

<PAGE>

                      ASSET BACKED PASS-THROUGH CERTIFICATE

evidencing a beneficial ownership interest in a portion of a Trust Fund (the
"Trust Fund") consisting primarily of a pool of conventional one- to
four-family, fixed-rate and adjustable-rate, first lien and second lien mortgage
loans (the "Mortgage Loans") formed and sold by

                                [_______________]

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         [_________], THE SERVICER, THE TRUST ADMINISTRATOR, THE TRUSTEE OR ANY
         OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS CERTIFICATE NOR THE
         UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY AGENCY OR
         INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that [____________] is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class CE Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class CE Certificates in REMIC II created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among
[_________] (hereinafter called the "Depositor," which term includes any
successor entity under the Agreement), the Servicer, Trust Administrator and the
Trustee, a summary of certain of the pertinent provisions of which is set forth
hereafter. To the extent not defined herein, the capitalized terms used herein
have the meanings assigned in the Agreement. This Certificate is issued under
and is subject to the terms, provisions and conditions of the Agreement, to
which Agreement the Holder of this Certificate by virtue of the acceptance
hereof assents and by which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the Record Date, in an amount equal to the product
of the Percentage Interest evidenced by this Certificate and the amount required
to be distributed to the Holders of Class CE Certificates on such Distribution
Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by the Trust Administrator by wire transfer in
immediately available funds to the account of the Person entitled thereto if
such Person shall have so notified the Trust Administrator in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date or otherwise by check mailed by first class mail to the
address of the Person entitled thereto, as such name and address shall appear on
the Certificate Register. Notwithstanding the above, the final distribution on
this Certificate will be made after due notice by the Trust Administrator of the
pendency of such distribution and only upon presentation and surrender of this
Certificate at the office or agency appointed by the Trust Administrator for
that purpose as provided in the Agreement.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset Backed Pass-Through Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing the
Percentage Interest specified above in the Class of Certificates to which the
Certificate belongs.

         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Servicer, the Trust Administrator and the Trustee and the rights
of the Certificateholders under the Agreement at any time by the Depositor, the
Servicer, the Trust Administrator and the Trustee with the consent of the
Holders of Certificates entitled to at least 66% of the Voting Rights. Any such
consent by the Holder of this Certificate shall be conclusive and binding on
such Holder and upon all future Holders of this Certificate and of any
Certificate issued upon the transfer hereof or in exchange herefor or in lieu
hereof whether or not notation of such consent is made upon this Certificate.
The Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Certificates.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trust Administrator as provided in the
Agreement, duly endorsed by, or accompanied by an assignment in the form below
or other written instrument of transfer in form satisfactory to the Trust
Administrator duly executed by, the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of the same
Class in authorized denominations evidencing the same aggregate Percentage
Interest will be issued to the designated transferee or transferees.

         No transfer of this Certificate shall be made unless the transfer is
made pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), and an effective registration or
qualification under applicable state securities laws, or is made in a
transaction that does not require such registration or qualification. In the
event that such a transfer of this Certificate is to be made without
registration or qualification, the Trust Administrator shall require receipt of
(i) if such transfer is purportedly being made in reliance upon Rule 144A under
the 1933 Act, written certifications from the Holder of the Certificate desiring
to effect the transfer, and from such Holder's prospective transferee,
substantially in the forms attached to the Agreement as Exhibit F-1, and (ii) in
all other cases, an Opinion of Counsel satisfactory to it that such transfer may
be made without such registration or qualification (which Opinion of Counsel
shall not be an expense of the Trust Fund or of the Depositor, the Trustee, the
Trust Administrator or the Servicer in their respective capacities as such),
together with copies of the written certification(s) of the Holder of the
Certificate desiring to effect the transfer and/or such Holder's prospective
transferee upon which such Opinion of Counsel is based. None of the Depositor or
the Trust Administrator is obligated to register or qualify the Class of
Certificates specified on the face hereof under the 1933 Act or any other
securities law or to take any action not otherwise required under the Agreement
to permit the transfer of such Certificates without registration or
qualification. Any Holder desiring to effect a transfer of this Certificate
shall be required to indemnify the Trustee, the Trust Administrator, the
Depositor, the Servicer and any Sub-Servicer against any liability that may
result if the transfer is not so exempt or is not made in accordance with such
federal and state laws.

         No transfer of this Certificate to a Plan subject to ERISA or Section
4975 of the Code, any Person acting, directly or indirectly, on behalf of any
such Plan or any Person using "Plan Assets" to acquire this Certificate shall be
made except in accordance with Section 5.02(b) of the Agreement.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, the Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange
of Certificates, but the Trust Administrator may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         The Depositor, the Servicer, the Trust Administrator, the Trustee and
any agent of the Depositor, the Servicer, the Trust Administrator or the Trustee
may treat the Person in whose name this Certificate is registered as the owner
hereof for all purposes, and none of the Depositor, the Servicer, the Trust
Administrator, the Trustee nor any such agent shall be affected by notice to the
contrary.

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by the Trust Administrator and required to be paid to them pursuant to the
Agreement following the earlier of (i) the final payment or other liquidation
(or any advance with respect thereto) of the last Mortgage Loan and REO Property
remaining in REMIC I and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans as of the
Cut-off Date.

         The recitals contained herein shall be taken as statements of the
Depositor and the Trustee assumes no responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Trust Administrator, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.

<PAGE>

         IN WITNESS WHEREOF, the Trust Administrator has caused this Certificate
to be duly executed.

Dated: [_________] ___, [___]

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Officer

                          CERTIFICATE OF AUTHENTICATION

         This is one of the Certificates referred to in the within-mentioned
Agreement.

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Signatory

<PAGE>

                                  ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

TEN COM - as tenants in common                   UNIF GIFT MIN ACT - Custodian
                                                                     ---------
TEN ENT - as tenants by the entireties           (Cust) (Minor) under
                                                 Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
     if survivorship and not as                  -------------------
     tenants in common                                 (State)

         Additional abbreviations may also be used though not in the above list.

                                   ASSIGNMENT

         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto _______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
                       Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Pass-Through Certificates and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Trustee to issue a new Certificate of a like
Percentage Interest and Class to the above named assignee and deliver such
Certificate to the following address:
________________________________________________________________________________
______________________________________________________________________________ .

Dated:                                     -------------------------------------
                                           Signature by or on behalf of assignor

                                           -------------------------------------
                                           Signature Guaranteed

<PAGE>

                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to _________________________________________________
________________________________________________________________ for the account
of _______________________________, account numbe______________________________,
or, if mailed by check, to______________________________________________________
______________________________________________________________________________ .

Applicable statements should be mailed to_______________________________________
______________________________________________________________________________ .

         This information is provided by ______________________________________,
the assignee named above, or ____________________________________, as its agent.

<PAGE>

                                  EXHIBIT A-18

                           FORM OF CLASS P CERTIFICATE

   SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
   INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
   DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE
   OF 1986 (THE "CODE").

   THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
   ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
   RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS
   OR IS SOLD OR TRANSFERRED IN TRANSACTIONS THAT ARE EXEMPT FROM REGISTRATION
   UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN
   ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT.

   NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT PLAN OR OTHER
   RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT
   OF 1974, AS AMENDED, OR THE CODE WILL BE REGISTERED EXCEPT IN COMPLIANCE WITH
   THE PROCEDURES DESCRIBED HEREIN.

Series: [____]                           Aggregate Certificate Principal Balance
                                         of the Class P Certificates as of the
                                         Issue Date: $100.00

Cut-off Date and date of Pooling and     Denomination: $100.00
Servicing Agreement: [_____________]

First Distribution Date: [__________]    Servicer:  [___________]

No. 1                                    Trust Administrator:  [___________]

                                         Trustee: [_________]

                                         Issue Date: [___________]

   DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
   CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
   OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE LESS THAN
   THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS CERTIFICATE.

<PAGE>

                      ASSET BACKED PASS-THROUGH CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family, fixed-rate
and adjustable-rate, first lien and second lien mortgage loans (the "Mortgage
Loans") formed and sold by

                                [______________]

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         [_________], THE SERVICER, THE TRUST ADMINISTRATOR, THE TRUSTEE OR ANY
         OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS CERTIFICATE NOR THE
         UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY AGENCY OR
         INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that [____________] is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class P Certificates as of
the Issue Date) in that certain beneficial ownership interest evidenced by all
the Class P Certificates in REMIC II created pursuant to a Pooling and Servicing
Agreement, dated as specified above (the "Agreement"), among [_________]
(hereinafter called the "Depositor," which term includes any successor entity
under the Agreement), the Servicer and the Trustee, a summary of certain of the
pertinent provisions of which is set forth hereafter. To the extent not defined
herein, the capitalized terms used herein have the meanings assigned in the
Agreement. This Certificate is issued under and is subject to the terms,
provisions and conditions of the Agreement, to which Agreement the Holder of
this Certificate by virtue of the acceptance hereof assents and by which such
Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the Record Date, in an amount equal to the product
of the Percentage Interest evidenced by this Certificate and the amount required
to be distributed to the Holders of Class P Certificates on such Distribution
Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by the Trust Administrator by wire transfer in
immediately available funds to the account of the Person entitled thereto if
such Person shall have so notified the Trust Administrator in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date or otherwise by check mailed by first class mail to the
address of the Person entitled thereto, as such name and address shall appear on
the Certificate Register. Notwithstanding the above, the final distribution on
this Certificate will be made after due notice by the Trust Administrator of the
pendency of such distribution and only upon presentation and surrender of this
Certificate at the office or agency appointed by the Trust Administrator for
that purpose as provided in the Agreement.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset Backed Pass-Through Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing the
Percentage Interest specified above in the Class of Certificates to which the
Certificate belongs.

         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Servicer, the Trust Administrator and the Trustee and the rights
of the Certificateholders under the Agreement at any time by the Depositor, the
Servicer, the Trust Administrator and the Trustee with the consent of the
Holders of Certificates entitled to at least 66% of the Voting Rights. Any such
consent by the Holder of this Certificate shall be conclusive and binding on
such Holder and upon all future Holders of this Certificate and of any
Certificate issued upon the transfer hereof or in exchange herefor or in lieu
hereof whether or not notation of such consent is made upon this Certificate.
The Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Certificates.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trust Administrator as provided in the
Agreement, duly endorsed by, or accompanied by an assignment in the form below
or other written instrument of transfer in form satisfactory to the Trust
Administrator duly executed by, the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of the same
Class in authorized denominations evidencing the same aggregate Percentage
Interest will be issued to the designated transferee or transferees.

         No transfer of this Certificate shall be made unless the transfer is
made pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), and an effective registration or
qualification under applicable state securities laws, or is made in a
transaction that does not require such registration or qualification. In the
event that such a transfer of this Certificate is to be made without
registration or qualification, the Trust Administrator shall require receipt of
(i) if such transfer is purportedly being made in reliance upon Rule 144A under
the 1933 Act, written certifications from the Holder of the Certificate desiring
to effect the transfer, and from such Holder's prospective transferee,
substantially in the forms attached to the Agreement as Exhibit F-1, and (ii) in
all other cases, an Opinion of Counsel satisfactory to it that such transfer may
be made without such registration or qualification (which Opinion of Counsel
shall not be an expense of the Trust Fund or of the Depositor, the Trustee, the
Trust Administrator or the Servicer in their respective capacities as such),
together with copies of the written certification(s) of the Holder of the
Certificate desiring to effect the transfer and/or such Holder's prospective
transferee upon which such Opinion of Counsel is based. None of the Depositor or
the Trust Administrator is obligated to register or qualify the Class of
Certificates specified on the face hereof under the 1933 Act or any other
securities law or to take any action not otherwise required under the Agreement
to permit the transfer of such Certificates without registration or
qualification. Any Holder desiring to effect a transfer of this Certificate
shall be required to indemnify the Trustee, the Trust Administrator, the
Depositor, the Servicer and any Sub-Servicer against any liability that may
result if the transfer is not so exempt or is not made in accordance with such
federal and state laws.

         No transfer of this Certificate to a Plan subject to ERISA or Section
4975 of the Code, any Person acting, directly or indirectly, on behalf of any
such Plan or any Person using "Plan Assets" to acquire this Certificate shall be
made except in accordance with Section 5.02(b) of the Agreement.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, the Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange
of Certificates, but the Trust Administrator may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         The Depositor, the Servicer, the Trust Administrator, the Trustee and
any agent of the Depositor, the Servicer, the Trust Administrator or the Trustee
may treat the Person in whose name this Certificate is registered as the owner
hereof for all purposes, and none of the Depositor, the Servicer, the Trust
Administrator, the Trustee nor any such agent shall be affected by notice to the
contrary.

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by the Trust Administrator and required to be paid to them pursuant to the
Agreement following the earlier of (i) the final payment or other liquidation
(or any advance with respect thereto) of the last Mortgage Loan and REO Property
remaining in REMIC I and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans as of the
Cut-off Date.

         The recitals contained herein shall be taken as statements of the
Depositor and the Trustee assumes no responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Trust Administrator, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.

<PAGE>

         IN WITNESS WHEREOF, the Trust Administrator has caused this Certificate
to be duly executed.

Dated: [_________] ___, [___]

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Officer

                          CERTIFICATE OF AUTHENTICATION

         This is one of the Certificates referred to in the within-mentioned
Agreement.

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Signatory

<PAGE>

                                  ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

TEN COM - as tenants in common                   UNIF GIFT MIN ACT - Custodian
                                                                     ---------
TEN ENT - as tenants by the entireties           (Cust) (Minor) under
                                                 Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
     if survivorship and not as                  -------------------
     tenants in common                                 (State)

         Additional abbreviations may also be used though not in the above list.

                                   ASSIGNMENT

         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto _______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
                       Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Pass-Through Certificates and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Trustee to issue a new Certificate of a like
Percentage Interest and Class to the above named assignee and deliver such
Certificate to the following address:
________________________________________________________________________________
______________________________________________________________________________ .

Dated:                                     -------------------------------------
                                           Signature by or on behalf of assignor

                                           -------------------------------------
                                           Signature Guaranteed

<PAGE>

                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to _________________________________________________
________________________________________________________________ for the account
of _______________________________, account numbe______________________________,
or, if mailed by check, to______________________________________________________
______________________________________________________________________________ .

Applicable statements should be mailed to_______________________________________
______________________________________________________________________________ .

         This information is provided by ______________________________________,
the assignee named above, or ____________________________________, as its agent.

<PAGE>

                                  EXHIBIT A-19

                           FORM OF CLASS R CERTIFICATE

   THIS CERTIFICATE MAY NOT BE TRANSFERRED TO A NON-UNITED STATES PERSON.

   SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "RESIDUAL
   INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" ("REMIC"), AS THOSE
   TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL
   REVENUE CODE OF 1986, AS AMENDED (THE "CODE").

   ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE MADE
   ONLY IN ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT
   REFERRED TO HEREIN.

   THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
   ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
   RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS
   OR IS SOLD OR TRANSFERRED IN TRANSACTIONS THAT ARE EXEMPT FROM REGISTRATION
   UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN
   ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT REFERRED TO
   HEREIN.

   NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT PLAN OR OTHER
   RETIREMENT ARRANGEMENT (EACH A "PLAN") SUBJECT TO THE EMPLOYEE RETIREMENT
   INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR THE CODE WILL BE
   REGISTERED EXCEPT IN COMPLIANCE WITH THE PROCEDURES DESCRIBED HEREIN.

   ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE MADE
   ONLY IF THE PROPOSED TRANSFEREE PROVIDES (I) AN AFFIDAVIT TO THE TRUSTEE THAT
   (A) SUCH TRANSFEREE IS NOT (1) THE UNITED STATES OR ANY POSSESSION THEREOF,
   ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY FOREIGN GOVERNMENT, ANY
   INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR INSTRUMENTALITY OF ANY OF THE
   FOREGOING, (2) ANY ORGANIZATION (OTHER THAN A COOPERATIVE DESCRIBED IN
   SECTION 521 OF THE CODE) THAT IS EXEMPT FROM THE TAX IMPOSED BY CHAPTER 1 OF
   THE CODE UNLESS SUCH ORGANIZATION IS SUBJECT TO THE TAX IMPOSED BY SECTION
   511 OF THE CODE, (3) ANY ORGANIZATION DESCRIBED IN SECTION 1381(A)(2)(C) OF
   THE CODE (ANY SUCH PERSON DESCRIBED IN THE FOREGOING CLAUSES (1), (2) OR (3)
   SHALL HEREINAFTER BE REFERRED TO AS A "DISQUALIFIED ORGANIZATION") OR (4) AN
   AGENT OF A DISQUALIFIED ORGANIZATION AND (B) NO PURPOSE OF SUCH TRANSFER IS
   TO IMPEDE THE ASSESSMENT OR COLLECTION OF TAX, AND (II) SUCH TRANSFEREE
   SATISFIES CERTAIN ADDITIONAL CONDITIONS RELATING TO THE FINANCIAL CONDITION
   OF THE PROPOSED TRANSFEREE. NOTWITHSTANDING THE REGISTRATION IN THE
   CERTIFICATE REGISTER OF ANY TRANSFER, SALE OR OTHER DISPOSITION OF THIS
   CERTIFICATE TO A DISQUALIFIED ORGANIZATION OR AN AGENT OF A DISQUALIFIED
   ORGANIZATION, SUCH REGISTRATION SHALL BE DEEMED TO BE OF NO LEGAL FORCE OR
   EFFECT WHATSOEVER AND SUCH PERSON SHALL NOT BE DEEMED TO BE A
   CERTIFICATEHOLDER FOR ANY PURPOSE HEREUNDER, INCLUDING, BUT NOT LIMITED TO,
   THE RECEIPT OF DISTRIBUTIONS ON THIS CERTIFICATE. EACH HOLDER OF THIS
   CERTIFICATE BY ACCEPTANCE HEREOF SHALL BE DEEMED TO HAVE CONSENTED TO THE
   PROVISIONS OF THIS PARAGRAPH AND THE PROVISIONS OF SECTION 5.02(D) OF THE
   AGREEMENT REFERRED TO HEREIN. ANY PERSON THAT IS A DISQUALIFIED ORGANIZATION
   IS PROHIBITED FROM ACQUIRING BENEFICIAL OWNERSHIP OF THIS CERTIFICATE.

Series [____]                             Aggregate Percentage Interest of the
                                          Class R Certificates as of the Issue
                                          Date: 100%
Cut-off Date and date of Pooling and
Servicing Agreement: [___________]

First Distribution Date: [___________]    Servicer:  [___________]

No. 1                                     Trust Administrator:  [___________]

                                          Trustee: [_________]

                                          Issue Date: [___________]

   DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
   CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
   OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE LESS THAN
   THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS CERTIFICATE.

<PAGE>

                      ASSET-BACKED PASS-THROUGH CERTIFICATE

evidencing a beneficial ownership interest in a portion of a Trust Fund (the
"Trust Fund") consisting primarily of a pool of conventional one- to
four-family, fixed-rate, first lien mortgage loans (the "Mortgage Loans") formed
and sold by

                                 [____________]

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         [_________], THE SERVICER, THE TRUST ADMINISTRATOR, THE TRUSTEE OR ANY
         OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS CERTIFICATE NOR THE
         UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY AGENCY OR
         INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that [____________] is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class R Certificates as of
the Issue Date) in that certain beneficial ownership interest evidenced by all
the Class R Certificates created pursuant to a Pooling and Servicing Agreement,
dated as specified above (the "Agreement"), among [_________] (hereinafter
called the "Depositor," which term includes any successor entity under the
Agreement), the Servicer, the Trust Administrator and the Trustee, a summary of
certain of the pertinent provisions of which is set forth hereafter. To the
extent not defined herein, the capitalized terms used herein have the meanings
assigned in the Agreement. This Certificate is issued under and is subject to
the terms, provisions and conditions of the Agreement, to which Agreement the
Holder of this Certificate by virtue of the acceptance hereof assents and by
which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be
made on the 25th day of each month or, if such 25th day is not a Business Day,
the Business Day immediately following (a "Distribution Date"), commencing on
the First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the Record Date, in an amount equal to the product
of the Percentage Interest evidenced by this Certificate and the amount required
to be distributed to the Holders of Class R Certificates on such Distribution
Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by the Trust Administrator by wire transfer in
immediately available funds to the account of the Person entitled thereto if
such Person shall have so notified the Trust Administrator in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date or otherwise by check mailed by first class mail to the
address of the Person entitled thereto, as such name and address shall appear on
the Certificate Register. Notwithstanding the above, the final distribution on
this Certificate will be made after due notice by the Trust Administrator of the
pendency of such distribution and only upon presentation and surrender of this
Certificate at the office or agency appointed by the Trust Administrator for
that purpose as provided in the Agreement.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset-Backed Pass-Through Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing a Percentage
Interest in the Class of Certificates equal to the denomination specified on the
face hereof divided by the aggregate Certificate Principal Balance of the Class
of Certificates specified on the face hereof.

         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Servicer, the Trust Administrator, the Trustee, and the rights of
the Certificateholders under the Agreement at any time by the Depositor, the
Servicer, the Trust Administrator and the Trustee with the consent of the
Holders of Certificates entitled to at least 66% of the Voting Rights. Any such
consent by the Holder of this Certificate shall be conclusive and binding on
such Holder and upon all future Holders of this Certificate and of any
Certificate issued upon the transfer hereof or in exchange herefor or in lieu
hereof whether or not notation of such consent is made upon this Certificate.
The Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Certificates.

         Any resale, transfer or other disposition of this certificate may be
made only in accordance with the provisions of section 5.02 of the agreement
referred to herein.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trust Administrator as provided in the
Agreement, duly endorsed by, or accompanied by an assignment in the form below
or other written instrument of transfer in form satisfactory to the Trust
Administrator duly executed by, the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of the same
Class in authorized denominations evidencing the same aggregate Percentage
Interest will be issued to the designated transferee or transferees.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, the Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange
of Certificates, but the Trust Administrator may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         No transfer of this Certificate shall be made unless the transfer is
made pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), and an effective registration or
qualification under applicable state securities laws, or is made in a
transaction that does not require such registration or qualification. In the
event that such a transfer of this Certificate is to be made without
registration or qualification, the Trust Administrator shall require receipt of
(i) if such transfer is purportedly being made in reliance upon Rule 144A under
the 1933 Act, written certifications from the Holder of the Certificate desiring
to effect the transfer, and from such Holder's prospective transferee,
substantially in the forms attached to the Agreement as Exhibit F-1, and (ii) in
all other cases, an Opinion of Counsel satisfactory to it that such transfer may
be made without such registration or qualification (which Opinion of Counsel
shall not be an expense of the Trust Fund or of the Depositor, the Trustee, the
Trust Administrator or the Servicer in their respective capacities as such),
together with copies of the written certification(s) of the Holder of the
Certificate desiring to effect the transfer and/or such Holder's prospective
transferee upon which such Opinion of Counsel is based. None of the Depositor or
the Trust Administrator is obligated to register or qualify the Class of
Certificates specified on the face hereof under the 1933 Act or any other
securities law or to take any action not otherwise required under the Agreement
to permit the transfer of such Certificates without registration or
qualification. Any Holder desiring to effect a transfer of this Certificate
shall be required to indemnify the Trustee, the Trust Administrator, the
Depositor, the Servicer and any Sub-Servicer against any liability that may
result if the transfer is not so exempt or is not made in accordance with such
federal and state laws.

         No transfer of this Certificate to a Plan subject to ERISA or Section
4975 of the Code, any Person acting, directly or indirectly, on behalf of any
such Plan or any person using Plan Assets to acquire this Certificate shall be
made except in accordance with Section 5.02(b) of the Agreement.

         Prior to registration of any transfer, sale or other disposition of
this Certificate, the proposed transferee shall provide to the Trust
Administrator (i) an affidavit to the effect that such transferee is any Person
other than a Disqualified Organization or the agent (including a broker, nominee
or middleman) of a Disqualified Organization, and (ii) a certificate that
acknowledges that (A) the Class R Certificates have been designated as a
residual interest in REMIC I and REMIC II, (B) it will include in its income a
pro rata share of the net income of the Trust Fund and that such income may be
an "excess inclusion," as defined in the Code, that, with certain exceptions,
cannot be offset by other losses or benefits from any tax exemption, and (C) it
expects to have the financial means to satisfy all of its tax obligations
including those relating to holding the Class R Certificates. Notwithstanding
the registration in the Certificate Register of any transfer, sale or other
disposition of this Certificate to a Disqualified Organization or an agent
(including a broker, nominee or middleman) of a Disqualified Organization, such
registration shall be deemed to be of no legal force or effect whatsoever and
such Person shall not be deemed to be a Certificateholder for any purpose,
including, but not limited to, the receipt of distributions in respect of this
Certificate.

         The Holder of this Certificate, by its acceptance hereof, shall be
deemed to have consented to the provisions of Section 5.02 of the Agreement and
to any amendment of the Agreement deemed necessary by counsel of the Depositor
to ensure that the transfer of this Certificate to any Person other than a
Permitted Transferee or any other Person will not cause the Trust Fund to cease
to qualify as a REMIC or cause the imposition of a tax upon REMIC I or REMIC II.

         No service charge will be made for any such registration of transfer or
exchange of Certificates, but the Trust Administrator may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any transfer or exchange of Certificates.

         The Depositor, the Servicer, the Trust Administrator, the Trustee and
any agent of the Depositor, the Servicer, the Trust Administrator or the Trustee
may treat the Person in whose name this Certificate is registered as the owner
hereof for all purposes, and none of the Depositor, the Servicer, the Trust
Administrator, the Trustee nor any such agent shall be affected by notice to the
contrary.

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by the Trust Administrator and required to be paid to them pursuant to the
Agreement following the earlier of (i) the purchase by the holders of the Class
X Certificates or the Servicer of all Mortgage Loans and related REO Property
remaining in REMIC I, (ii) the final payment or other liquidation (or any
advance with respect thereto) of the last Mortgage Loan or REO Property
remaining in REMIC I. The Agreement permits, but does not require, the party
designated in the Agreement to purchase from REMIC I all the Mortgage Loans and
all property acquired in respect of any Mortgage Loan at a price determined as
provided in the Agreement. The exercise of such right will effect early
retirement of the Certificates; however, such right to purchase is subject to
the aggregate Stated Principal Balance of the Mortgage Loans at the time of
purchase being less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date.

         The recitals contained herein shall be taken as statements of the
Depositor, and none of the Trustee, Servicer or Trust Administrator assume
responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Trust Administrator, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.

<PAGE>

         IN WITNESS WHEREOF, the Trust Administrator has caused this Certificate
to be duly executed.

Dated: [_________] ___, [___]

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Officer

                          CERTIFICATE OF AUTHENTICATION

         This is one of the Certificates referred to in the within-mentioned
Agreement.

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Signatory

<PAGE>

                                  ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

TEN COM - as tenants in common                   UNIF GIFT MIN ACT - Custodian
                                                                     ---------
TEN ENT - as tenants by the entireties           (Cust) (Minor) under
                                                 Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
     if survivorship and not as                  -------------------
     tenants in common                                 (State)

         Additional abbreviations may also be used though not in the above list.

                                   ASSIGNMENT

         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto _______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
                       Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Pass-Through Certificates and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Trustee to issue a new Certificate of a like
Percentage Interest and Class to the above named assignee and deliver such
Certificate to the following address:
________________________________________________________________________________
______________________________________________________________________________ .

Dated:                                     -------------------------------------
                                           Signature by or on behalf of assignor

                                           -------------------------------------
                                           Signature Guaranteed

<PAGE>

                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to _________________________________________________
________________________________________________________________ for the account
of _______________________________, account numbe______________________________,
or, if mailed by check, to______________________________________________________
______________________________________________________________________________ .

Applicable statements should be mailed to_______________________________________
______________________________________________________________________________ .

         This information is provided by ______________________________________,
the assignee named above, or ____________________________________, as its agent.

<PAGE>

                                  EXHIBIT A-20

                          FORM OF CLASS R-X CERTIFICATE

   THIS CERTIFICATE MAY NOT BE TRANSFERRED TO A NON-UNITED STATES PERSON.

   SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "RESIDUAL
   INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" ("REMIC"), AS THOSE
   TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL
   REVENUE CODE OF 1986, AS AMENDED (THE "CODE").

   ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE MADE
   ONLY IN ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT
   REFERRED TO HEREIN.

   THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
   ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
   RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS
   OR IS SOLD OR TRANSFERRED IN TRANSACTIONS THAT ARE EXEMPT FROM REGISTRATION
   UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN
   ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE AGREEMENT REFERRED TO
   HEREIN.

   NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT PLAN OR OTHER
   RETIREMENT ARRANGEMENT (EACH A "PLAN") SUBJECT TO THE EMPLOYEE RETIREMENT
   INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR THE CODE WILL BE
   REGISTERED EXCEPT IN COMPLIANCE WITH THE PROCEDURES DESCRIBED HEREIN.

   ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE MADE
   ONLY IF THE PROPOSED TRANSFEREE PROVIDES (I) AN AFFIDAVIT TO THE TRUSTEE THAT
   (A) SUCH TRANSFEREE IS NOT (1) THE UNITED STATES OR ANY POSSESSION THEREOF,
   ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY FOREIGN GOVERNMENT, ANY
   INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR INSTRUMENTALITY OF ANY OF THE
   FOREGOING, (2) ANY ORGANIZATION (OTHER THAN A COOPERATIVE DESCRIBED IN
   SECTION 521 OF THE CODE) THAT IS EXEMPT FROM THE TAX IMPOSED BY CHAPTER 1 OF
   THE CODE UNLESS SUCH ORGANIZATION IS SUBJECT TO THE TAX IMPOSED BY SECTION
   511 OF THE CODE, (3) ANY ORGANIZATION DESCRIBED IN SECTION 1381(A)(2)(C) OF
   THE CODE (ANY SUCH PERSON DESCRIBED IN THE FOREGOING CLAUSES (1), (2) OR (3)
   SHALL HEREINAFTER BE REFERRED TO AS A "DISQUALIFIED ORGANIZATION") OR (4) AN
   AGENT OF A DISQUALIFIED ORGANIZATION AND (B) NO PURPOSE OF SUCH TRANSFER IS
   TO IMPEDE THE ASSESSMENT OR COLLECTION OF TAX, AND (II) SUCH TRANSFEREE
   SATISFIES CERTAIN ADDITIONAL CONDITIONS RELATING TO THE FINANCIAL CONDITION
   OF THE PROPOSED TRANSFEREE. NOTWITHSTANDING THE REGISTRATION IN THE
   CERTIFICATE REGISTER OF ANY TRANSFER, SALE OR OTHER DISPOSITION OF THIS
   CERTIFICATE TO A DISQUALIFIED ORGANIZATION OR AN AGENT OF A DISQUALIFIED
   ORGANIZATION, SUCH REGISTRATION SHALL BE DEEMED TO BE OF NO LEGAL FORCE OR
   EFFECT WHATSOEVER AND SUCH PERSON SHALL NOT BE DEEMED TO BE A
   CERTIFICATEHOLDER FOR ANY PURPOSE HEREUNDER, INCLUDING, BUT NOT LIMITED TO,
   THE RECEIPT OF DISTRIBUTIONS ON THIS CERTIFICATE. EACH HOLDER OF THIS
   CERTIFICATE BY ACCEPTANCE HEREOF SHALL BE DEEMED TO HAVE CONSENTED TO THE
   PROVISIONS OF THIS PARAGRAPH AND THE PROVISIONS OF SECTION 5.02(D) OF THE
   AGREEMENT REFERRED TO HEREIN. ANY PERSON THAT IS A DISQUALIFIED ORGANIZATION
   IS PROHIBITED FROM ACQUIRING BENEFICIAL OWNERSHIP OF THIS CERTIFICATE.

Series [____]                           Aggregate Percentage Interest of the
                                        Class R-X Certificates as of the Issue
                                        Date: 100%

Cut-off Date and date of Pooling and
Servicing Agreement: [___________]

First Distribution Date: [___________]  Servicer:  [___________]

No. 1                                   Trust Administrator:  [___________]

                                        Trustee: [_________]

                                        Issue Date: [___________]

   DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
   CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
   OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE LESS THAN
   THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS CERTIFICATE.

<PAGE>

                      ASSET-BACKED PASS-THROUGH CERTIFICATE

evidencing a beneficial ownership interest in a portion of a Trust Fund (the
"Trust Fund") consisting primarily of a pool of conventional one- to
four-family, fixed-rate, first lien mortgage loans (the "Mortgage Loans") formed
and sold by

                                  [___________]

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         [_________], THE SERVICER, THE TRUST ADMINISTRATOR, THE TRUSTEE OR ANY
         OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS CERTIFICATE NOR THE
         UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY AGENCY OR
         INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that [____________] is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class R-X Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class R-X Certificates created pursuant to a Pooling and Servicing
Agreement, dated as specified above (the "Agreement"), among [_________]
(hereinafter called the "Depositor," which term includes any successor entity
under the Agreement), the Servicer, the Trust Administrator and the Trustee, a
summary of certain of the pertinent provisions of which is set forth hereafter.
To the extent not defined herein, the capitalized terms used herein have the
meanings assigned in the Agreement. This Certificate is issued under and is
subject to the terms, provisions and conditions of the Agreement, to which
Agreement the Holder of this Certificate by virtue of the acceptance hereof
assents and by which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the Record Date, in an amount equal to the product
of the Percentage Interest evidenced by this Certificate and the amount required
to be distributed to the Holders of Class R-X Certificates on such Distribution
Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by the Trust Administrator by wire transfer in
immediately available funds to the account of the Person entitled thereto if
such Person shall have so notified the Trust Administrator in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date or otherwise by check mailed by first class mail to the
address of the Person entitled thereto, as such name and address shall appear on
the Certificate Register. Notwithstanding the above, the final distribution on
this Certificate will be made after due notice by the Trust Administrator of the
pendency of such distribution and only upon presentation and surrender of this
Certificate at the office or agency appointed by the Trust Administrator for
that purpose as provided in the Agreement.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset-Backed Pass-Through Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing a Percentage
Interest in the Class of Certificates equal to the denomination specified on the
face hereof divided by the aggregate Certificate Principal Balance of the Class
of Certificates specified on the face hereof.

         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Servicer, the Trust Administrator, the Trustee, and the rights of
the Certificateholders under the Agreement at any time by the Depositor, the
Servicer, the Trust Administrator and the Trustee with the consent of the
Holders of Certificates entitled to at least 66% of the Voting Rights. Any such
consent by the Holder of this Certificate shall be conclusive and binding on
such Holder and upon all future Holders of this Certificate and of any
Certificate issued upon the transfer hereof or in exchange herefor or in lieu
hereof whether or not notation of such consent is made upon this Certificate.
The Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Certificates.

         Any resale, transfer or other disposition of this certificate may be
made only in accordance with the provisions of section 5.02 of the agreement
referred to herein.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trust Administrator as provided in the
Agreement, duly endorsed by, or accompanied by an assignment in the form below
or other written instrument of transfer in form satisfactory to the Trust
Administrator duly executed by, the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of the same
Class in authorized denominations evidencing the same aggregate Percentage
Interest will be issued to the designated transferee or transferees.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, the Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange
of Certificates, but the Trust Administrator may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         No transfer of this Certificate shall be made unless the transfer is
made pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), and an effective registration or
qualification under applicable state securities laws, or is made in a
transaction that does not require such registration or qualification. In the
event that such a transfer of this Certificate is to be made without
registration or qualification, the Trust Administrator shall require receipt of
(i) if such transfer is purportedly being made in reliance upon Rule 144A under
the 1933 Act, written certifications from the Holder of the Certificate desiring
to effect the transfer, and from such Holder's prospective transferee,
substantially in the forms attached to the Agreement as Exhibit F-1, and (ii) in
all other cases, an Opinion of Counsel satisfactory to it that such transfer may
be made without such registration or qualification (which Opinion of Counsel
shall not be an expense of the Trust Fund or of the Depositor, the Trustee, the
Trust Administrator or the Servicer in their respective capacities as such),
together with copies of the written certification(s) of the Holder of the
Certificate desiring to effect the transfer and/or such Holder's prospective
transferee upon which such Opinion of Counsel is based. None of the Depositor or
the Trust Administrator is obligated to register or qualify the Class of
Certificates specified on the face hereof under the 1933 Act or any other
securities law or to take any action not otherwise required under the Agreement
to permit the transfer of such Certificates without registration or
qualification. Any Holder desiring to effect a transfer of this Certificate
shall be required to indemnify the Trustee, the Trust Administrator, the
Depositor, the Servicer and any Sub-Servicer against any liability that may
result if the transfer is not so exempt or is not made in accordance with such
federal and state laws.

         No transfer of this Certificate to a Plan subject to ERISA or Section
4975 of the Code, any Person acting, directly or indirectly, on behalf of any
such Plan or any person using Plan Assets to acquire this Certificate shall be
made except in accordance with Section 5.02(b) of the Agreement.

         Prior to registration of any transfer, sale or other disposition of
this Certificate, the proposed transferee shall provide to the Trust
Administrator (i) an affidavit to the effect that such transferee is any Person
other than a Disqualified Organization or the agent (including a broker, nominee
or middleman) of a Disqualified Organization, and (ii) a certificate that
acknowledges that (A) the Class R-X Certificates have been designated as a
residual interest in REMIC I and REMIC II, (B) it will include in its income a
pro rata share of the net income of the Trust Fund and that such income may be
an "excess inclusion," as defined in the Code, that, with certain exceptions,
cannot be offset by other losses or benefits from any tax exemption, and (C) it
expects to have the financial means to satisfy all of its tax obligations
including those relating to holding the Class R-X Certificates. Notwithstanding
the registration in the Certificate Register of any transfer, sale or other
disposition of this Certificate to a Disqualified Organization or an agent
(including a broker, nominee or middleman) of a Disqualified Organization, such
registration shall be deemed to be of no legal force or effect whatsoever and
such Person shall not be deemed to be a Certificateholder for any purpose,
including, but not limited to, the receipt of distributions in respect of this
Certificate.

         The Holder of this Certificate, by its acceptance hereof, shall be
deemed to have consented to the provisions of Section 5.02 of the Agreement and
to any amendment of the Agreement deemed necessary by counsel of the Depositor
to ensure that the transfer of this Certificate to any Person other than a
Permitted Transferee or any other Person will not cause the Trust Fund to cease
to qualify as a REMIC or cause the imposition of a tax upon REMIC I or REMIC II.

         No service charge will be made for any such registration of transfer or
exchange of Certificates, but the Trust Administrator may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any transfer or exchange of Certificates.

         The Depositor, the Servicer, the Trust Administrator, the Trustee and
any agent of the Depositor, the Servicer, the Trust Administrator or the Trustee
may treat the Person in whose name this Certificate is registered as the owner
hereof for all purposes, and none of the Depositor, the Servicer, the Trust
Administrator, the Trustee nor any such agent shall be affected by notice to the
contrary.

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by the Trust Administrator and required to be paid to them pursuant to the
Agreement following the earlier of (i) the purchase by the holders of the Class
X Certificates or the Servicer of all Mortgage Loans and related REO Property
remaining in REMIC I, (ii) the final payment or other liquidation (or any
advance with respect thereto) of the last Mortgage Loan or REO Property
remaining in REMIC I. The Agreement permits, but does not require, the party
designated in the Agreement to purchase from REMIC I all the Mortgage Loans and
all property acquired in respect of any Mortgage Loan at a price determined as
provided in the Agreement. The exercise of such right will effect early
retirement of the Certificates; however, such right to purchase is subject to
the aggregate Stated Principal Balance of the Mortgage Loans at the time of
purchase being less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date.

         The recitals contained herein shall be taken as statements of the
Depositor, and none of the Trustee, Servicer or Trust Administrator assume
responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Trust Administrator, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.

<PAGE>

         IN WITNESS WHEREOF, the Trust Administrator has caused this Certificate
to be duly executed.

Dated: [_________] ___, [___]

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Officer

                          CERTIFICATE OF AUTHENTICATION

         This is one of the Certificates referred to in the within-mentioned
Agreement.

                                           [___________], as Trust Administrator

                                            By:
                                                --------------------------------
                                                Authorized Signatory

<PAGE>

                                  ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations:

TEN COM - as tenants in common                   UNIF GIFT MIN ACT - Custodian
                                                                     ---------
TEN ENT - as tenants by the entireties           (Cust) (Minor) under
                                                 Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
     if survivorship and not as                  -------------------
     tenants in common                                 (State)

         Additional abbreviations may also be used though not in the above list.

                                   ASSIGNMENT

         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto _______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
                       Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Pass-Through Certificates and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Trustee to issue a new Certificate of a like
Percentage Interest and Class to the above named assignee and deliver such
Certificate to the following address:
________________________________________________________________________________
______________________________________________________________________________ .

Dated:                                     -------------------------------------
                                           Signature by or on behalf of assignor

                                           -------------------------------------
                                           Signature Guaranteed

<PAGE>

                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to _________________________________________________
________________________________________________________________ for the account
of _______________________________, account numbe______________________________,
or, if mailed by check, to______________________________________________________
______________________________________________________________________________ .

Applicable statements should be mailed to_______________________________________
______________________________________________________________________________ .

         This information is provided by ______________________________________,
the assignee named above, or ____________________________________, as its agent.

<PAGE>

                                    EXHIBIT B

                        FORM 10-D, FORM 8-K AND FORM 10-K
                            REPORTING RESPONSIBILITY

As to each item described below, the entity indicated as the Responsible Party
shall be primarily responsible for reporting the information to the Trust
Administrator pursuant to Section 4.07(a)(iv). If the Trust Administrator is
indicated below as to any item, then the Trust Administrator is primarily
responsible for obtaining that information.

Under Item 1 of Form 10-D: a) items marked "4.02 statement" are required to be
included in the periodic Distribution Date statement under Section 4.02,
provided by the Trust Administrator based on information received from the
Servicer; and b) items marked "Form 10-D report" are required to be in the Form
10-D report but not the 4.02 statement, provided by the party indicated.
Information under all other Items of Form 10-D is to be included in the Form
10-D report.

<TABLE>
<CAPTION>
    FORM            ITEM                              DESCRIPTION                             RESPONSIBLE PARTY
-------------- --------------- ---------------------------------------------------------- ---------------------------
<C>            <C>             <C>                                                     <C>
10-D           Must be filed within 15 days of the Distribution Date.
               ======================================================
-------------- --------------- ------------------------------------------------------- ------------------------------
               1               DISTRIBUTION AND POOL PERFORMANCE INFORMATION
-------------- --------------- ------------------------------------------------------- ------------------------------
                               ITEM  1121(A)  -  DISTRIBUTION  AND  POOL  PERFORMANCE
                               INFORMATION
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (1)  Any  applicable  record  dates,   accrual  dates,  4.02 statement
                               determination dates for calculating  distributions and
                               actual distribution dates for the distribution period.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (2) Cash flows  received  and the sources  thereof for  4.02 statement
                               distributions, fees and expenses.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (3) Calculated  amounts and  distribution  of the flow  4.02 statement
                               of funds for the period  itemized by type and priority
                               of payment, including:
-------------- --------------- ------------------------------------------------------- ------------------------------
                                        (i) Fees or expenses  accrued and paid,  with  4.02 statement
                               an  identification of the general purpose of such fees
                               and the party receiving such fees or expenses.
-------------- --------------- ------------------------------------------------------- ------------------------------
                                        (ii)  Payments  accrued or paid with  respect  4.02 statement
                               to  enhancement  or other  support  identified in Item
                               1114 of Regulation  AB (such as insurance  premiums or
                               other   enhancement   maintenance   fees),   with   an
                               identification   of  the   general   purpose  of  such
                               payments and the party receiving such payments.
-------------- --------------- ------------------------------------------------------- ------------------------------
                                        (iii)    Principal,    interest   and   other  4.02 statement
                               distributions  accrued  and  paid on the  asset-backed
                               securities  by type  and by class  or  series  and any
                               principal or interest shortfalls or carryovers.
-------------- --------------- ------------------------------------------------------- ------------------------------
                                        (iv)  The  amount  of  excess  cash  flow  or  4.02 statement
                               excess spread and the disposition of excess cash flow.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (4)  Beginning  and ending  principal  balances of the  4.02 statement
                               asset-backed securities.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (5) Interest  rates  applicable to the pool assets and  4.02 statement
                               the asset-backed securities,  as applicable.  Consider
                               providing  interest rate  information  for pool assets
                               in  appropriate  distributional  groups or incremental
                               ranges.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (6)  Beginning  and  ending  balances  of  transaction  4.02 statement
                               accounts,  such  as  reserve  accounts,  and  material
                               account activity during the period.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (7) Any  amounts  drawn on any credit  enhancement  or  4.02 statement
                               other  support  identified  in Item 1114 of Regulation
                               AB,  as   applicable,   and  the  amount  of  coverage
                               remaining  under  any such  enhancement,  if known and
                               applicable.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (8) Number and amount of pool assets at the  beginning  4.02 statement
                               and  ending  of  each   period,   and   updated   pool
                               composition  information,  such  as  weighted  average  Updated pool composition
                               coupon,   weighted  average  life,   weighted  average  information fields to be as
                               remaining term, pool factors and prepayment amounts.    specified by Depositor from
                                                                                       time to time
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (9) Delinquency and loss information for the period.    4.02 statement.

                               In  addition,  describe  any  material  changes to the  Form 10-D report: Depositor
                               information    specified   in   Item   1100(b)(5)   of
                               Regulation AB regarding the pool assets.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (10)  Information  on the  amount,  terms and  general  4.02 statement
                               purpose of any advances made or reimbursed  during the
                               period,  including  the general use of funds  advanced
                               and the general source of funds for reimbursements.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (11)  Any  material   modifications,   extensions   or  Form   10-D   report:   Trust
                               waivers  to  pool  asset  terms,  fees,  penalties  or  Administrator  (to the extent
                               payments during the  distribution  period or that have  of the Trust  Administrator's
                               cumulatively become material over time.                 actual knowledge)
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (12) Material  breaches of pool asset  representations  Form 10-D report
                               or warranties or transaction covenants.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (13)  Information  on ratio,  coverage  or other tests  4.02 statement
                               used   for   determining   any   early   amortization,
                               liquidation or other  performance  trigger and whether
                               the trigger was met.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               (14)   Information   regarding  any  new  issuance  of  Form 10-D report: Depositor
                               asset-backed  securities  backed  by  the  same  asset
                               pool,                                                   Form 10-D report: Depositor
                               [information  regarding] any pool asset changes (other
                               than in connection  with a pool asset  converting into
                               cash in accordance with its terms),  such as additions
                               or  removals  in  connection   with  a  prefunding  or
                               revolving  period  and pool  asset  substitutions  and  Form 10-D report: Depositor
                               repurchases  (and purchase rates, if applicable),  and
                               cash flows  available  for future  purchases,  such as
                               the balances of any prefunding or revolving  accounts,
                               if applicable.
                               Disclose  any  material  changes in the  solicitation,
                               credit-granting,       underwriting,      origination,
                               acquisition or pool selection  criteria or procedures,
                               as  applicable,  used to originate,  acquire or select
                               the new pool assets.
-------------- --------------- ------------------------------------------------------- ------------------------------
                               ITEM  1121(B)  -  PRE-FUNDING   OR  REVOLVING   PERIOD  Depositor
                               INFORMATION
                               Updated  pool   information  as  required  under  Item
                               1121(b).
-------------- --------------- ------------------------------------------------------- ------------------------------
               2               LEGAL PROCEEDINGS
-------------- --------------- ------------------------------------------------------- ------------------------------
                               Item  1117 - Legal  proceedings  pending  against  the
                               following  entities,  or  their  respective  property,
                               that  is  material  to  Certificateholders,  including
                               proceedings  known to be  contemplated by governmental  Seller
                               authorities:                                            Depositor
                               Seller                                                  Trustee
                               Depositor                                               Trust Administrator
                               Trustee                                                 Depositor
                               Trust Administrator                                     Servicer
                               Issuing entity                                          Originator
                               Servicer                                                Custodian
                               Originator
                               Custodian
-------------- --------------- ------------------------------------------------------- ------------------------------
               3               SALES OF SECURITIES AND USE OF PROCEEDS
-------------- --------------- ------------------------------------------------------- ------------------------------
                               INFORMATION FROM ITEM 2(A) OF PART II OF FORM 10-Q:

                               With  respect  to  any  sale  of   securities  by  the
                               sponsor,  depositor or issuing entity, that are backed  Depositor
                               by the same asset pool or are otherwise  issued by the
                               issuing  entity,  whether or not  registered,  provide
                               the sales and use of proceeds  information in Item 701
                               of  Regulation   S-K.   Pricing   information  can  be
                               omitted if securities were not registered.
-------------- --------------- ------------------------------------------------------- ------------------------------
               4               DEFAULTS UPON SENIOR SECURITIES
-------------- --------------- ------------------------------------------------------- ------------------------------
                               INFORMATION FROM ITEM 3 OF PART II OF FORM 10-Q:
                               Report the  occurrence of any Event of Default  (after
                               expiration  of any grace  period and  provision of any               N/A
                               required notice)
-------------- --------------- ------------------------------------------------------- ------------------------------
               5               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------- --------------- ------------------------------------------------------- ------------------------------
                               INFORMATION FROM ITEM 4 OF PART II OF FORM 10-Q         Depositor       or      Trust
                                                                                       Administrator  (to the extent
                                                                                       of the Trust  Administrator's
                                                                                       actual knowledge)
-------------- --------------- ------------------------------------------------------- ------------------------------
               6               SIGNIFICANT OBLIGORS OF POOL ASSETS
-------------- --------------- ------------------------------------------------------- ------------------------------
                               ITEM   1112(B)   -   SIGNIFICANT   OBLIGOR   FINANCIAL  N/A
                               INFORMATION*
-------------- --------------- ------------------------------------------------------- ------------------------------
                               *This  information  need only be  reported on the Form
                               10-D for the  distribution  period  in  which  updated
                               information is required pursuant to the Item.
-------------- --------------- ------------------------------------------------------- ------------------------------
               7               SIGNIFICANT ENHANCEMENT PROVIDER INFORMATION
-------------- --------------- ------------------------------------------------------- ------------------------------
                               ITEM   1114(B)(2)   -  CREDIT   ENHANCEMENT   PROVIDER
                               FINANCIAL INFORMATION*
                               Determining applicable disclosure threshold             Depositor
                               Obtaining required financial  information or effecting
                               incorporation by reference                              Depositor
-------------- --------------- ------------------------------------------------------- ------------------------------
                               ITEM  1115(B)  -  DERIVATIVE   COUNTERPARTY  FINANCIAL
                               INFORMATION*
                               Determining current maximum probable exposure           Depositor
                               Determining current significance percentage
                               Obtaining required financial  information or effecting
                               incorporation by reference                              Trust Administrator
                                                                                       Depositor

-------------- --------------- ------------------------------------------------------- ------------------------------
                               *This  information  need only be  reported on the Form
                               10-D for the  distribution  period  in  which  updated
                               information is required pursuant to the Items.
-------------- --------------- ------------------------------------------------------- ------------------------------
               8               OTHER INFORMATION
-------------- --------------- ------------------------------------------------------- ------------------------------
                               DISCLOSE  ANY  INFORMATION  REQUIRED TO BE REPORTED ON  The Responsible Party for
                               FORM 8-K DURING  THE  PERIOD  COVERED BY THE FORM 10-D  the applicable Form 8-K item
                               BUT NOT REPORTED                                        as indicated below
-------------- --------------- ------------------------------------------------------- ------------------------------
               9               EXHIBITS
-------------- --------------- ------------------------------------------------------- ------------------------------
                               Distribution report                                     Trust Administrator
-------------- --------------- ------------------------------------------------------- ------------------------------
                               EXHIBITS  REQUIRED BY ITEM 601 OF REGULATION S-K, SUCH  Depositor
                               AS MATERIAL AGREEMENTS
-------------- --------------- ------------------------------------------------------- ------------------------------
8-K            Must be filed within four business days of an event reportable on Form 8-K.
               ===========================================================================
-------------- ------------------------------------------------------------------------------------------------------
               1.01            ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Disclosure   is   required   regarding   entry  into  or  Depositor
                               amendment of any  definitive  agreement that is material
                               to  the  securitization,  even  if  depositor  is  not a
                               party.
                               Examples: servicing agreement, custodial agreement.
                               Note:   disclosure   not   required  as  to   definitive
                               agreements that are fully disclosed in the prospectus
-------------- --------------- --------------------------------------------------------- ----------------------------
               1.02            TERMINATION OF A MATERIAL DEFINITIVE AGREEMENT
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Disclosure  is  required  regarding  termination  of any  Depositor
                               definitive   agreement   that   is   material   to   the
                               securitization  (other  than  expiration  in  accordance
                               with its terms), even if depositor is not a party.
                               Examples: servicing agreement, custodial agreement.

-------------- --------------- --------------------------------------------------------- ----------------------------
               1.03            BANKRUPTCY OR RECEIVERSHIP
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Disclosure  is  required  regarding  the  bankruptcy  or  Trust Administrator (to
                               receivership with respect to any of the following:        the extent of the Trust
                               Sponsor    (Seller),    Depositor,    Servicer,    Trust  Administrator's actual
                               Administrator, Cap Provider, Custodian                    knowledge)
-------------- --------------- --------------------------------------------------------- ----------------------------
               2.04            TRIGGERING EVENTS THAT ACCELERATE OR INCREASE A DIRECT
                               FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
                               OFF-BALANCE SHEET ARRANGEMENT
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Includes an early  amortization,  performance trigger or  Trust   Administrator   (to
                               other  event,  including  event of  default,  that would  the  extent  of  the  Trust
                               materially  alter the payment  priority/distribution  of  Administrator's      actual
                               cash flows/amortization schedule.                         knowledge)
                               Disclosure  will be made of events other than  waterfall
                               triggers which are disclosed in the 4.02 statement
-------------- --------------- --------------------------------------------------------- ----------------------------
               3.03            MATERIAL MODIFICATION TO RIGHTS OF SECURITY HOLDERS
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Disclosure is required of any material modification to    Trust Administrator
                               documents defining the rights of Certificateholders,
                               including the Pooling and Servicing Agreement
-------------- --------------- --------------------------------------------------------- ----------------------------
               5.03            AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS;
                               CHANGE IN FISCAL YEAR
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Disclosure is required of any amendment "to the           Depositor
                               governing documents of the issuing entity"
-------------- --------------- --------------------------------------------------------- ----------------------------
               5.06            CHANGE IN SHELL COMPANY STATUS
-------------- --------------- --------------------------------------------------------- ----------------------------
                               [Not applicable to ABS issuers]                           Depositor
-------------- --------------- --------------------------------------------------------- ----------------------------
               6.01            ABS INFORMATIONAL AND COMPUTATIONAL MATERIAL
-------------- --------------- --------------------------------------------------------- ----------------------------
                               [Not included in reports to be filed under Section 4.07]  Depositor
-------------- --------------- --------------------------------------------------------- ----------------------------
-------------- --------------- --------------------------------------------------------- ----------------------------
               6.02            CHANGE OF SERVICER, TRUSTEE OR TRUST ADMINISTRATOR
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Requires   disclosure   of  any  removal,   replacement,  Trust Administrator or
                               substitution   or  addition  of  any  master   servicer,  Servicer
                               affiliated  servicer,  other  servicer  servicing 10% or
                               more of pool  assets at time of report,  other  material
                               servicers,   trust  administrator  or  trustee.  Reg  AB
                               disclosure about any new servicer,  trust  administrator
                               or trustee is also required.
-------------- --------------- --------------------------------------------------------- ----------------------------
               6.03            CHANGE IN CREDIT ENHANCEMENT OR OTHER EXTERNAL SUPPORT
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Covers  termination  of any  enhancement in manner other  Depositor
                               than by its terms, the addition of an enhancement,  or a
                               material  change in the  enhancement  provided.  Applies
                               to   external    credit    enhancements   as   well   as
                               derivatives.   Reg   AB   disclosure   about   any   new
                               enhancement provider is also required.
-------------- --------------- --------------------------------------------------------- ----------------------------
               6.04            FAILURE TO MAKE A REQUIRED DISTRIBUTION                   Trust Administrator
-------------- --------------- --------------------------------------------------------- ----------------------------
               6.05            SECURITIES ACT UPDATING DISCLOSURE
-------------- --------------- --------------------------------------------------------- ----------------------------
                               If any  material  pool  characteristic  differs by 5% or  Depositor
                               more at the time of issuance of the securities  from the
                               description  in the final  prospectus,  provide  updated
                               Reg AB disclosure about the actual asset pool.
-------------- --------------- --------------------------------------------------------- ----------------------------
                               If there are any new servicers or  originators  required  Depositor
                               to be disclosed  under  Regulation AB as a result of the
                               foregoing,  provide the information  called for in Items
                               1108 and 1110 respectively.
-------------- --------------- --------------------------------------------------------- ----------------------------
               7.01            REGULATION FD DISCLOSURE                                  Depositor
-------------- --------------- --------------------------------------------------------- ----------------------------
               8.01            OTHER EVENTS
-------------- --------------- --------------------------------------------------------- ----------------------------
                               Any  event,  with  respect to which  information  is not  Depositor
                               otherwise  called for in Form 8-K,  that the  registrant
                               deems of importance to security holders.
-------------- --------------- --------------------------------------------------------- ----------------------------
               9.01            FINANCIAL STATEMENTS AND EXHIBITS                                     N/A
-------------- --------------- --------------------------------------------------------- ----------------------------
10-K           Must be filed within 90 days of the fiscal year end for the registrant.
               =======================================================================
-------------- ------------------------------------------------------------------------------------------------------
               9B              OTHER INFORMATION
-------------- --------------- ---------------------------------------------------------- ---------------------------
                               Disclose any information  required to be reported on Form  Depositor
                               8-K during the  fourth  quarter  covered by the Form 10-K
                               but not reported
-------------- --------------- ---------------------------------------------------------- ---------------------------
               15              EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
-------------- --------------- ---------------------------------------------------------- ---------------------------
                               ITEM 1112(B) - SIGNIFICANT OBLIGOR FINANCIAL INFORMATION              N/A
-------------- --------------- ---------------------------------------------------------- ---------------------------
                               ITEM 1114(B)(2) - CREDIT  ENHANCEMENT  PROVIDER FINANCIAL
                               INFORMATION
                               Determining applicable disclosure threshold
                               Obtaining  required  financial  information  or effecting  Trust Administrator
                               incorporation by reference
                                                                                          Depositor
-------------- --------------- ---------------------------------------------------------- ---------------------------
                               ITEM   1115(B)  -   DERIVATIVE   COUNTERPARTY   FINANCIAL
                               INFORMATION
                               Determining current maximum probable exposure              Trust Administrator
                               Determining current significance percentage
                               Obtaining  required  financial  information  or effecting  Trust Administrator
                               incorporation by reference
                                                                                          Depositor
-------------- --------------- ---------------------------------------------------------- ---------------------------

-------------- --------------- ---------------------------------------------------------- ---------------------------
                               Item 1119 - Affiliations  and  relationships  between the
                               following  entities,   or  their  respective   affiliates
                               entered into  outside the ordinary  course of business or
                               is on terms  other  than  would be  obtained  in an arm's
                               length  transaction with an unrelated third party,  apart
                               from the asset-backed  securities  transaction,  that are
                               material to Certificateholders:
                               Seller                                                     Seller
                               Depositor                                                  Depositor
                               Trustee                                                    Trustee
                               Trust Administrator                                        Trust Administrator
                               Issuing entity                                             Issuing entity
                               Servicer                                                   Servicer
                               Originator                                                 Originator
                               Custodian                                                  Custodian
                               Credit Enhancer/Support Provider, if any                   Depositor
                               Significant Obligor, if any                                Depositor
-------------- --------------- ---------------------------------------------------------- ---------------------------
                               ITEM  1122 -  ASSESSMENT  OF  COMPLIANCE  WITH  SERVICING  Each  Party  participating
                               CRITERIA                                                   in the servicing function
-------------- --------------- ---------------------------------------------------------- ---------------------------
                               ITEM 1123 - SERVICER COMPLIANCE STATEMENT                  Servicer and Trust
                                                                                          Administrator
-------------- --------------- ---------------------------------------------------------- ---------------------------
</TABLE>

<PAGE>

                                    EXHIBIT C

                       SERVICING CRITERIA TO BE ADDRESSED
                           IN ASSESSMENT OF COMPLIANCE

Definitions
-----------
Primary Servicer - transaction party having borrower contact
Master Servicer - aggregator of pool assets
Trust Administrator - waterfall calculator (may be the Trustee, or may be the
Master Servicer)
Back-up Servicer - named in the transaction (in the event a Back up Servicer
becomes the Primary Servicer, follow Primary Servicer obligations)
Custodian - safe keeper of pool assets
Paying Agent - distributor of funds to ultimate investor (Trust Administrator
performs this function)
Trustee - fiduciary of the transaction

Note: The definitions above describe the essential function that the party
performs, rather than the party's title. So, for example, in a particular
transaction, the trustee may perform the "paying agent" and "trust
administrator" functions, while in another transaction, the trust administrator
may perform these functions.

Where there are multiple checks for criteria the attesting party will identify
in their management assertion that they are attesting only to the portion of the
distribution chain they are responsible for in the related transaction
agreements.

KEY:
----
X - obligation

<TABLE>
<CAPTION>
------------------ ---------------------------------- ------------- ---------- ----------------
REG AB REFERENCE   SERVICING CRITERIA                 PRIMARY       MASTER     TRUST
                                                      SERVICER      SERVICER   ADMINISTRATOR
------------------ ---------------------------------- ------------- ---------- ----------------
<S>                <C>                                <C>           <C>        <C>
                   GENERAL SERVICING CONSIDERATIONS
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(1)(i)      Policies   and   procedures   are       X            X
                   instituted    to   monitor    any
                   performance   or  other  triggers
                   and    events   of   default   in
                   accordance  with the  transaction
                   agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(1)(ii)     If   any    material    servicing       X            X
                   activities   are   outsourced  to
                   third   parties,   policies   and
                   procedures   are   instituted  to
                   monitor    the   third    party's
                   performance  and compliance  with
                   such servicing activities.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Any     requirements    in    the
                   transaction     agreements     to
                   maintain a back-up  servicer  for
1122(d)(1)(iii)    the Pool Assets are maintained.
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(1)(iv)     A  fidelity  bond and  errors and       X            X
                   omissions  policy is in effect on
                   the  party  participating  in the
                   servicing   function   throughout
                   the   reporting   period  in  the
                   amount of  coverage  required  by
                   and otherwise in accordance  with
                   the  terms  of  the   transaction
                   agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   CASH COLLECTION AND
                   ADMINISTRATION
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(2)(i)      Payments   on  pool   assets  are       X            X             X
                   deposited  into  the  appropriate
                   custodial   bank   accounts   and
                   related  bank  clearing  accounts
                   no more  than two  business  days
                   following receipt,  or such other
                   number of days  specified  in the
                   transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Disbursements   made   via   wire       X            X             X
                   transfer  on behalf of an obligor
                   or to an  investor  are made only
1122(d)(2)(ii)     by authorized personnel.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Advances  of funds or  guarantees       X            X
                   regarding    collections,    cash
                   flows or  distributions,  and any
                   interest  or other  fees  charged
                   for  such  advances,   are  made,
                   reviewed    and    approved    as
                   specified   in  the   transaction
1122(d)(2)(iii)    agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   The  related   accounts  for  the                                  X
                   transaction,    such    as   cash
                   reserve   accounts   or  accounts
                   established  as a  form  of  over
                   collateralization,            are
                   separately    maintained   (e.g.,
                   with  respect to  commingling  of
                   cash)   as  set   forth   in  the
1122(d)(2)(iv)     transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Each    custodial    account   is       X            X             X
                   maintained    at   a    federally
                   insured  depository   institution
                   as set  forth in the  transaction
                   agreements.  For purposes of this
                   criterion,   "federally   insured
                   depository    institution"   with
                   respect  to a  foreign  financial
                   institution   means   a   foreign
                   financial  institution that meets
                   the    requirements    of    Rule
                   13k-1(b)(1)   of  the  Securities
1122(d)(2)(v)      Exchange Act. *
------------------ ---------------------------------- ------------ ------------ ---------------
                   Unissued  checks are  safeguarded       X
                   so  as  to  prevent  unauthorized
1122(d)(2)(vi)     access.
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(2)(vii)    Reconciliations  are  prepared on       X            X             X
                   a    monthly    basis   for   all
                   asset-backed  securities  related
                   bank     accounts,      including
                   custodial  accounts  and  related
                   bank  clearing  accounts.   These
                   reconciliations      are      (A)
                   mathematically    accurate;   (B)
                   prepared  within 30 calendar days
                   after the bank  statement  cutoff
                   date,  or such  other  number  of
                   days     specified     in     the
                   transaction    agreements;    (C)
                   reviewed  and approved by someone
                   other   than   the   person   who
                   prepared the reconciliation;  and
                   (D)  contain   explanations   for
                   reconciling      items.     These
                   reconciling  items  are  resolved
                   within 90 calendar  days of their
                   original identification,  or such
                   other  number  of days  specified
                   in the transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   INVESTOR REMITTANCES AND
                   REPORTING
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(3)(i)      Reports to  investors,  including       X            X             X
                   those  to  be   filed   with  the
                   Commission,   are  maintained  in
                   accordance  with the  transaction
                   agreements     and     applicable
                   Commission          requirements.
                   Specifically,  such  reports  (A)
                   are prepared in  accordance  with
                   timeframes  and  other  terms set
                   forth    in    the    transaction
                   agreements;      (B)      provide
                   information     calculated     in
                   accordance    with   the    terms
                   specified   in  the   transaction
                   agreements;  (C) are  filed  with
                   the  Commission  as  required  by
                   its  rules and  regulations;  and
                   (D) agree with  investors' or the
                   trustee's   records   as  to  the
                   total  unpaid  principal  balance
                   and   number   of   Pool   Assets
                   serviced by the Servicer.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Amounts  due  to  investors   are       X            X             X
                   allocated    and    remitted   in
                   accordance    with    timeframes,
                   distribution  priority  and other
                   terms    set    forth    in   the
1122(d)(3)(ii)     transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Disbursements    made    to    an       X            X             X
                   investor  are  posted  within two
                   business  days to the  Servicer's
                   investor  records,  or such other
                   number of days  specified  in the
1122(d)(3)(iii)    transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Amounts   remitted  to  investors       X            X             X
                   per the  investor  reports  agree
                   with cancelled  checks,  or other
                   form  of  payment,  or  custodial
1122(d)(3)(iv)     bank statements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   POOL ASSET ADMINISTRATION
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(4)(i)      Collateral  or  security  on pool       X            X
                   assets is  maintained as required
                   by the transaction  agreements or
                   related pool asset documents.
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(4)(ii)     Pool     assets    and    related       X            X
                   documents  are   safeguarded   as
                   required   by   the   transaction
                   agreements
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(4)(iii)    Any   additions,    removals   or       X            X
                   substitutions  to the asset  pool
                   are made,  reviewed  and approved
                   in     accordance     with    any
                   conditions  or   requirements  in
                   the transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(4)(iv)     Payments    on    pool    assets,       X
                   including  any  payoffs,  made in
                   accordance  with the related pool
                   asset  documents  are  posted  to
                   the  Servicer's  obligor  records
                   maintained   no  more   than  two
                   business days after  receipt,  or
                   such   other   number   of   days
                   specified   in  the   transaction
                   agreements,   and   allocated  to
                   principal,   interest   or  other
                   items    (e.g.,     escrow)    in
                   accordance  with the related pool
                   asset documents.
------------------ ---------------------------------- ------------ ------------ ---------------
                   The Servicer's  records regarding       X
                   the pool  assets  agree  with the
                   Servicer's  records  with respect
                   to an obligor's  unpaid principal
1122(d)(4)(v)      balance.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Changes   with   respect  to  the       X            X
                   terms or status  of an  obligor's
                   pool    assets    (e.g.,     loan
                   modifications  or re-agings)  are
                   made,  reviewed  and  approved by
                   authorized      personnel      in
                   accordance  with the  transaction
                   agreements   and   related   pool
1122(d)(4)(vi)     asset documents.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Loss   mitigation   or   recovery       X            X
                   actions    (e.g.,     forbearance
                   plans,  modifications  and  deeds
                   in    lieu    of     foreclosure,
                   foreclosures  and  repossessions,
                   as  applicable)   are  initiated,
                   conducted    and   concluded   in
                   accordance  with  the  timeframes
                   or       other       requirements
                   established  by  the  transaction
1122(d)(4)(vii)    agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(4)(viii)   Records  documenting   collection       X
                   efforts  are  maintained   during
                   the   period  a  pool   asset  is
                   delinquent  in  accordance   with
                   the transaction agreements.  Such
                   records  are   maintained  on  at
                   least a  monthly  basis,  or such
                   other  period  specified  in  the
                   transaction    agreements,    and
                   describe the entity's  activities
                   in  monitoring   delinquent  pool
                   assets  including,  for  example,
                   phone calls,  letters and payment
                   rescheduling   plans   in   cases
                   where   delinquency   is   deemed
                   temporary   (e.g.,   illness   or
                   unemployment).
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(4)(ix)     Adjustments  to interest rates or       X            X
                   rates of return  for pool  assets
                   with variable  rates are computed
                   based on the  related  pool asset
                   documents.
------------------ ---------------------------------- ------------ ------------ ---------------
1122(d)(4)(x)      Regarding   any  funds   held  in       X
                   trust  for an  obligor  (such  as
                   escrow accounts):  (A) such funds
                   are analyzed,  in accordance with
                   the    obligor's    pool    asset
                   documents,  on at least an annual
                   basis,   or  such  other   period
                   specified   in  the   transaction
                   agreements;  (B) interest on such
                   funds is paid,  or  credited,  to
                   obligors   in   accordance   with
                   applicable  pool asset  documents
                   and  state  laws;  and  (C)  such
                   funds   are   returned   to   the
                   obligor  within 30 calendar  days
                   of full  repayment of the related
                   pool   assets,   or  such   other
                   number of days  specified  in the
                   transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Payments  made  on  behalf  of an       X
                   obligor    (such    as   tax   or
                   insurance  payments)  are made on
                   or before the related  penalty or
                   expiration  dates,  as  indicated
                   on  the   appropriate   bills  or
                   notices   for   such    payments,
                   provided  that such  support  has
                   been  received by the servicer at
                   least 30  calendar  days prior to
                   these   dates,   or  such   other
                   number of days  specified  in the
1122(d)(4)(xi)     transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Any  late  payment  penalties  in       X
                   connection  with any  payment  to
                   be made on behalf  of an  obligor
                   are  paid  from  the   Servicer's
                   funds  and  not  charged  to  the
                   obligor,  unless the late payment
                   was  due to the  obligor's  error
1122(d)(4)(xii)    or omission.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Disbursements  made on  behalf of       X
                   an obligor are posted  within two
                   business  days  to the  obligor's
                   records    maintained    by   the
                   servicer,  or such  other  number
                   of   days    specified   in   the
1122(d)(4)(xiii)   transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Delinquencies,   charge-offs  and                    X
                   uncollectible     accounts    are
                   recognized    and   recorded   in
                   accordance  with the  transaction
1122(d)(4)(xiv)    agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
                   Any   external   enhancement   or                                  X
                   other   support,   identified  in
                   Item  1114(a)(1)  through  (3) or
                   Item  1115 of  Regulation  AB, is
                   maintained  as set  forth  in the
1122(d)(4)(xv)     transaction agreements.
------------------ ---------------------------------- ------------ ------------ ---------------
</TABLE>

___________
*Subject to clarification from the SEC.

<PAGE>

                                    EXHIBIT D

                  FORM OF ASSIGNMENT AND RECOGNITION AGREEMENT

<PAGE>

                                    EXHIBIT E

                               REQUEST FOR RELEASE

                  TO:      [____________]

Re:      Pooling and Servicing Agreement dated as of [___________], among
         [_________], as Depositor, [___________] as Servicer, [___________] as
         Trust Administrator and [_________] as Trustee
         ------------------------------------------------------------------

         In connection with the administration of the Mortgage Loans held by you
as Trustee for the Owner pursuant to the above-captioned Agreement, we request
the release, and hereby acknowledge receipt, of the Trustee's Mortgage File for
the Mortgage Loan described below, for the reason indicated.

Mortgage Loan Number:
Mortgagor Name, Address & Zip Code:

Reason for Requesting Documents (check one):

______________               1.     Mortgage Paid in Full
______________               2.     Foreclosure
______________               3.     Substitution
______________               4.     Other Liquidation (Repurchases, etc.)
______________               5.     Nonliquidation

Reason:______________________________________________

Address to which Trustee should
Deliver the Custodian's Mortgage File:

                               [_________________]
                               [_________________]

                                              By:
                                                  ------------------------------
                                                  Name:
                                                  Title:

Issuer:
        -----------------------------

                                              Address:
                                                       -------------------------

Date:
      ----------------------                           -------------------------

Trustee

[_________________]

Please acknowledge the execution of the above request by your signature and date
below:

-------------------------------------
Signature                                     Date

Documents returned to Trustee:

------------------------------------
Trustee                                       Date

<PAGE>

                                   EXHIBIT F-1

                    FORM OF TRANSFEROR REPRESENTATION LETTER

[Date]

[______________]

         Re:      [_________], Asset-Backed Pass-Through Certificates, Series
                  [____], Class , representing a % Class Percentage Interest
                  -----------------------------------------------------------

Ladies and Gentlemen:

         In connection with the transfer by ________________ (the "Transferor")
to ________________ (the "Transferee") of the captioned mortgage pass-through
certificates (the "Certificates"), the Transferor hereby certifies as follows:

         Neither the Transferor nor anyone acting on its behalf has (a) offered,
pledged, sold, disposed of or otherwise transferred any Certificate, any
interest in any Certificate or any other similar security to any person in any
manner, (b) has solicited any offer to buy or to accept a pledge, disposition or
other transfer of any Certificate, any interest in any Certificate or any other
similar security from any person in any manner, (c) has otherwise approached or
negotiated with respect to any Certificate, any interest in any Certificate or
any other similar security with any person in any manner, (d) has made any
general solicitation by means of general advertising or in any other manner, (e)
has taken any other action, that (in the case of each of subclauses (a) through
(e) above) would constitute a distribution of the Certificates under the
Securities Act of 1933, as amended (the "1933 Act"), or would render the
disposition of any Certificate a violation of Section 5 of the 1933 Act or any
state securities law or would require registration or qualification pursuant
thereto. The Transferor will not act, nor has it authorized or will it authorize
any person to act, in any manner set forth in the foregoing sentence with
respect to any Certificate. The Transferor will not sell or otherwise transfer
any of the Certificates, except in compliance with the provisions of that
certain Pooling and Servicing Agreement dated as of [___________], among
[_________], as Depositor, [___________] as Servicer, [___________] as trust
administrator and [_________] as Trustee (the "Pooling and Servicing
Agreement"), pursuant to which Pooling and Servicing Agreement the Certificates
were issued.

<PAGE>

         Capitalized terms used but not defined herein shall have the meanings
assigned thereto in the Pooling and Servicing Agreement.

                                              Very truly yours,

                                              [Transferor]

                                              By:
                                                  ------------------------------
                                                  Name:
                                                  Title:

<PAGE>

                    FORM OF TRANSFEREE REPRESENTATION LETTER

[Date]

[______________]

         Re:      [_________], Asset-Backed Pass-Through Certificates, Class,
                  Series [____], representing a % Percentage Interest
                  -----------------------------------------------------------

Ladies and Gentlemen:

         In connection with the purchase from ______________________ (the
"Transferor") on the date hereof of the captioned trust certificates (the
"Certificates"), _______________ (the "Transferee") hereby certifies as follows:

         1. The Transferee is a "qualified institutional buyer" as that term is
defined in Rule 144A ("Rule 144A") under the Securities Act of 1933 (the "1933
Act") and has completed either of the forms of certification to that effect
attached hereto as Annex 1 or Annex 2. The Transferee is aware that the sale to
it is being made in reliance on Rule 144A. The Transferee is acquiring the
Certificates for its own account or for the account of a qualified institutional
buyer, and understands that such Certificate may be resold, pledged or
transferred only (i) to a person reasonably believed to be a qualified
institutional buyer that purchases for its own account or for the account of a
qualified institutional buyer to whom notice is given that the resale, pledge or
transfer is being made in reliance on Rule 144A, or (ii) pursuant to another
exemption from registration under the 1933 Act.

         2. The Transferee has been furnished with all information regarding (a)
the Certificates and distributions thereon, (b) the nature, performance and
servicing of the Mortgage Loans, (c) the Pooling and Servicing Agreement
referred to below, and (d) any credit enhancement mechanism associated with the
Certificates, that it has requested.

         All capitalized terms used but not otherwise defined herein have the
respective meanings assigned thereto in the Pooling and Servicing Agreement
dated as of [___________], among [_________], as Depositor, [___________] as
Servicer, [___________] as trust administrator and [_________] as Trustee ,
pursuant to which the Certificates were issued.

                                              [Transferee]

                                              By:
                                                  -----------------------------
                                                  Name:
                                                  Title:

<PAGE>

                              ANNEX 1 TO EXHIBIT F
            QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A

          [For Transferees Other Than Registered Investment Companies]

         The undersigned hereby certifies as follows to [name of Transferor]
(the "Transferor") and [_________], as Trustee, with respect to the mortgage
pass-through certificates (the "Certificates") described in the Transferee
Certificate to which this certification relates and to which this certification
is an Annex:

         1.       As indicated below, the undersigned is the President, Chief
                  Financial Officer, Senior Vice President or other executive
                  officer of the entity purchasing the Certificates (the
                  "Transferee").

         2.       In connection with purchases by the Transferee, the Transferee
                  is a "qualified institutional buyer" as that term is defined
                  in Rule 144A under the Securities Act of 1933 ("Rule 144A")
                  because (i) the Transferee owned and/or invested on a
                  discretionary basis $______________________(1) in securities
                  (except for the excluded securities referred to below) as of
                  the end of the Transferee's most recent fiscal year (such
                  amount being calculated in accordance with Rule 144A) and (ii)
                  the Transferee satisfies the criteria in the category marked
                  below.

         ___      CORPORATION, ETC. The Transferee is a corporation (other than
                  a bank, savings and loan association or similar institution),
                  Massachusetts or similar business trust, partnership, or any
                  organization described in Section 501(c)(3) of the Internal
                  Revenue Code of 1986.

         ___      BANK. The Transferee (a) is a national bank or banking
                  institution organized under the laws of any State, territory
                  or the District of Columbia, the business of which is
                  substantially confined to banking and is supervised by the
                  State or territorial banking commission or similar official or
                  is a foreign bank or equivalent institution, and (b) has an
                  audited net worth of at least $25,000,000 as demonstrated in
                  its latest annual financial statements, a copy of which is
                  attached hereto.

         ___      SAVINGS AND LOAN. The Transferee (a) is a savings and loan
                  association, building and loan association, cooperative bank,
                  homestead association or similar institution, which is
                  supervised and examined by a State or Federal authority having
                  supervision over any such institutions or is a foreign savings
                  and loan association or equivalent institution and (b) has an
                  audited net worth of at least

         ___      BROKER-DEALER. The Transferee is a dealer registered pursuant
                  to Section 15 of the Securities Exchange Act of 1934.

------------
*    Subject to clarification from the SEC.
(1)  Transferee must own and/or invest on a discretionary basis at least
     $100,000,000 in securities unless Transferee is a dealer, and, in that
     case, Transferee must own and/or invest on a discretionary basis at least
     $10,000,000 in securities. $25,000,000 as demonstrated in its latest annual
     financial statements, A COPY OF WHICH IS ATTACHED HERETO.

         ___      INSURANCE COMPANY. The Transferee is an insurance company
                  whose primary and predominant business activity is the writing
                  of insurance or the reinsuring of risks underwritten by
                  insurance companies and which is subject to supervision by the
                  insurance commissioner or a similar official or agency of a
                  State, territory or the District of Columbia.

         ___      STATE OR LOCAL PLAN. The Transferee is a plan established and
                  maintained by a State, its political subdivisions, or any
                  agency or instrumentality of the State or its political
                  subdivisions, for the benefit of its employees.

         ___      ERISA PLAN. The Transferee is an employee benefit plan within
                  the meaning of Title I of the Employee Retirement Income
                  Security Act of 1974.

         ___      INVESTMENT ADVISOR. The Transferee is an investment advisor
                  registered under the Investment Advisers Act of 1940.

         3.       The term "SECURITIES" as used herein DOES NOT INCLUDE (i)
                  securities of issuers that are affiliated with the Transferee,
                  (ii) securities that are part of an unsold allotment to or
                  subscription by the Transferee, if the Transferee is a dealer,
                  (iii) securities issued or guaranteed by the U.S. or any
                  instrumentality thereof, (iv) bank deposit notes and
                  certificates of deposit, (v) loan participations, (vi)
                  repurchase agreements, (vii) securities owned but subject to a
                  repurchase agreement and (viii) currency, interest rate and
                  commodity swaps.

         4.       For purposes of determining the aggregate amount of securities
                  owned and/or invested on a discretionary basis by the
                  Transferee, the Transferee used the cost of such securities to
                  the Transferee and did not include any of the securities
                  referred to in the preceding paragraph. Further, in
                  determining such aggregate amount, the Transferee may have
                  included securities owned by subsidiaries of the Transferee,
                  but only if such subsidiaries are consolidated with the
                  Transferee in its financial statements prepared in accordance
                  with generally accepted accounting principles and if the
                  investments of such subsidiaries are managed under the
                  Transferee's direction. However, such securities were not
                  included if the Transferee is a majority-owned, consolidated
                  subsidiary of another enterprise and the Transferee is not
                  itself a reporting company under the Securities Exchange Act
                  of 1934.

         5.       The Transferee acknowledges that it is familiar with Rule 144A
                  and understands that the Transferor and other parties related
                  to the Certificates are relying and will continue to rely on
                  the statements made herein because one or more sales to the
                  Transferee may be in reliance on Rule 144A.

___     ___       Will the Transferee be purchasing the Certificates only for
Yes     No        the Transferee's own account?

         6.       If the answer to the foregoing question is "no", the
                  Transferee agrees that, in connection with any purchase of
                  securities sold to the Transferee for the account of a third
                  party (including any separate account) in reliance on Rule
                  144A, the Transferee will only purchase for the account of a
                  third party that at the time is a "qualified institutional
                  buyer" within the meaning of Rule 144A. In addition, the
                  Transferee agrees that the Transferee will not purchase
                  securities for a third party unless the Transferee has
                  obtained a current representation letter from such third party
                  or taken other appropriate steps contemplated by Rule 144A to
                  conclude that such third party independently meets the
                  definition of "qualified institutional buyer" set forth in
                  Rule 144A.

         7.       The Transferee will notify each of the parties to which this
                  certification is made of any changes in the information and
                  conclusions herein. Until such notice is given, the
                  Transferee's purchase of the Certificates will constitute a
                  reaffirmation of this certification as of the date of such
                  purchase. In addition, if the Transferee is a bank or savings
                  and loan as provided above, the Transferee agrees that it will
                  furnish to such parties updated annual financial statements
                  promptly after they become available.

Dated:
                                              ----------------------------------
                                              Print Name of Transferee

                                              By:
                                                  ------------------------------
                                                  Name:
                                                  Title:

<PAGE>

                              ANNEX 2 TO EXHIBIT F

            QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A

           [For Transferees That Are Registered Investment Companies]

The undersigned hereby certifies as follows to [name of Transferor] (the
"Transferor") and [_________], as Trustee, with respect to the mortgage pass-
through certificates (the "Certificates") described in the Transferee
Certificate to which this certification relates and to which this certification
is an Annex:

1. As indicated below, the undersigned is the President, Chief Financial Officer
or Senior Vice President of the entity purchasing the Certificates (the
"Transferee") or, if the Transferee is a "qualified institutional buyer" as that
term is defined in Rule 144A under the Securities Act of 1933 ("Rule 144A")
because the Transferee is part of a Family of Investment Companies (as defined
below), is such an officer of the investment adviser (the "Adviser").

2. In connection with purchases by the Transferee, the Transferee is a
"qualified institutional buyer" as defined in Rule 144A because (i) the
Transferee is an investment company registered under the Investment Company Act
of 1940, and (ii) as marked below, the Transferee alone, or the Transferee's
Family of Investment Companies, owned at least $100,000,000 in securities (other
than the excluded securities referred to below) as of the end of the
Transferee's most recent fiscal year. For purposes of determining the amount of
securities owned by the Transferee or the Transferee's Family of Investment
Companies, the cost of such securities was used.

____ The Transferee owned $___________________ in securities (other than the
excluded securities referred to below) as of the end of the Transferee's most
recent fiscal year (such amount being calculated in accordance with Rule 144A).

____ The Transferee is part of a Family of Investment Companies which owned in
the aggregate $______________ in securities (other than the excluded securities
referred to below) as of the end of the Transferee's most recent fiscal year
(such amount being calculated in accordance with Rule 144A).

3. The term "FAMILY OF INVESTMENT COMPANIES" as used herein means two or more
registered investment companies (or series thereof) that have the same
investment adviser or investment advisers that are affiliated (by virtue of
being majority owned subsidiaries of the same parent or because one investment
adviser is a majority owned subsidiary of the other).

4. The term "SECURITIES" as used herein does not include (i) securities of
issuers that are affiliated with the Transferee or are part of the Transferee's
Family of Investment Companies, (ii) securities issued or guaranteed by the U.S.
or any instrumentality thereof, (iii) bank deposit notes and certificates of
deposit, (iv) loan participations, (v) repurchase agreements, (vi) securities
owned but subject to a repurchase agreement and (vii) currency, interest rate
and commodity swaps.

5. The Transferee is familiar with Rule 144A and understands that the parties to
which this certification is being made are relying and will continue to rely on
the statements made herein because one or more sales to the Transferee will be
in reliance on Rule 144A. In addition, the Transferee will only purchase for the
Transferee's own account.

6. The undersigned will notify the parties to which this certification is made
of any changes in the information and conclusions herein. Until such notice, the
Transferee's purchase of the Certificates will constitute a reaffirmation of
this certification by the undersigned as of the date of such purchase.

                                             Dated:

                                             ----------------------------------
                                             Print Name of Transferee or Advisor

                                             By:
                                                 -------------------------------
                                                 Name:
                                                 Title:

                                             IF AN ADVISER:

                                             -----------------------------------
                                             Print Name of Transferee

<PAGE>

                    FORM OF TRANSFEREE REPRESENTATION LETTER

       The undersigned hereby certifies on behalf of the purchaser named below
(the "Purchaser") as follows:

1.       I am an executive officer of the Purchaser.

2.       The Purchaser is a "qualified institutional buyer", as defined in Rule
         144A, ("Rule 144A") under the Securities Act of 1933, as amended.

3.       As of the date specified below (which is not earlier than the last day
         of the Purchaser's most recent fiscal year), the amount of
         "securities", computed for purposes of Rule 144A, owned and invested on
         a discretionary basis by the Purchaser was in excess of $100,000,000.

                                              Name of Purchaser

                                              ----------------------------------

                                              By:
                                                  ------------------------------
                                                  Name:
                                                  Title:

                                              Date of this certificate:
                                              Date of information provided in
                                              paragraph 3

<PAGE>

                                   EXHIBIT F-2

                 FORM OF RESIDUAL CERTIFICATE TRANSFER AFFIDAVIT

STATE OF                )
                        )   ss.:
COUNTY OF               )

         The undersigned, being first duly sworn, deposes and says as follows:

         1. The undersigned is an officer of, the proposed Transferee of an
Ownership Interest in a Residual Certificate (the "Certificate") issued pursuant
to the Pooling and Servicing Agreement dated as of [___________] (the
"Agreement"), among [_________], as depositor (the "Depositor"), [___________]
as Servicer, (the "Servicer"), [___________] as trust administrator and
[_________], as trustee (the "Trustee"). Capitalized terms used, but not defined
herein or in Exhibit 1 hereto, shall have the meanings ascribed to such terms in
the Agreement. The Transferee has authorized the undersigned to make this
affidavit on behalf of the Transferee for the benefit of the Depositor and the
Trustee.

         2. The Transferee is, as of the date hereof, and will be, as of the
date of the Transfer, a Permitted Transferee. The Transferee is acquiring its
Ownership Interest in the Certificate for its own account. The Transferee has no
knowledge that any such affidavit is false.

         3. The Transferee has been advised of, and understands that (i) a tax
will be imposed on Transfers of the Certificate to Persons that are not
Permitted Transferees; (ii) such tax will be imposed on the transferor, or, if
such Transfer is through an agent (which includes a broker, nominee or
middleman) for a Person that is not a Permitted Transferee, on the agent; and
(iii) the Person otherwise liable for the tax shall be relieved of liability for
the tax if the subsequent Transferee furnished to such Person an affidavit that
such subsequent Transferee is a Permitted Transferee and, at the time of
Transfer, such Person does not have actual knowledge that the affidavit is
false.

         4. The Transferee has been advised of, and understands that a tax will
be imposed on a "pass-through entity" holding the Certificate if at any time
during the taxable year of the pass-through entity a Person that is not a
Permitted Transferee is the record holder of an interest in such entity. The
Transferee understands that such tax will not be imposed for any period with
respect to which the record holder furnishes to the pass-through entity an
affidavit that such record holder is a Permitted Transferee and the pass-through
entity does not have actual knowledge that such affidavit is false. (For this
purpose, a "pass-through entity" includes a regulated investment company, a real
estate investment trust or common trust fund, a partnership, trust or estate,
and certain cooperatives and, except as may be provided in Treasury Regulations,
persons holding interests in pass-through entities as a nominee for another
Person.)

         5. The Transferee has reviewed the provisions of Section 5.02(d) of the
Agreement and understands the legal consequences of the acquisition of an
Ownership Interest in the Certificate including, without limitation, the
restrictions on subsequent Transfers and the provisions regarding voiding the
Transfer and mandatory sales. The Transferee expressly agrees to be bound by and
to abide by the provisions of Section 5.02(d) of the Agreement and the
restrictions noted on the face of the Certificate. The Transferee understands
and agrees that any breach of any of the representations included herein shall
render the Transfer to the Transferee contemplated hereby null and void.

         6. The Transferee agrees to require a Transfer Affidavit from any
Person to whom the Transferee attempts to Transfer its Ownership Interest in the
Certificate, and in connection with any Transfer by a Person for whom the
Transferee is acting as nominee, trustee or agent, and the Transferee will not
Transfer its Ownership Interest or cause any Ownership Interest to be
Transferred to any Person that the Transferee knows is not a Permitted
Transferee. In connection with any such Transfer by the Transferee, the
Transferee agrees to deliver to the Trustee a certificate substantially in the
form set forth as Exhibit L to the Agreement (a "Transferor Certificate") to the
effect that such Transferee has no actual knowledge that the Person to which the
Transfer is to be made is not a Permitted Transferee.

         7. The Transferee has historically paid its debts as they have come
due, intends to pay its debts as they come due in the future, and understands
that the taxes payable with respect to the Certificate may exceed the cash flow
with respect thereto in some or all periods and intends to pay such taxes as
they become due. The Transferee does not have the intention to impede the
assessment or collection of any tax legally required to be paid with respect to
the Certificate.

         8. The Transferee's taxpayer identification number is ___________.

         9. The Transferee is a U.S. Person as defined in Code Section
7701(a)(30).

         10. The Transferee is aware that the Certificate may be a "noneconomic
residual interest" within the meaning of proposed Treasury regulations
promulgated pursuant to the Code and that the transferor of a noneconomic
residual interest will remain liable for any taxes due with respect to the
income on such residual interest, unless no significant purpose of the transfer
was to impede the assessment or collection of tax.

         11. The Transferee will not cause income from the Certificate to be
attributable to a foreign permanent establishment or fixed base, within the
meaning of an applicable income tax treaty, of the Transferee or any other U.S.
person.

         12. Check one of the following:

         [_] The present value of the anticipated tax liabilities associated
with holding the Certificate, as applicable, does not exceed the sum of:

         (i)      the present value of any consideration given to the Transferee
                  to acquire such Certificate;

         (ii)     the present value of the expected future distributions on such
                  Certificate; and

         (iii)    the present value of the anticipated tax savings associated
                  with holding such Certificate as the related REMIC generates
                  losses.

         For purposes of this calculation, (i) the Transferee is assumed to pay
tax at the highest rate currently specified in Section 11(b) of the Code (but
the tax rate in Section 55(b)(1)(B) of the Code may be used in lieu of the
highest rate specified in Section 11(b) of the Code if the Transferee has been
subject to the alternative minimum tax under Section 55 of the Code in the
preceding two years and will compute its taxable income in the current taxable
year using the alternative minimum tax rate) and (ii) present values are
computed using a discount rate equal to the short-term Federal rate prescribed
by Section 1274(d) of the Code for the month of the transfer and the compounding
period used by the Transferee.

         [_] The transfer of the Certificate complies with U.S. Treasury
Regulations Sections 1.860E-1(c)(5) and (6) and, accordingly,

         (i)      the Transferee is an "eligible corporation," as defined in
                  U.S. Treasury Regulations Section 1.860E-1(c)(6)(i), as to
                  which income from the Certificate will only be taxed in the
                  United States;

         (ii)     at the time of the transfer, and at the close of the
                  Transferee's two fiscal years preceding the year of the
                  transfer, the Transferee had gross assets for financial
                  reporting purposes (excluding any obligation of a person
                  related to the Transferee within the meaning of U.S. Treasury
                  Regulations Section 1.860E-1(c)(6)(ii)) in excess of $100
                  million and net assets in excess of $10 million;

         (iii)    the Transferee will transfer the Certificate only to another
                  "eligible corporation," as defined in U.S. Treasury
                  Regulations Section 1.860E-1(c)(6)(i), in a transaction that
                  satisfies the requirements of Sections 1.860E-1(c)(4)(i), (ii)
                  and (iii) and Section 1.860E-1(c)(5) of the U.S. Treasury
                  Regulations; and

         (iv)     the Transferee determined the consideration paid to it to
                  acquire the Certificate based on reasonable market assumptions
                  (including, but not limited to, borrowing and investment
                  rates, prepayment and loss assumptions, expense and
                  reinvestment assumptions, tax rates and other factors specific
                  to the Transferee) that it has determined in good faith.

         [_]      None of the above.

         13. The Transferee is not an employee benefit plan that is subject to
Title I of ERISA or a plan that is subject to Section 4975 of the Code or a plan
subject to any Federal, state or local law that is substantially similar to
Title I of ERISA or Section 4975 of the Code, and the Transferee is not acting
on behalf of or investing plan assets of such a plan.

<PAGE>

         IN WITNESS WHEREOF, the Transferee has caused this instrument to be
executed on its behalf, pursuant to authority of its Board of Directors, by its
duly authorized officer and its corporate seal to be hereunto affixed, duly
attested, this day of , 20 .

                                              [NAME OF TRANSFEREE]

                                              By:
                                                  ------------------------------
                                                  Name:
                                                  Title:

 [Corporate Seal]

ATTEST:

-----------------------------------
 [Assistant] Secretary

         Personally appeared before me the above-named __________, known or
proved to me to be the same person who executed the foregoing instrument and to
be the ___________ of the Transferee, and acknowledged that he executed the same
as his free act and deed and the free act and deed of the Transferee.

         Subscribed and sworn before me this ______ day of ____________, 20__.

                                              ----------------------------------
                                                         NOTARY PUBLIC

                                              My Commission expires the __ day
                                              of _________, 20__

<PAGE>

                          FORM OF TRANSFEROR AFFIDAVIT

STATE OF NEW YORK   )
                    )
COUNTY OF NEW YORK  )

         __________________________, being duly sworn, deposes, represents and
warrants as follows:

         1. I am a ____________________ of ____________________________ (the
"Owner"), a corporation duly organized and existing under the laws of
______________, on behalf of whom I make this affidavit.

         2. The Owner is not transferring the Class R Certificates or Class R-X
Certificates (the "Residual Certificates") to impede the assessment or
collection of any tax.

         3. The Owner has no actual knowledge that the Person that is the
proposed transferee (the "Purchaser") of the Residual Certificates: (i) has
insufficient assets to pay any taxes owed by such proposed transferee as holder
of the Residual Certificates; (ii) may become insolvent or subject to a
bankruptcy proceeding for so long as the Residual Certificates remain
outstanding and (iii) is not a Permitted Transferee.

         4. The Owner understands that the Purchaser has delivered to the
Trustee a transfer affidavit and agreement in the form attached to the Pooling
and Servicing Agreement as Exhibit F-2. The Owner does not know or believe that
any representation contained therein is false.

         5. At the time of transfer, the Owner has conducted a reasonable
investigation of the financial condition of the Purchaser as contemplated by
Treasury Regulations Section 1.860E-1(c)(4)(i) and, as a result of that
investigation, the Owner has determined that the Purchaser has historically paid
its debts as they became due and has found no significant evidence to indicate
that the Purchaser will not continue to pay its debts as they become due in the
future. The Owner understands that the transfer of a Residual Certificate may
not be respected for United States income tax purposes (and the Owner may
continue to be liable for United States income taxes associated therewith)
unless the Owner has conducted such an investigation.

         6. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Pooling and Servicing Agreement.

<PAGE>

         IN WITNESS WHEREOF, the Owner has caused this instrument to be executed
on its behalf, pursuant to the authority of its Board of Directors, by its
[Vice] President, attested by its [Assistant] Secretary, this ____ day of
___________, 20__.

                                              [OWNER]

                                              By:
                                                  ------------------------------
                                                  Name:
                                                  Title:  [Vice] President

ATTEST

By:
    ---------------------------------
    Name:
    Title:  [Assistant] Secretary

         Personally appeared before me the above-named , known or proved to me
to be the same person who executed the foregoing instrument and to be a [Vice]
President of the Owner, and acknowledged to me that [he/she] executed the same
as [his/her] free act and deed and the free act and deed of the Owner.

         Subscribed and sworn before me this ____ day of __________, 20___.

                                              ----------------------------------
                                              Notary Public

                                              County of ________________________
                                              State of _________________________

                                              My Commission expires:

<PAGE>

                                    EXHIBIT G

            FORM OF CERTIFICATION WITH RESPECT TO ERISA AND THE CODE

                                     [Date]

[________________]

Re:      [_________]
         Asset-Backed Pass-Through Certificates, Series [____], Mortgage Class
         ---------------------------------------------------------------------

Dear Sirs:

         _______________________ (the "Transferee") intends to acquire from
_____________________ (the "Transferor") $____________ Initial Certificate
Principal Balance of Citigroup Mortgage Loan Trust, Series [____], Mortgage
Pass-Through Certificates, Class [CE] [P] [R] (the "Certificates"), issued
pursuant to a Pooling and Servicing Agreement dated as of [___________] (the
"Agreement"), among [_________], as depositor (the "Depositor"), [___________]
as Servicer, (the "Servicer"), [___________] as trust administrator and
[_________], as trustee (the "Trustee"). Capitalized terms used herein and not
otherwise defined shall have the meanings assigned thereto in the Pooling and
Servicing Agreement. The Transferee hereby certifies, represents and warrants
to, and covenants with the Depositor, the Trustee and the Servicer that:

         The Certificates (i) are not being acquired by, and will not be
transferred to, any employee benefit plan within the meaning of section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
other retirement arrangement, including individual retirement accounts and
annuities, Keogh plans and bank collective investment funds and insurance
company general or separate accounts in which such plans, accounts or
arrangements are invested, that is subject to Section 406 of ERISA or Section
4975 of the Internal Revenue Code of 1986 (the "Code") (any of the foregoing, a
"Plan"), (ii) are not being acquired with "plan assets" of a Plan within the
meaning of the Department of Labor ("DOL") regulation, 29 C.F.R.ss.2510.3-101,
and (iii) will not be transferred to any entity that is deemed to be investing
in plan assets within the meaning of the DOL regulation at 29 C.F.R.ss.
2510.3-101.

                                              Very truly yours,

                                              By:
                                                  ------------------------------
                                                  Name:
                                                  Title:

<PAGE>

                                   EXHIBIT H-1

      FORM OF CERTIFICATION TO BE PROVIDED BY THE DEPOSITOR WITH FORM 10-K

                                  Certification

         I, [identify the certifying individual], certify that:

         1. I have reviewed this annual report on Form 10-K, and all reports on
Form 10-D required to be filed in respect of the period covered by this report
on Form 10-K [identify issuing entity] (i.e., the name of the specific deal to
which this certification relates rather than just the name of the Depositor)]
(the "Exchange Act periodic reports");

         2. Based on my knowledge, the Exchange Act periodic reports, taken as a
whole, do not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;

         3. Based on my knowledge, all of the distribution, servicing and other
information required to be provided under Form 10-D for the period covered by
this report is included in the Exchange Act periodic reports;

         4. Based on my knowledge and the servicer compliance statement(s)
required in this report under Item 1123 of Regulation AB, and except as
disclosed in Exchange Act periodic reports, the servicer(s) [has/have] fulfilled
[its/their] obligations under the servicing agreement(s); and

         5. All of the reports on assessment of compliance with servicing
criteria for asset-backed securities and their related attestation reports on
assessment of compliance with servicing criteria for asset-backed securities
required to be included in this report in accordance with Item 1122 of
Regulation AB and Exchange Act Rules 13a-18 and 15d-18 have been included as an
exhibit to this report, except as otherwise disclosed in this report. Any
material instances of noncompliance described in such reports have been
disclosed in this report on Form 10-K.

         In giving the certifications above, I have reasonably relied on
information provided to me by the following unaffiliated party: [_____________].

                                              [_____________________]

                                              By:
                                                  ------------------------------
                                              Name:
                                              Title:
                                              Date:

<PAGE>

                                   EXHIBIT H-2

                            FORM CERTIFICATION TO BE
                PROVIDED TO DEPOSITOR BY THE TRUST ADMINISTRATOR

<PAGE>

                                   EXHIBIT H-3

                            FORM CERTIFICATION TO BE
                      PROVIDED TO DEPOSITOR BY THE SERVICER
                                 WITH RESPECT TO
                               [________________]

<PAGE>

                                    EXHIBIT I

                                    RESERVED

<PAGE>

                                    EXHIBIT J

                                    RESERVED

<PAGE>

                                   SCHEDULE 1

                             MORTGAGE LOAN SCHEDULE

<PAGE>

                                   SCHEDULE 2

                           PREPAYMENT CHARGE SCHEDULE

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