Document:

EXHIBIT
4.1

 

EXECUTION
VERSION

 

 

 

PG&E
ENERGY RECOVERY FUNDING LLC,

 

Issuer

 

and

 

DEUTSCHE BANK
NATIONAL TRUST COMPANY

 

Trustee

 

 

 

INDENTURE

 

Dated as of February 10,
2005

 

 

 

 

 

Reconciliation and Tie between Trust Indenture Act of
1939 and Indenture, dated as of February 10, 2005.

 

	
  Trust Indenture Act Section

  	
   

  	
  Indenture Section(s)

  
	
  Section 310

  	
  (a)(1)

  	
   

  	
  6.11

  
	
   

  	
  (a)(2)

  	
   

  	
  6.11

  
	
   

  	
  (a)(3)

  	
   

  	
  6.10(b)(i)

  
	
   

  	
  (a)(4)

  	
   

  	
  Not Applicable

  
	
   

  	
  (b)

  	
   

  	
  6.11

  
	
  Section 311

  	
  (a)

  	
   

  	
  6.12

  
	
   

  	
  (b)

  	
   

  	
  6.12

  
	
   

  	
  (c)

  	
   

  	
  Not Applicable

  
	
  Section 312

  	
  (a)

  	
   

  	
  7.01, 7.02

  
	
   

  	
  (b)

  	
   

  	
  7.02(a)

  
	
   

  	
  (c)

  	
   

  	
  7.02(b)

  
	
  Section 313

  	
  (a)

  	
   

  	
  7.04

  
	
   

  	
  (b)

  	
   

  	
  7.04

  
	
   

  	
  (c)

  	
   

  	
  7.04

  
	
   

  	
  (d)

  	
   

  	
  7.04

  
	
  Section 314

  	
  (a)

  	
   

  	
  7.03(a)(i), 7.03(a)(ii), 7.03(a)(iii), 3.09

  
	
   

  	
  (b)

  	
   

  	
  3.06

  
	
   

  	
  (c)(1)

  	
   

  	
  11.01

  
	
   

  	
  (c)(2)

  	
   

  	
  11.01

  
	
   

  	
  (c)(3)

  	
   

  	
  2.11, 4.01(c), 8.05(b)

  
	
   

  	
  (d)(1)

  	
   

  	
  2.11, 11.01(b)

  
	
   

  	
  (d)(2)

  	
   

  	
  Not Applicable

  
	
   

  	
  (d)(3)

  	
   

  	
  Not Applicable

  
	
   

  	
  (e)

  	
   

  	
  11.01

  
	
  Section 315

  	
  (a)

  	
   

  	
  6.01(b)

  
	
   

  	
  (b)

  	
   

  	
  6.05

  
	
   

  	
  (c)

  	
   

  	
  6.01(a)

  
	
   

  	
  (d)(1)

  	
   

  	
  6.01(c)

  
	
   

  	
  (e)

  	
   

  	
  5.13

  
	
  Section 316

  	
  (a)

  	
   

  	
  5.11

  
	
   

  	
  (a)(1)(A)

  	
   

  	
  5.11

  
	
   

  	
  (a)(1)(B)

  	
   

  	
  5.12

  
	
   

  	
  (a)(2)

  	
   

  	
  1.01

  
	
   

  	
  (b)

  	
   

  	
  5.07

  
	
  Section 317

  	
  (a)

  	
   

  	
  5.03(f)

  
	
   

  	
  (b)

  	
   

  	
  3.03

  
	
  Section 318

  	
  (a)

  	
   

  	
  11.06

  
	
   

  	
  (e)

  	
   

  	
  11.06

  
					

 

 

TABLE OF
CONTENTS

 

	
  ARTICLE I

  
	
  DEFINITIONS
  AND INCORPORATION BY REFERENCE

  
	
   

  	
   

  	
   

  
	
  SECTION 1.01.

  	
  Definitions

  	
   

  
	
  SECTION 1.02.

  	
  Incorporation
  by Reference of Trust Indenture Act

  	
   

  
	
  SECTION 1.03.

  	
  Rules of Construction

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II

  
	
  THE
  BONDS

  
	
   

  	
   

  	
   

  
	
  SECTION 2.01.

  	
  Form

  	
   

  
	
  SECTION 2.02.

  	
  Designation;
  Denominations; Initial Principal Amount, Bond Interest Rate; Scheduled
  Maturity Date; Final Legal Maturity Date; Etc

  	
   

  
	
  SECTION 2.03.

  	
  Execution,
  Authentication and Delivery

  	
   

  
	
  SECTION 2.04.

  	
  Temporary Bonds

  	
   

  
	
  SECTION 2.05.

  	
  Registration;
  Registration of Transfer and Exchange

  	
   

  
	
  SECTION 2.06.

  	
  Mutilated,
  Destroyed, Lost or Stolen Bonds

  	
   

  
	
  SECTION 2.07.

  	
  Persons Deemed Owner

  	
   

  
	
  SECTION 2.08.

  	
  Payment
  of Principal, Premium, if any, and Interest; Principal, Premium, if any, and
  Interest Rights Preserved

  	
   

  
	
  SECTION 2.09.

  	
  Cancellation

  	
   

  
	
  SECTION 2.10.

  	
  Amount Issuable

  	
   

  
	
  SECTION 2.11.

  	
  Release of Collateral

  	
   

  
	
  SECTION 2.12.

  	
  Global Bonds

  	
   

  
	
  SECTION 2.13.

  	
  Notices to Clearing Agency

  	
   

  
	
  SECTION 2.14.

  	
  Definitive Bonds

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III

  
	
  COVENANTS

  
	
   

  	
   

  	
   

  
	
  SECTION 3.01.

  	
  Payment
  of Principal, Premium, if any, and Interest

  	
   

  
	
  SECTION 3.02.

  	
  Maintenance of Office
  or Agency

  	
   

  
	
  SECTION 3.03.

  	
  Money for
  Payments To Be Held in Trust

  	
   

  
	
  SECTION 3.04.

  	
  Existence

  	
   

  
	
  SECTION 3.05.

  	
  Protection of Collateral

  	
   

  
	
  SECTION 3.06.

  	
  Opinions as to Collateral

  	
   

  
	
  SECTION 3.07.

  	
  Performance
  of Obligations; Servicing; SEC Filings

  	
   

  
	
  SECTION 3.08.

  	
  Negative Covenants

  	
   

  
	
  SECTION 3.09.

  	
  Annual Statement as
  to Compliance

  	
   

  
	
  SECTION 3.10.

  	
  Issuer
  May Consolidate, etc., Only on Certain Terms

  	
   

  
	
  SECTION 3.11.

  	
  Successor or Transferee

  	
   

  
	
  SECTION 3.12.

  	
  No Other Business

  	
   

  
	
  SECTION 3.13.

  	
  No Borrowing

  	
   

  

 

i

 

	
  SECTION 3.14.

  	
  Servicer’s Obligations

  	
   

  
	
  SECTION 3.15.

  	
  Guarantees,
  Loans, Advances and Other Liabilities

  	
   

  
	
  SECTION 3.16.

  	
  Capital Expenditures

  	
   

  
	
  SECTION 3.17.

  	
  Restricted Payments

  	
   

  
	
  SECTION 3.18.

  	
  Payment by Issuer is
  Nonrecourse

  	
   

  
	
  SECTION 3.19.

  	
  Notice of Events of Default

  	
   

  
	
  SECTION 3.20.

  	
  Further Instruments and
  Acts

  	
   

  
	
  SECTION 3.21.

  	
  Representations and
  Warranties

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV

  
	
  SATISFACTION
  AND DISCHARGE; DEFEASANCE

  
	
   

  	
   

  	
   

  
	
  SECTION 4.01.

  	
  Satisfaction
  and Discharge of Indenture; Defeasance

  	
   

  
	
  SECTION 4.02.

  	
  Conditions to Defeasance

  	
   

  
	
  SECTION 4.03.

  	
  Application of Trust Money

  	
   

  
	
  SECTION 4.04.

  	
  Repayment of
  Moneys Held by Paying Agent

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V

  
	
  REMEDIES

  
	
   

  	
   

  	
   

  
	
  SECTION 5.01.

  	
  Events of Default

  	
   

  
	
  SECTION 5.02.

  	
  Acceleration
  of Maturity; Rescission and Annulment

  	
   

  
	
  SECTION 5.03.

  	
  Collection
  of Indebtedness and Suits for Enforcement by Trustee

  	
   

  
	
  SECTION 5.04.

  	
  Remedies; Priorities

  	
   

  
	
  SECTION 5.05.

  	
  Optional
  Preservation of the Collateral

  	
   

  
	
  SECTION 5.06.

  	
  Limitation of Suits

  	
   

  
	
  SECTION 5.07.

  	
  Unconditional
  Rights of Bondholders To Receive Principal, Premium, if any, and Interest

  	
   

  
	
  SECTION 5.08.

  	
  Restoration of
  Rights and Remedies

  	
   

  
	
  SECTION 5.09.

  	
  Rights and Remedies
  Cumulative

  	
   

  
	
  SECTION 5.10.

  	
  Delay or Omission Not a
  Waiver

  	
   

  
	
  SECTION 5.11.

  	
  Control by Bondholders

  	
   

  
	
  SECTION 5.12.

  	
  Waiver of Past Defaults

  	
   

  
	
  SECTION 5.13.

  	
  Undertaking for Costs

  	
   

  
	
  SECTION 5.14.

  	
  Waiver of Stay or
  Extension Laws

  	
   

  
	
  SECTION 5.15.

  	
  Action on Bonds

  	
   

  
	
  SECTION 5.16.

  	
  Performance
  and Enforcement of Certain Obligations

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI

  
	
  THE
  TRUSTEE

  
	
   

  	
   

  	
   

  
	
  SECTION 6.01.

  	
  Duties of Trustee

  	
   

  
	
  SECTION 6.02.

  	
  Rights of Trustee

  	
   

  

 

ii

 

	
  SECTION 6.03.

  	
  Individual Rights of
  Trustee

  	
   

  
	
  SECTION 6.04.

  	
  Trustee’s Disclaimer

  	
   

  
	
  SECTION 6.05.

  	
  Notice of Defaults

  	
   

  
	
  SECTION 6.06.

  	
  Reports by Trustee to
  Holders

  	
   

  
	
  SECTION 6.07.

  	
  Compensation and Indemnity

  	
   

  
	
  SECTION 6.08.

  	
  Resignation;
  Replacement of Trustee

  	
   

  
	
  SECTION 6.09.

  	
  Successor Trustee by Merger

  	
   

  
	
  SECTION 6.10.

  	
  Appointment
  of Co-Trustee or Separate Trustee

  	
   

  
	
  SECTION 6.11.

  	
  Eligibility;
  Disqualification

  	
   

  
	
  SECTION 6.12.

  	
  Preferential
  Collection of Claims Against Issuer

  	
   

  
	
  SECTION 6.13.

  	
  Representations
  and Warranties of Trustee

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII

  
	
  BONDHOLDERS’ LISTS AND REPORTS

  
	
   

  	
   

  	
   

  
	
  SECTION 7.01.

  	
  Issuer
  To Furnish Trustee Names and Addresses of Bondholders

  	
   

  
	
  SECTION 7.02.

  	
  Preservation
  of Information; Communications to Bondholders

  	
   

  
	
  SECTION 7.03.

  	
  Reports by Issuer

  	
   

  
	
  SECTION 7.04.

  	
  Reports by Trustee

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  
	
  ACCOUNTS, DISBURSEMENTS AND RELEASES

  
	
   

  	
   

  	
   

  
	
  SECTION 8.01.

  	
  Collection of Money

  	
   

  
	
  SECTION 8.02.

  	
  Collection Account

  	
   

  
	
  SECTION 8.03.

  	
  General
  Provisions Regarding the Collection Account

  	
   

  
	
  SECTION 8.04.

  	
  Deposit of Excess
  Costs of Issuance

  	
   

  
	
  SECTION 8.05.

  	
  Release of Collateral

  	
   

  
	
  SECTION 8.06.

  	
  Opinion of Counsel

  	
   

  
	
  SECTION 8.07.

  	
  Reports by
  Independent Accountants

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX

  
	
  SUPPLEMENTAL
  INDENTURES

  
	
   

  	
   

  	
   

  
	
  SECTION 9.01.

  	
  Supplemental
  Indentures Without Consent of Bondholders

  	
   

  
	
  SECTION 9.02.

  	
  Supplemental
  Indentures with Consent of Bondholders

  	
   

  
	
  SECTION 9.03.

  	
  Execution of
  Supplemental Indentures

  	
   

  
	
  SECTION 9.04.

  	
  Effect of Supplemental
  Indenture

  	
   

  
	
  SECTION 9.05.

  	
  Conformity with
  Trust Indenture Act

  	
   

  
	
  SECTION 9.06.

  	
  Reference
  in Bonds to Supplemental Indentures

  	
   

  

 

iii

 

	
  ARTICLE X

  
	
  REDEMPTION
  OF BONDS

  
	
   

  	
   

  	
   

  
	
  SECTION 10.01.

  	
  Optional Redemption by
  Issuer

  	
   

  
	
  SECTION 10.02.

  	
  Form of Optional
  Redemption Notice

  	
   

  
	
  SECTION 10.03.

  	
  Bonds
  Payable on Redemption Date or Payment Date

  	
   

  
	
  SECTION 10.04.

  	
  Purchase in Lieu of
  Redemption

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XI

  
	
  MISCELLANEOUS

  
	
   

  	
   

  	
   

  
	
  SECTION 11.01.

  	
  Compliance
  Certificates and Opinions, etc

  	
   

  
	
  SECTION 11.02.

  	
  Form of
  Documents Delivered to Trustee

  	
   

  
	
  SECTION 11.03.

  	
  Acts of Bondholders

  	
   

  
	
  SECTION 11.04.

  	
  Notices,
  etc., to Trustee, Issuer, Rating Agencies and CPUC

  	
   

  
	
  SECTION 11.05.

  	
  Notices
  to Bondholders; Waiver

  	
   

  
	
  SECTION 11.06.

  	
  Conflict
  with Trust Indenture Act

  	
   

  
	
  SECTION 11.07.

  	
  Effect of
  Headings and Table of Contents

  	
   

  
	
  SECTION 11.08.

  	
  Successors
  and Assigns

  	
   

  
	
  SECTION 11.09.

  	
  Separability

  	
   

  
	
  SECTION 11.10.

  	
  Benefits
  of Indenture

  	
   

  
	
  SECTION 11.11.

  	
  Legal Holidays

  	
   

  
	
  SECTION 11.12.

  	
  Governing Law

  	
   

  
	
  SECTION 11.13.

  	
  Counterparts

  	
   

  
	
  SECTION 11.14.

  	
  Recording
  of Indenture

  	
   

  
	
  SECTION 11.15.

  	
  No Liability

  	
   

  
	
  SECTION 11.16.

  	
  No
  Recourse to Issuer

  	
   

  
	
  SECTION 11.17.

  	
  Inspection

  	
   

  
	
  SECTION 11.18.

  	
  No Petition

  	
   

  
	
  SECTION 11.19.

  	
  No Premium

  	
   

  

 

iv

 

INDENTURE dated as of February 10, 2005, between
PG&E ENERGY RECOVERY FUNDING LLC, a Delaware limited liability company, and
DEUTSCHE BANK NATIONAL TRUST COMPANY, a national banking association, as
trustee.

 

RECITALS OF THE
ISSUER

 

The Issuer has duly authorized the execution and
delivery of this Indenture and the creation and issuance of Bonds issuable
hereunder to be of substantially the tenor set forth herein.

 

The Bonds
shall be non-recourse obligations and shall be secured by and payable solely
out of the proceeds of the Recovery Property and the other Collateral.

 

All things necessary to (a) make the Bonds, when
executed by the Issuer and authenticated and delivered by the Trustee hereunder
and duly issued by the Issuer, valid obligations, and (b) make this Indenture a
valid agreement of the Issuer, in each case, in accordance with their
respective terms, have been done.

 

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

 

That the Issuer, in consideration of the purchase of
the Bonds by the Holders and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, has hereby executed
and delivered this Indenture, and

 

GRANTING CLAUSE

 

The Issuer hereby Grants to the Trustee all of the
Issuer’s right, title and interest, whether now owned or hereafter acquired or
arising, in, to, and under the following property:  (a) the Recovery Property, (b) the Sale
Agreement, (c) the Servicing Agreement to the extent it relates to the Recovery
Property, (d) the Collection Account, the General Subaccount, the Capital Subaccount,
the Overcollateralization Subaccount, the Reserve Subaccount and all other
subaccounts in the Collection Account, and all money, instruments, investment
property and other property on deposit therein or credited thereto from time to
time, (e) all rights to compel the Servicer to file for and obtain true-up
adjustments to the DRC Charge in accordance with the Statute and the Financing
Order, (f) all present and future claims, demands, causes and choses in action
in respect of any or all of the foregoing, and all payments on or under the
foregoing, and (g) all proceeds of the foregoing (collectively, the “Collateral”).  The following do not constitute Collateral:
(i) all property contributed to the Issuer by the Seller that is not held in
the Capital Subaccount, (ii) net investment earnings that have been released to
the Issuer pursuant to Section 8.02(d)(xiii), and (iii) subject to Section 8.04,
amounts held by the Issuer on the Closing Date for payment of costs of issuance
with respect to the Bonds (collectively, the “Excluded Property”).

 

The foregoing Grant is made in trust to secure the
payment of principal of and premium, if any, interest on, and any other amounts
owing in respect of, the Bonds equally and ratably without prejudice, priority
or distinction, except as expressly provided in this Indenture, and to secure
compliance with the provisions of this Indenture with respect to the Bonds, all
as provided in this Indenture.  This
Indenture constitutes a security agreement within the meaning

 

 

of the Statute and under
the CUCC to the extent that the provisions of the CUCC are applicable hereto.

 

The Trustee, as trustee on behalf of the Holders of
the Bonds, acknowledges such Grant and accepts the trusts under this Indenture
in accordance with the provisions of this Indenture and agrees to perform its
duties herein required.

 

AND IT IS HEREBY COVENANTED, DECLARED AND AGREED
between the parties hereto that all Bonds are to be issued, countersigned and
delivered and that all of the Collateral is to be held and applied, subject to
the further covenants, conditions, releases, uses and trusts hereinafter set
forth, and the Issuer, for itself and any successor, does hereby covenant and
agree to and with the Trustee and its successors in said trust, for the benefit
of the Holders, as follows:

 

ARTICLE I

DEFINITIONS AND INCORPORATION BY REFERENCE

 

SECTION 1.01.  Definitions.  (a)  Except as otherwise specified
herein or as the context may otherwise require, the following terms have the
respective meanings set forth below for all purposes of this Indenture.

 

“Act” has the meaning specified in Section 11.03(a).

 

“Administrative Services Agreement” means the
Amended and Restated Administrative Services and Premises Agreement, dated as
of February 10, 2005, between the Administrator and Issuer.

 

“Administrator” means Pacific Gas and Electric
Company, or any successor Administrator under the Administrative Services
Agreement.

 

“Affiliate” means, 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.

 

“Authorized Officer” means, with respect to the
Issuer, any officer of the Issuer who is authorized to act for the Issuer in
matters relating to the Issuer and who is identified on the list of Authorized
Officers delivered by the Issuer to the Trustee on the Closing Date (as such
list may be modified or supplemented from time to time thereafter).  For purposes of Section 3.09 only, an
Authorized Officer shall be the principal executive officer, the principal
financial officer or the principal accounting officer of the Issuer.  For purposes of Section 8.03 only, an
Authorized Officer may also include any other duly authorized person designated
by an Authorized Officer in writing to the Trustee.

 

2

 

“Basic Documents” means this Indenture, the
Sale Agreement and the Servicing Agreement.

 

“Bond Interest Rate” means, with respect to any
Class, the rate at which interest accrues on the Bonds of such Class, as
specified in Section 2.02(c).

 

“Bond Register” and “Bond Registrar”
have the respective meanings specified in Section 2.05.

 

“Bonds” means the bonds issued under this
Indenture, as provided in Section 2.02.

 

“Book-Entry Form” means, with respect to any
Bond, that security entitlements to such Bond shall be held through a Clearing
Agency as described in Section 2.12.

 

“Business Day” means any day other than a
Saturday, a Sunday or a day on which banking institutions or trust companies in
San Francisco, California, New York, New York, the city in which the
Corporate Trust Office of the Trustee is located, or the city in which the
Clearing Agency is located are authorized or obligated by law, regulation or
executive order to remain closed.

 

“Capital Subaccount” has the meaning
set forth in Section 8.02(a).

 

“Claim” means a “claim” as defined in Section 101(5)
of the Bankruptcy Code.

 

“Class” means any one of the classes of Bonds.

 

“Clearing Agency” means an organization
registered as a “clearing agency” pursuant to Section 17A of the Exchange
Act.

 

“Closing Date” means February 10, 2005.

 

“Code” means the Internal Revenue Code of 1986,
as amended from time to time, and Treasury Regulations promulgated thereunder.

 

“Collateral” has the meaning specified in the
Granting Clause of this Indenture.

 

“Collection Account” has the meaning specified
in Section 8.02(a).

 

“Corporate Trust Office” means the principal
office of the Trustee at which at any particular time its corporate trust
business shall be administered, which office at the date of the execution of
this Indenture is located at 60 Wall Street, 26th Floor, New York, NY 10005,
Attention:  Structured Finance Services,
or at such other address as the Trustee may designate from time to time by
notice to the Bondholders and the Issuer, or the principal corporate trust
office of any successor Trustee (the address of which the successor Trustee
will notify the Bondholders and the Issuer).

 

“Covenant Defeasance Option” has the meaning
specified in Section 4.01(b).

 

3

 

“CPUC” means the California Public Utilities
Commission or any successor governmental agency.

 

“CUCC” means the California Commercial Code, as
amended from time to time.

 

“Default” means any occurrence that is, or with
notice or the lapse of time or both would become, an Event of Default.

 

“Definitive Bonds” means Bonds
issued in definitive form in accordance with Section 2.13 of the
Indenture.

 

“DRC Charge” means the charges for fixed
recovery amounts authorized to be billed to Consumers in respect of Recovery
Property pursuant to the Financing Order and the Issuance Advice Letter, as
calculated pursuant to the Issuance Advice Letter and each true-up mechanism
advice letter relating to the DRC Charge filed with the CPUC pursuant to the
Financing Order.

 

“DRC Collections” means DRC Payments that are
remitted by the Servicer to the Collection Account.

 

“DTC” means The
Depository Trust Company.

 

“DTC Letter” means
the Blanket Issuer Letter of Representation executed by the Issuer on February 2,2005, or any other agreement with any
successor Clearing Agency with respect to such Clearing Agency’s rights and
obligations (in its capacity as a Clearing Agency) with respect to any Bonds in
Book-Entry Form, and in each case, as the same may be amended, supplemented or
otherwise modified from time to time.

 

“Eligible Deposit Account” means either
(a) a segregated account with an Eligible Institution or (b) a
segregated trust account with the corporate trust department of a depository
institution organized under the laws of the United States of America or
any one of the States (or any domestic branch of a foreign bank), having
corporate trust powers and acting as trustee for funds deposited in such
account, so long as any of the securities of such depository institution shall
have a credit rating from each Rating Agency in one of its three highest rating
categories.

 

“Eligible Institution” means (a) the
corporate trust department of the Trustee; provided, that an account
with the Trustee will only be an Eligible Deposit Account if it is a segregated
trust account, or (b) a depository institution organized under the laws of
the United States of America or any State or any domestic branch of a
foreign bank, (i) that has either (A) a long-term unsecured debt
rating of “AAA” by Standard & Poor’s, “Aaa” by Moody’s and “AAA” by
Fitch, or (B) a certificate of deposit rating of “A-1+” by Standard
& Poor’s, “P-1” by Moody’s and if rated by Fitch, “F1+”, or any other
long-term, short-term or certificate of deposit rating acceptable to the
applicable Rating Agencies and (ii) whose deposits are insured by the
FDIC.  If so qualified under
clause (b) above, the Trustee may be considered an Eligible Institution
for the purposes of clause (a) of this definition.

 

“Eligible Investments” mean:

 

4

 

(a)                                  direct
obligations of, and obligations fully and unconditionally guaranteed as to
timely payment by, the United States of America;

 

(b)                                 demand
deposits, time deposits, certificates of deposit or bankers’ acceptances of any
depository institution incorporated under the laws of the United States of
America or any State, or any domestic branch of a foreign bank, and subject to
the supervision and examination by federal or State banking or depository
institution authorities, so long as at the time of the investment or
contractual commitment to invest therein, the commercial paper or other
short-term unsecured debt obligations, other than any obligations thereof where
the rating is based on the credit of a person other than that depository
institution, shall have a credit rating from each of the Rating Agencies in the
highest investment category granted thereby;

 

(c)                                  commercial
paper or other short-term obligations of any corporation (other than the
Seller) organized under the laws of the United States of America or any State
having a rating, at the time of the investment or contractual commitment to
invest therein, from each of the Rating Agencies in the highest short-term or
long-term investment category granted thereby;

 

(d)                                 investments
in money market funds having a rating from each of the Rating Agencies in the
highest investment category granted thereby (including funds for which the
Trustee or any of its Affiliates is investment manager or advisor);

 

(e)                                  repurchase
obligations with respect to any security that is a direct obligation of, or
fully guaranteed by, the United States of America or any agency or
instrumentality thereof the obligations of which are backed by the full faith
and credit of the United States of America, in either case entered into
with a depository institution or trust company, acting as principal, described
in clause (b) of the definition of Eligible Institutions;

 

(f)                                    repurchase
obligations with respect to any security or whole loan entered into with: (A) a
depository institution or trust company, acting as principal, described in
clause (b) of the definition of Eligible Institution, except that the rating
referred to in the proviso in clause (b) of the definition of Eligible
Institution above shall be “A-1+” or higher in the case of Standard & Poor’s,
(B) a broker/dealer, acting as principal, registered as a broker or dealer
under Section 15 of the Exchange Act, the unsecured short-term debt
obligations of which are rated “P-1” by Moody’s, “F1+” by Fitch, if rated by
Fitch, and at least “A-1+” by Standard & Poor’s at the time of entering
into this repurchase obligation, or (C) an unrated broker/dealer, acting as
principal, that is a wholly-owned subsidiary of a non-bank or bank holding
company the unsecured short term debt obligations of which are rated “P-1” by
Moody’s, “F1+” by Fitch, if rated by Fitch, and at least “A-1+” by Standard
& Poor’s at the time of purchase; and

 

(g)                                 any
other investment permitted by each of the Rating Agencies;

 

provided, that unless otherwise
permitted by the applicable Rating Agencies, upon the failure of any Eligible
Institution to maintain any applicable rating set forth in this definition or
in the

 

5

 

definition of “Eligible Institution,” the related investments at such
institution shall be reinvested in other Eligible Investments within ten (10)
days; and, provided  further, that no obligation of, or security
issued by, the Seller shall constitute an Eligible Investment.

 

“Event of Default” has the meaning specified in
Section 5.01.

 

“Exchange Act” means the Securities Exchange
Act of 1934, as amended.

 

“Excluded Property” has the meaning set forth
in the Granting Clause.

 

“Expected Amortization Schedule” means Schedule A
hereto.

 

“FDIC” means the Federal Deposit Insurance
Corporation or any successor.

 

“Final Legal Maturity Date” means, with respect
to any Class of Bonds, the Final Legal Maturity Date therefor, as specified
herein.

 

“Fitch” means Fitch, Inc. or its successor.

 

“General Subaccount” has the meaning set forth
in Section 8.02(a).

 

“Global Bond” means a Bond issued in Book-Entry
Form and registered in the name of the Clearing Agency or its nominee in
accordance with Section 2.12.

 

“Grant” means mortgage, pledge, bargain, sell,
warrant, alienate, remise, release, convey, assign, transfer, create, and grant
a lien upon and a security interest in and right of set-off against, deposit,
set over and confirm pursuant to this Indenture.  A Grant of any item of Collateral shall
include all rights, powers and options (but none of the obligations) of the
Granting party thereunder, including the immediate and continuing right to
claim for, collect, receive and give receipt for payments in respect of such
item of Collateral and all other moneys payable thereunder, to give and receive
notices and other communications, to make waivers or other agreements, to
exercise all rights and options, to bring Proceedings in the name of the
Granting party or otherwise and generally to do and receive anything that the
Granting party is or may be entitled to do or receive thereunder or with
respect thereto.

 

“Holder” or “Bondholder” means the
Person in whose name a Bond is registered on the Bond Register.

 

“Indemnity Amount” means any amounts payable by
the Issuer pursuant to Section 6.07(b).

 

“Indenture” or “this Indenture” means
this instrument as originally executed and, as from time to time supplemented
or amended by one or more indentures supplemental hereto entered into pursuant
to the applicable provisions hereof, as so supplemented or amended, or both,
and shall include the forms and terms of the Bonds established hereunder.

 

“Independent” means, when used with respect to
any specified Person, that the Person (a) is in fact independent of the
Issuer, any other obligor upon the Bonds, the Seller, the

 

6

 

Servicer and any
Affiliate of any of the foregoing Persons, (b) does not have any direct
financial interest or any material indirect financial interest in the Issuer,
any such other obligor, the Seller, the Servicer or any Affiliate of any of the
foregoing Persons and (c) is not connected with the Issuer, any such other
obligor, the Seller, the Servicer or any Affiliate of any of the foregoing
Persons as an officer, employee, promoter, underwriter, trustee, partner, director
or person performing similar functions.

 

“Independent Certificate” means a certificate
or opinion to be delivered to the Trustee under the circumstances described in,
and otherwise complying with, the applicable requirements of Section 11.01,
made by an Independent appraiser or other expert appointed by an Issuer Order
and consented to by the Trustee, and such opinion or certificate shall state
that the signer has read the definition of “Independent” in this Indenture and
that the signer is Independent within the meaning thereof.

 

“Initial Payment Date” has the meaning set
forth in Section 2.02(e).

 

“Issuance Advice Letter” has the meaning set
forth in Section 1.01 of the Sale Agreement.

 

“Issuance Date” means the Closing Date.

 

“Issuer” means the party named as such in this
Indenture until a successor replaces it and, thereafter, means the successor
and, for purposes of any provision contained herein and required by the TIA,
each other obligor on the Bonds.

 

“Issuer Order” or “Issuer Request” means
a written order or request signed in the name of the Issuer by any one of its
Authorized Officers and delivered to the Trustee.

 

“Legal Defeasance Option” has the meaning
specified in Section 4.01(b).

 

“Minimum Denomination” means, with respect to
any Bond, $1,000 and any integral multiple thereof.

 

“Moody’s” means Moody’s Investors Service Inc.
or its successor.

 

“Officer’s Certificate” means a certificate
signed by any Authorized Officer of the Issuer, under the circumstances
described in, and otherwise complying with, the applicable requirements of Section 11.01,
and delivered to the Trustee.  Unless
otherwise specified, any reference in this Indenture to an Officer’s
Certificate shall be to an Officer’s Certificate of any Authorized Officer of
the Issuer.

 

“Operating Expenses” means all fees, costs and
expenses of the Issuer, including all amounts owed by the Issuer to the Trustee
or any of its directors, taxes, the Servicing Fee in respect of the Recovery
Property, the Quarterly Administration Fee, any rating agency surveillance and
similar fees, any fees, costs and expenses payable or reimbursable by the
Issuer to the Administrator under the Administrative Services Agreement, and
legal and accounting fees, costs and expenses of the Issuer.

 

7

 

“Opinion of Counsel” means one or more written
opinions of counsel who may, except as otherwise expressly provided in this
Indenture, be employees of or counsel to the Issuer or any Affiliate thereof
and who shall be reasonably satisfactory to the Trustee, and which opinion or
opinions shall be addressed to the Trustee as trustee, shall comply with any
applicable requirements of Section 11.01, and shall be in form and
substance reasonably satisfactory to the Trustee.

 

“Optional Redemption Price” has the meaning
specified in Section 10.01.

 

“Other Issuer Assets” has the meaning specified
in Section 3.18.

 

“Outstanding” means, as of the date of
determination, all Bonds theretofore authenticated and delivered under this
Indenture except:

 

(i)                                     Bonds
theretofore canceled by the Bond Registrar or delivered to the Bond Registrar
for cancellation;

 

(ii)                                  Bonds
or portions thereof the payment for which money in the necessary amount has
been theretofore deposited with the Trustee or any Paying Agent in trust for
the Holders of such Bonds (provided, however, that if such Bonds
are to be redeemed, notice of such redemption has been duly given pursuant to
this Indenture or provision therefor, satisfactory to the Trustee, made); and

 

(iii)                               Bonds
in exchange for or in lieu of other Bonds which have been authenticated and
delivered pursuant to this Indenture unless proof satisfactory to the Trustee
is presented that any such other Bonds are held by a protected purchaser;

 

provided, that in determining
whether the Holders of the requisite Outstanding Amount of the Bonds or any
Class thereof have given any request, demand, authorization, direction, notice,
consent or waiver hereunder, Bonds owned by the Issuer, any other obligor upon
the Bonds, the Seller or any Affiliate of any of the foregoing Persons  shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Bonds that the Trustee actually knows to be so owned
shall be so disregarded.  Bonds so owned
that have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Trustee the pledgee’s right so
to act with respect to such Bonds and that the pledgee is not the Issuer, any
other obligor upon the Bonds, the Seller or any Affiliate of any of the
foregoing Persons.

 

“Outstanding Amount” means the aggregate
principal amount of all Bonds or, if the context requires, all Bonds of a
Class, Outstanding at the date of determination.

 

“Overcollateralization Subaccount” has the
meaning specified in Section 8.02(a).

 

“Paying Agent” means the Trustee or any other
Person that meets the eligibility standards for the Trustee specified in Section 6.11
and is authorized by the Issuer to make payment of principal of or premium, if
any, or interest on the Bonds on behalf of the Issuer.

 

8

 

“Payment Date” means, with respect to any
Class, the March 25, June 25, September 25 and December 25
of each year or, if any such date is not a Business Day, the next succeeding
Business Day.

 

“Person” means any individual, corporation,
limited liability company, estate, partnership, joint venture, association,
joint stock company, trust, unincorporated organization, government or any
agency or political subdivision thereof, or any other entity or organization,
whether or not a legal entity.

 

“Predecessor Bond” means, with respect to any
particular Bond, every previous Bond evidencing all or a portion of the same
debt as that evidenced by such particular Bond; and, for the purpose of this
definition, any Bond authenticated and delivered under Section 2.06 in
lieu of a mutilated, lost, destroyed or stolen Bond shall be deemed to evidence
the same debt as the mutilated, lost, destroyed or stolen Bond.

 

“Pro Rata Basis” has the meaning set forth in Section 8.02(d).

 

“Proceeding” means any suit in equity, action
at law or other judicial or administrative proceeding.

 

“Purchase in Lieu of Redemption Date” means the
date on which Bonds are purchased in lieu of redemption by the Issuer or its
designee, in accordance with Section 10.04 hereof, which shall be the date
on which such Bonds were to have been otherwise redeemed in accordance with the
provisions of Section 10.04 of this Indenture.

 

“Quarterly Administration Fee” shall mean
$25,000 per calendar quarter.

 

“Quarterly Interest” means, with respect to any
Payment Date and any Class of Bonds, the accrued interest at the applicable
Bond Interest Rate on the Outstanding Amount of such Class of Bonds (as of the
close of business on the preceding Payment Date after giving effect to all
payments of principal made to Holders of such Class of Bonds on such preceding
Payment Date) during the period from and including the prior Payment Date (or
in the case of the Initial Payment Date, the Issuance Date) through but
excluding such Payment Date.

 

“Quarterly Principal” means, with respect to
any Payment Date and any Class of Bonds, the excess, if any, of the Outstanding
Amount of such Class of Bonds over the outstanding Principal Balance specified
for such Payment Date on the applicable Expected Amortization Schedule.

 

“Rating Agency” means Moody’s,
Standard & Poor’s and Fitch to the extent each such Rating Agency
maintains a rating on the Bonds at the request of the Issuer.  If no such organization or successor is any
longer in existence, “Rating Agency” shall be a nationally recognized statistical
rating organization or other comparable Person designated by the Issuer, notice
of which designation shall be given to the Trustee and the Servicer.

 

“Rating Agency Condition” means, with respect
to any action, that each Rating Agency shall have been given ten (10) days
prior notice thereof and that each of the Rating Agencies shall have notified
the Servicer, the Issuer and the Trustee in writing that such action

 

9

 

will not result in a
reduction or withdrawal of the then current rating by such Rating Agency of any
Class of Bonds.

 

“Record Date” means, (a) with respect to a
Payment Date or Redemption Date, the Business Day preceding that Payment Date
or Redemption Date, or if the Bonds are in definitive form, the last day of the
calendar month preceding the calendar month in which such Payment Date or
Redemption Date occurs, and (b) with respect to a Special Payment Date, the
special record date established in accordance with Section 2.08(c).

 

“Recovery Property” has the meaning set forth
in Section 1.01 of the Sale Agreement.

 

“Redemption Date” means the date specified by
the Issuer for the redemption of the Bonds pursuant to Section 10.01.

 

“Required Capital Level” means, as of any
Payment Date, 0.50% of the initial principal amount of the Bonds, being
$9,439,320.

 

“Required Overcollateralization Level” means,
as of any Payment Date, the amount required to be on deposit in the
Overcollateralization Subaccount as specified in Schedule B hereto.

 

“Reserve Subaccount” has the meaning specified
in Section 8.02(a).

 

“Responsible Officer” means any officer within
the Corporate Trust Office, including any Managing Director, Vice President,
Assistant Vice President, Secretary, Assistant Secretary or Assistant Treasurer
or any other officer of the Trustee or the Bond Registrar, as applicable,
customarily performing functions similar to those performed by any of the above
designated officers and also, with respect to a particular matter, any other
officer to whom such matter is referred because of such officer’s knowledge and
familiarity with the particular subject.

 

“Sale Agreement” means the Recovery Property
Purchase and Sale Agreement dated as of February 10, 2005, between the
Issuer and the Seller, as the same may be amended, supplemented or otherwise
modified from time to time.

 

“Scheduled Maturity Date” means, with respect
to any Class of Bonds, the Scheduled Maturity Date therefor, as specified
herein.

 

“SEC” means the Securities and Exchange
Commission.

 

“Securities Act” means the Securities Act of
1933, as amended.

 

“Servicing Agreement” means the Recovery
Property Servicing Agreement dated as of February 10, 2005, between the
Issuer and the Servicer, as the same may be amended, supplemented or otherwise
modified from time to time.

 

“Special Payment Date” has the meaning set
forth in Section 2.08(c).

 

10

 

“Standard & Poor’s” means Standard &
Poor’s, a division of The McGraw-Hill Companies, Inc. or its successor.

 

“State” means any one of the states of the
United States of America or the District of Columbia.

 

“State Pledge” has the meaning specified in Section 5.01(vii).

 

“Statute” means Chapter 46, California Statutes
of 2004, codified at Public Utilities Code Section 848 et seq., as further
amended from time to time.

 

“Successor Servicer” has the meaning specified
in Section 3.07(e).

 

“Tariff” has the meaning set forth in Section 1.01
of the Sale Agreement.

 

“Trustee” means Deutsche Bank National Trust
Company, a national banking association, as Trustee under this Indenture, or
any successor Trustee under this Indenture.

 

“Trust Indenture Act” or “TIA” means the
Trust Indenture Act of 1939 as in force on the date hereof, unless otherwise
specifically provided.

 

“U.S. Government Obligations” means direct
obligations (or certificates representing an ownership interest in such
obligations) of the United States of America (including any agency or
instrumentality thereof) for the payment of which the full faith and credit of
the United States of America is pledged and which are not callable at the
option of the issuer thereof.

 

(b)                                 Except
as otherwise specified herein or as the context may otherwise require, the
following terms have the respective meanings set forth in the Servicing
Agreement as in effect on the Closing Date for all purposes of this Indenture,
and the definitions of such terms are equally applicable both to the singular
and plural forms of such terms:

 

11

 

	
  Term

  	
   

  	
  Section of

  Servicing Agreement

  
	
  Advice Letter

  	
   

  	
  Section 1.01

  
	
  Consumers

  	
   

  	
  Section 1.01

  
	
  CPUC

  	
   

  	
  Section 1.01

  
	
  CPUC Regulations

  	
   

  	
  Section 1.01

  
	
  DRC Payments

  	
   

  	
  Section 1.01

  
	
  ESPs

  	
   

  	
  Section 1.01

  
	
  Estimated DRC Payments

  	
   

  	
  Section 1.01

  
	
  Financing Order

  	
   

  	
  Section 1.01

  
	
  Principal Balance

  	
   

  	
  Section 1.01

  
	
  PU Code

  	
   

  	
  Section 1.01

  
	
  Seller

  	
   

  	
  Section 1.01

  
	
  Servicer

  	
   

  	
  Section 1.01

  
	
  Servicer Default

  	
   

  	
  Section 1.01

  
	
  Servicing Fee

  	
   

  	
  Section 1.01

  

 

SECTION 1.02.  Incorporation by Reference of Trust
Indenture Act.  Whenever this Indenture
refers to a provision of the TIA, the provision is incorporated by reference in
and made a part of this Indenture.  The
following TIA terms used in this Indenture have the following meanings:

 

“indenture securities”
means the Bonds.

 

“indenture security
holder” means a Bondholder.

 

“indenture to be
qualified” means this Indenture.

 

“indenture trustee” or “institutional
trustee” means the Trustee.

 

“obligor” on the
indenture securities means the Issuer and any other obligor on the indenture
securities.

 

All other TIA terms used in this Indenture that are
defined by the TIA, defined by TIA reference to another statute or defined by
SEC rule have the meanings assigned to them by such definitions.

 

SECTION 1.03.  Rules
of Construction.  Unless the context
otherwise requires:

 

(i)                                     terms
used herein that are defined in the Statute or the CUCC and not otherwise
defined herein shall have the meanings set forth in the Statute or the CUCC, as
applicable;

 

(ii)                                  as
used in this Indenture and in any certificate or other document made or
delivered pursuant hereto, accounting terms not defined in this Indenture or in
any such certificate or other document, and accounting terms partly defined in
this Indenture or in any such certificate or other document to the extent not
defined, shall have the respective

 

12

 

meanings given to them under generally accepted
accounting principles as in effect from time to time in the United States.  To the extent that the definitions of accounting
terms in this Indenture or in any such certificate or other document are
inconsistent with the meanings of such terms under such generally accepted
accounting principles, the definitions contained in this Indenture or in any
such certificate or other document shall control;

 

(iii)                               “or”
is not exclusive;

 

(iv)                              “including”
means including without limitation;

 

(v)                                 words
in the singular include the plural and words in the plural include the
singular;

 

(vi)                              reference
to any gender shall include all other genders; and

 

(vii)                           the
words “herein,” “hereof,” “hereunder” and other words of similar import refer
to this Indenture as a whole and not to any particular Article, Section or
other subdivision.

 

ARTICLE II

THE BONDS

 

SECTION 2.01.  Form.  The Bonds and the Trustee’s certificate of
authentication shall be in substantially the forms set forth in Exhibit A, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may,
consistently herewith, be determined by the officers executing such Bonds, as
evidenced by their execution of such Bonds. 
Any portion of the text of any Bond may be set forth on the reverse
thereof, with an appropriate reference thereto on the face of the Bond.

 

The Bonds shall be word-processed, printed,
lithographed or engraved or produced by any combination of these methods (with
or without steel engraved borders), all as determined by the officers executing
such Bonds, as evidenced by their execution of such Bonds.

 

Each Bond shall be dated the date of its
authentication.  The terms of the Bonds
set forth in Exhibit A are
part of the terms of this Indenture.

 

SECTION 2.02.  Designation;
Denominations; Initial Principal Amount, Bond Interest Rate; Scheduled Maturity
Date; Final Legal Maturity Date; Etc.

 

(a)                                  Designation.  The Bonds shall be issued in the Classes set
forth in Section 2.02(c) and shall be designated “PG&E Energy Recovery
Funding LLC Energy Recovery Bonds, Series 2005-1” and further denominated as
Classes A-1 through A-5.  All Bonds
of the same Class shall be identical in all respects except for the
denominations thereof.  All Bonds of the
same Class shall be in all respects equally and ratably entitled to the
benefits

 

13

 

hereof without
preference, priority, or distinction on account of the actual time or times of
authentication and delivery, all in accordance with the terms and provisions of
this Indenture.

 

(b)                                 Denominations.  Except as provided in Section 2.14, the
Bonds shall be issuable as registered Bonds in Book-Entry Form in any Minimum
Denomination, except that one Bond of each Class may be in a smaller
denomination.

 

(c)                                  Initial
Principal Amount, Bond Interest Rates, Scheduled Maturity Dates, Final Legal
Maturity Dates.  The Bonds of each
Class shall have the initial principal amount, bear interest at the rates per
annum and shall have Scheduled Maturity Dates and Final Legal Maturity Dates as
set forth below: 

 

	
  Class

  	
   

  	
  Initial

  Principal

  Amount

  	
   

  	
  Bond

  Interest Rate

  	
   

  	
  Scheduled

  Maturity Date

  	
   

  	
  Final Legal

  Maturity Date

  	
   

  
	
  A-1

  	
   

  	
  $

  	
  268,000,000

  	
   

  	
  3.32%

  	
   

  	
  September 25,
  2006

  	
   

  	
  September 25,
  2008

  	
   

  
	
  A-2

  	
   

  	
  $

  	
  647,000,000

  	
   

  	
  3.87%

  	
   

  	
  June 25,
  2009

  	
   

  	
  June 25,
  2011

  	
   

  
	
  A-3

  	
   

  	
  $

  	
  320,000,000

  	
   

  	
  4.14%

  	
   

  	
  September 25,
  2010

  	
   

  	
  September 25,
  2012

  	
   

  
	
  A-4

  	
   

  	
  $

  	
  468,000,000

  	
   

  	
  4.37%

  	
   

  	
  June 25,
  2012

  	
   

  	
  June 25,
  2014

  	
   

  
	
  A-5

  	
   

  	
  $

  	
  184,864,000

  	
   

  	
  4.47%

  	
   

  	
  December 25,
  2012

  	
   

  	
  December 25,
  2014

  	
   

  

 

The Bond Interest Rate shall be computed on the basis
of a 360-day year of twelve 30-day months.

 

(d)                                 Payment
Dates.  Principal of, and interest
on, the Bonds shall be payable on each Payment Date, commencing on the Payment
Date in June, 2005 (the “Initial Payment Date”) and continuing until the
earlier of repayment of each Class in full and the applicable Final Legal
Maturity Date for such Class.

 

(e)                                  Expected
Amortization Schedule for Principal. 
Unless an Event of Default shall have occurred and be continuing, on
each Payment Date, the Trustee shall distribute to the Holders of record as of
the related Record Date amounts payable pursuant to Section 8.02(d)(viii)
of this Indenture as principal, in the following order and priority: (1) to the
holders of the Class A-1 Bonds, until the Outstanding Amount of such Class of
Bonds thereof has been reduced to zero; (2) to the holders of the Class A-2
Bonds, until the Outstanding Amount of such Class of Bonds thereof has been
reduced to zero; (3) to the holders of the Class A-3 Bonds, until the
Outstanding Amount of such Class of Bonds thereof has been reduced to zero; (4)
to the holders of the Class A-4 Bonds, until the Outstanding Amount of such
Class of Bonds thereof has been reduced to zero; and (5) to the holders of
the Class A-5 Bonds, until the Outstanding Amount of such Class of Bonds
has been reduced to zero; provided, however, that in no event
shall a principal payment pursuant to this Section 2.02(e) on any Class on
a Payment Date be greater than the amount necessary to reduce the Outstanding
Amount of such Class of Bonds to the amount specified in the Expected
Amortization Schedule which is attached as Schedule A hereto for such Class and Payment Date, except
in the case of an acceleration of the Bonds following an Event of Default.

 

14

 

(f)                                    Quarterly
Interest.  Quarterly Interest will be
payable on each Class of the Bonds on each Payment Date.  To the extent not paid on any Payment Date,
and only if the Bonds are not declared to be immediately due and payable as
provided in Section 5.02, Quarterly Interest will be paid when the Issuer
has sufficient amounts therefor in accordance with Section 8.02(d).

 

(g)                                 Required
Overcollateralization Level.  The
Required Overcollateralization Level for any Payment Date shall be as set forth
in Schedule B hereto.

 

SECTION 2.03.  Execution,
Authentication and Delivery.  The
Bonds shall be executed on behalf of the Issuer by any of its Authorized
Officers.  The signature of any such Authorized
Officer on the Bonds may be manual or facsimile.

 

Bonds bearing the manual or facsimile signature of
individuals who were at the time of execution Authorized Officers of the Issuer
shall bind the Issuer, notwithstanding that such individuals or any of them
have ceased to hold such offices prior to the authentication and delivery of
such Bonds or did not hold such offices at the date of such Bonds.

 

At any time and from time to time after the execution
and delivery of this Indenture, the Issuer may deliver Bonds executed by the
Issuer to the Trustee pursuant to an Issuer Order for authentication; and the
Trustee shall authenticate and deliver such Bonds as in this Indenture provided
and not otherwise.

 

Each Bond shall be dated the date of its authentication.

 

No Bond shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose, unless there appears on
such Bond a certificate of authentication substantially in the form provided
for herein executed by the Trustee by the manual signature of one of its
authorized signatories, and such certificate upon any Bond shall be conclusive
evidence, and the only evidence, that such Bond has been duly authenticated and
delivered hereunder.

 

SECTION 2.04.  Temporary
Bonds.  Subject to Section 2.12,
pending the preparation of Definitive Bonds pursuant to Section 2.14, the
Issuer may execute, and upon receipt of an Issuer Order the Trustee shall
authenticate and deliver, temporary Bonds that are printed, lithographed,
word-processed or otherwise produced, of the tenor of the Definitive Bonds in
lieu of which they are issued and with such variations not inconsistent with
the terms of this Indenture as the Authorized Officer executing such Bonds may
determine, as evidenced by the execution of such Bonds.

 

After the preparation of Definitive Bonds, the
temporary Bonds shall be exchangeable for Definitive Bonds upon surrender of
the temporary Bonds at the office or agency of the Issuer to be maintained as
provided in Section 3.02, without charge to the Holder.  Upon surrender for cancellation of any one or
more temporary Bonds, the Issuer shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
Definitive Bonds.  Until so exchanged,
the temporary Bonds shall in all respects be entitled to the same benefits
under this Indenture as Definitive Bonds.

 

15

 

SECTION 2.05.  Registration;
Registration of Transfer and Exchange. 
The Issuer shall cause to be kept a register (the “Bond Register”)
in which, subject to such reasonable regulations as it may prescribe, the
Issuer shall provide for the registration of Bonds and the registration of
transfers of Bonds.  Initially, the
Trustee shall be the “Bond Registrar” for the purpose of registering Bonds and
transfers of Bonds as herein provided. 
Upon any resignation of any Bond Registrar, the Issuer shall promptly
appoint a successor or, if it elects not to make such an appointment, assume
the duties of the Bond Registrar.

 

If a Person other than the Trustee is appointed by the
Issuer as Bond Registrar, the Issuer will give the Trustee prompt written
notice of the appointment of such Bond Registrar and of the location, and any
change in the location, of the Bond Register, and the Trustee shall have the
right to inspect the Bond Register at all reasonable times and to obtain copies
thereof, and the Trustee shall have the right to rely upon a certificate
executed on behalf of the Bond Registrar by a Responsible Officer thereof as to
the names and addresses of the Holders of the Bonds and the principal amounts
and number of such Bonds.

 

Upon surrender for registration of transfer of any
Bond at the office or agency of the Issuer to be maintained as provided in Section 3.02,
the Issuer shall execute, and the Trustee shall authenticate and the Bondholder
shall obtain from the Trustee, in the name of the designated transferee or
transferees, one or more new Bonds in any Minimum Denominations, to the extent
applicable, of a like Class and aggregate principal amount.

 

At the option of the Holder, Bonds may be exchanged
for other Bonds in any Minimum Denominations, to the extent applicable, of a
like Class and aggregate principal amount, upon surrender of the Bonds to be exchanged
at such office or agency.  Whenever any
Bonds are so surrendered for exchange, the Issuer shall execute, and the
Trustee shall authenticate and the Bondholder shall obtain from the Trustee,
the Bonds which the Bondholder making the exchange is entitled to receive.

 

All Bonds issued upon any registration of transfer or
exchange of Bonds shall be the valid obligations of the Issuer, evidencing the
same debt, and entitled to the same benefits under this Indenture, as the Bonds
surrendered upon such registration of transfer or exchange.

 

Every Bond presented or surrendered for registration
of transfer or exchange shall be duly endorsed by, or be accompanied by
(a) a written instrument of transfer in form satisfactory to the Trustee
duly executed by the Holder thereof or such Holder’s attorney duly authorized
in writing, with such signature guaranteed by an institution which is a member
of one of the following recognized Signature Guaranty Programs:  (i) The Securities Transfer Agent Medallion
Program (STAMP); (ii) The New York Stock Exchange Medallion Program (MSP);
(iii) The Stock Exchange Medallion Program (SEMP); or (iv) such other
guarantee program acceptable to the Trustee or authorized by the regulations of
the SEC, and (b) such other documents as the Trustee may reasonably
require.

 

No service charge shall be made to a Holder for any
registration of transfer or exchange of Bonds, but the Issuer may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or

 

16

 

exchange of Bonds, other
than exchanges pursuant to Section 2.04 or 9.06 not involving any
transfer.

 

The preceding provisions of this Section notwithstanding,
the Issuer shall not be required to make and the Bond Registrar need not
register transfers or exchanges of Bonds selected for redemption or of any Bond
for a period of fifteen (15) days preceding the due date for any payment
with respect to the Bond.

 

SECTION 2.06.  Mutilated,
Destroyed, Lost or Stolen Bonds.  If
(i) any mutilated Bond is surrendered to the Trustee, or the Trustee
receives evidence to its satisfaction of the destruction, loss or theft of any
Bond, and (ii) in case of destruction, loss, or theft, there is delivered
to the Trustee such security or indemnity as may be reasonably required by it
to hold the Issuer and the Trustee harmless, then, in the absence of notice to
the Issuer, the Bond Registrar or the Trustee that such Bond has been acquired
by a protected purchaser, the Issuer shall execute and, upon its request, the
Trustee shall authenticate and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Bond, a replacement Bond of like Class,
tenor and principal amount, bearing a number not contemporaneously outstanding;
provided, however, that if any such destroyed, lost or stolen
Bond, but not a mutilated Bond, shall have become or within seven (7) days
shall be due and payable, or shall have been called for redemption, instead of
issuing a replacement Bond, the Issuer may pay such destroyed, lost or stolen
Bond when so due or payable or upon the Redemption Date, without surrender
thereof.  If, after the delivery of such
replacement Bond or payment of a destroyed, lost or stolen Bond pursuant to the
proviso to the preceding sentence, a protected purchaser of the original Bond
in lieu of which such replacement Bond was issued presents for payment such
original Bond, the Issuer and the Trustee shall be entitled to recover such
replacement Bond (or such payment) from the Person to whom it was delivered or
any Person taking such replacement Bond from such Person to whom such
replacement Bond was delivered or any assignee of such Person, except a
protected purchaser, and shall be entitled to recover upon the security or
indemnity provided therefor to the extent of any loss, damage, cost or expense
incurred by the Issuer or the Trustee in connection therewith.

 

Upon the issuance of any replacement Bond under this
Section, the Issuer may require the payment by the Holder of such Bond of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other reasonable expenses (including the fees and
expenses of the Trustee) connected therewith.

 

Every replacement Bond issued pursuant to this Section in
replacement of any mutilated, destroyed, lost or stolen Bond shall constitute
an original additional contractual obligation of the Issuer, whether or not the
mutilated, destroyed, lost or stolen Bond shall be at any time enforceable by
anyone, and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Bonds duly issued hereunder.

 

The provisions of this Section are exclusive and
shall preclude (to the extent lawful) all other rights and remedies with
respect to the replacement or payment of mutilated, destroyed, lost or stolen
Bonds.

 

17

 

SECTION 2.07.  Persons
Deemed Owner.  Prior to due
presentment for registration of transfer of any Bond, the Issuer, the Trustee
and any agent of the Issuer or the Trustee may treat the Person in whose name
any Bond is registered (as of the day of determination) as the owner of such
Bond for the purpose of receiving payments of principal of and premium, if any,
and interest on such Bond and for all other purposes whatsoever, whether or not
such Bond be overdue, and neither the Issuer, the Trustee nor any agent of the
Issuer or the Trustee shall be affected by notice to the contrary.

 

SECTION 2.08.  Payment
of Principal, Premium, if any, and Interest; Principal, Premium, if any, and
Interest Rights Preserved.  (a)  
Any installment of interest, principal or premium, if any, payable on any Bond which
is punctually paid or duly provided for by the Issuer on the applicable Payment
Date shall be paid to the Person in whose name such Bond (or one or more
Predecessor Bonds) is registered on the Record Date for such Payment Date, by
check mailed first-class, postage prepaid to such Person’s address as it
appears on the Bond Register on such Record Date, except that (i) upon application to the Trustee by any Holder owning Bonds
of any Class in the principal amount of $10,000,000 or more not later than the
applicable Record Date, payment will be made by wire transfer to an account
maintained by such Holder in New York, New York and (ii) with respect to
Bonds registered on the Record Date in the name of DTC or another Clearing
Agency, payments will be made by wire transfer in immediately available funds
to the account designated by DTC or such other Clearing Agency, as applicable,
and except for the final installment of principal and premium, if any, and
interest payable with respect to such Bond on a Payment Date which shall be
payable as provided below.  The funds
represented by any such checks returned undelivered shall be held in accordance
with Section 3.03 hereof.

 

(b)                                 The
principal of each Bond of each Class shall be paid, to the extent funds are
available therefor in the Collection Account, as specified in Sections 2.02(e)
and 8.03 on each Payment Date. 
Notwithstanding the foregoing, the entire unpaid principal amount of the
Bonds shall be due and payable, if not previously paid, on the date on which an
Event of Default shall have occurred and be continuing, if the Trustee or the
Holders of the Bonds representing not less than a majority of the Outstanding
Amount of the Bonds have declared the Bonds to be immediately due and payable
in the manner provided in Section 5.02. 
All payments of principal and premium, if any, on the Bonds of each
Class shall be made pro rata to the Bondholders entitled thereto.  The Trustee shall notify the Person in whose
name a Bond is registered at the close of business on the Record Date preceding
the Payment Date on which the Issuer expects that the final installment of
principal of and premium, if any, and interest on such Bond will be paid.  Such notice shall be mailed no later than
five (5) days prior to such final Payment Date and shall specify that such
final installment will be payable only upon presentation and surrender of such
Bond and shall specify the place where such Bond may be presented and
surrendered for payment of such installment and the date and amount of such
payment.  Notices in connection with
redemptions of Bonds shall be mailed to Bondholders as provided in Section 10.02.

 

(c)                                  If
the Issuer defaults in a payment of interest on the Bonds when due, the Issuer
shall pay such defaulted interest to the Persons who are Bondholders on a
special record date, which date shall be at least fifteen (15) Business
Days prior to the payment date established for the payment of such defaulted
interest (the “Special Payment Date”). 
The Issuer shall fix or cause to be fixed any such special record date
and Special Payment Date, and, at least ten (10)

 

18

 

days before any
such special record date, the Issuer shall mail to each affected Bondholder a
notice that states the special record date, the Special Payment Date and the
amount of defaulted interest to be paid.

 

SECTION 2.09.  Cancellation.  All Bonds surrendered for payment,
registration of transfer, exchange or redemption shall, if surrendered to any
Person other than the Trustee, be delivered to the Trustee and shall be
promptly canceled by the Trustee. 
Subject to Section 10.04, the Issuer may at any time deliver to the
Trustee for cancellation any Bonds previously authenticated and delivered
hereunder which the Issuer may have acquired in any manner whatsoever, and all
Bonds so delivered shall be promptly canceled by the Trustee.  No Bonds shall be authenticated in lieu of or
in exchange for any Bonds canceled as provided in this Section, except as
expressly permitted by this Indenture. 
All canceled Bonds may be held or disposed of by the Trustee in
accordance with its standard retention or disposal policy as in effect at the
time.

 

SECTION 2.10.  Amount
Issuable.  The aggregate principal
amount of Bonds that may be authenticated and delivered under this Indenture is
$1,887,864,000.

 

SECTION 2.11.  Release
of Collateral.  Subject to Section 11.01,
the Trustee shall release Collateral from the lien of this Indenture only as
specified in Section 8.02(d) or upon receipt of an Issuer Request
accompanied by an Officer’s Certificate, an Opinion of Counsel and Independent
Certificates in accordance with TIA Sections 314(c) and 314(d)(l) or an Opinion
of Counsel in lieu of such Independent Certificates to the effect that the TIA does
not require any such Independent Certificates. 
Except for Collateral released from the lien of this Indenture as
specified in Section 8.02(d), the Issuer will notify the Rating Agencies
in writing of such release.

 

SECTION 2.12.  Global Bonds.  The Bonds shall be issued in Book-Entry Form,
and the Issuer shall execute and the Trustee shall, in accordance with this Section and
the Issuer Order, authenticate and deliver one or more Global Bonds,
representing the Bonds which (i) shall be in an aggregate original principal
amount equal to the aggregate original principal amount of such Bonds to be
issued pursuant to the applicable Issuer Order, (ii) shall be registered in the
name of the Clearing Agency therefor or its nominee, which shall initially be Cede
& Co., as nominee for DTC, the initial Clearing Agency, (iii) shall be held
by the Trustee as custodian for such Clearing Agency pursuant to such Clearing
Agency’s or such nominee’s instructions, and (iv) shall bear a legend
substantially to the effect set forth in Exhibit
A.

 

Each Clearing Agency designated
pursuant to this Section 2.12 must, at the time of its designation and at
all times while it serves as Clearing Agency hereunder, be a “clearing agency”
registered under the Exchange Act and any other applicable statute or
regulation.

 

No Holder of any Bonds issued in
Book-Entry Form shall receive a Definitive Bond representing such Holder’s
interest in any such Bonds, except as provided in Section 2.14.  Unless (and until) fully registered
Definitive Bonds have been issued to the Holders pursuant to Section 2.14:

 

(a)                                  the provisions of this Section 2.12 shall be in
full force and effect;

 

19

 

(b)                                 the Issuer, the Servicer, the Paying Agent, the Bond
Registrar and the Trustee may deal with the Clearing Agency for all purposes
(including the making of distributions on the Bonds) as the Holder;

 

(c)                                  to the extent that the provisions of this Section 2.12
conflict with any other provisions of this Indenture, the provisions of this Section 2.12
shall control; and

 

(d)                                 the rights of owners of security entitlements to Bonds
shall be exercised only through the Clearing Agency and the Clearing Agency
participants and shall be limited to those established by law and agreements
between such owners and the Clearing Agency and/or the Clearing Agency
participants.  Unless and until
Definitive Bonds are issued pursuant to Section 2.14, the initial Clearing
Agency will make book-entry transfers among the Clearing Agency participants
and receive and transmit distributions of principal and interest on the Global
Bonds to such Clearing Agency participants.

 

SECTION 2.13.  Notices to Clearing Agency.  Unless and
until Definitive Bonds shall have been issued pursuant to Section 2.14,
whenever notice, payment, or other communication to the owners of security
entitlements to Bonds is required under this Indenture, the Trustee and the
Paying Agent shall give all such notices and communications specified herein to
be given to owners of security entitlements to Bonds to the Clearing Agency.

 

SECTION 2.14.  Definitive Bonds.

 

If (i) the Issuer, at its option,
advises the Trustee in writing that it elects to terminate the book-entry
system through the Clearing Agency or (ii) after the occurrence of an Event of
Default hereunder, owners of security entitlements to Bonds aggregating not
less than a majority of the aggregate Outstanding Amount of Bonds advise the
Trustee, the Issuer and the Clearing Agency (through the Clearing Agency
participants) in writing that the continuation of a book-entry system through
the Clearing Agency is no longer in the best interests of the owners of
security entitlements to such Bonds, the Issuer shall notify the Clearing
Agency, the Trustee and all such owners in writing of the occurrence of any
such event and of the availability of Definitive Bonds.  Upon surrender to the Trustee of the Global
Bonds by the Clearing Agency accompanied by registration instructions from such
Clearing Agency for re-registration, the Issuer shall execute, and the Trustee
shall authenticate and deliver, Definitive Bonds.  None of the Issuer, the Bond Registrar or the
Trustee shall be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be fully protected in relying on, such
instructions.  Upon the issuance of
Definitive Bonds the Trustee shall recognize the Holders of the Definitive
Bonds as Holders hereunder.

 

Definitive Bonds will be transferable
and exchangeable at the offices of the Bond Registrar.

 

ARTICLE III

COVENANTS

 

SECTION 3.01.  Payment
of Principal, Premium, if any, and Interest.  The Issuer will duly and punctually pay the
principal of and premium, if any, and interest on the

 

20

 

Bonds in
accordance with the terms of the Bonds and this Indenture.  Amounts properly withheld under the Code by
any Person from a payment to any Bondholder of interest or principal or
premium, if any, shall be considered as having been paid by the Issuer to such
Bondholder for all purposes of this Indenture.

 

SECTION 3.02.  Maintenance
of Office or Agency.  The Issuer will
maintain an office or agency where Bonds may be surrendered for registration of
transfer or exchange.  The Issuer hereby
initially appoints the Trustee to serve as its agent for the foregoing
purposes.  The Issuer will give prompt
written notice to the Trustee of the location, and of any change in the
location, of any such office or agency. 
If at any time the Issuer shall fail to maintain any such office or
agency or shall fail to furnish the Trustee with the address thereof, such
surrenders may be made at the Corporate Trust Office, and the Issuer hereby
appoints the Trustee as its agent to receive all such surrenders.

 

SECTION 3.03.  Money
for Payments To Be Held in Trust.  As
provided in Section 8.02(a), all payments of amounts due and payable with
respect to any Bonds that are to be made from amounts withdrawn from the
Collection Account pursuant to Section 8.02(d) shall be made on behalf of
the Issuer by the Trustee or by another Paying Agent, and no amounts so
withdrawn from the Collection Account for payments of Bonds shall be paid over
to the Issuer except as provided in this Section and Section 8.02.

 

The Issuer will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee (and if the Trustee acts as Paying
Agent, it hereby so agrees), subject to the provisions of this Section, that
such Paying Agent will:

 

(i)                                     hold
all sums held by it for the payment of amounts due with respect to the Bonds in
trust for the benefit of the Persons entitled thereto until such sums shall be
paid to such Persons or otherwise disposed of as herein provided and pay such
sums to such Persons as herein provided;

 

(ii)                                  give
the Trustee notice of any default by the Issuer (or any other obligor upon the
Bonds) of which it has actual knowledge in the making of any payment required
to be made with respect to the Bonds;

 

(iii)                               at
any time during the continuance of any such default, upon the written request
of the Trustee, forthwith pay to the Trustee all sums so held in trust by such
Paying Agent;

 

(iv)                              immediately
resign as a Paying Agent and forthwith pay to the Trustee all sums held by it
in trust for the payment of Bonds if at any time it ceases to meet the
standards required to be met by a Paying Agent at the time of its appointment;
and

 

(v)                                 comply
with all requirements of the Code with respect to the withholding from any
payments made by it on any Bonds of any applicable withholding taxes imposed
thereon and with respect to any applicable reporting requirements in connection
therewith.

 

21

 

The Issuer may at any time, for the purpose of
obtaining the satisfaction and discharge of this Indenture or for any other
purpose, by Issuer Order direct any Paying Agent to pay to the Trustee all sums
held in trust by such Paying Agent, such sums to be held by the Trustee upon
the same trusts as those upon which the sums were held by such Paying Agent;
and upon such payment by any Paying Agent to the Trustee, such Paying Agent
shall be released from all further liability with respect to such money.

 

Subject to applicable laws with respect to escheat of
funds, any money held by the Trustee or any Paying Agent in trust for the
payment of any amount due with respect to any Bond and remaining unclaimed for
two (2) years after such amount has become due and payable shall be
discharged from such trust and be repaid to the Issuer on Issuer Request; and,
subject to Section 11.18, the Holder of such Bond shall thereafter, as an
unsecured general creditor, look only to the Issuer for payment thereof (but
only to the extent of the amounts so repaid to the Issuer), and all liability
of the Trustee or such Paying Agent with respect to such trust money shall
thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Issuer cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in The City of New York, notice that such money remains unclaimed
and that, after a date specified therein, any unclaimed balance of such money
then remaining will be repaid to the Issuer. 
The Trustee may also adopt and employ, at the expense of the Issuer, any
other reasonable means of notification of such repayment (including mailing
notice of such repayment to Holders whose Bonds have been called but have not
been surrendered for redemption or whose right to or interest in moneys due and
payable but not claimed is determinable from the records of the Trustee or of
any Paying Agent, at the last address of record for each such Holder).

 

SECTION 3.04.  Existence.  The Issuer will keep in full effect its
existence, rights and franchises as a limited liability company under the laws
of the State of Delaware (unless it becomes, or any successor Issuer hereunder
is or becomes, organized under the laws of any other State or of the United
States of America, in which case the Issuer will keep in full effect its
existence, rights and franchises under the laws of such other jurisdiction) and
will obtain and preserve its qualification to do business in each jurisdiction
in which such qualification is or shall be necessary to protect the validity
and enforceability of this Indenture, the Bonds, the Collateral and each other
instrument or agreement included in the Collateral.

 

SECTION 3.05.  Protection
of Collateral.  The Issuer will from
time to time authorize, execute and deliver all such supplements and amendments
hereto and all such filings with the CPUC pursuant to the PU Code, financing
statements, amendments thereto, continuation statements, instruments of further
assurance and other instruments, and will take such other action necessary or
advisable to:

 

(i)                                     maintain,
perfect, continue the perfection of, or preserve the lien and security interest
(and the priority thereof) of this Indenture or carry out more effectively the
purposes hereof;

 

(ii)                                  perfect,
publish notice of or protect the validity of any Grant made or to be made by
this Indenture;

 

22

 

(iii)                               enforce
any of the Collateral;

 

(iv)                              preserve
and defend title to the Collateral and the rights of the Trustee and the
Bondholders in such Collateral against the claims of all Persons and parties,
including the challenge by any party to the validity or enforceability of the
Financing Order, the Issuance Advice Letter or the Recovery Property or any
proceeding relating thereto and institute any action or proceeding necessary to
compel performance by the CPUC or the State of California of any of its
obligations or duties under the PU Code, the Financing Order or any Advice
Letter; or

 

(v)                                 pay
any and all taxes levied or assessed upon all or any part of the Collateral.

 

The Issuer hereby designates the Trustee its agent and
attorney-in-fact to execute any filings with the CPUC, financing statements,
continuation statements or other instruments required pursuant to this Section,
it being understood that the Trustee shall have no such obligation.

 

SECTION 3.06.  Opinions
as to Collateral.  (a)  On
the Issuance Date, the Issuer shall furnish to the Trustee an Opinion of
Counsel either stating that, in the opinion of such counsel, such action has
been taken with respect to the recording and filing of this Indenture, and any
other requisite documents, and with respect to the execution and filing of any
filings with the CPUC pursuant to the PU Code and financing statements, as are
necessary to perfect and make effective the lien and security interest of this
Indenture and reciting the details of such action, or stating that, in the
opinion of such counsel, no such action is necessary to make such lien and
security interest effective.

 

(b)                                 On
or before September 30 in each calendar year, while any Bonds are
Outstanding, the Issuer shall furnish to the Trustee an Opinion of Counsel
either stating that, in the opinion of such counsel, such action has been taken
with respect to the recording, filing, re-recording and refiling of this
Indenture, and any indentures supplemental hereto, and any other requisite
documents and with respect to the execution and filing of any filings with the
CPUC or the California Secretary of State pursuant to the PU Code, financing
statements and continuation statements as is necessary to maintain the lien and
security interest created by this Indenture and reciting the details of such
action or stating that in the opinion of such counsel no such action is
necessary to maintain such lien and security interest. Such Opinion of Counsel
shall also describe the recording, filing, re-recording and refiling of this
Indenture, any indentures supplemental hereto and any other requisite documents
and the execution and filing of any filings with the CPUC or the California
Secretary of State, financing statements and continuation statements that will,
in the opinion of such counsel, be required to maintain the lien and security
interest of this Indenture until September 30 in the following calendar
year.

 

SECTION 3.07.  Performance
of Obligations; Servicing; SEC Filings. 
(a)  The Issuer (i) will diligently pursue any and all
actions to enforce its rights under each instrument or agreement included in
the Collateral and (ii) will not take any action and will use its best
efforts not to permit any action to be taken by others that would release any
Person from any of such Person’s covenants or obligations under any such
instrument or agreement or that would result in the amendment, hypothecation,
subordination, termination or discharge of, or impair the validity

 

23

 

or effectiveness
of, any such instrument or agreement, except, in each case, as expressly
provided in this Indenture, the Sale Agreement or the Servicing Agreement.

 

(b)                                 The
Issuer may contract with other Persons to assist it in performing its duties
under this Indenture, and any performance of such duties by a Person identified
to the Trustee in an Officer’s Certificate of the Issuer shall satisfy the
Issuer’s obligation to perform such duties. 
Initially, the Issuer has contracted with the Servicer pursuant to the
Servicing Agreement to assist the Issuer in performing its duties under this
Indenture.

 

(c)                                  The
Issuer will punctually perform and observe all of its obligations and
agreements contained in this Indenture and in the instruments and agreements included
in the Collateral, including filing or causing to be filed all filings with the
CPUC pursuant to the PU Code, UCC financing statements and continuation
statements required to be filed by it by the terms of this Indenture with
respect to the Recovery Property and the other Collateral in accordance with
and within the time periods provided for herein.

 

(d)                                 If
the Issuer shall have knowledge of the occurrence of a Servicer Default with
respect to the Recovery Property under the Servicing Agreement, the Issuer
shall promptly give written notice thereof to the Trustee and the Rating
Agencies, and shall specify in such notice the action, if any, the Issuer is
taking in respect of such default.  If a
Servicer Default shall arise from the failure of the Servicer to perform any of
its duties or obligations with respect to the Recovery Property under the
Servicing Agreement, the Issuer shall take all reasonable steps available to it
to remedy such failure.

 

(e)                                  As
promptly as possible after the giving of notice of termination to the Servicer
and the Rating Agencies of the Servicer’s rights and powers pursuant to Section 7.01
of the Servicing Agreement, the Issuer shall appoint a successor Servicer (the “Successor
Servicer”) with the Trustee’s prior written consent thereto (which consent
shall not be unreasonably withheld) and the CPUC’s prior written consent
thereto, and such Successor Servicer shall accept its appointment by a written
assumption in a form acceptable to the Issuer and the Trustee.  A Person shall qualify as a Successor
Servicer only if such Person satisfies the requirements of the Servicing
Agreement.  If within thirty (30)
days after the delivery of the notice referred to above, the Issuer shall not
have obtained such a new Servicer, the Trustee may petition the CPUC or a court
of competent jurisdiction to appoint a Successor Servicer.  In connection with any such appointment, the
Issuer may make such arrangements for the compensation of such successor as it
and such successor shall agree, subject to the limitations set forth below and
in the Servicing Agreement, and in accordance with Section 7.02 of the
Servicing Agreement, the Issuer shall enter into an agreement with such
successor for the servicing of the Recovery Property (such agreement to be in
form and substance satisfactory to the Trustee).

 

(f)                                    Upon
any termination of the Servicer’s rights and powers pursuant to the Servicing
Agreement with respect to the Recovery Property, the Trustee shall promptly
notify the Issuer, the Bondholders and the Rating Agencies.  As soon as a Successor Servicer is appointed,
the Issuer shall notify the Trustee, the Bondholders, the CPUC and the Rating
Agencies of such appointment, specifying in such notice the name and address of
such Successor Servicer.

 

24

 

(g)                                 Without
derogating from the absolute nature of the assignment granted to the Trustee
under this Indenture or the rights of the Trustee hereunder, the Issuer agrees
that it will not, amend, modify, waive, supplement, terminate or surrender, or
agree to any amendment, modification, supplement, termination, waiver or
surrender of, the terms of the Sale Agreement or the Servicing Agreement,
except as provided in the Sale Agreement or the Servicing Agreement,
respectively, or (ii) waive timely performance or observance by the Seller
or the Servicer with respect to the Recovery Property under the Sale Agreement
or the Servicing Agreement, respectively. 
The Issuer agrees that no such amendment, modification, supplement or
waiver shall adversely affect in any material respect the interests of the
Holders of the Bonds outstanding at the time of any such amendment,
modification, supplement or waiver.

 

(h)                                 The
Issuer shall file with the SEC such periodic reports, if any, as are required
from time to time under Section 13 of the Exchange Act.

 

(i)                                     The
Issuer shall make all filings required under the Statute or the CUCC relating
to the transfer of the ownership or security interest in the Recovery Property
other than those required to be made by the Seller pursuant to the Sale
Agreement.

 

SECTION 3.08.  Negative
Covenants.  So long as any Bonds are
Outstanding, the Issuer shall not:

 

(i)                                     except
as expressly permitted by this Indenture, the Sale Agreement or the Servicing
Agreement, sell, transfer, exchange or otherwise dispose of any of the assets
that constitute part of the Collateral, unless directed to do so by the Trustee
in accordance with Article V;

 

(ii)                                  claim
any credit on, or make any deduction from the principal or premium, if any, or
interest payable in respect of, the Bonds (other than amounts properly withheld
from such payments under the Code or other tax laws) or assert any claim
against any present or former Bondholder by reason of the payment of the taxes
levied or assessed upon any part of the Collateral;

 

(iii)                               terminate
its existence or dissolve or liquidate in whole or in part except in a
transaction permitted by Section 3.10;

 

(iv)                              (A) permit
the validity or effectiveness of this Indenture to be impaired, or permit the
lien of this Indenture to be amended, hypothecated, subordinated, terminated or
discharged, or permit any Person to be released from any covenants or
obligations with respect to the Bonds under this Indenture except as may be
expressly permitted hereby, (B) permit any lien, charge, claim, security
interest, mortgage or other encumbrance (other than the lien of this Indenture
and the lien arising under Section 848.3(g) of the PU Code, the Financing
Order and the Issuance Advice Letter) to be created on or extend to or
otherwise arise upon or burden the Collateral or any part thereof or any
interest therein (other than tax liens arising by operation of law with respect
to amounts not yet due) or (C) subject to the lien arising under Section 848.3(g)
of the PU Code, the Financing Order and the Issuance Advice Letter, permit the
lien of this Indenture not to constitute a valid first priority security
interest in the Collateral;

 

25

 

(v)                                 elect
to be classified as an association taxable as a corporation for federal income
tax purposes or otherwise take any action, file any tax return, or make any
election inconsistent with the treatment of the Issuer, for purposes of federal
income taxes and, to the extent consistent with applicable state tax law, state
income and franchise tax purposes, as a disregarded entity that is not separate
from the equity member of the Issuer;

 

(vi)                              change
its name or type or jurisdiction of organization, unless prior to the effective
date of any such change the Issuer delivers to the Trustee such documents,
filings, instruments or agreements, authorized and executed by the Issuer, as
are necessary to reflect such change and to continue the perfection of the
security interest of this Indenture;

 

(vii)                           issue
other bonds, notes or other evidences of indebtedness authorized by the
Financing Order unless the Rating Agency Condition has been satisfied; or

 

(viii)                        take any
action which is expressly stated in the Basic Documents to require satisfaction
of the Rating Agency Condition without satisfying the Rating Agency Condition.

 

SECTION 3.09.  Annual
Statement as to Compliance.  The
Issuer will deliver to the Trustee and the Rating Agencies not later than September 30
of each year (commencing with September 30, 2005), an Officer’s
Certificate (which need not comply with Section 11.01) stating, as to the
Authorized Officer signing such Officer’s Certificate, that

 

(i)                                     a
review of the activities of the Issuer during the preceding twelve (12) months
ended June 30 (or relevant portion thereof) and of performance under this
Indenture has been made under such Authorized Officer’s supervision; and

 

(ii)                                  to
the best of such Authorized Officer’s knowledge, based on such review, the
Issuer has complied with all conditions and covenants under this Indenture
throughout such twelve month period (or relevant portion thereof), or, if there
has been a default in the compliance of any such condition or covenant,
specifying each such default known to such Authorized Officer and the nature
and status thereof.

 

SECTION 3.10.  Issuer
May Consolidate, etc., Only on Certain Terms.  (a)  The Issuer shall not
consolidate with or merge into any other Person, or sell, convey, exchange,
transfer or otherwise dispose of substantially all of its properties or assets
to any Person, unless

 

(i)                                     the
Person (if other than the Issuer) formed by or surviving such consolidation or
merger or to whom substantially all of the Issuer’s assets are sold or disposed
of shall be a Person organized and existing under the laws of the United States
of America or any State and shall expressly assume, (A) by an indenture
supplemental hereto, executed and delivered to the Trustee, in form and
substance satisfactory to the Trustee, the due and punctual payment of the
principal of and premium, if any, and interest on all Bonds and the performance
of the Issuer’s obligations under this Indenture on the part of the Issuer to
be performed or observed, all as provided herein, and (B) by an assignment and
assumption agreement, all obligations and succeeds to all of the

 

26

 

Issuer’s rights under the Sale Agreement and the
Servicing Agreement with respect to the Recovery Property;

 

(ii)                                  immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing;

 

(iii)                               the
Rating Agency Condition shall have been satisfied with respect to such
transaction;

 

(iv)                              the
Issuer shall have received an Opinion of Counsel (and shall have delivered
copies thereof to the Servicer, the Trustee and the Rating Agencies) to the
effect that such transaction (A) will not have any material adverse tax
consequence to the Issuer or any Bondholder and (B) will result in the Trustee
continuing to have a perfected security interest in the Collateral;

 

(v)                                 any
action as is necessary to continue the perfection of the security interest
granted by the Issuer under this Indenture shall have been taken;

 

(vi)                              the
Issuer shall have delivered to the Trustee an Officer’s Certificate and an
Opinion of Counsel (with copies to the Servicer and the Rating Agencies) each
stating that such consolidation or merger and such supplemental indenture
comply with this Section 3.10 and that all conditions precedent herein
provided for relating to such transaction have been complied with (including
any filing required by the Exchange Act);

 

(vii)                           none of
the Recovery Property, the Financing Order or the Seller’s, Servicer’s or
Issuer’s rights under the Statute or the Financing Order are impaired thereby;
and

 

(viii)                        the CPUC
shall have approved the transaction.

 

(b)                                 Except
as specifically provided herein, the Issuer shall not sell, convey, exchange,
transfer or otherwise dispose of any of its properties or assets included in
the Collateral, to any Person, unless

 

(i)                                     the
Person that acquires by conveyance or transfer the properties and assets of the
Issuer the conveyance or transfer of which is hereby restricted shall
(A) be a United States citizen or a Person organized and existing under
the laws of the United States of America or any State, (B) expressly
assumes, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form and substance satisfactory to the Trustee, the due and punctual
payment of the principal of and premium, if any, and interest on all Bonds and
the performance or observance of every agreement and covenant of this Indenture
on the part of the Issuer to be performed or observed, all as provided herein,
(C) expressly agrees by means of such supplemental indenture that all
right, title and interest so conveyed or transferred shall be subject and
subordinate to the rights of Holders of the Bonds, and (D) unless
otherwise provided in the supplemental indenture referred to in clause (B)
above, expressly agrees to indemnify, defend and hold harmless the Issuer
against and from any loss, liability or expense arising under or related to
this Indenture and the Bonds;

 

27

 

(ii)                                  immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing;

 

(iii)                               the
Rating Agency Condition shall have been satisfied with respect to such
transaction;

 

(iv)                              the
Issuer shall have received an Opinion of Counsel (and shall have delivered
copies thereof to the Trustee) to the effect that such transaction will not
have any material adverse tax consequence to the Issuer or any Bondholder;

 

(v)                                 any
action as is necessary to maintain the security interest created by this
Indenture shall have been taken;

 

(vi)                              the
Issuer shall have delivered to the Trustee an Officer’s Certificate and an
Opinion of Counsel each stating that such conveyance or transfer and such
supplemental indenture comply with this Section 3.10 and that all
conditions precedent herein provided for relating to such transaction have been
complied with (including any filing required by the Exchange Act); and

 

(vii)                           the
CPUC shall have approved the transaction.

 

(c)                                  Whenever
the approval of the CPUC shall be required pursuant to this Section 3.10,
the Issuer shall follow the following procedures in obtaining such approval:

 

(i)                                     At
least thirty (30) calendar days prior to the closing of the transaction, the
Issuer shall deliver to each of the CPUC’s Executive Director, General Counsel
and Director of the Energy Division (or any successor to any of such positions,
if any), at the address specified in or provided pursuant to Section 11.04,
written notification of the proposed transaction, which notification shall
contain:

 

(A)                              a
reference to the Financing Order; and

 

(B)                                a
statement identifying the person to whom the CPUC or its staff is to address
any response to the proposed transaction or is to request additional time to
respond to the proposed transaction.

 

(ii)                                  If
the CPUC or its staff have, within thirty (30) calendar days of receiving a
notification complying with Section 3.10(c)(i) above, delivered to the
office of the person specified in Section 3.10(c)(i)(B) above a written
statement that the CPUC might object to the proposed transaction, then such
proposed transaction shall not be effective unless and until the CPUC
subsequently delivers a written statement that it approves such proposed
transaction.

 

(iii)                               If
the CPUC or its staff shall not have delivered a written statement that the
CPUC might object to such proposed transaction within the time period described
in Section 3.10(c)(ii) above, then the CPUC shall be conclusively deemed
to have approved the proposed transaction, and such transaction may
subsequently become effective upon the satisfaction of any other conditions
thereto.

 

28

 

(iv)                              Following
the delivery of a notice to the CPUC by the Issuer under Section 3.10(c)(i)
above, the Issuer shall have the right at any time to withdraw from the CPUC
further consideration of any notification of a proposed transaction.

 

SECTION 3.11.  Successor
or Transferee.  (a)  Upon
any consolidation or merger of the Issuer in accordance with Section 3.10(a),
the Person formed by or surviving such consolidation or merger (if other than
the Issuer) shall succeed to, and be substituted for, and may exercise every
right and power of, the Issuer under this Indenture with the same effect as if
such Person had been named as the Issuer herein.

 

(b)                                 Except
as set forth in Section 6.07, upon a conveyance or transfer of all the
assets and properties of the Issuer pursuant to Section 3.10(b), the
Issuer will be released from every covenant and agreement of this Indenture to
be observed or performed on the part of the Issuer with respect to the Bonds
immediately upon the delivery of written notice to the Trustee stating that the
Issuer is to be so released.

 

SECTION 3.12.  No
Other Business.  The Issuer shall not
engage in any business other than (i) financing, purchasing, owning and
managing the Recovery Property and the other Collateral and issuing bonds in
the manner contemplated by the Financing Order, this Indenture and the Basic
Documents and activities incidental thereto and (ii) financing, purchasing,
owning and managing other property authorized or contemplated by the Financing
Order and any other sale agreement or any other servicing agreement authorized
or contemplated by the Financing Order and activities incidental thereto.

 

SECTION 3.13.  No
Borrowing.  The Issuer shall not
issue, incur, assume, guarantee or otherwise become liable, directly or
indirectly, for any indebtedness except for the Bonds and other bonds, notes or
other evidences of indebtedness authorized by the Financing Order and related
expenses.

 

SECTION 3.14.  Servicer’s
Obligations.  The Issuer shall
enforce in all material respects the Servicer’s compliance with all of the
Servicer’s obligations under the Servicing Agreement with respect to the
Recovery Property.

 

SECTION 3.15.  Guarantees,
Loans, Advances and Other Liabilities. 
Except as otherwise contemplated by the Sale Agreement, the Servicing
Agreement, this Indenture, and any similar documents relating to other bonds
authorized by the Financing Order, the Issuer shall not make any loan or
advance or credit to, or guarantee (directly or indirectly or by an instrument
having the effect of assuring another’s payment or performance on any
obligation or capability of so doing or otherwise), endorse or otherwise become
contingently liable, directly or indirectly, in connection with the
obligations, stocks or dividends of, or own, purchase, repurchase or acquire
(or agree contingently to do so) any stock, obligations, assets or securities
of, or any other interest in, or make any capital contribution to, any other
Person.

 

SECTION 3.16.  Capital
Expenditures.  Other than
expenditures in an aggregate amount not to exceed $200,000 per series of bonds
authorized to be issued by the Financing Order (including the Bonds) in any
calendar year and other than as contemplated by the Sale Agreement, the
Servicing Agreement, this Indenture, and any similar documents relating to
other

 

29

 

bonds authorized
by the Financing Order, the Issuer shall not make any expenditure (by long-term
or operating lease or otherwise) for capital assets (either realty or
personalty).

 

SECTION 3.17.  Restricted
Payments.  The Issuer shall not,
directly or indirectly, (i) pay any dividend or make any distribution (by
reduction of capital or otherwise), whether in cash, property, securities or a
combination thereof, to any owner of a beneficial interest in the Issuer or
otherwise with respect to any ownership or equity interest or security in or of
the Issuer, (ii) redeem, purchase, retire or otherwise acquire for value
any such ownership or equity interest or security or (iii) set aside or
otherwise segregate any amounts for any such purpose; provided, however,
that, if no Event of Default shall have occurred and be continuing, the Issuer
may make, or cause to be made, any such distributions to any owner of a
beneficial interest in the Issuer or otherwise with respect to any ownership or
equity interest or security in or of the Issuer using funds distributed to the
Issuer pursuant to Section 8.02(d) to the extent that such distributions
would not cause the balance of the Capital Subaccount to decline below the
Required Capital Level or using any other funds that are not subject to the lien
of this Indenture.  The Issuer will not,
directly or indirectly, make payments to or distributions from the Collection
Account except in accordance with this Indenture and the Basic Documents.

 

SECTION 3.18.  Payment
by Issuer is Nonrecourse.  Any amounts
due hereunder from the Issuer with respect to the Bonds shall be paid solely
from the Collateral.  In the event the
Collateral pledged to secure the Bonds has been exhausted and the Bonds have
not been paid in full, then any and all amounts remaining due on the Bonds
shall be extinguished and the Bonds cancelled. 
To the extent that under any applicable law the Holder of a Bond or any
owner of a security entitlement to a Bond is deemed to have an interest in
assets of the Issuer other than the Collateral (“Other Issuer Assets”),
such Holder or owner is deemed to have agreed that its interest in such Other
Issuer Assets is fully subordinate to the claim against such Other Issuer
Assets of the pledgees or grantees to which such Other Issuer Assets are pledged
or granted and is further deemed to have agreed that this agreement shall
constitute a subordination agreement for purpose of Section 510(a) of the
United States Bankruptcy Code.

 

SECTION 3.19.  Notice
of Events of Default.  The Issuer
agrees to give the Trustee, the CPUC and the Rating Agencies prompt written
notice of each Event of Default hereunder and each default on the part of the
Seller or the Servicer of its obligations under the Sale Agreement or the
Servicing Agreement with respect to the Recovery Property, respectively.

 

SECTION 3.20.  Further
Instruments and Acts.  Upon request
of the Trustee, the Issuer will authorize, execute and deliver such further
instruments and do such further acts as may be reasonably necessary or proper
to carry out more effectively the purpose of this Indenture.

 

SECTION 3.21.  Representations
and Warranties.

 

(a)                                  The
Issuer makes the following representations and warranties:

 

(i)                                     This
Indenture creates a valid and continuing security interest in the Recovery
Property in favor of the Trustee, which security interest is prior to all other
liens, and is enforceable as such as against creditors of and purchasers from
the Issuer.

 

30

 

(ii)                                  The
Issuer owns and has good and marketable title to the Recovery Property, free
and clear of any lien, claim or encumbrance of any Person.

 

(iii)                               The
Issuer has received all consents and approvals required by the terms of the
Recovery Property to the transfer of the Recovery Property hereunder to the
Trustee.

 

(iv)                              Other
than the security interest granted to the Trustee pursuant to this Indenture
and the statutory lien created pursuant to Section 848.3(g) of the PU
Code, the Financing Order, and the Issuance Advice Letter, the Issuer has not
pledged, assigned, sold, granted a security interest in, or otherwise conveyed
the Recovery Property.  The Issuer has
not authorized the filing of and is not aware of any financing statements
against the Issuer that include a description of collateral covering the
Recovery Property other than any financing statement relating to the security
interest granted to the Trustee hereunder or that has been terminated.  The Issuer is not aware of any judgment or
tax lien filings against the Issuer.

 

(v)                                 The
Issuer has caused or will have caused, within ten (10) days, the filing of all
appropriate financing statements in the proper filing office in the appropriate
jurisdictions under applicable law in order to perfect the security interest in
the Recovery Property granted to the Trustee hereunder.

 

(b)                                 None
of the provisions of this Section 3.21 shall be waived or amended without
the prior written confirmation from Standard & Poor’s that such waiver or
amendment shall not result in a reduction or withdrawal of the then-current
rating of the Bonds.

 

ARTICLE IV

SATISFACTION AND DISCHARGE; DEFEASANCE

 

SECTION 4.01.  Satisfaction
and Discharge of Indenture; Defeasance. 
(a)  This Indenture shall cease to be of further effect with
respect to the Bonds and the Trustee, on reasonable demand of and at the
expense of the Issuer, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture with respect to the Bonds, when

 

(A)                              either

 

(1)                                  all
Bonds theretofore authenticated and delivered (other than (i) Bonds that
have been destroyed, lost or stolen and that have been replaced or paid as
provided in Section 2.06 and (ii) Bonds for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the
Issuer and thereafter repaid to the Issuer or discharged from such trust, as
provided in Section 3.03) have been delivered to the Trustee for
cancellation; or

 

(2)                                  the
Scheduled Maturity Date has occurred with respect to all Bonds not theretofore
delivered to the Trustee for cancellation, and the Issuer has irrevocably
deposited or caused to be irrevocably deposited with the Trustee cash, in trust
for such purpose, in an amount sufficient to pay and discharge the entire

 

31

 

indebtedness
on such Bonds not theretofore delivered to the Trustee for cancellation on the
Scheduled Maturity Date therefor;

 

(B)                                the
Issuer has paid or caused to be paid all other sums payable hereunder by the
Issuer; and

 

(C)                                the
Issuer has delivered to the Trustee (i) an Officer’s Certificate and an Opinion
of Counsel each meeting the applicable requirements of Section 11.01(a)
and each stating that all conditions precedent herein provided for relating to
the satisfaction and discharge of this Indenture with respect to the Bonds have
been complied with and (ii) (if required by the TIA) an Independent Certificate
from a firm of certified public accountants meeting the requirements of TIA Section 314(c).

 

(b)                                 Subject
to Sections 4.01(c) and 4.02, the Issuer at any time may terminate (i) all
its obligations under this Indenture with respect to the Bonds (“Legal
Defeasance Option”) or (ii) its obligations under Sections 3.04,
3.05, 3.06, 3.07, 3.08, 3.09, 3.10, 3.12, 3.13, 3.14, 3.15, 3.16 and 3.17 and
the operation of Section 5.01(iv) (“Covenant Defeasance Option”).  The Issuer may exercise the Legal Defeasance
Option notwithstanding its prior exercise of the Covenant Defeasance Option.

 

If the Issuer exercises the Legal Defeasance Option,
the maturity of the Bonds may not be accelerated because of an Event of
Default.  If the Issuer exercises the
Covenant Defeasance Option, the maturity of the Bonds may not be accelerated
because of an Event of Default specified in Section 5.01(iv).

 

Upon satisfaction of the conditions set forth herein
to the exercise of the Legal Defeasance Option or the Covenant Defeasance
Options the Trustee, on reasonable demand of and at the expense of the Issuer,
shall execute proper instruments acknowledging satisfaction and discharge of the
obligations that are terminated pursuant to such exercise.

 

(c)                                  Notwithstanding
Sections 4.01(a) and 4.01(b) above, (i) rights of registration of
transfer and exchange, (ii) substitution of mutilated, destroyed, lost or
stolen Bonds, (iii) rights of Bondholders to receive payments of
principal, premium, if any, and interest, (iv) Sections 4.03 and
4.04, (v) the rights, obligations and immunities of the Trustee hereunder
(including the rights of the Trustee under Section 6.07 and the
obligations of the Trustee under Section 4.03), (vi) Sections 3.18
and 11.18 and (vii) the rights of Bondholders as beneficiaries hereof with
respect to the property deposited with the Trustee payable to all or any of
them, shall survive until the Bonds that have been satisfied and discharged
pursuant to Section 4.01(a) or 4.01(b) have been paid in full.  Thereafter, the obligations in
Sections 3.18, 6.07, 4.04 and 11.18 shall survive.

 

SECTION 4.02.  Conditions
to Defeasance.  The Issuer may
exercise the Legal Defeasance Option or the Covenant Defeasance Option only if:

 

(a)                                  the
Issuer irrevocably deposits or causes to be deposited in trust with the Trustee
cash or U.S. Government Obligations, or both, for the payment of principal of
and premium, if any, and interest on such Bonds to the Scheduled Maturity Dates
or Redemption Date therefor, as applicable;

 

32

 

(b)                                 the
Issuer delivers to the Trustee a report from a nationally recognized firm of
Independent accountants to the effect that the payments of principal and
interest when due and without reinvestment on the deposited U.S. Government
Obligations plus any deposited cash without investment will provide cash at
such times and in such amounts (but, in the case of the Legal Defeasance Option
only, not more than such amounts) as will be sufficient to pay in respect of
the Bonds (i) subject to clause (ii), principal in accordance with
the Expected Amortization Schedule therefor, (ii) if Bonds are to be
redeemed, the Optional Redemption Price therefor on the Redemption Date
therefor and (iii) interest when due;

 

(c)                                  in
the case of the Legal Defeasance Option, 91 days pass after the deposit is
made and during the 91-day period no Default specified in Section 5.01(v)
or (vi) occurs which is continuing at the end of the period;

 

(d)                                 no
Default has occurred and is continuing on the day of such deposit and after
giving effect thereto;

 

(e)                                  in
the case of an exercise of the Legal Defeasance Option, the Issuer shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Issuer has
received from, or there has been published by, the Internal Revenue Service a
ruling, or (ii) since the date of execution of this Indenture, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion shall confirm that, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such legal defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such legal defeasance had not occurred;

 

(f)                                    in
the case of an exercise of the Covenant Defeasance Option, the Issuer shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Bonds will not recognize income, gain or loss for federal income
tax purposes as a result of such covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not occurred;

 

(g)                                 the
Issuer delivers to the Trustee an Officer’s Certificate and an Opinion of
Counsel, each stating that all conditions precedent to the satisfaction and
discharge of the Bonds to the extent contemplated by this Article IV have
been complied with; and

 

(h)                                 the
Rating Agency Condition shall have been satisfied.

 

Before or after a deposit pursuant to this Section 4.02,
the Issuer may make arrangements satisfactory to the Trustee for the redemption
of such Bonds at a future date in accordance with Article X.

 

SECTION 4.03.  Application
of Trust Money.  All moneys or U.S.
Government Obligations deposited with the Trustee pursuant to Section 4.01
or 4.02 hereof shall be held in trust and applied by it, in accordance with the
provisions of the Bonds and this Indenture, to the payment, either directly or
through any Paying Agent, as the Trustee may determine, to the

 

33

 

Holders of the
particular Bonds for the payment or redemption of which such moneys have been
deposited with the Trustee, of all sums due and to become due thereon for
principal, premium, if any, and interest; but such moneys need not be
segregated from other funds except to the extent required herein or in the
Servicing Agreement or required by law.

 

SECTION 4.04.  Repayment
of Moneys Held by Paying Agent.  In
connection with the satisfaction and discharge of this Indenture or the
Covenant Defeasance Option or Legal Defeasance Option, all moneys then held by
any Paying Agent other than the Trustee under the provisions of this Indenture
with respect to such Bonds shall, upon demand of the Issuer, be paid to the
Trustee to be held and applied according to Section 3.03 and thereupon
such Paying Agent shall be released from all further liability with respect to
such moneys.

 

ARTICLE V

REMEDIES

 

SECTION 5.01.  Events
of Default.  “Event of Default”,
wherever used herein, means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):

 

(i)                                     default
in the payment of any interest on any Bond when the same becomes due and
payable, and such default shall continue for a period of five (5) Business
Days; or

 

(ii)                                  default
in the payment of the then unpaid principal of any Bond of any Class on the
Final Legal Maturity Date for such Class; or

 

(iii)                               default
in the payment of the Optional Redemption Price for any Bond on the Redemption
Date therefor; or

 

(iv)                              (a) default
in the observance or performance of any covenant or agreement of the Issuer
made in this Indenture (other than those specifically described in clauses (i)-(iii)
above), or (b) any representation or warranty of the Issuer made in this
Indenture or in any certificate or other writing delivered pursuant hereto or
in connection herewith proving to have been incorrect in any material respect
as of the time when the same shall have been made, which, in either case,
materially adversely affects Holders, and such default shall continue or not be
cured, or the circumstance or condition in respect of which such
misrepresentation or warranty was incorrect shall not have been eliminated or
otherwise cured, for a period of thirty (30) days after there shall have been
given, by registered or certified mail, return receipt requested, to the Issuer
by the Trustee or to the Issuer and the Trustee by the Holders of at least
twenty-five percent (25%) of the Outstanding Amount of the Bonds, a written
notice specifying such default or incorrect representation or warranty and
requiring it to be remedied and stating that such notice is a “Notice of
Default” hereunder; or

 

34

 

(v)                                 the
filing of a decree or order for relief by a court having jurisdiction in the
premises in respect of the Issuer or any substantial part of the Collateral in
an involuntary case or Proceeding under any applicable federal or state
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Issuer or the Issuer’s property or for any substantial
part of the Collateral, or ordering the winding-up or liquidation of the Issuer’s
affairs, and such decree or order shall remain unstayed and in effect for a
period of ninety (90) consecutive days; or

 

(vi)                              the
commencement by the Issuer of a voluntary case or Proceeding under any
applicable federal or state bankruptcy, insolvency or other similar law now or
hereafter in effect, or the consent by the Issuer to the entry of an order for
relief in an involuntary case under any such law, or the consent by the Issuer
to the appointment or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or for any
substantial part of the Collateral, or the making by the Issuer of any
assignment for the benefit of creditors, or the failure by the Issuer generally
to pay its debts as such debts become due; or

 

(vii)                           a
breach by the State of California or any of its agencies (including the CPUC)
of the pledge set forth in Section 848.1(g) of the PU Code (the “State
Pledge”).

 

The Issuer shall deliver to a Responsible Officer of
the Trustee and the Rating Agencies, within five (5) days after an
Authorized Officer has knowledge of the occurrence thereof, written notice in
the form of an Officer’s Certificate of any event which with the giving of
notice and the lapse of time would become an Event of Default under clause
(iv), its status and what action the Issuer is taking or proposes to take with
respect thereto.

 

SECTION 5.02.  Acceleration
of Maturity; Rescission and Annulment. 
If an Event of Default should occur and be continuing (other than an
Event of Default under Section 5.01(vii)), then and in every such case the
Trustee or the Holders of Bonds representing not less than a majority of the
Outstanding Amount of the Bonds may declare all the Bonds to be immediately due
and payable, by a notice in writing to the Issuer (and to the Trustee if given
by Bondholders), and upon any such declaration the unpaid principal amount of
the Bonds, together with accrued and unpaid interest thereon through the date
of acceleration, shall become immediately due and payable.

 

Upon acceleration of the principal of the Bonds,
payments under this Indenture, including interest on and principal of the
Bonds, will be made in accordance with the priority set forth in Section 8.02(d).

 

At any time after such declaration of acceleration of
maturity has been made and before a judgment or decree for payment of the money
due has been obtained by the Trustee as hereinafter in this Article V
provided, the Holders of Bonds representing a majority of the Outstanding
Amount of the Bonds, by written notice to the Issuer and the Trustee, may
rescind and annul such declaration and its consequences if:

 

(i)                                     the
Issuer has paid or deposited with the Trustee a sum sufficient to pay

 

35

 

(A)                              all
payments of principal of and premium, if any, and interest on all Bonds and all
other amounts that would then be due hereunder or upon such Bonds if the Event
of Default giving rise to such acceleration had not occurred; and

 

(B)                                all
amounts paid or advanced by the Trustee hereunder and the reasonable
compensation, expenses, disbursements and advances of the Trustee and its
agents and counsel; and

 

(ii)                                  all
Events of Default, other than the nonpayment of the principal of the Bonds that
has become due solely by such acceleration, have been cured or waived as
provided in Section 5.12.

 

No such rescission shall affect any subsequent default
or impair any right consequent thereto.

 

SECTION 5.03.  Collection
of Indebtedness and Suits for Enforcement by Trustee.  (a)  The Issuer covenants that if
(i) default is made in the payment of any interest on any Bond when the same
becomes due and payable, and such default continues for a period of
five (5) days, (ii) default is made in the payment of the then unpaid
principal of any Bond on the Final Legal Maturity Date for such Bond or (iii) default
is made in the payment of the Optional Redemption Price for any Bond on the
Redemption Date therefor, the Issuer will, upon demand of the Trustee, pay to
it, for the benefit of the Holders of the Bonds, the whole amount then due and
payable on such Bonds for principal, premium, if any, and interest, and in
addition thereto such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee and its agents and counsel.

 

(b)                                 Subject
to Section 11.18, in case the Issuer shall fail forthwith to pay such
amounts upon such demand, the Trustee, in its own name and as trustee of an
express trust, may institute a Proceeding for the collection of the sums so due
and unpaid, and may prosecute such Proceeding to judgment or final decree, and
may enforce the same against the Issuer or other obligor upon such Bonds and
collect in the manner provided by law out of the Collateral, wherever situated,
the moneys adjudged or decreed to be payable.

 

(c)                                  If
an Event of Default occurs and is continuing, the Trustee may, as more
particularly provided in Section 5.04, in its discretion, proceed to
protect and enforce its rights and the rights of the Bondholders, by such
appropriate Proceedings as the Trustee shall deem most effective to protect and
enforce any such rights, whether for the specific enforcement of any covenant
or agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy or legal or equitable right
vested in the Trustee by this Indenture or by law.

 

(d)                                 In
case there shall be pending, relative to the Issuer or any other obligor upon
the Bonds or any Person having or claiming an ownership interest in the Collateral,
Proceedings under Title 11 of the United States Code or any other
applicable federal or state bankruptcy, insolvency or other similar law, or in
case a receiver, assignee, trustee in

 

36

 

bankruptcy,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Issuer or its property or such other obligor or Person,
or in case of any other comparable judicial Proceedings relative to the Issuer
or other obligor upon the Bonds, or to the creditors or property of the Issuer
or such other obligor, the Trustee, irrespective of whether the principal of
any Bonds shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
pursuant to the provisions of this Section, shall be entitled and empowered, by
intervention in such Proceedings or otherwise:

 

(i)                                     to
file and prove a claim for the whole amount of principal, premium, if any, and interest
owing and unpaid in respect of the Bonds and to file such other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for reasonable compensation to the Trustee and
each predecessor Trustee, and their respective agents, attorneys and counsel,
and for reimbursement of all expenses and liabilities incurred, and all
advances made, by the Trustee and each predecessor Trustee, except as a result
of negligence or bad faith) and of the Bondholders allowed in such Proceedings;

 

(ii)                                  unless
prohibited by applicable law and regulations, to vote on behalf of the Holders
of Bonds in any election of a trustee, a standby trustee or Person performing
similar functions in any such Proceedings; and

 

(iii)                               to
collect and receive any moneys or other property payable or deliverable on any
such claims and to distribute all amounts received with respect to the claims
of the Bondholders and of the Trustee on their behalf;

 

and any trustee, receiver, liquidator, custodian or
other similar official in any such Proceeding is hereby authorized by each of
such Bondholders to make payments to the Trustee, and, in the event that the
Trustee shall consent to the making of payments directly to such Bondholders,
to pay to the Trustee such amounts as shall be sufficient to cover reasonable
compensation to the Trustee, each predecessor Trustee and their respective
agents, attorneys and counsel, and all other expenses and liabilities incurred,
and all advances made, by the Trustee and each predecessor Trustee except as a
result of negligence or bad faith.

 

(e)                                  Nothing
herein contained shall be deemed to authorize the Trustee to authorize or
consent to or vote for or accept or adopt on behalf of any Bondholder any plan
of reorganization, arrangement, adjustment or composition affecting the Bonds
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Bondholder in any such proceeding except, as
aforesaid, to vote for the election of a trustee in bankruptcy or similar
Person.

 

(f)                                    All
rights of action and of asserting claims under this Indenture, or under any of
the Bonds, may be enforced by the Trustee without the possession of any of the
Bonds or the production thereof in any trial or other Proceedings relative
thereto, and any such action or other Proceedings instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery of judgment, subject to the payment of the expenses, disbursements and
compensation of the Trustee, each predecessor Trustee and their respective

 

37

 

agents and
attorneys, shall be for the ratable benefit of the Holders of the Bonds.  In the case of a default in the payment of
principal of and interest on the Bonds when and as the same shall become due
and payable hereunder (including all grace periods), the Trustee shall be
entitled to recover judgment against the Issuer for the whole amount of such
principal and interest and to file proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee and the Holders allowed in any judicial proceedings relative to the
Issuer, its creditors or the Collateral.

 

(g)                                 In
any Proceedings brought by the Trustee (and also any Proceedings involving the
interpretation of any provision of this Indenture to which the Trustee shall be
a party), the Trustee shall be held to represent all the Holders of the Bonds,
and it shall not be necessary to make any Bondholder a party to any such
Proceedings.

 

SECTION 5.04.  Remedies;
Priorities.  (a)  If an
Event of Default shall have occurred and be continuing, the Trustee may do one
or more of the following (subject to Section 5.05):

 

(i)                                     institute
Proceedings in its own name and as trustee of an express trust for the
collection of all amounts then payable on the Bonds or under this Indenture
with respect thereto, whether by declaration or otherwise, enforce any judgment
obtained, and collect from the Collateral moneys adjudged due;

 

(ii)                                  institute
Proceedings from time to time for the complete or partial foreclosure of this
Indenture with respect to the Collateral;

 

(iii)                               exercise
any remedies of a secured party under the CUCC or the Statute and take any
other appropriate action to protect and enforce the rights and remedies of the
Trustee and the Holders of the Bonds;

 

(iv)                              sell
the Collateral or any portion thereof or rights or interest therein, at one or
more public or private sales called and conducted in any manner permitted by
law; and

 

(v)                                 exercise
all rights, remedies, powers, privileges and claims of the Issuer against the
Seller or the Servicer under or in connection with the Sale Agreement or the
Servicing Agreement with respect to the Recovery Property;

 

provided, however, that the
Trustee may not sell or otherwise liquidate any portion of the Collateral
following an Event of Default, other than an Event of Default described in Section 5.01(i),
(ii) or (iii), unless (A) the Holders of one hundred percent (100%) of the
Outstanding Amount of the Bonds consent thereto, or (B) the proceeds of such
sale or liquidation distributable to the Bondholders, together with all other
funds available for such purpose, are sufficient to discharge in full all
amounts then due and unpaid upon such Bonds for principal, premium, if any, and
interest after taking into account payment of all amounts due prior thereto
pursuant to the priorities set forth in Section 8.02(d), or (C) the
Trustee determines that the Collateral will not continue to provide sufficient
funds for all payments on the Bonds as they would have become due if the Bonds
had not been declared due and payable, and the Trustee obtains the consent of
Holders of sixty-six and two-thirds percent (66-2/3%) of the Outstanding Amount
of the Bonds.  In determining such
sufficiency or insufficiency with respect to clause (B)

 

38

 

and (C), the Trustee may, but need not, obtain and
conclusively rely upon a certificate of an Independent investment banking or
accounting firm of national reputation as to the feasibility of such proposed
action and as to the sufficiency of the Collateral for such purpose.

 

(b)                                 If
an Event of Default under clause (vii) of Section 5.01 shall have occurred
and be continuing, the Trustee, for the benefit of the Holders, shall be
entitled and empowered to the extent permitted by applicable law, to institute
or participate in Proceedings necessary to compel performance of or to enforce
the State Pledge and to collect any monetary damages incurred by the Holders or
the Trustee as a result of any such Event of Default, and may prosecute any
such Proceeding to final judgment or decree.

 

(c)                                  If
the Trustee collects any money pursuant to this Article V, it shall pay
out such money in accordance with the priorities set forth in Section 8.02(d).

 

SECTION 5.05.  Optional
Preservation of the Collateral.  If
the Bonds have been declared to be due and payable under Section 5.02
following an Event of Default and such declaration and its consequences have
not been rescinded and annulled, the Trustee may, but need not, elect to
maintain possession of the Collateral. 
It is the desire of the parties hereto and the Bondholders that there be
at all times sufficient funds for the payment of principal of and premium, if
any, and interest on the Bonds, and the Trustee shall take such desire into
account when determining whether or not to maintain possession of the
Collateral.  In determining whether to
maintain possession of the Collateral, the Trustee may, but need not, obtain
and conclusively rely upon a certificate of an Independent investment banking
or accounting firm of national reputation as to the feasibility of such
proposed action and as to the sufficiency of the Collateral for such purpose.

 

SECTION 5.06.  Limitation
of Suits.  No Holder of any Bond
shall have any right to institute any Proceeding, judicial or otherwise, with
respect to this Indenture, or for the appointment of a receiver or trustee, or
for any other remedy hereunder, unless:

 

(i)                                     such
Holder previously has given written notice to the Trustee of a continuing Event
of Default;

 

(ii)                                  the
Holders of not less than a majority of the Outstanding Amount of the Bonds have
made written request to the Trustee to institute such Proceeding in respect of
such Event of Default in its own name as Trustee hereunder;

 

(iii)                               such
Holder or Holders have offered to the Trustee security or indemnity reasonably
satisfactory to it against the costs, expenses and liabilities to be incurred
in complying with such request;

 

(iv)                              the
Trustee for sixty (60) days after its receipt of such notice, request and offer
of indemnity has failed to institute such Proceedings; and

 

(v)                                 no
direction inconsistent with such written request has been given to the Trustee
during such 60-day period by the Holders of a majority of the Outstanding
Amount of the Bonds;

 

39

 

it being understood and intended that no one or more
Holders of Bonds shall have any right in any manner whatever by virtue of, or
by availing of, any provision of this Indenture to affect, disturb or prejudice
the rights of any other Holders of Bonds or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under
this Indenture, except in the manner herein provided.

 

In the event the Trustee shall receive conflicting or
inconsistent requests and indemnity from two or more groups of Holders of
Bonds, each representing less than a majority of the Outstanding Amount of the
Bonds, the Trustee in its sole discretion may determine what action, if any,
shall be taken, notwithstanding any other provisions of this Indenture.

 

SECTION 5.07.  Unconditional
Rights of Bondholders To Receive Principal, Premium, if any, and Interest.  Notwithstanding any other provisions in this
Indenture, the Holder of any Bond shall have the right, which is absolute and
unconditional,  (a) to receive
payment of (i) the interest, if any, on such Bond on the due dates thereof
expressed in such Bond or in this Indenture, (ii) the unpaid principal, if
any, of such Bonds on the Final Legal Maturity Date therefor or (iii) in
the case of redemption, receive payment of the unpaid principal and premium, if
any, and interest, if any, on such Bond on the Redemption Date therefor and (b)
to institute suit for the enforcement of any such payment, and such right shall
not be impaired without the consent of such Holder.

 

SECTION 5.08.  Restoration
of Rights and Remedies.  If the
Trustee or any Bondholder has instituted any Proceeding to enforce any right or
remedy under this Indenture and such Proceeding has been discontinued or
abandoned for any reason or has been determined adversely to the Trustee or to
such Bondholder, then and in every such case the Issuer, the Trustee and the
Bondholders shall, subject to any determination in such Proceeding, be restored
severally and respectively to their former positions hereunder, and thereafter
all rights and remedies of the Trustee and the Bondholders shall continue as
though no such Proceeding had been instituted.

 

SECTION 5.09.  Rights
and Remedies Cumulative.  No right or
remedy herein conferred upon or reserved to the Trustee or to the Bondholders
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at
law or in equity or otherwise.  The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.

 

SECTION 5.10.  Delay
or Omission Not a Waiver.  No delay
or omission of the Trustee or any Bondholder to exercise any right or remedy
accruing upon any Default or Event of Default shall impair any such right or
remedy or constitute a waiver of any such Default or Event of Default or an
acquiescence therein.  Every right and
remedy given by this Article V or by law to the Trustee or to the
Bondholders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Bondholders, as the case may be.

 

SECTION 5.11.  Control
by Bondholders.  The Holders of a
majority of the Outstanding Amount of the Bonds (or, if less than all Classes
are affected, the affected Class or

 

40

 

Classes) shall
have the right to direct the time, method and place of conducting any
Proceeding for any remedy available to the Trustee with respect to the Bonds or
the Bonds of such Class or Classes or exercising any trust or power conferred
on the Trustee with respect to the Bonds or the Bonds of such Class or Classes;
provided, that

 

(i)                                     such
direction shall not be in conflict with any rule of law or with this Indenture;

 

(ii)                                  subject
to the express terms of Section 5.04, any direction to the Trustee to sell
or liquidate the Collateral shall be by the Holders of Bonds representing not
less than one hundred percent (100%) of the Outstanding Amount of the Bonds;

 

(iii)                               if
the conditions set forth in Section 5.05 have been satisfied and the
Trustee elects to retain the Collateral pursuant to such Section, then any
direction to the Trustee by Holders of Bonds representing less than one hundred
percent (100%) of the Outstanding Amount of the Bonds to sell or liquidate the
Collateral shall be of no force and effect; and

 

(iv)                              the
Trustee may take any other action deemed proper by the Trustee that is not
inconsistent with such direction;

 

provided, however, that,
subject to Section 6.01, the Trustee need not take any action that it
determines might involve it in liability or might materially adversely affect
the rights of any Bondholders not consenting to such action.

 

SECTION 5.12.  Waiver
of Past Defaults.  Prior to the
declaration of the acceleration of the maturity of the Bonds as provided in Section 5.02,
the Holders of Bonds of not less than a majority of the Outstanding Amount of
the Bonds may waive any past Default or Event of Default and its consequences
except a Default (a) in payment of principal of or premium, if any, or interest
on any of the Bonds on the Final Legal Maturity Date or (b) in respect of a
covenant or provision hereof which cannot be modified or amended without the
waiver or consent of the Holder of each Bond of each Class affected.  In the case of any such waiver, the Issuer,
the Trustee and the Holders of the Bonds shall be restored to their former
positions and rights hereunder, respectively; but no such waiver shall extend
to any subsequent or other Default or Event of Default or impair any right
consequent thereto.

 

Upon any such waiver, such Default shall cease to
exist and be deemed to have been cured and not to have occurred, and any Event of
Default arising therefrom shall be deemed to have been cured and not to have
occurred, for every purpose of this Indenture.

 

SECTION 5.13.  Undertaking
for Costs.  All parties to this
Indenture agree, and each Holder of any Bond by such Holder’s acceptance
thereof shall be deemed to have agreed, that any court may in its discretion
require, in any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken or omitted
by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys’ fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section

 

41

 

shall not apply to
(a) any suit instituted by the Trustee, (b) any suit instituted by any
Bondholder, or group of Bondholders, in each case holding in the aggregate more
than 10 percent (10%) of the Outstanding Amount of the Bonds or (c) any
suit instituted by any Bondholder for the enforcement of the payment of
(i) interest on any Bond on or after the due dates expressed in such Bond
and in this Indenture, (ii) the unpaid principal, if any, of any Bond on
or after the Final Legal Maturity Date therefor or (iii) in the case of
redemption, the unpaid principal of and premium, if any, and interest on any
Bond on or after the Redemption Date therefor.

 

SECTION 5.14.  Waiver
of Stay or Extension Laws.  The
Issuer covenants (to the extent that it may lawfully do so) that it will not at
any time insist upon, or plead or in any manner whatsoever, claim or take the
benefit or advantage of, any stay or extension law wherever enacted, now or at
any time hereafter in force, that may affect the covenants or the performance
of this Indenture; and the Issuer (to the extent that it may lawfully do so)
hereby expressly waives all benefit or advantage of any such law, and covenants
that it will not hinder, delay or impede the execution of any power herein
granted to the Trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.

 

SECTION 5.15.  Action
on Bonds.  The Trustee’s right to
seek and recover judgment on the Bonds or under this Indenture shall not be
affected by the seeking, obtaining or application of any other relief under or
with respect to this Indenture.  Neither
the lien of this Indenture nor any rights or remedies of the Trustee or the
Bondholders shall be impaired by the recovery of any judgment by the Trustee
against the Issuer or by the levy of any execution under such judgment upon any
portion of the Collateral.

 

SECTION 5.16.  Performance
and Enforcement of Certain Obligations. 
(a)  Promptly following a request from the Trustee to do so
and at the Issuer’s expense, the Issuer agrees to take all such lawful action
as the Trustee may request to compel or secure the performance and observance
by the Seller and the Servicer, as applicable, of each of their obligations to
the Issuer under or in connection with the Sale Agreement and the Servicing
Agreement with respect to the Recovery Property, respectively, in accordance
with the terms thereof, and to exercise any and all rights, remedies, powers
and privileges lawfully available to the Issuer under or in connection with the
Sale Agreement and the Servicing Agreement, respectively, to the extent and in
the manner directed by the Trustee, including the transmission of notices of
default on the part of the Seller or the Servicer thereunder and the
institution of legal or administrative actions or proceedings to compel or
secure performance by the Seller or the Servicer of each of their obligations
under the Sale Agreement and the Servicing Agreement with respect to the
Recovery Property, respectively.

 

(b)                                 If
an Event of Default has occurred, the Trustee may, and, at the direction (which
direction shall be in writing or by telephone (confirmed in writing promptly
thereafter)) of the Holders of sixty-six and two-thirds percent (66-2/3%) of
the Outstanding Amount of the Bonds shall, subject to Article VI, exercise
all rights, remedies, powers, privileges and claims of the Issuer against the
Seller or the Servicer under or in connection with the Sale Agreement or the
Servicing Agreement with respect to the Recovery Property, respectively,
including the right or power to take any action to compel or secure performance
or observance by the Seller or the Servicer of each of their obligations to the
Issuer thereunder and to give any consent, request,

 

42

 

notice, direction,
approval, extension or waiver under the Sale Agreement or the Servicing
Agreement, respectively, and any right of the Issuer to take such action shall
be suspended.

 

ARTICLE VI

THE TRUSTEE

 

SECTION 6.01.  Duties
of Trustee.  (a)  If an
Event of Default has occurred and is continuing, the Trustee shall exercise the
rights and powers vested in it by this Indenture 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.

 

(b)                                 Except
during the continuance of an Event of Default:

 

(i)                                     the
Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and

 

(ii)                                  in
the absence of bad faith on its part, the Trustee may conclusively rely, as to
the truth of the statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the Trustee and conforming
to the requirements of this Indenture; however, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to the
requirements of this Indenture.

 

(c)                                  The
Trustee may not be relieved from liability for its own negligent action, its
own negligent failure to act or its own willful misconduct, except that:

 

(i)                                     this
paragraph does not limit the effect of paragraph (b) of this Section;

 

(ii)                                  the
Trustee shall not be liable for any error of judgment made in good faith by a
Responsible Officer unless it is proved that the Trustee was negligent in
ascertaining the pertinent facts; and

 

(iii)                               the
Trustee shall not be liable with respect to any action it takes or omits to
take in good faith in accordance with a direction received by it pursuant to Section 5.11.

 

(d)                                 Every
provision of this Indenture that in any way relates to the Trustee is subject
to paragraphs (a), (b) and (c) of this Section.

 

(e)                                  The
Trustee shall not be liable for interest on any money received by it except as
the Trustee may agree in writing with the Issuer.

 

(f)                                    Money
held in trust by the Trustee need not be segregated from other funds except to
the extent required by law or the terms of this Indenture, the Sale Agreement
or the Servicing Agreement.

 

43

 

(g)                                 No
provision of this Indenture shall require the Trustee 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, if it shall
have reasonable grounds to believe that repayments of such funds or indemnity
satisfactory to it against such risk or liability is not reasonably assured to
it.

 

(h)                                 Every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Section and to the provisions of the TIA.

 

(i)                                     In
the event that the Trustee is also acting as Paying Agent or Bond Registrar
hereunder, the protections of this Article VI shall also be afforded to
such Paying Agent or Bond Registrar.

 

SECTION 6.02.  Rights
of Trustee.  (a)  The
Trustee may conclusively rely and shall be fully protected in relying on any
document believed by it to be genuine and to have been signed or presented by
the proper person.  The Trustee need not
investigate any fact or matter stated in the document.

 

(b)                                 Before
the Trustee acts or refrains from acting, it may require an Officer’s
Certificate or an Opinion of Counsel. 
The Trustee shall not be liable for any action it takes or omits to take
in good faith in reliance on the Officer’s Certificate or Opinion of Counsel.

 

(c)                                  The
Trustee may execute any of the trusts or powers hereunder or perform any duties
hereunder either directly or by or through agents or attorneys or a custodian
or nominee, and the Trustee shall not be responsible for any misconduct or
negligence on the part of, or for the supervision of, any such agent (other
than its employees), attorney, custodian or nominee appointed with due care by
it hereunder.

 

(d)                                 The
Trustee shall not be liable for any action it takes or omits to take in good
faith which it believes to be authorized or within its rights or powers; provided,
however, that the Trustee’s conduct does not constitute willful
misconduct, negligence or bad faith.

 

(e)                                  The
Trustee may consult with counsel, and the advice or opinion of counsel with
respect to legal matters relating to this Indenture and the Bonds shall be full
and complete authorization and protection from liability in respect to any
action taken, omitted or suffered by it hereunder in good faith and in
accordance with the advice or opinion of such counsel.

 

SECTION 6.03.  Individual
Rights of Trustee.  The Trustee in
its individual or any other capacity may become the owner or pledgee of Bonds
and may otherwise deal with the Issuer or its affiliates with the same rights
it would have if it were not Trustee. 
Any Paying Agent, Bond Registrar, co-registrar or co-paying agent may do
the same with like rights.  However, the
Trustee must comply with Sections 6.11 and 6.12.

 

SECTION 6.04.  Trustee’s
Disclaimer.  The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Bonds, it shall not be accountable for the Issuer’s use
of the proceeds from the Bonds, and it shall not be

 

44

 

responsible for
any statement of the Issuer in this Indenture or in any document issued in
connection with the sale of the Bonds or in the Bonds other than the Trustee’s
certificate of authentication.

 

SECTION 6.05.  Notice
of Defaults.  If a Default or Event
of Default occurs and is continuing and if it is actually known to a
Responsible Officer of the Trustee, the Trustee shall mail, as required by TIA Section 313(c),
to each Holder of Bonds notice of the Default or Event of Default within ninety
(90) days after it occurs.  Except in the
case of a Default or Event of Default in payment of principal of and premium,
if any, or interest on any Bond, the Trustee may withhold the notice if and so
long as a committee of its Responsible Officers in good faith determines that
withholding the notice is in the interests of Bondholders.

 

SECTION 6.06.  Reports
by Trustee to Holders.

 

(a)                                  So
long as Bonds are Outstanding and the Trustee is the Bond Registrar and Paying
Agent, within the prescribed period of time for tax reporting purposes after
the end of each calendar year, the Trustee shall mail to each Person that was a
Holder during all or part of that calendar year a statement containing such
information concerning the Bonds as may be required to enable such Holders to
prepare its federal and state income tax returns.

 

(b)                                 On
or prior to each Payment Date or Special Payment Date therefor, the Trustee
will deliver to each Holder of Bonds as of the Record Date for such Payment
Date or Special Payment Date and the CPUC a statement as provided and prepared
by the Servicer which will include (to the extent applicable) the following information
as to the Bonds with respect to such Payment Date, Special Payment Date or the
period since the previous Payment Date, as applicable:

 

(i)                                     the
amount paid to Holders in respect of principal;

 

(ii)                                  the
amount paid to Holders in respect of interest;

 

(iii)                               the
aggregate Outstanding Amount of the Bonds, after giving effect to payments to
be made in respect of principal reported under (i) above; and

 

(iv)                              the
difference, if any, between the amount specified in subsection (iii) above
and the principal amount scheduled to be outstanding on that Payment Date
according to the Expected Amortization Schedule.

 

(c)                                  The
Issuer shall send a copy of each of the Certificate of Compliance delivered to
it pursuant to Section 3.03 of the Servicing Agreement with respect to the
Recovery Property and the Annual Accountant’s Report delivered to it pursuant
to Section 3.04 of the Servicing Agreement with respect to the Recovery
Property to the Rating Agencies and the CPUC. 
A copy of such certificate and report may be obtained by any Bondholder
by a request in writing to the Trustee.

 

45

 

SECTION 6.07.  Compensation
and Indemnity.

 

(a)                                  The
Issuer shall pay to the Trustee from time to time reasonable compensation for
its services.  The Trustee’s compensation
shall not be limited by any law on compensation of a trustee of an express
trust.  The Issuer shall reimburse the
Trustee for all reasonable out-of-pocket expenses incurred or made by it in
connection with the Bonds, including costs of collection, in addition to the
compensation for its services.  Such
expenses shall include the reasonable compensation and expenses, disbursements
and advances of the Trustee’s agents, counsel, accountants and experts.

 

(b)                                 The
Issuer shall indemnify the Trustee and its officers, directors, employees and
agents against any and all loss, liability or expense (including attorneys’
fees and expenses) incurred by it in connection with the administration of this
trust and the performance of its duties hereunder.  The Trustee shall notify the Issuer as soon
as is reasonably practicable of any claim for which it may seek indemnity.  Failure by the Trustee to so notify the Issuer
shall not relieve the Issuer of its obligations hereunder.  The Issuer shall defend the claim and the
Trustee may have separate counsel and the Issuer shall pay the fees and
expenses of such counsel.

 

(c)                                  Notwithstanding
any other provision of this Indenture, the Issuer need not reimburse any
expense or indemnify against any loss, liability or expense incurred by the
Trustee through the Trustee’s own willful misconduct, negligence or bad faith.

 

(d)                                 The
Issuer’s payment obligations to the Trustee pursuant to this Section shall
survive the discharge of this Indenture or the earlier resignation or removal
of the Trustee.  When the Trustee incurs
expenses after the occurrence of a Default specified in Section 5.01(v) or
(vi) with respect to the Issuer, the expenses are intended to constitute
expenses of administration under Title 11 of the United States Code or any
other applicable federal or state bankruptcy, insolvency or similar law.

 

SECTION 6.08.  Resignation;
Replacement of Trustee.  The Trustee
may resign at any time upon thirty (30) days’ written notice to the Issuer, provided
that no such resignation shall be effective until a successor trustee having
the qualifications set forth in Section 6.11 has been designated and has
accepted such trusteeship.  The Holders
of a majority in Outstanding Amount of the Bonds may remove the Trustee by so
notifying the Issuer and the Trustee and may appoint a successor Trustee.  The Issuer shall remove the Trustee if:

 

(i)                                     the
Trustee fails to comply with Section 6.11;

 

(ii)                                  the
Trustee is adjudged a bankrupt or insolvent;

 

(iii)                               a
receiver or other public officer takes charge of the Trustee or its property;
or

 

(iv)                              the
Trustee otherwise becomes incapable of acting.

 

If the Trustee resigns or is removed or if a vacancy
exists in the office of Trustee for any reason (the Trustee in such event being
referred to herein as the retiring Trustee), the Issuer shall promptly appoint
a successor Trustee.

 

46

 

A successor Trustee shall deliver a written acceptance
of its appointment to the retiring Trustee and to the Issuer.  Thereupon the resignation or removal of the
retiring Trustee shall become effective, and the successor Trustee shall have
all the rights, powers and duties of the Trustee under this Indenture.  The successor Trustee shall mail a notice of
its succession to Bondholders.  The
retiring Trustee shall promptly transfer all property held by it as Trustee to
the successor Trustee.

 

If a successor Trustee does not take office within
sixty (60) days after the retiring Trustee resigns or is removed, the
retiring Trustee or the Holders of a majority in Outstanding Amount of the
Bonds may petition any court of competent jurisdiction for the appointment of a
successor Trustee.

 

If the Trustee fails to comply with Section 6.11,
any Bondholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.

 

Notwithstanding the replacement of the Trustee
pursuant to this Section, the Issuer’s obligations under Section 6.07
shall continue for the benefit of the retiring Trustee.

 

SECTION 6.09.  Successor
Trustee by Merger.  If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation or banking
association without any further act shall be the successor Trustee.

 

In case at the time such successor by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Bonds shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Bonds so
authenticated; and in case at that time any of the Bonds shall not have been
authenticated, any successor to the Trustee may authenticate such Bonds either
in the name of any predecessor hereunder or in the name of the successor to the
Trustee; and in all such cases such certificates shall have the full force
which it is anywhere in the Bonds or in this Indenture provided that the
certificate of the Trustee shall have.

 

SECTION 6.10.  Appointment
of Co-Trustee or Separate Trustee.  (a)  Notwithstanding
any other provisions of this Indenture, at any time the Trustee shall have the
power and may execute and deliver all instruments to appoint one or more
Persons to act as a co-trustee, or separate trustee, and to vest in such
Persons, in such capacity and for the benefit of the Bondholders, such title to
the Collateral, or any part hereof, and, subject to the other provisions of
this Section, such powers, duties, obligations, rights and trusts as the
Trustee may consider necessary or desirable. 
No co-trustee or separate trustee hereunder shall be required to meet
the terms of eligibility as a successor trustee under Section 6.11 and no
notice to Bondholders of the appointment of any co-trustee or separate trustee
shall be required under Section 6.08 hereof.

 

(b)                                 Every
separate trustee and co-trustee shall, to the extent permitted by law, be
appointed and act subject to the following provisions and conditions:

 

47

 

(i)                                     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 (it being understood that such separate
trustee or co-trustee is not authorized to act separately without the Trustee
joining in such act), except to the extent that under any law of any
jurisdiction in which any particular act is to be performed the Trustee shall
be incompetent or unqualified to perform such act, in which event such rights,
powers, duties and obligations (including the holding of title to the
Collateral or any portion thereof in any such jurisdiction) shall be exercised
and performed singly by such separate trustee or co-trustee, but solely at the
direction of the Trustee;

 

(ii)                                  no
trustee hereunder shall be personally liable by reason of any act or omission
of any other trustee hereunder; and

 

(iii)                               the
Trustee may at any time accept the resignation of or remove any separate
trustee or co-trustee.

 

(c)                                  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 Indenture and the conditions of this Article VI.  Each separate trustee and co-trustee, upon
its acceptance of the trusts 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 Indenture, specifically including every provision of this
Indenture relating to the conduct of, affecting the liability of, or affording
protection to, the Trustee.  Every such
instrument shall be filed with the Trustee.

 

(d)                                 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 Indenture 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 6.11.  Eligibility;
Disqualification.  The Trustee shall
at all times satisfy the requirements of TIA 310(a) and Section 26(a)(i)
of the Investment Company Act of 1940. 
The Trustee shall have a combined capital and surplus of at least
$50,000,000 as set forth in its most recent published annual report of
condition and it shall have a long term debt rating of “Baa3” or better by
Moody’s and “BBB-” or better by Standard and Poor’s and Fitch.  The Trustee shall comply with
TIA 310(b), including the optional provision permitted by the
second sentence of TIA 310(b)(9); provided, however,
that there shall be excluded from the operation of TIA 310(b)(1)
any indenture or indentures under which other securities of the Issuer are
outstanding if the requirements for such exclusion set forth in TIA 310(b)(1)
are met.

 

SECTION 6.12.  Preferential
Collection of Claims Against Issuer. 
The Trustee shall comply with TIA 311(a), excluding any
creditor relationship listed in TIA 311(b). 
A

 

48

 

Trustee who has
resigned or been removed shall be subject to TIA 311(a) to the extent provided
therein.

 

SECTION 6.13.  Representations
and Warranties of Trustee.  The
initial Trustee hereby represents and warrants that:

 

(a)                                  The
Trustee is a national bank, validly existing and in good standing under the
laws of the United States of America; and

 

(b)                                 The
Trustee has full power, authority and legal rights to execute, deliver and
perform this Indenture and the Basic Documents to which the Trustee is a party
and has taken all necessary action to authorize the execution, delivery, and
performance by it of this Indenture and such Basic Documents.

 

ARTICLE VII

BONDHOLDERS’ LISTS AND REPORTS

 

SECTION 7.01.  Issuer
To Furnish Trustee Names and Addresses of Bondholders.  The Issuer will furnish or cause to be
furnished to the Trustee (a) not more than five days after the earlier of
(i) each Record Date and (ii) three months after the last Record
Date, a list, in such form as the Trustee may reasonably require, of the names
and addresses of the Holders of Bonds as of such Record Date, and (b) at
such other times as the Trustee may request in writing, within 30 days
after receipt by the Issuer of any such request, a list of similar form and
content as of a date not more than ten (10) days prior to the time such
list is furnished; provided, however, that so long as the Trustee
is the Bond Registrar, no such list shall be required to be furnished.

 

SECTION 7.02.  Preservation
of Information; Communications to Bondholders.  (a)  The Trustee shall preserve, in
as current a form as is reasonably practicable, the names and addresses of the
Holders of Bonds contained in the most recent list furnished to the Trustee as
provided in Section 7.01 and the names and addresses of Holders of Bonds
received by the Trustee in its capacity as Bond Registrar.  The Trustee may destroy any list furnished to
it as provided in Section 7.01 upon receipt of a new list so furnished.

 

(b)                                 Bondholders
may communicate pursuant to TIA 312(b) with other Bondholders with respect to
their rights under this Indenture or under the Bonds.  In addition, upon the written request of any
Holder or group of Holders evidencing not less than ten percent (10%) of the
Outstanding Amount of the Bonds, the Trustee shall provide the Holder or
Holders the current list of Holders for purposes of communicating with other
Holders with respect to their rights hereunder.

 

(c)                                  The
Issuer, the Trustee and the Bond Registrar shall have the protection of TIA
312(c).

 

49

 

SECTION 7.03.  Reports
by Issuer.  (a)  The Issuer
shall:

 

(i)                                     so
long as the Issuer is required to file such documents with the SEC, file with the
Trustee, within fifteen (15) days after the Issuer is required to file the
same with the SEC, copies of the annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the SEC may from time to time by rules and regulations prescribe) which the
Issuer may be required to file with the SEC pursuant to Section 13 or
15(d) of the Exchange Act;

 

(ii)                                  file
with the Trustee and the SEC in accordance with rules and regulations
prescribed from time to time by the SEC such additional information, documents
and reports with respect to compliance by the Issuer with the conditions and
covenants of this Indenture as may be required from time to time by such rules
and regulations; and

 

(iii)                               supply
to the Trustee (and the Trustee shall transmit by mail to all Bondholders
described in TIA 313(c)) such summaries of any information, documents and
reports required to be filed by the Issuer pursuant to clauses (i) and
(ii) of this Section 7.03(a) as may be required by rules and regulations
prescribed from time to time by the SEC.

 

(b)                                 Unless
the Issuer otherwise determines, the fiscal year of the Issuer shall end on December 31
of each year.

 

SECTION 7.04.  Reports
by Trustee.  If required by
TIA 313(a), within sixty (60) days after September 30 of
each year, commencing with the year after the issuance of the Bonds, the
Trustee shall mail to each Holder of Bonds as required by
TIA 313(c) a brief report dated as of such date that complies with
TIA 313(a).  The Trustee
also shall comply with TIA 313(b); provided, however,
that the initial report so issued shall be delivered not more than
12 months after the initial issuance of the Bonds.

 

A copy of each report at the time of its mailing to Bondholders
shall be filed by the Trustee with the SEC and each stock exchange, if any, on
which the Bonds are listed.  The Issuer
shall notify the Trustee if and when the Bonds are listed on any stock
exchange.

 

ARTICLE VIII

ACCOUNTS, DISBURSEMENTS AND RELEASES

 

SECTION 8.01.  Collection
of Money.  Except as otherwise
expressly provided herein, the Trustee may demand payment or delivery of, and
shall receive and collect, directly and without intervention or assistance of
any fiscal agent or other intermediary, all money and other property payable to
or receivable by the Trustee pursuant to this Indenture.  The Trustee shall apply all such money
received by it as provided in this Indenture. 
Except as otherwise expressly provided in this Indenture, if any default
occurs in the making of any payment or performance under any agreement or
instrument that is part of the Collateral, the Trustee may take such action as
may be appropriate to enforce such payment or performance, subject to Article VI,
including the institution and prosecution of appropriate Proceedings.  Any such action shall be without prejudice to
any right to claim a Default or Event of Default under this Indenture and any
right to proceed thereafter as provided in Article V.

 

50

 

SECTION 8.02.  Collection
Account.  (a)  Prior to the
Issuance Date, the Issuer shall open, at the Trustee’s Corporate Trust Office,
or at another Eligible Institution, a segregated trust account in the Trustee’s
name for the deposit of Estimated DRC Payments, DRC Payments, and all other
amounts received with respect to the Collateral (the “Collection Account”).  The Collection Account will consist of four
subaccounts:  a general subaccount (the “General
Subaccount”), a reserve subaccount (the “Reserve Subaccount”), an
overcollateralization subaccount (the “Overcollateralization Subaccount”),
and a capital subaccount (the “Capital Subaccount”).  Notwithstanding any other provision of this Section 8.02(a),
the Trustee shall be authorized to establish each of the General Subaccount,
the Reserve Subaccount, the Overcollateralization Subaccount, and the Capital
Subaccount as separate trust accounts in the Trustee’s name at an Eligible
Institution; if the Trustee does so, the General Subaccount, the Reserve
Subaccount, the Overcollateralization Subaccount, and the Capital Subaccount
shall together be deemed to constitute the Collection Account, and it shall not
be necessary to establish the Collection Account as a separate trust account.  Prior to depositing funds or U.S. Government
Obligations in the Collection Account pursuant to Section 4.02(b), the
Issuer shall establish a defeasance subaccount (“Defeasance Subaccount”)
for which such funds and/or U.S. Government Obligations shall be deposited, as
a subaccount of the Collection Account. 
All amounts in the Collection Account not allocated to any other
subaccount shall be allocated to the General Subaccount.  Prior to the initial Payment Date, all
amounts in the Collection Account (other than funds deposited into the Capital
Subaccount, up to the Required Capital Level) shall be allocated to the General
Subaccount.  All references to the
Collection Account shall be deemed to include reference to all subaccounts
contained therein.  Withdrawals from and
deposits to each of the foregoing subaccounts of the Collection Account shall
be made as set forth in Section 8.02(c), (d) and (e).  The Collection Account shall at all times be
maintained as an Eligible Deposit Account and only the Trustee shall have
access to the Collection Account for the purpose of making deposits in and
withdrawals from the Collection Account in accordance with this Indenture.  Funds in the Collection Account shall not be
commingled with any other moneys.  All
moneys deposited from time to time in the Collection Account, all deposits
therein pursuant to this Indenture, and all investments made in Eligible
Investments with such moneys, including all income or other gain from such
investments, shall be held by the Trustee in the Collection Account as part of
the Collateral securing the Bonds as herein provided.  Money in the Defeasance Subaccount shall be
invested solely in U.S. Government Obligations.

 

(b)                                 The
Trustee shall have sole dominion and exclusive control over all moneys in the
Collection Account and shall apply such amounts therein as provided in this Section 8.02.  The Trustee shall also pay from the
Collection Account any amounts requested to be paid by the Servicer pursuant to
Section 6.11(c)(ii) of the Servicing Agreement.

 

(c)                                  DRC
Collections shall be deposited in the General Subaccount as provided in Section 6.11
of the Servicing Agreement.  All
Indemnity Amounts shall be deposited in the General Subaccount.  All deposits to and withdrawals from the
Collection Account and all allocations to the subaccounts of such Collection
Account shall be made by the Trustee in accordance with the written
instructions provided by the Servicer in the Monthly Servicer’s Certificate and
the Quarterly Servicer’s Certificate, as applicable.

 

(d)                                 On
each Payment Date, the Trustee shall apply, first, all amounts on deposit in
the General Subaccount and, second, all amounts on deposit in the Reserve

 

51

 

Subaccount, to the
extent funds are available therein, to pay or allocate the following amounts,
in accordance with the Quarterly Servicer’s Certificate, in the following
priority:

 

(i)                                     amounts
owed by the Issuer to the Trustee (including legal fees and expenses and any
Indemnity Amount) shall be paid to the Trustee (subject to Section 6.07),
up to $200,000 in each calendar year;

 

(ii)                                  amounts
owed by the Issuer to the independent directors of the Issuer in connection
with their acting as directors of the Issuer shall be paid to the independent
directors up to $5,000 in each calendar year;

 

(iii)                               the
Servicing Fee in respect of the Bonds for such Payment Date and all unpaid
Servicing Fees in respect of the Bonds for prior Payment Dates shall be paid to
the Servicer;

 

(iv)                              so
long as no Event of Default shall have occurred and be continuing or would
result from such payment, all other Operating Expenses and Indemnity Amounts
shall be paid to the Persons entitled thereto on a Pro Rata Basis (or if such
have been previously paid by the Issuer, to the Issuer in reimbursement
thereof); provided, that the amount paid in any calendar year shall not
exceed $400,000 (inclusive of the amounts paid under clauses (i) and (ii)
above);

 

(v)                                 any
overdue Quarterly Interest and Quarterly Interest then due on such Payment Date
shall be paid to Bondholders on a Pro Rata Basis;

 

(vi)                              principal
due and payable on the Bonds as a result of an Event of Default and an
acceleration of principal shall be paid to the Bondholders on a Pro Rata Basis;

 

(vii)                           principal
due and payable on each Class of Bonds on the Final Legal Maturity Date
(including any unpaid principal from prior Payment Dates) of such Class or upon
redemption shall be paid to Bondholders of such Class;

 

(viii)                        Quarterly
Principal for the Class of Bonds then scheduled to be paid according to the
Expected Amortization Schedule (including any unpaid principal from prior
Payment Dates) shall be paid to the Bondholders of such Class, but only if all
of the Bonds of a Class whose principal is scheduled to amortize earlier than
that Class have been paid in full;

 

(ix)                                the
amount, if any, by which the Required Capital Level exceeds the amount in the
Capital Subaccount as of such Payment Date shall be allocated to the Capital
Subaccount;

 

(x)                                   the
amount, if any, by which the Required Overcollateralization Level exceeds the
amount in the Overcollateralization Subaccount as of such Payment Date shall be
allocated to the Overcollateralization Subaccount;

 

(xi)                                unpaid
Operating Expenses and Indemnity Amounts not paid under clauses (i), (ii) and
(iv) above shall be paid to the Persons entitled thereto (or if such have

 

52

 

been previously paid by the Issuer, to the Issuer in
reimbursement thereof) on a Pro Rata Basis;

 

(xii)                             if
there is a positive balance after making the foregoing payments or allocations,
the Trustee shall release to the Issuer an amount equal to the lesser of such
balance and the investment earnings, net of any investment loss, on amounts in
the Capital Subaccount, free and clear of the lien of this Indenture; and

 

(xiii)                          the
balance, if any, shall be allocated to the Reserve Subaccount for use on
subsequent Payment Dates.

 

After principal of and premium, if any, and interest
on all Bonds, and all of the other foregoing amounts in clauses (i) through
(xiii) above have been paid in full, the balance, if any, in the Collection
Account (including all amounts in all subaccounts therein) shall be paid to the
Issuer, free and clear of the lien of this Indenture.

 

“Pro Rata Basis” means with respect to any Class of
Bonds a ratio, (A) in the case of clause (d)(v) above, the numerator of which
is the aggregate amount of interest payable with respect to such Class on such
Payment Date and the denominator of which is the sum of the aggregate amounts
of interest payable with respect to all Outstanding Classes on such Payment
Date; (B) in the case of clause (d)(vi) above, the numerator of which is the
aggregate amount of principal to be paid or payable pursuant to such clause
with respect to such Class on such Payment Date and the denominator of which is
the sum of the aggregate amounts of principal to be paid or payable pursuant to
such clause with respect to all Outstanding Classes on such Payment Date and
(C) in the case of clauses (d)(iv) and (d)(xi) above, with respect to each
Person entitled to payment, the numerator of which is the amount payable to
that Person under the applicable clause on such payment date and the
denominator of which is the sum of the aggregate amounts to be paid or payable
to all Persons under the applicable clause on such payment date.

 

(e)                                  If
on any Payment Date funds on deposit in the General Subaccount and Reserve
Subaccount are insufficient to make the payments contemplated by clauses (i) through
(viii) of Section 8.02(d) above, the Trustee shall (i) first, draw
from amounts on deposit in the Overcollateralization Subaccount and (ii) second,
draw from amounts on deposit in the Capital Subaccount, in each case, up to the
amount of such shortfall in order to make the payments contemplated by clauses
(i) through (viii) of Section 8.02(d). 
Funds in such subaccounts may not be used for any other purpose, except
as expressly provided herein.

 

(f)                                    On
the Issuance Date, the Issuer shall deposit $9,439,320 into the Capital
Subaccount.

 

(g)                                 Notwithstanding
anything to the contrary contained in this Indenture, failure to have
sufficient funds available to maintain the Required Overcollaterization Level
or the Required Capital Level will not constitute a Default or an Event of
Default hereunder.

 

SECTION 8.03.  General
Provisions Regarding the Collection Account.  (a)  So long as no Default or Event
of Default shall have occurred and be continuing, all or a portion of the funds
in the Collection Account shall be invested in Eligible Investments and
reinvested by

 

53

 

the Trustee upon
Issuer Order; provided, however, that such Eligible Investments
shall not (i) mature later than the Business Day prior to the next Payment
Date, or (ii) be sold, liquidated or otherwise disposed of at a loss prior
to the maturity thereof (unless they are in default).  All income or other gain from investments of
moneys deposited in the Collection Account shall be deposited by the Trustee in
the General Subaccount, and any loss resulting from such investments shall be
charged to the General Subaccount.  In no
event shall the Trustee be liable for the selection of Eligible
Investments.  The Trustee shall have no
liability in respect of losses incurred as a result of the liquidation of any
Eligible Investment prior to its stated maturity or the failure of the Issuer
to provide timely written investment direction. 
The Trustee shall have no obligation to invest or reinvest any amounts
held hereunder in the absence of written investment direction pursuant to an
Issuer Order.

 

(b)                                 Subject
to Section 6.01(c), the Trustee shall not in any way be held liable by
reason of any insufficiency in the Collection Account resulting from any loss
on any Eligible Investment included therein except for losses attributable to
the Trustee’s failure to make payments on such Eligible Investments issued by
the Trustee, in its commercial capacity as principal obligor and not as
trustee, in accordance with their terms.

 

(c)                                  If
(i) the Issuer shall have failed to give written investment directions for
any funds on deposit in the Collection Account to the Trustee by
11:00 a.m. Eastern Time (or such other time as may be agreed by the Issuer
and Trustee) on any Business Day; or (ii) a Default or Event of Default
shall have occurred and be continuing but the Bonds shall not have been
declared due and payable pursuant to Section 5.02; then the Trustee shall,
to the fullest extent practicable, invest and reinvest funds in the Collection
Account in one or more investments which qualify as investments in money market
funds described under paragraph (d) of the definition of Eligible
Investments.

 

SECTION 8.04.  Deposit
of Excess Costs of Issuance.  Within
six (6) months after the Closing Date, the Issuer shall notify and transfer to
the Trustee for deposit into the Reserve Subaccount proceeds from the sale of
the Bonds held by it to pay for costs of issuance with respect to the Bonds but
that are not needed to pay for such costs of issuance, together with any
interest earned thereon while such proceeds were held by the Issuer.

 

SECTION 8.05.  Release
of Collateral.  (a)  The
Trustee may, and when required by the provisions of this Indenture shall,
execute instruments to release property from the lien of this Indenture, or
convey the Trustee’s interest in the same, in a manner and under circumstances
that are not inconsistent with the provisions of this Indenture.  No party relying upon an instrument executed
by the Trustee as provided in this Article VIII shall be bound to
ascertain the Trustee’s authority, inquire into the satisfaction of any
conditions precedent or see to the application of any moneys.

 

(b)                                 The
Trustee shall, at such time as there are no Bonds Outstanding, release any
remaining portion of the Collateral from the lien of this Indenture and release
to the Issuer or any other Person entitled thereto any funds then on deposit in
the Collection Account.  The Trustee
shall release property from the lien of this Indenture pursuant to this Section 8.05(b)
only upon receipt of an Issuer Request accompanied by an Officer’s Certificate,
an Opinion of

 

54

 

Counsel and (if
required by the TIA) Independent Certificates in accordance with TIA 314(c) and
314(d)(1) meeting the applicable requirements of Section 11.01.

 

SECTION 8.06.  Opinion
of Counsel.  The Trustee shall
receive at least seven (7) days’ notice when requested by the Issuer to
take any action pursuant to Section 8.05(a), accompanied by copies of any
instruments involved, and the Trustee shall also require, as a condition to
such action, an Opinion of Counsel, in form and substance satisfactory to the
Trustee, stating the legal effect of any such action, outlining the steps
required to complete the same, and concluding that all conditions precedent to
the taking of such action have been complied with and such action will not
materially and adversely impair the security for the Bonds or the rights of the
Bondholders in contravention of the provisions of this Indenture; provided,
however, that such Opinion of Counsel shall not be required to express
an opinion as to the fair value of the Collateral.  Counsel rendering any such opinion may rely,
without independent investigation, on the accuracy and validity of any
certificate or other instrument delivered to the Trustee in connection with any
such action.  The provisions of this Section and
the last sentence of Section 8.05(b) shall not apply to releases described
in Section 8.02(d).

 

SECTION 8.07.  Reports
by Independent Accountants.  As of
the Closing Date, the Issuer shall appoint a firm of Independent certified
public accountants of recognized national reputation for purposes of preparing
and delivering the reports or certificates of such accountants required by this
Indenture.  In the event such firm
requires the Trustee to agree to the procedures performed by such firm, the
Issuer shall direct the Trustee in writing to so agree; it being understood and
agreed that the Trustee will deliver such letter of agreement in conclusive
reliance upon the direction of the Issuer, and the Trustee makes no independent
inquiry or investigation to, and shall have no obligation or liability in
respect of, the sufficiency, validity or correctness of such procedures. Upon
any resignation by such firm the Issuer shall provide written notice thereof to
the Trustee and shall promptly appoint a successor thereto that shall also be a
firm of Independent certified public accountants of recognized national
reputation.  If the Issuer shall fail to
appoint a successor to a firm of Independent certified public accountants that
has resigned within fifteen (15)  days after such resignation, the
Trustee shall promptly notify the Issuer of such failure in writing.  If the Issuer shall not have appointed a successor
within ten (10) days thereafter the Trustee shall promptly appoint a
successor firm of Independent certified public accountants of recognized
national reputation; provided, that the Trustee shall have no liability
with respect to such appointment if the Trustee acted with due care with
respect thereto.  The fees of such
Independent certified public accountants and its successor shall be payable by
the Issuer.

 

ARTICLE IX

SUPPLEMENTAL INDENTURES

 

SECTION 9.01.  Supplemental
Indentures Without Consent of Bondholders. 
(a)  Without the consent of the Holders of any Bonds, the
Issuer and the Trustee, when authorized by an Issuer Order and upon
satisfaction of the Rating Agency Condition, at any time and from time to time,
may enter into one or more indentures supplemental hereto (which shall conform
to the provisions of the Trust Indenture Act as in force at the date of the
execution thereof), in form satisfactory to the Trustee, for any of the
following purposes:

 

55

 

(i)                                     to
correct or amplify the description of the Collateral at any time subject to the
lien of this Indenture, or better to assure, convey and confirm unto the
Trustee the Collateral subject or required to be subjected to the lien of this
Indenture, or to subject to the lien of this Indenture additional property;

 

(ii)                                  to
evidence the succession, in compliance with the applicable provisions hereof,
of another person to the Issuer, and the assumption by any such successor of
the covenants of the Issuer herein and in the Bonds contained;

 

(iii)                               to
add to the covenants of the Issuer, for the benefit of the Holders of the
Bonds, or to surrender any right or power herein conferred upon the Issuer;

 

(iv)                              to
convey, transfer, assign, mortgage or pledge any property to or with the
Trustee;

 

(v)                                 to
cure any ambiguity, to correct or supplement any provision herein or in any
supplemental indenture which may be inconsistent with any other provision
herein or in any supplemental indenture or to make any other provisions with
respect to matters or questions arising under this Indenture or in any
supplemental indenture; provided, that such action shall not adversely
affect in any material respect the interests of the Holders of the Bonds;

 

(vi)                              to
evidence the succession, in compliance with this Indenture, of another Person
to the Trustee and provide for the acceptance of the appointment hereunder by a
successor trustee with respect to the Bonds and to add to or change any of the
provisions of this Indenture as shall be necessary to facilitate the
administration of the trusts hereunder by more than one trustee, pursuant to
the requirements of Article VI; or

 

(vii)                           to
modify, eliminate or add to the provisions of this Indenture to such extent as
shall be necessary to effect the qualification of this Indenture under the TIA
or under any similar federal statute hereafter enacted and to add to this
Indenture such other provisions as may be expressly required by the TIA.

 

The Trustee is hereby authorized to join in the
execution of any such supplemental indenture and to make any further
appropriate agreements and stipulations that may be therein contained.

 

(b)                                 The
Issuer and the Trustee, when authorized by an Issuer Order, may, also without
the consent of any of the Holders of the Bonds, enter into an indenture or
indentures supplemental hereto; provided, however, that
(i) such action shall not, as evidenced by an Opinion of Counsel,
adversely affect in any material respect the interests of the holders of Bonds
then Outstanding and (ii) the Rating Agency Condition shall have been
satisfied with respect thereto.

 

SECTION 9.02.  Supplemental
Indentures with Consent of Bondholders. 
The Issuer and the Trustee, when authorized by an Issuer Order, also
may, with prior notice to the Rating Agencies and with the consent of the Holders
of not less than a majority of the Outstanding Amount of the Bonds or of
Holders of not less than a majority of the Outstanding

 

56

 

Amount of the
Bonds of each Class to be affected, by Act of such Holders delivered to the
Issuer and the Trustee, enter into an indenture or indentures supplemental
hereto for the purpose of adding any provisions to, or changing in any manner
or eliminating any of the provisions of, this Indenture or of modifying in any manner
the rights of the Holders of the Bonds under this Indenture; provided, however,
that no such supplemental indenture shall, without the consent of the Holder of
each Outstanding Bond affected thereby, or of the Holder of each Outstanding
Bonds of each Class affected thereby:

 

(i)                                     change
the date of payment of any installment of principal of or premium, if any, or
interest on any Bond, or reduce the principal amount thereof, the interest rate
thereon or premium, if any, with respect thereto, change the provisions of this
Indenture relating to the application of collections on, or the proceeds of the
sale of, the Collateral to payment of principal of or premium, if any, or
interest on the Bonds, or change any place of payment where, or the coin or
currency in which, any Bond or the interest thereon is payable, or impair the
right to institute suit for the enforcement of the provisions of this Indenture
requiring the application of funds available therefor, as provided in Article V,
to the payment of any such amount due on the Bonds on or after the respective
due dates thereof (or, in the case of optional redemption, on or after the
Redemption Date);

 

(ii)                                  reduce
the percentage of the Outstanding Amount of the Bonds or of a Class, the
consent of the Holders of which is required for any such supplemental
indenture, or the consent of the Holders of which is required for any waiver of
compliance with the provisions of this Indenture or defaults hereunder and
their consequences provided for in this Indenture;

 

(iii)                               modify
or alter the provisions of the proviso to the definition of the term “Outstanding;”

 

(iv)                              reduce
the percentage of the Outstanding Amount of the Bonds required to direct the
Trustee to direct the Issuer to sell or liquidate the Collateral pursuant to Section 5.04;

 

(v)                                 modify
any provision of this Section except to increase any percentage specified
herein or to provide that certain additional provisions of this Indenture or
the Basic Documents cannot be modified or waived without the consent of the
Holder of each Outstanding Bond affected thereby;

 

(vi)                              modify
any of the provisions of this Indenture in such manner as to affect the
calculation of the amount of any payment of interest, principal or premium, if
any, due on any Bond on any Payment Date (including the calculation of any of
the individual components of such calculation);

 

(vii)                           permit
the creation of any lien ranking prior to or on a parity with the lien of this
Indenture with respect to any part of the Collateral or, except as otherwise permitted
or contemplated herein, terminate the lien of this Indenture on any property at

 

57

 

any time subject hereto or deprive the Holder of any
Bond of the security provided by the lien of this Indenture; or

 

(viii)                        cause any
material adverse federal income tax consequence to the Seller, the Issuer, the
members of the Issuer, the Trustee or the then existing Holders.

 

The Trustee may in its discretion determine whether or
not any Bonds of a Class would be affected by any supplemental indenture and
any such determination shall be conclusive upon the Holders of all Bonds of
such Class, whether theretofore or thereafter authenticated and delivered
hereunder.  The Trustee shall not be
liable for any such determination made in good faith.

 

It shall not be necessary for any Act of Bondholders
under this Section to approve the particular form of any proposed
supplemental indenture, but it shall be sufficient if such Act shall approve
the substance thereof.

 

Promptly after the execution by the Issuer and the
Trustee of any supplemental indenture pursuant to this Section, the Issuer
shall mail to the Rating Agencies and the Holders of the Bonds to which such
amendment or supplemental indenture relates a notice setting forth in general
terms the substance of such supplemental indenture.  Any failure of the Issuer to mail such
notice, or any defect therein, shall not, however, in any way impair or affect
the validity of any such supplemental indenture.

 

SECTION 9.03.  Execution
of Supplemental Indentures.  In
executing, or permitting the additional trusts created by, any supplemental
indenture permitted by this Article IX or the modifications thereby of the
trusts created by this Indenture, the Trustee shall be entitled to receive, and
subject to Sections 6.01 and 6.02, shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or permitted by this Indenture.  The Trustee may, but shall not be obligated
to, enter into any such supplemental indenture that affects the Trustee’s own
rights, duties, liabilities or immunities under this Indenture or otherwise.

 

SECTION 9.04.  Effect
of Supplemental Indenture.  Upon the
execution of any supplemental indenture pursuant to the provisions hereof, this
Indenture shall be and be deemed to be modified and amended in accordance
therewith with respect to each Class of Bonds affected thereby, and the
respective rights, limitations of rights, obligations, duties, liabilities and
immunities under this Indenture of the Trustee, the Issuer and the Holders of
the Bonds shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments, and all the terms
and conditions of any such supplemental indenture shall be and be deemed to be
part of the terms and conditions of this Indenture for any and all purposes.

 

SECTION 9.05.  Conformity
with Trust Indenture Act.  Every
amendment of this Indenture and every supplemental indenture executed pursuant
to this Article IX shall conform to the requirements of the Trust
Indenture Act as then in effect so long as this Indenture shall then be
qualified under the Trust Indenture Act.

 

58

 

SECTION 9.06.  Reference
in Bonds to Supplemental Indentures. 
Bonds authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article IX may, and if required by
the Trustee shall, bear a notation in form approved by the Trustee as to any
matter provided for in such supplemental indenture.  If the Issuer or the Trustee shall so
determine, new Bonds so modified as to conform, in the opinion of the Trustee
and the Issuer, to any such supplemental indenture may be prepared and executed
by the Issuer and authenticated and delivered by the Trustee in exchange for
Outstanding Bonds.

 

ARTICLE X

REDEMPTION OF BONDS

 

SECTION 10.01.  Optional
Redemption by Issuer.  The Issuer may
redeem the Bonds, in whole, at its option, without premium or penalty, only
after the latest Scheduled Maturity Date for all Classes of Bonds and only if
the Outstanding Amount of any such Bonds on or before the Redemption Date is
less than or equal to five percent (5%) of the initial principal amount of all
Bonds.  The redemption price in any case
shall be equal to the outstanding principal amount of the Bonds to be redeemed,
plus accrued and unpaid interest thereon at the Bond Interest Rate to the
Redemption Date (such price being called the “Optional Redemption Price”).  The Issuer may only redeem Bonds pursuant to
this Section 10.01 if the Issuer has adequate funds to do so and if such
exercise would not cause the Issuer to be insolvent.  If the Issuer shall elect to redeem the Bonds
pursuant to this Section 10.01, it shall furnish written notice (which
notice shall state all items listed in Section 10.02) of such election to
the Trustee and the Rating Agencies not less than twenty-five (25) days
nor more than fifty (50) days prior to the Redemption Date and shall deposit
with the Trustee not later than one (1) Business Day prior to the Redemption
Date the Redemption Price of the Bonds to be redeemed whereupon all such Bonds
shall be due and payable on the Redemption Date upon the furnishing of a notice
complying with Section 10.02 hereof to each Holder of the Bonds pursuant
to this Section 10.01.

 

SECTION 10.02.  Form
of Optional Redemption Notice. 
Notice of redemption under Section 10.01 hereof shall be given by
the Trustee by first-class mail, postage prepaid, mailed not less than five (5)
days nor more than forty-five (45) days prior to the Redemption Date to each
Holder of Bonds to be redeemed, as of the close of business on the Record Date
preceding the Redemption Date at such Holder’s address appearing in the Bond
Register.

 

All notices of redemption shall state:

 

(1)                                  the
Redemption Date;

 

(2)                                  the
Optional Redemption Price; and

 

(3)                                  the
place where such Bonds are to be surrendered for payment of the Optional
Redemption Price (which shall be the office or agency of the Issuer to be
maintained as provided in Section 3.02 hereof).

 

Notice of redemption of the Bonds to be redeemed shall
be given by the Trustee in the name and at the expense of the Issuer.  Failure to give notice of redemption, or any
defect

 

59

 

therein, to any Holder of
any Bond selected for redemption shall not impair or affect the validity of the
redemption of any other Bond.

 

SECTION 10.03.  Bonds
Payable on Redemption Date or Payment Date. 
Notice of redemption having been given as provided in Section 10.02
hereof, the Bonds to be redeemed shall on the Redemption Date become due and
payable at the Optional Redemption Price and (unless the Issuer shall default
in the payment of the Optional Redemption Price) no interest shall accrue on
the Optional Redemption Price for any period on and after the Redemption Date.

 

SECTION 10.04.  Purchase
in Lieu of Redemption.

 

(a)                                  In
the event that the Bonds are called for optional redemption pursuant to Section 10.01
of this Indenture, such Bonds, or any portion thereof, may be purchased in lieu
of redemption, at the direction of the Issuer or its designee on the Purchase
in Lieu of Redemption Date therefor at a purchase price equal to the principal
amount thereof, plus any premium payable with respect to such Bonds if such
Bonds were redeemed on such Purchase in Lieu of Redemption Date, plus accrued
interest, if any, thereon to, but not including, such Purchase in Lieu of
Redemption Date.  In the event the Issuer
or its designee desires to cause a purchase of Bonds that have previously been
called for redemption, then not less than one Business Day prior to the
designated Purchase in Lieu of Redemption Date, the Issuer shall give written
notice to the Trustee of the aggregate principal amount of Bonds for which an
election to purchase pursuant to this Section 10.04 is being made.  Bonds to be purchased as described above
shall be purchased with funds of the Issuer or its designee which shall be
deposited, notwithstanding anything contained herein to the contrary, to the
Collection Account on or before the applicable Purchase in Lieu of Redemption
Date.  Bonds to be purchased but which
are not delivered to the Trustee on the Purchase in Lieu of Redemption Date
shall be deemed to have been purchased pursuant to the provisions of this Section 10.04.  Bonds purchased in lieu of redemption
pursuant to this Section 10.04 shall be deemed to be purchased by the
Issuer or its designee, as the case may be, and the Issuer or its designee, as
applicable, shall be the owner of such Bonds for all purposes under this
Indenture, and interest accruing on such Bonds on and after the Purchase in
Lieu of Redemption Date shall be payable solely to Issuer or its designee, as applicable.  In any such event, the Trustee shall
authenticate (and the Issuer shall execute, if necessary) and deliver to the
Issuer or its designee, as applicable, a new Bond as provided in Section 2.05.

 

(b)                                 It
is the intention of the parties hereto that the purchase of the Bonds pursuant
to this Section 10.04 shall not constitute a prepayment of the Bonds or a
merger or extinguishment of the indebtedness of the Issuer thereunder or the
Bonds so purchased and that such Bonds shall for all purposes be regarded as
Outstanding hereunder.

 

(c)                                  Notwithstanding
any other provision of this Indenture, in the event that the Issuer or its
designee purchases all of the Outstanding Bonds by the purchase in lieu of
redemption of all of the Outstanding Bonds pursuant to this Section 10.04
or otherwise, any such Bonds shall not be remarketed or otherwise transferred,
assigned or sold to any person other than the Issuer or its designee, except
with the prior written approval of the Issuer.

 

(d)                                 If
money sufficient to pay the purchase price of Bonds to be purchased pursuant to
this Section 10.04 shall be held by the Trustee on the date such Bonds are
to be

 

60

 

purchased, such
Bonds shall be deemed to have been purchased for all purposes of this
Indenture, irrespective of whether or not such Bonds shall have been delivered
to the Trustee, and neither the former Holder of such Bonds nor any other
person shall have any claim thereon, under this Indenture or otherwise, for any
amount other than the purchase price thereof.

 

(e)                                  In
the event of non-delivery of any Bond to be purchased pursuant to this Section 10.04,
the Trustee shall segregate and hold uninvested the money for the purchase
price of such Bonds in trust, without liability for interest thereon, for the
benefit of the former Holders of such Bonds, who shall, except as provided in
the following sentence, thereafter be restricted exclusively to such money for
the satisfaction of any claim for the purchase price of such Bonds.  Subject to applicable laws with respect to
escheat of funds, any money which the Trustee shall segregate and hold in trust
for the payment of the purchase price of any Bond and remaining unclaimed for
two (2) years after the date of purchase shall be paid, upon the Issuer’s
written request, to the Issuer.  After
the payment of such unclaimed money to the Issuer, the former Holder of such
Bond shall look only to the Issuer for the payment thereof.

 

(f)                                    In
the event that Issuer or its designee exercises its right to purchase Bonds in
lieu of redemption pursuant to this Section 10.04, the Trustee agrees to
accept and hold all Bonds delivered to it for purchase in lieu of redemption in
trust for the benefit of the respective Bondholders which shall have so delivered
such Bonds until the purchase price of such Bonds shall have been delivered to
or for the account of or to the order of such Holders pursuant to this Section 10.04.  Any Bonds registered for transfer to the
Issuer or its designee, as the case may be, and delivered to the Trustee
pursuant to this Section 10.04 shall, after payment of the purchase price
therefor, be held in trust by the Trustee for the benefit of the Issuer or its
designee, as applicable, until delivery to the Issuer or its designee.

 

ARTICLE XI

MISCELLANEOUS

 

SECTION 11.01.  Compliance
Certificates and Opinions, etc.  (a)  Upon
any application or request by the Issuer to the Trustee to take any action
under any provision of this Indenture, the Issuer shall furnish to the Trustee
(i) an Officer’s Certificate stating that all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with and (ii) an Opinion of Counsel stating that in the opinion of
such counsel all such conditions precedent, if any, have been complied with,
except that, in the case of any such application or request as to which the
furnishing of such documents is specifically required by any provision of this
Indenture, no additional certificate or opinion need be furnished.

 

Every certificate or opinion with respect to
compliance with a condition or covenant provided for in this Indenture shall
include:

 

(i)                                     a
statement that each signatory of such certificate or opinion has read such
covenant or condition and the definitions herein relating thereto;

 

61

 

(ii)                                  a
brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion
are based;

 

(iii)                               a
statement that, in the opinion of each such signatory, such signatory has made
such examination or investigation as is necessary to enable such signatory to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

 

(iv)                              a
statement as to whether, in the opinion of each such signatory, such condition
or covenant has been complied with.

 

(b)                                 (i)  Prior
to the deposit of any Collateral or other property or securities with the
Trustee that is to be made the basis for the release of any property or
securities subject to the lien of this Indenture, the Issuer shall, in addition
to any obligation imposed in Section 11.01(a) or elsewhere in this
Indenture, furnish to the Trustee an Officer’s Certificate certifying or
stating the opinion of each person signing such certificate as to the fair
value (within ninety (90) days of such deposit) to the Issuer of the
Collateral or other property or securities to be so deposited.

 

(ii)                                  To
the extent required by the TIA, whenever the Issuer is required to furnish to
the Trustee an Officer’s Certificate certifying or stating the opinion of any
signer thereof as to the matters described in clause (i) above, the Issuer
shall also deliver to the Trustee an Independent Certificate as to the same
matters, if the fair value to the Issuer of the securities to be so deposited
and of all other such securities made the basis of any such withdrawal or
release since the commencement of the then-current fiscal year of the Issuer, as
set forth in the certificates delivered pursuant to clause (i) above and this
clause (ii), is ten percent (10%) or more of the Outstanding Amount of the
Bonds, but such a certificate need not be furnished with respect to any
securities so deposited, if the fair value thereof to the Issuer as set forth
in the related Officer’s Certificate is less than $25,000 or less than one
percent (1%) of the Outstanding Amount of the Bonds.

 

(iii)                               Whenever
any property or securities are to be released from the lien of this Indenture
other than pursuant to Section 8.02(d), the Issuer shall also furnish to
the Trustee an Officer’s Certificate certifying or stating the opinion of each
person signing such certificate as to the fair value (within ninety (90)
days of such release) of the property or securities proposed to be released and
stating that in the opinion of such person the proposed release will not impair
the security under this Indenture in contravention of the provisions hereof.

 

(iv)                              To
the extent required by the TIA, whenever the Issuer is required to furnish to
the Trustee an Officer’s Certificate certifying or stating the opinion of any
signer thereof as to the matters described in clause (iii) above, the Issuer
shall also furnish to the Trustee an Independent Certificate as to the same
matters if the fair value of the property or securities and of all other
property with respect to the Bonds or securities released from the lien of this
Indenture (other than pursuant to Section 8.02(d) hereof) since the
commencement of the then-current calendar year, as set forth in the
certificates

 

62

 

required by clause (iii) above and this clause (iv),
equals ten percent (10%) or more of the Outstanding Amount of the Bonds, but such
certificate need not be furnished in the case of any release of property or
securities if the fair value thereof as set forth in the related Officer’s
Certificate is less than $25,000 or less than one percent (1%) of the then
Outstanding Amount of the Bonds.

 

(v)                                 Notwithstanding
Section 2.11, Section 8.05, Section 8.06, or any other provision
of this Section, the Issuer may (A) collect, liquidate, sell or otherwise
dispose of the Recovery Property and the other Collateral as and to the extent
permitted or required by the Basic Documents and (B) make cash payments
out of the Collection Accounts as and to the extent permitted or required by
the Basic Documents.

 

SECTION 11.02.  Form
of Documents Delivered to Trustee. 
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.

 

Any certificate or opinion of an Authorized Officer of
the Issuer may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations by, counsel, unless such officer
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to the matters upon which his or her
certificate or opinion is based are erroneous. 
Any such certificate of an Authorized Officer or Opinion of Counsel may
be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer of the Servicer, the Seller, the
Issuer or the Administrator, stating that the information with respect to such
factual matters is in the possession of the Servicer, the Seller, the Issuer or
the Administrator, unless such counsel knows, or in the exercise of reasonable
care should know, that the certificate or opinion or representations with
respect to such matters are erroneous.

 

Whenever in this Indenture, in connection with any
application or certificate or report to the Trustee, it is provided that the
Issuer shall deliver any document as a condition of the granting of such
application, or as evidence of the Issuer’s compliance with any term hereof, it
is intended that the truth and accuracy, at the time of the granting of such
application or at the effective date of such certificate or report (as the case
may be), of the facts and opinions stated in such document shall in such case
be conditions precedent to the right of the Issuer to have such application
granted or to the sufficiency of such certificate or report.  The foregoing shall not, however, be
construed to affect the Trustee’s right to rely upon the truth and accuracy of
any statement or opinion contained in any such document as provided in Article VI.

 

Where any Person is required to make, give or execute
two or more applications, requests, consents, certificates, statements,
opinions or other instruments under this Indenture, they may, but need not, be
consolidated and form one instrument.

 

63

 

SECTION 11.03.  Acts
of Bondholders.  (a)  Any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be given or taken by Bondholders may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Bondholders in person or by agents duly appointed in
writing; and except as herein otherwise expressly provided such action shall
become effective when such instrument or instruments are delivered to the
Trustee, and, where it is hereby expressly required, to the Issuer.  Such instrument or instruments (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the “Act” of the Bondholders signing such instrument or instruments.  Proof of execution of any such instrument or
of a writing appointing any such agent shall be sufficient for any purpose of
this Indenture and (subject to Section 6.01) conclusive in favor of the
Trustee and the Issuer, if made in the manner provided in this Section.

 

(b)                                 The
fact and date of the execution by any person of any such instrument or writing
may be proved in any manner that the Trustee deems sufficient.

 

(c)                                  The
ownership of Bonds shall be proved by the Bond Register.

 

(d)                                 Any
request, demand, authorization, direction, notice, consent, waiver or other
action by the Holder of any Bonds shall bind the Holder of every Bond issued
upon the registration thereof or in exchange therefor or in lieu thereof, in
respect of anything done, omitted or suffered to be done by the Trustee or the
Issuer in reliance thereon, whether or not notation of such action is made upon
such Bond.

 

SECTION 11.04.  Notices,
etc., to Trustee, Issuer, Rating Agencies and CPUC.  (a)  Any request, demand,
authorization, direction, notice, consent, waiver or Act of Bondholders or
other documents provided or permitted by this Indenture to be made upon, given
or furnished to or filed with:

 

(i)                                     the
Trustee by any Bondholder or by the Issuer shall be sufficient for every
purpose hereunder if made, given, furnished or filed in writing by facsimile
transmission, first-class mail or overnight delivery service to or with the
Trustee at its Corporate Trust Office, or

 

(ii)                                  the
Issuer by the Trustee or by any Bondholder shall be sufficient for every
purpose hereunder if in writing and mailed, first-class, postage prepaid, to
the Issuer addressed to:  PG&E Energy
Recovery Funding LLC, 245 Market Street, Room 424,
San Francisco, California 94105, Attention:  President, or at any other address previously
furnished in writing to the Trustee by the Issuer.  The Issuer shall promptly transmit any notice
received by it from the Bondholders to the Trustee.

 

(b)                                 Notices
required to be given to the Rating Agencies or to the CPUC by the Issuer or the
Trustee shall be in writing, personally delivered or mailed by certified mail,
return receipt requested or sent by telecopy or other similar form of rapid
transmission to (i) in the case of Moody’s, to:  Moody’s Investors Service, Inc., ABS
Monitoring Department, 99 Church Street, New York, New York 10007; telephone: (212) 553-3686, facsimile (212) 553-0573,
(ii) in the case of Standard & Poor’s, to:  Standard & Poor’s Ratings Services,
55 Water Street, 41st Floor, New York, New York 10041, Attention of
Asset Backed Surveillance Department;

 

64

 

telephone:
(212) 438-2000, facsimile: (212) 438-2665, (iii) in the case of Fitch,
to Fitch, Inc., One State Street Plaza, New York, NY 10004, Attention of ABS
Surveillance; telephone: (212) 908-0500,
facsimile: (212) 908-0355, (iv) in the case of the CPUC, to California
Public Utilities Commission, 505 Van Ness Avenue, San Francisco, CA 94102,
Attention of General Counsel, with copies to the attention of the Executive
Director and the Director of the Energy Division, and (v) to each of the
foregoing, at such other address as shall be designated by written notice to
the other parties.

 

SECTION 11.05.  Notices
to Bondholders; Waiver.  Where this
Indenture provides for notice to Bondholders of any event, such notice shall be
sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class, postage prepaid to each Bondholder affected by such
event, at such Bondholder’s address as it appears on the Bond Register, not
later than the latest date, and not earlier than the earliest date, prescribed
for the giving of such notice.  In any
case where notice to Bondholders is given by mail, neither the failure to mail
such notice nor any defect in any notice so mailed to any particular Bondholder
shall affect the sufficiency of such notice with respect to other Bondholders,
and any notice that is mailed in the manner herein provided shall conclusively
be presumed to have been duly given.

 

Where this Indenture provides for notice in any
manner, such notice may be waived in writing by any Person entitled to receive
such notice, either before or after the event, and such waiver shall be the equivalent
of such notice.  Waivers of notice by
Bondholders shall be filed with the Trustee but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such a
waiver.

 

In case, by reason of the suspension of regular mail
service, it shall be impractical to mail notice of any event to Bondholders
when such notice is required to be given pursuant to any provision of this
Indenture, then any manner of giving such notice as shall be satisfactory to
the Trustee shall be deemed to be a sufficient giving of such notice.

 

Where this Indenture provides for notice to the Rating
Agencies, failure to give such notice shall not affect any other rights or
obligations created hereunder, and shall not under any circumstance constitute
a Default or Event of Default.

 

SECTION 11.06.  Conflict
with Trust Indenture Act.  If any
provision hereof limits, qualifies or conflicts with another provision hereof
that is required to be included in this Indenture by any of the provisions of
the Trust Indenture Act, such required provision shall control.

 

The provisions of TIA
Sections 310 through 317 that impose duties on any person (including the
provisions automatically deemed included herein unless expressly excluded by
this Indenture) are a part of and govern this Indenture, whether or not
physically contained herein.

 

SECTION 11.07.  Effect
of Headings and Table of Contents. 
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.

 

65

 

SECTION 11.08.  Successors
and Assigns.  All covenants and
agreements in this Indenture and the Bonds by the Issuer shall bind its
successors and assigns, whether so expressed or not.  All agreements of the Trustee in this
Indenture shall bind its successors.

 

SECTION 11.09.  Separability.  In case any provision in this Indenture or in
the Bonds shall be invalid, illegal or unenforceable, the validity, legality,
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.

 

SECTION 11.10.  Benefits
of Indenture.  Nothing in this
Indenture or in the Bonds, express or implied, shall give to any Person, other
than the parties hereto and their successors hereunder, and the Bondholders,
any benefit or any legal or equitable right, remedy or claim under this
Indenture.

 

SECTION 11.11.  Legal
Holidays.  In any case where the date
on which any payment is due shall not be a Business Day, then (notwithstanding
any other provision of the Bonds or this Indenture) payment need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the date on which nominally due, and no interest
shall accrue for the period from and after any such nominal date.

 

SECTION 11.12.  Governing
Law.  THIS INDENTURE SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT
REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS.

 

SECTION 11.13.  Counterparts.  This Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same instrument.

 

SECTION 11.14.  Recording
of Indenture.  If this Indenture is
subject to recording in any appropriate public recording offices, such
recording is to be effected by the Issuer and at its expense accompanied by an
Opinion of Counsel (which may be counsel to the Trustee or any other counsel
reasonably acceptable to the Trustee) to the effect that such recording is
necessary either for the protection of the Bondholders or for the enforcement
of any right or remedy granted to the Trustee under this Indenture.

 

SECTION 11.15.  No
Liability.  No recourse may be taken,
directly or indirectly, with respect to the obligations of the Issuer or the
Trustee on the Bonds or under this Indenture or any certificate or other
writing delivered in connection herewith or therewith, against (i) the
Trustee or any member of the Issuer in its individual capacity, (ii) any
owner of a membership interest in the Issuer or (iii) any shareholder,
partner, owner, beneficiary, agent, officer, director or employee of the
Trustee, any member of the Issuer or any owner of a membership interest in the
Issuer in their respective individual capacities, or of any successor or assign
of any of them in their respective individual capacities, except as any such
Person may have expressly agreed (it being understood that the neither the
Trustee nor any member of the Issuer has any such obligations in their
respective individual or corporate capacities).

 

66

 

SECTION 11.16.  No
Recourse to Issuer.  Notwithstanding
any provision of this Indenture to the contrary, Bondholders shall have no
recourse against the Issuer, but shall look only to the Collateral, with
respect to any amounts due to the Bondholders hereunder.

 

SECTION 11.17.  Inspection.  The Issuer agrees that, on reasonable prior
notice, it will permit, subject to the requirements of applicable law and the
CPUC Regulations, any representative of the Trustee, during the Issuer’s normal
business hours, to examine all the books of account, records, reports, and
other papers of the Issuer, to make copies and extracts therefrom, to cause
such books to be audited by Independent certified public accountants, and to
discuss the Issuer’s affairs, finances and accounts with the Issuer’s officers,
employees, and Independent certified public accountants, all at such reasonable
times and as often as may be reasonably requested.  The Trustee shall and shall cause its
representatives to hold in confidence all such information except to the extent
disclosure may be required by law (and all reasonable applications for
confidential treatment are unavailing) and except to the extent that the
Trustee may reasonably determine that such disclosure is consistent with its
obligations hereunder.  Notwithstanding
anything herein to the contrary, the foregoing shall not be construed to
prohibit (i) disclosure of any and all information that is or becomes
publicly known, or information obtained by the Trustee from sources other than
the Issuer, provided such parties are rightfully in possession of such
information and are not subject to a duty of confidentiality,
(ii) disclosure of any and all information (A) if required to do so
by any applicable statute, law, rule or regulation, (B) pursuant to any
subpoena, civil investigative demand or similar demand or request of any court
or regulatory authority exercising its proper jurisdiction, (C) in any
preliminary or final offering circular, registration statement or contract or
other document pertaining to the transactions contemplated by this Indenture or
the Basic Documents approved in advance by the Issuer or (D) to any
affiliate, independent or internal auditor, agent, employee or attorney of the
Trustee having a need to know the same, provided, that such parties
agree to be bound by the confidentiality provisions contained in this Section 11.17,
or (iii) any other disclosure authorized by the Issuer.

 

SECTION 11.18.  No Petition.  The Trustee, by entering into this Indenture,
and each Holder, by accepting a Bond (or interest therein) issued hereunder,
hereby covenant and agree, and each owner of a security entitlement to a Bond,
by accepting such security entitlement, is deemed to covenant and agree, with
the Issuer and each other that notwithstanding any prior termination of all
indentures for all bonds authorized to be issued by the Financing Order, but
subject to the CPUC’s right to order the sequestration and payment of revenues
arising with respect to the Recovery Property notwithstanding any bankruptcy,
reorganization or other insolvency proceedings with respect to the debtor,
pledgor or transferor of the Recovery Property pursuant to Section 848.3(e)
and (g) of the PU Code, they shall not, prior to the date that is one year and
one day after the termination of all indentures for all bonds authorized to be
issued by the Financing Order, acquiesce, petition or otherwise invoke or cause
the Issuer to invoke the process of any court or governmental authority for the
purpose of commencing or sustaining a case against the Issuer under any federal
or state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar
official of the Issuer or any substantial part of the property of the Issuer or
ordering the winding up or liquidation of the affairs of the Issuer.  The Trustee and each Holder hereby further
covenant and agree, and each owner of a security entitlement to a Bond is
hereby deemed to covenant and agree, with the Issuer and each other that they
shall not cooperate with or

 

67

 

encourage others
to file a bankruptcy petition against the Issuer during the same period.  Nothing in this paragraph shall preclude, or
be deemed to estop, such Holder or owner of a security entitlement (A) from
taking or omitting to take any action prior to such date in (i) any case or
proceeding voluntarily filed or commenced by or on behalf of the Issuer under
or pursuant to any such law or (ii) any involuntary case or proceeding
pertaining to the Issuer that is filed or commenced by or on behalf of a person
other than such Holder or owner of a security entitlement and is not joined in
by such Holder (or any person to which such Holder shall have assigned,
transferred or otherwise conveyed any part of the obligations of the Issuer
hereunder) or owner of a security entitlement under or pursuant to any such
law, or (B) from commencing or prosecuting any legal action that is not an
involuntary case or proceeding under or pursuant to any such law against the
Issuer or any of its properties.

 

SECTION 11.19.  No
Premium.  Notwithstanding any other
provision of this Indenture or any Bond, no premium is payable by the Issuer
under any circumstances with respect to any Bond.

 

68

 

IN WITNESS WHEREOF, the Issuer and the Trustee have
caused this Indenture to be duly executed by their respective officers
thereunto duly authorized, all as of the date first above written.

 

 

	
   

  	
  PG&E ENERGY RECOVERY FUNDING LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael J. Donnelly

  
	
   

  	
  Name: Michael J. Donnelly

  
	
   

  	
  Title: Treasurer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  DEUTSCHE BANK NATIONAL TRUST

  COMPANY, as Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ronaldo Reyes

  
	
   

  	
  Name:Ronaldo Reyes

  
	
   

  	
  Title:Vice President

  

 

 

EXHIBIT A

 

FORM OF BOND

 

SEE REVERSE FOR CERTAIN
DEFINITIONS

 

[FACE OF BOND]

 

UNLESS AND UNTIL IT
IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN DEFINITIVE REGISTERED FORM,
THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE CLEARING AGENCY
TO THE NOMINEE OF THE CLEARING AGENCY OR BY A NOMINEE OF THE CLEARING AGENCY TO
THE CLEARING AGENCY OR ANOTHER NOMINEE OF THE CLEARING AGENCY OR BY THE
CLEARING AGENCY OR ANY SUCH NOMINEE TO A SUCCESSOR CLEARING AGENCY OR A NOMINEE
OF THE SUCCESSOR CLEARING AGENCY.  UNLESS
THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY
TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY 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.

 

THE PRINCIPAL OF THIS
BOND WILL BE PAID IN INSTALLMENTS AS SET FORTH HEREIN.  ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT
OF THIS BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF.

 

THE HOLDER OF THIS
BOND HAS NO RECOURSE TO THE ISSUER HEREOF AND AGREES TO LOOK ONLY TO THE
COLLATERAL, AS DESCRIBED IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF FOR
PAYMENT OF ANY AMOUNTS DUE HEREUNDER.  IN
THE EVENT THE COLLATERAL PLEDGED TO SECURE THIS BOND HAS BEEN EXHAUSTED AND
THIS BOND HAS NOT BEEN PAID IN FULL, THEN ANY AND ALL AMOUNTS REMAINING DUE ON
THIS BOND SHALL BE EXTINGUISHED AND THIS BOND SHALL BE CANCELLED.  TO THE EXTENT THAT UNDER ANY APPLICABLE LAW
THE HOLDER OF THIS BOND OR THE OWNER OF A SECURITY ENTITLEMENT HERETO IS DEEMED
TO HAVE AN INTEREST IN OTHER ISSUER ASSETS, THE HOLDER HEREOF AND THE OWNER OF
A SECURITY ENTITLEMENT HERETO ARE EACH DEEMED TO HAVE AGREED THAT THEIR
INTEREST IN SUCH OTHER ISSUER ASSETS IS FULLY SUBORDINATE TO THE CLAIM AGAINST
SUCH OTHER ISSUER ASSETS OF THE PLEDGEES OR GRANTEES TO WHICH SUCH OTHER ISSUER
ASSETS ARE PLEDGED OR GRANTED AND ARE FURTHER DEEMED TO HAVE AGREED THAT THIS
AGREEMENT SHALL CONSTITUTE A SUBORDINATION AGREEMENT FOR PURPOSE OF SECTION 510(a)
OF THE UNITED STATES BANKRUPTCY CODE.

 

THE HOLDER OF THIS
BOND, BY ACCEPTING THIS BOND (OR INTEREST HEREIN), HEREBY COVENANTS AND AGREES,
AND EACH OWNER OF A SECURITY ENTITLEMENT HERETO, BY ACCEPTING SUCH SECURITY
ENTITLEMENT, IS DEEMED TO COVENANT AND AGREE, WITH THE ISSUER, THE TRUSTEE AND
EACH OTHER THAT NOTWITHSTANDING ANY PRIOR TERMINATION OF ALL INDENTURES FOR ALL
BONDS AUTHORIZED TO BE ISSUED BY THE FINANCING ORDER, BUT SUBJECT TO THE CPUC’S
RIGHT TO ORDER THE SEQUESTRATION AND PAYMENT OF REVENUES ARISING WITH RESPECT
TO THE RECOVERY PROPERTY NOTWITHSTANDING ANY BANKRUPTCY, REORGANIZATION OR
OTHER

 

A-1

 

INSOLVENCY
PROCEEDINGS WITH RESPECT TO THE DEBTOR, PLEDGOR OR TRANSFEROR OF THE RECOVERY
PROPERTY PURSUANT TO SECTION 848.3(e) AND (g) OF THE PU CODE, THEY SHALL
NOT, PRIOR TO THE DATE THAT IS ONE YEAR AND ONE DAY AFTER THE TERMINATION OF
ALL INDENTURES FOR ALL BONDS AUTHORIZED TO BE ISSUED BY THE FINANCING ORDER,
ACQUIESCE, PETITION OR OTHERWISE INVOKE OR CAUSE THE ISSUER TO INVOKE THE
PROCESS OF ANY COURT OR GOVERNMENTAL AUTHORITY FOR THE PURPOSE OF COMMENCING OR
SUSTAINING A CASE AGAINST THE ISSUER UNDER ANY FEDERAL OR STATE BANKRUPTCY,
INSOLVENCY OR SIMILAR LAW OR APPOINTING A RECEIVER, LIQUIDATOR, ASSIGNEE,
TRUSTEE, CUSTODIAN, SEQUESTRATOR OR OTHER SIMILAR OFFICIAL OF THE ISSUER OR ANY
SUBSTANTIAL PART OF THE PROPERTY OF THE ISSUER OR ORDERING THE WINDING UP OR
LIQUIDATION OF THE AFFAIRS OF THE ISSUER. 
THE HOLDER OF THIS BOND HEREBY FURTHER COVENANTS AND AGREES, AND EACH
OWNER OF A SECURITY ENTITLEMENT HERETO IS HEREBY DEEMED TO COVENANT AND AGREE,
WITH THE ISSUER, THE TRUSTEE AND EACH OTHER THAT THEY SHALL NOT COOPERATE WITH
OR ENCOURAGE OTHERS TO FILE A BANKRUPTCY PETITION AGAINST THE ISSUER DURING THE
SAME PERIOD.  NOTHING IN THIS PARAGRAPH
SHALL PRECLUDE, OR BE DEEMED TO ESTOP, THE HOLDER OF THIS BOND OR OWNER OF A
SECURITY ENTITLEMENT HERETO (A) FROM TAKING OR OMITTING TO TAKE ANY ACTION
PRIOR TO SUCH DATE IN (I) ANY CASE OR PROCEEDING VOLUNTARILY FILED OR COMMENCED
BY OR ON BEHALF OF THE ISSUER UNDER OR PURSUANT TO ANY SUCH LAW OR (II) ANY
INVOLUNTARY CASE OR PROCEEDING PERTAINING TO THE ISSUER THAT IS FILED OR
COMMENCED BY OR ON BEHALF OF A PERSON OTHER THAN THE HOLDER OF THIS BOND OR
OWNER OF A SECURITY ENTITLEMENT HERETO AND IS NOT JOINED IN BY THE HOLDER OF
THIS BOND (OR ANY PERSON TO WHICH SUCH HOLDER SHALL HAVE ASSIGNED, TRANSFERRED
OR OTHERWISE CONVEYED ANY PART OF THE OBLIGATIONS OF THE ISSUER UNDER THE
INDENTURE) OR OWNER OF A SECURITY ENTITLEMENT HERETO UNDER OR PURSUANT TO ANY
SUCH LAW, OR (B) FROM COMMENCING OR PROSECUTING ANY LEGAL ACTION THAT IS NOT AN
INVOLUNTARY CASE OR PROCEEDING UNDER OR PURSUANT TO ANY SUCH LAW AGAINST THE
ISSUER OR ANY OF ITS PROPERTIES.

 

NEITHER THE FULL FAITH AND CREDIT NOR THE
TAXING POWER OF THE STATE OF CALIFORNIA IS PLEDGED TO THE PAYMENT OF THE
PRINCIPAL OF, OR INTEREST ON, THIS BOND.

 

	
  REGISTERED

  	
   

  	
  $

  
	
  No.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CUSIP NO.

  

 

PG&E
ENERGY RECOVERY FUNDING LLC

 

ENERGY
RECOVERY BONDS, SERIES 2005-1, CLASS A-    .

 

	
  Bond Interest Rate

  	
   

  	
  Original Principal Amount

  	
   

  	
  Final Legal Maturity Date

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

PG&E Energy Recovery Funding LLC, a
limited liability company organized and existing under the laws of the State of
Delaware (herein referred to as the “Issuer”), for value received, hereby
promises to pay to Cede & Co., or registered assigns, the Original
Principal Amount shown above in quarterly installments on the Payment Dates and
in the amounts specified on the reverse hereof or, if less, the amounts
determined pursuant to Section 8.02 of the Indenture, in each year,
commencing on the Payment Date (defined below) in June 2005 and ending on
or before the Final Legal Maturity Date and to pay interest, at the Bond
Interest Rate shown above, on each March 25,

 

A-2

 

June 25, September 25
and December 25 or if any such day is not a Business Day, the next
succeeding Business Day (each a “Payment Date”), commencing on the Payment Date
in June 2005 and continuing until the earlier of the payment of the
principal hereof and the Final Legal Maturity Date, on the principal amount of
this Class A-     Bond. 
Interest on this Class A-     Bond will accrue for
each Payment Date from the most recent Payment Date on which interest has been
paid to but excluding such Payment Date or, if no interest has yet been paid,
from February 10, 2005.  Interest
will be computed on the basis of a 360-day year of twelve 30-day months.  Such principal of and interest on this Class
A-     Bond shall be paid in the manner specified on the
reverse hereof.

 

The principal of and interest on this Class
A-     Bond are payable in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.  All
payments made by the Issuer with respect to this Class A-    
Bond shall be applied first to interest due and payable on this Class A-    
Bond as provided above and then to the unpaid principal of this Class A-    
Bond, all in the manner set forth in Section 8.02 of the Indenture.

 

Reference is made to the further provisions
of this Class A-     Bond set forth on the reverse hereof,
which shall have the same effect as though fully set forth on the face of this
Class A-     Bond.

 

Unless the certificate of authentication
hereon has been executed by the Trustee whose name appears below by manual
signature, this Class A-     Bond shall not be entitled to
any benefit under the Indenture referred to on the reverse hereof, or be valid
or obligatory for any purpose.

 

A-3

 

IN WITNESS WHEREOF, the Issuer has caused
this instrument to be signed, manually or in facsimile, by its Authorized
Officer.

 

	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PG&E ENERGY RECOVERY FUNDING LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Authorized
  Officer

  	
   

  

 

A-4

 

TRUSTEE’S CERTIFICATE OF
AUTHENTICATION

 

	
  Date:

  	
   

  	
   

  	
   

  

 

This Class A-     Bond is
one of the Bonds of the Series 2005-1 Bonds, designated above and referred to
in the within-mentioned Indenture.

 

	
   

  	
  DEUTSCHE BANK NATIONAL TRUST COMPANY,

  not in its individual capacity but solely as Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Authorized
  Signatory

  	
   

  

 

A-5

 

[REVERSE OF
BOND]

 

This Series 2005-1, Class A-    
Bond is one of a duly authorized issue of Bonds of the Issuer, designated as
its Energy Recovery Bonds, Series 2005-1 (herein called the “Bonds”), issued in
five Classes, including Class A-       (herein
called the “Class A-     Bonds”) of which this Class A-    
Bond is one, all issued under an Indenture, dated as of February 10, 2005
(herein referred to as the “Indenture”), between the Issuer and Deutsche Bank
National Trust Company, as Trustee (the “Trustee”, which term includes any
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights and obligations thereunder of the Issuer, the Trustee and the Holders of
the Bonds.  All terms used in this Class
A-     Bond that are defined in the Indenture, as
supplemented or amended, shall have the meanings assigned to them in the
Indenture.

 

The Class A-     Bonds
and the other Classes of Series 2005-1 Bonds issued by the Issuer are and will
be equally and ratably secured by the Collateral pledged as security therefor
as provided in the Indenture.

 

Pursuant to subdivision (g) of Section 848.1
of the California Public Utilities Code, the State of California (the “State”)
has pledged and agreed with the recovery corporation (as defined in subdivision
(h) of Section 848 of the California Public Utilities Code), the owners of
the Recovery Property and Holders that the State shall neither limit nor alter
the DRC Charge, the Recovery Property, the Financing Order or any rights
thereunder until the Bonds, together with the interest thereon, are fully paid
and discharged; provided, that nothing contained in that section shall
preclude the limitation or alteration if and when adequate provision shall be
made by law for the protection of the recovery corporation, the owners of the
Recovery Property and Holders.

 

The principal of this Class A-    
Bond shall be payable on each Payment Date, commencing on the Payment Date in June 2005,
only to the extent that amounts in the Collection Account are available
therefor, and only until the outstanding principal balance thereof on such
Payment Date (after giving effect to all payments of principal, if any, made on
such Payment Date) has been reduced to the principal balance specified in the
Expected Amortization Schedule which is attached to the Indenture as Schedule A,
unless payable earlier either because (x) an Event of Default (except for
a breach of the State pledge described in the immediately preceding paragraph)
shall have occurred and be continuing and the Trustee or the Holders of Bonds
representing not less than a majority of the Outstanding Amount of the Bonds
have declared the Bonds to be immediately due and payable in accordance with Section 5.02
of the Indenture (unless such declaration shall have been rescinded and
annulled in accordance with Section 5.02 of the Indenture), or
(y) the Issuer, at its option, shall have called for the redemption of the
Series 2005-1 Bonds pursuant to Section 10.01 of the Indenture.  However, actual principal payments may be
made in lesser than expected amounts and at later than expected times as
determined pursuant to Section 8.02 of the Indenture.  The entire unpaid principal amount of this
Class A-     Bond shall be due and payable on the earlier
of the Final Legal Maturity Date hereof and the Redemption Date, if any,
herefor.  Notwithstanding the foregoing,
the entire unpaid principal amount of the Bonds shall be due and payable, if
not then previously paid, on the date on which an Event of Default (except for
a breach of the State pledge described in the immediately preceding paragraph)
shall have occurred and be continuing and the Trustee or the Holders of the Bonds
representing not less than a majority of the Outstanding Amount of the Bonds
have declared the Bonds to be immediately due and payable in the manner
provided in Section 5.02 of the Indenture (unless such declaration shall
have been rescinded and annulled in accordance with Section 5.02 of the
Indenture).  All principal payments on
the Class A-     Bonds shall be made pro rata to the Class
A-     Bondholders entitled thereto based on the respective
principal amounts of the Class A-     Bonds held by them.

 

Payments of interest on this Class A-    
Bond due and payable on each Payment Date, together with the installment of
principal shall be made by check mailed first-class, postage prepaid, to the
Person whose name appears as the Registered Holder of this Class A-    
Bond (or one or more Predecessor Bonds) on the Bond Register as of the close of
business on the Record Date or in such other manner as may be provided in the
Indenture, except that with respect to Bonds registered on the Record Date in
the name of the Clearing Agency or its nominee, payments will be made by wire
transfer in immediately available funds to the account designated by the
Clearing Agency and except for the final installment of principal and interest
payable with respect to this Class A-     Bond on a Payment
Date which shall be payable as provided below. 
Such checks shall be mailed to the Person entitled thereto at the
address of such Person as it appears on the Bond Register as of the applicable
Record Date without requiring that this Class A-     Bond
be submitted for notation of payment. 
Any reduction in the principal amount of

 

A-6

 

this Class A-    
Bond (or any one or more Predecessor Bonds) effected by any payments made on
any Payment Date shall be binding upon all future Holders of this Class A-    
Bond and of any Bond issued upon the registration of transfer hereof or in
exchange hereof or in lieu hereof, whether or not noted hereon.  If funds are expected to be available, as provided
in the Indenture, for payment in full of the then remaining unpaid principal
amount of this Class A-     Bond on a Payment Date, then
the Trustee, in the name of and on behalf of the Issuer, will notify the Person
who was the Registered Holder hereof as of the Record Date preceding such
Payment Date by notice mailed no later than five days prior to such final
Payment Date and shall specify that such final installment will be payable only
upon presentation and surrender of this Class A-     Bond
and shall specify the place where this Class A-     Bond
may be presented and surrendered for payment of such installment.

 

As provided in the Indenture, the Bonds,
including the Class A-     Bonds, may be redeemed, in whole
at the option of the Issuer, without premium or penalty, only after the latest
Scheduled Maturity Date for all Classes of Bonds and only if the Outstanding
Amount of any such Bonds on or before the Redemption Date is less than or equal
to five percent of the initial principal amount of all Bonds.  The redemption price shall be equal to the
outstanding principal amount of the Bonds to be redeemed, plus accrued and
unpaid interest thereon at the Bond Interest Rate to the Redemption Date.

 

As provided in the Indenture and subject to
certain limitations set forth therein, the transfer of this Class A-    
Bond may be registered on the Bond Register upon surrender of this Class A-    
Bond for registration of transfer at the office or agency designated by the
Issuer pursuant to the Indenture, duly endorsed by, or accompanied by
(a) a written instrument of transfer in form satisfactory to the Trustee
duly executed by the Holder hereof or such Holder’s attorney duly authorized in
writing, with such signature guaranteed by an institution which is a member of
one of the following recognized Signature Guaranty Programs:  (i) The Securities Transfer Agent
Medallion Program (STAMP); (ii) The New York Stock Exchange Medallion
Program (MSP); (iii) The Stock Exchange Medallion Program (SEMP); or
(iv) in such other guarantee program acceptable to the Trustee or
authorized by the regulations of the SEC, and (b) such other documents as
the Trustee may require, and thereupon one or more new Class A-    
Bonds of Minimum Denominations and in the same aggregate principal amount will
be issued to the designated transferee or transferees.  No service charge will be charged for any
registration of transfer or exchange of this Class A-    
Bond, but the transferor may be required to pay a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with any
such registration of transfer or exchange, other than exchanges pursuant to Section 2.04
or 9.06 of the Indenture not involving any transfer.

 

The Issuer shall not be required to make and
the Bond Registrar need not register transfers or exchanges of Bonds selected
for redemption or of any Bond for a period of 15 days preceding the due date
for any payment with respect to such Bond.

 

Each Bondholder, by acceptance of a Bond,
covenants and agrees that no recourse may be taken, directly or indirectly,
with respect to the obligations of the Issuer or the Trustee on the Bonds or
under the Indenture or any certificate or other writing delivered in connection
therewith, against (i) the Trustee or any member of the Issuer in its
individual capacity (ii) any owner of a membership interest in the Issuer
or (iii) any shareholder, partner, owner, beneficiary, agent, officer,
director or employee of the Trustee, any member of the Issuer or any owner of a
membership interest in the Issuer in their respective individual capacities or
of any successor or assign of any of them in their respective individual
capacities, except as any such Person may have expressly agreed (it being
understood that neither the Trustee nor any member of the Issuer has any such
obligations in their respective individual or corporate capacities).

 

Prior to the due presentment for registration
of transfer of this Class A-     Bond, the Issuer, the
Trustee and any agent of the Issuer or the Trustee may treat the Person in
whose name this Class A-     Bond is registered (as of the
day of determination) as the owner hereof for the purpose of receiving payments
of principal of and interest on this Class A-     Bond and
for all other purposes whatsoever, whether or not this Class A-    
Bond be overdue, and neither the Issuer, the Trustee nor any such agent shall
be affected by notice to the contrary.

 

The Indenture permits, with certain
exceptions as therein provided, the amendment thereof and the modification of
the rights and obligations of the Issuer and the rights of all Holders or
Holders of an affected Class under the Indenture at any time by the Issuer with
the consent of the Holders representing a majority of the Outstanding Amount of
all Bonds at the time Outstanding or of the Holders representing a majority of
the

 

A-7

 

Outstanding
Amount of such affected Class, as applicable. 
The Indenture also contains provisions permitting the Holders of Bonds
representing specified percentages of the Outstanding Amount of the Bonds, on
behalf of the Holders of all the Bonds, to waive compliance by the Issuer with
certain provisions of the Indenture and certain past defaults under the Indenture
and their consequences.  Any such consent
or waiver by the Holder of this Class A-     Bond (or any
one of more Predecessor Bonds) shall be conclusive and binding upon such Holder
and upon all future Holders of this Class A-     Bond and
of any Bond issued upon the registration of transfer hereof or in exchange
hereof or in lieu hereof whether or not notation of such consent or waiver is
made upon this Class A-     Bond.  The Indenture also permits the Trustee to
amend or waive certain terms and conditions set forth in the Indenture without
the consent of Holders of the Bonds issued thereunder.

 

The Indenture contains provisions for
defeasance at any time of (a) the entire indebtedness of the Issuer on this
Class A-     Bond and (b) certain restrictive covenants and
the related Events of Default, upon compliance by the Issuer with certain
conditions set forth therein, which provisions apply to this Class A-    
Bond.

 

The term “Issuer” as used in this Class A-    
Bond includes any successor to the Issuer under the Indenture.

 

The Issuer is permitted by the Indenture,
under certain circumstances, to merge or consolidate, subject to the rights of
the Trustee and the Holders of Bonds under the Indenture.

 

The Class A-     Bonds
are issuable only in registered form in denominations as provided in the
Indenture, subject to certain limitations therein set forth.

 

This Class A-     Bond,
the Indenture shall be construed in accordance with the laws of the State of
California, without reference to its conflict of law provisions, and the
obligations, rights and remedies of the parties hereunder and thereunder shall
be determined in accordance with such laws.

 

No reference herein to the Indenture and no
provision of this Class A-     Bond or of the Indenture
shall alter or impair the obligation of the Issuer, which is absolute and
unconditional, to pay the principal of and interest on this Class A-    
Bond at the times, place, and rate, and in the coin or currency herein
prescribed.

 

A-8

 

ASSIGNMENT

 

	
  Social Security or taxpayer I.D. or other
  identifying number of assignee

  	
   

  	
   

  
	
   

  	
   

  
	
  FOR VALUE
  RECEIVED, the undersigned hereby sells, assigns and transfers unto

  	
   

  
	
   

  	
   

  
	
  (name and address of assignee)

  
						

 

the within Class A-     Bond and all rights
thereunder, and hereby irrevocably constitutes and appoints
                                   ,
attorney, to transfer said Class A-     Bond on the books
kept for registration thereof, with full power of substitution in the premises.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
  Signature Guaranteed:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
					

 

 

 

*NOTE: The signature to this assignment must correspond with the name
of the registered owner as it appears on the face of the within Class A-    
Bond in every particular, without alteration, enlargement or any change
whatsoever.

 

A-9

 

SCHEDULE A

 

EXPECTED AMORTIZATION SCHEDULE

 

	
   

  	
   

  	
  Outstanding Principal Balance

  	
   

  
	
  Payment Date

  	
   

  	
  Class A-1

  	
   

  	
  Class A-2

  	
   

  	
  Class A-3

  	
   

  	
  Class A-4

  	
   

  	
  Class A-5

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Closing Date

  	
   

  	
  $

  	
  268,000,000.00

  	
   

  	
  $

  	
  647,000,000.00

  	
   

  	
  $

  	
  320,000,000.00

  	
   

  	
  $

  	
  468,000,000.00

  	
   

  	
  $

  	
  184,864,000.00

  	
   

  
	
  June 2005

  	
   

  	
  253,672,239.30

  	
   

  	
  647,000,000.00

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  September 2005

  	
   

  	
  191,354,378.20

  	
   

  	
  647,000,000.00

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  December 2005

  	
   

  	
  127,972,390.50

  	
   

  	
  647,000,000.00

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  March 2006

  	
   

  	
  71,463,317.00

  	
   

  	
  647,000,000.00

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  June 2006

  	
   

  	
  22,002,837.00

  	
   

  	
  647,000,000.00

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  September 2006

  	
   

  	
  0

  	
   

  	
  610,651,144.60

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  December 2006

  	
   

  	
  0

  	
   

  	
  553,644,681.30

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  March 2007

  	
   

  	
  0

  	
   

  	
  499,124,603.30

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  June 2007

  	
   

  	
  0

  	
   

  	
  446,693,213.90

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  September 2007

  	
   

  	
  0

  	
   

  	
  384,684,147.20

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  December 2007

  	
   

  	
  0

  	
   

  	
  324,020,926.10

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  March 2008

  	
   

  	
  0

  	
   

  	
  266,525,555.80

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  June 2008

  	
   

  	
  0

  	
   

  	
  212,018,305.10

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  September 2008

  	
   

  	
  0

  	
   

  	
  148,035,702.20

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  December 2008

  	
   

  	
  0

  	
   

  	
  85,365,112.00

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  March 2009

  	
   

  	
  0

  	
   

  	
  25,630,899.00

  	
   

  	
  320,000,000.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  June 2009

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  288,758,553.10

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  September 2009

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  222,386,871.90

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  December 2009

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  157,252,479.50

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  March 2010

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  94,936.586.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  June 2010

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  35,490,418.00

  	
   

  	
  468,000,000.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  September 2010

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  434,534,009.60

  	
   

  	
  184,864,000.00

  	
   

  
	
  December 2010

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  366,763,472.20

  	
   

  	
  184,864,000.00

  	
   

  
	
  March 2011

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  301,686,938.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  June 2011

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  239,441,760.60

  	
   

  	
  184,864,000.00

  	
   

  
	
  September 2011

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  167,635,745.60

  	
   

  	
  184,864,000.00

  	
   

  
	
  December 2011

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  96,961,141.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  March 2012

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  28,896,551.00

  	
   

  	
  184,864,000.00

  	
   

  
	
  June 2012

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  148,543,764.00

  	
   

  
	
  September 2012

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  73,742,437.00

  	
   

  
	
  December 2012

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  	
  0

  	
   

  
																	

 

 

SCHEDULE B

 

REQUIRED OVERCOLLATERALIZATION
LEVEL SCHEDULE

 

	
  Payment Date

  	
   

  	
  Required

  Overcollateralization Level

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Closing Date

  	
   

  	
  $

  	
  0

  	
   

  
	
  June 2005

  	
   

  	
  304,494

  	
   

  
	
  September 2005

  	
   

  	
  608,988

  	
   

  
	
  December 2005

  	
   

  	
  913,483

  	
   

  
	
  March 2006

  	
   

  	
  1,217,977

  	
   

  
	
  June 2006

  	
   

  	
  1,522,471

  	
   

  
	
  September 2006

  	
   

  	
  1,826,965

  	
   

  
	
  December 2006

  	
   

  	
  2,131,459

  	
   

  
	
  March 2007

  	
   

  	
  2,435,954

  	
   

  
	
  June 2007

  	
   

  	
  2,740,448

  	
   

  
	
  September 2007

  	
   

  	
  3,044,942

  	
   

  
	
  December 2007

  	
   

  	
  3,349,436

  	
   

  
	
  March 2008

  	
   

  	
  3,653,930

  	
   

  
	
  June 2008

  	
   

  	
  3,958,425

  	
   

  
	
  September 2008

  	
   

  	
  4,262,919

  	
   

  
	
  December 2008

  	
   

  	
  4,567,413

  	
   

  
	
  March 2009

  	
   

  	
  4,871,907

  	
   

  
	
  June 2009

  	
   

  	
  5,176,401

  	
   

  
	
  September 2009

  	
   

  	
  5,480,895

  	
   

  
	
  December 2009

  	
   

  	
  5,785,390

  	
   

  
	
  March 2010

  	
   

  	
  6,089,884

  	
   

  
	
  June 2010

  	
   

  	
  6,394,378

  	
   

  
	
  September 2010

  	
   

  	
  6,698,872

  	
   

  
	
  December 2010

  	
   

  	
  7,003,366

  	
   

  
	
  March 2011

  	
   

  	
  7,307,861

  	
   

  
	
  June 2011

  	
   

  	
  7,612,355

  	
   

  
	
  September 2011

  	
   

  	
  7,916,849

  	
   

  
	
  December 2011

  	
   

  	
  8,221,343

  	
   

  
	
  March 2012

  	
   

  	
  8,525,837

  	
   

  
	
  June 2012

  	
   

  	
  8,830,332

  	
   

  
	
  September 2012

  	
   

  	
  9,134,826

  	
   

  
	
  December 2012

  	
   

  	
  9,439,320EXHIBIT
10.1

 

EXECUTION VERSION

 

 

RECOVERY
PROPERTY PURCHASE AND SALE AGREEMENT

 

 

between

 

 

PG&E
ENERGY RECOVERY FUNDING LLC

 

 

Issuer

 

 

and

 

 

PACIFIC
GAS AND ELECTRIC COMPANY

 

 

Seller

 

 

Dated as
of February 10, 2005

 

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  SECTION 1.01. Definitions

  	
   

  
	
  SECTION 1.02. Other Definitional
  Provisions

  	
   

  
	
   

  	
   

  
	
  ARTICLE II
  CONVEYANCE OF RECOVERY PROPERTY

  	
   

  
	
   

  	
   

  
	
  SECTION 2.01. Conveyance of
  Recovery Property

  	
   

  
	
  SECTION 2.02. Conditions to the
  Sale of Recovery Property

  	
   

  
	
   

  	
   

  
	
  ARTICLE
  III REPRESENTATIONS AND WARRANTIES OF SELLER

  	
   

  
	
   

  	
   

  
	
  SECTION 3.01. Organization and
  Good Standing

  	
   

  
	
  SECTION 3.02. Due Qualification

  	
   

  
	
  SECTION 3.03. Power and Authority

  	
   

  
	
  SECTION 3.04. Binding Obligation

  	
   

  
	
  SECTION 3.05. No Violation and Consistency

  	
   

  
	
  SECTION 3.06. No Proceedings

  	
   

  
	
  SECTION 3.07. Approvals

  	
   

  
	
  SECTION 3.08. The Recovery Property

  	
   

  
	
  SECTION 3.09. Change in Law

  	
   

  
	
  SECTION 3.10 Pending Litigation

  	
   

  
	
  SECTION 3.11. Exemptions to DRC
  Charges

  	
   

  
	
  SECTION 3.12. Limitations on
  Representations and Warranties

  	
   

  
	
   

  	
   

  
	
  ARTICLE IV
  COVENANTS OF THE SELLER

  	
   

  
	
   

  	
   

  
	
  SECTION 4.01. Corporate Existence

  	
   

  
	
  SECTION 4.02. No Liens

  	
   

  
	
  SECTION 4.03. Delivery of Payments

  	
   

  
	
  SECTION 4.04. Notice of Liens

  	
   

  
	
  SECTION 4.05. Compliance With Law

  	
   

  
	
  SECTION 4.06. Covenants Related to
  Recovery Property

  	
   

  
	
  SECTION 4.07. Protection of Title

  	
   

  
	
  SECTION 4.08. Nonpetition Covenants

  	
   

  
	
  SECTION 4.09. Taxes

  	
   

  
	
   

  	
   

  
	
  ARTICLE
  V THE SELLER

  	
   

  
	
   

  	
   

  
	
  SECTION 5.01. Liability of Seller;
  Indemnities

  	
   

  
	
  SECTION 5.02. Merger or Consolidation of,
  or Assumption of the Obligations of, Seller

  	
   

  
	
  SECTION 5.03. Limitation on Liability of
  Seller and Others

  	
   

  
	
   

  	
   

  
	
  ARTICLE VI
  MISCELLANEOUS PROVISIONS

  	
   

  
	
   

  	
   

  
	
  SECTION 6.01. Amendment

  	
   

  

 

 

	
  SECTION 6.02. Notices

  	
   

  
	
  SECTION 6.03. Assignment

  	
   

  
	
  SECTION 6.04. Limitations on Rights of
  Others

  	
   

  
	
  SECTION 6.05. Severability

  	
   

  
	
  SECTION 6.06. Separate Counterparts

  	
   

  
	
  SECTION 6.07. Headings

  	
   

  
	
  SECTION 6.08. Governing Law

  	
   

  
	
  SECTION 6.09. Assignment to Note Trustee

  	
   

  

 

ii

 

RECOVERY PROPERTY
PURCHASE AND SALE AGREEMENT dated as of February 10, 2005, between
PG&E ENERGY RECOVERY FUNDING LLC, a Delaware limited liability company (the
“Issuer”), and PACIFIC GAS AND ELECTRIC COMPANY, a California corporation, as
Seller (the “Seller”).

 

WHEREAS the Issuer
desires to purchase the Recovery Property created pursuant to the Statute, the
Financing Order and the Issuance Advice Letter; and

 

WHEREAS the Seller
is willing to sell such Recovery Property to the Issuer.

 

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

 

ARTICLE I

DEFINITIONS

 

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

 

“Agreement” means
this Recovery Property Purchase and Sale Agreement, as the same may be amended
and supplemented from time to time.

 

“Basic Documents”
means this Agreement, the Servicing Agreement, and the Indenture.

 

“Bonds” means the
Series 2005-1 Energy Recovery Bonds issued by the Issuer under the Indenture.

 

“Class” means any
one of the classes of Bonds.

 

“Closing Date”
means February 10, 2005.

 

1

 

“Consumers” means
the existing and future consumers of electricity that has been transmitted or
distributed by means of electric transmission or distribution facilities,
whether those facilities are owned by the consumer, PG&E or any other
party, to the extent those existing and future consumers of electricity are
located in the service territory in which the Seller provided electric
distribution service as of December 19, 2003, other than consumers of
electricity exempted from the obligation to pay DRC Charges under the Statute
as further implemented by the CPUC.

 

“CPUC” means the
California Public Utilities Commission or any successor in interest.

 

“CPUC Regulations”
has the meaning assigned to that term in the Servicing Agreement.

 

“DRC Charge” means
the charges for fixed recovery amounts authorized to be billed to Consumers in
respect of Recovery Property pursuant to the Financing Order and the Issuance
Advice Letter, as calculated pursuant to the Issuance Advice Letter and each
true-up mechanism advice letter relating to the DRC Charge filed with the CPUC
pursuant to the Financing Order.

 

“Financing Order”
means the order of the CPUC, Decision 04-11-015, issued on
November 19, 2004, which became effective on November 29, 2004.

 

“Holders” or “Bondholders”
means the Persons in whose name a Bond is registered on the Bond Register (as
defined in the Indenture).

 

“Indenture” means
the Indenture dated as of February 10, 2005, between the Issuer and the
Trustee.

 

2

 

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

 

“Issuance Advice
Letter” means Advice 2626-E, dated February 7, 2005, filed with the CPUC by the
Seller pursuant to the Financing Order.

 

“Issuer” has the
meaning set forth in the heading of this Agreement.

 

“Lien” means a
security interest, lien, charge, pledge or encumbrance of any kind.

 

“Officer’s
Certificate” means a certificate signed by the chairman of the board, the
president, the vice chairman of the board, any vice president, the treasurer,
any assistant treasurer, the  secretary
or any assistant secretary of the Seller.

 

3

 

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

 

“Pending Appeals”
has the meaning specified in Section 3.08(f).

 

“Person” means any
individual, corporation, limited liability company, estate, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof, or any other entity
or organization, whether or not a legal entity.

 

“Plan of
Reorganization” has the meaning specified in Section 3.10.

 

“PG&E” means
Pacific Gas and Electric Company, a California corporation, or any successor.

 

“PU Code” means
the California Public Utilities Code, as amended from time to time.

 

“Rating Agencies”
means Moody’s, Standard & Poor’s and Fitch to the extent each such
Rating Agency maintains a rating on the Bonds at the request of the
Issuer.  If no such organization or
successor is any longer in existence, “Rating Agency” shall be a nationally
recognized statistical rating organization or other comparable Person
designated by the Issuer, notice of which designation shall be given to the
Trustee and the Servicer.

 

“Rating Agency
Condition” means, with respect to any action, that each Rating Agency shall
have been given ten (10) days prior notice thereof and that each of the
Rating Agencies shall have notified the Servicer, the Issuer and the Trustee in
writing that such action will not result in a reduction or withdrawal of the
then current rating by such Rating Agency of any Class of Bonds.

 

4

 

“Recovery Costs”
has the meaning assigned to that term in Section 848(i) of the PU Code.

 

“Recovery Property”
means the “recovery property” as defined in PU Code Section 848(j) that is
identified as “Recovery Property” in the Issuance Advice Letter and authorized
and created pursuant to the Financing Order.

 

“Seller” has the
meaning set forth in the heading hereto.

 

“Servicer Default”
means an event specified in Section 7.01 of the Servicing Agreement.

 

“Servicing
Agreement” means the Recovery Property Servicing Agreement, dated as of
February 10, 2005 between Pacific Gas and Electric Company, as Servicer,
and the Issuer.

 

“Settlement
Agreement” means the Settlement Agreement entered into on December 19, 2003, by
PG&E, PG&E Corporation and the CPUC in connection with PG&E’s
bankruptcy.

 

“Statute” means
Chapter 46, California Statutes of 2004, codified at Public Utilities Code
Section 848 et seq., as further amended from time to time.

 

“Tariff” means the
rate tariff filed with the CPUC as Advice 2596-E-A pursuant to the Statute and
the Financing Order, relating to the DRC Charges, as amended.

 

“Trustee” means
the Person acting as trustee under the Indenture, its successors in interest
and any successor trustee under the Indenture.

 

SECTION 1.02.  Other Definitional Provisions.

 

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

 

5

 

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

 

(c)  The words “hereof,” “herein,” “hereunder” and
words of similar import, when used in this Agreement, shall refer to this Agreement
as a whole and not to any particular provision of this Agreement; Section,
Schedule and Exhibit references contained in this Agreement are references to
Sections, Schedules and Exhibits in or to this Agreement unless otherwise
specified; and the term “including” shall mean “including without limitation”.

 

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

 

(e)  Each reference herein to the Servicing
Agreement, the Indenture, or any other Basic Document refers to such agreement
as in effect on the Closing Date unless otherwise agreed to by the Seller and
the Issuer.

 

(f)  Any term used herein that is defined in the
Statute and not otherwise defined herein shall have the meaning set forth in
the Statute.

 

ARTICLE II

CONVEYANCE OF RECOVERY PROPERTY

 

SECTION 2.01.  Conveyance of Recovery Property.

 

(a)                                  In
consideration of the Issuer’s payment to the Seller of $1,887,864,000, the
Seller does hereby irrevocably sell, transfer, assign, set over and otherwise
convey to the Issuer, without recourse except as otherwise set forth herein,
all right, title and interest of the

 

6

 

Seller in and to the
Recovery Property (such sale, transfer, assignment, set over and conveyance of
the Recovery Property includes, to the fullest extent permitted by the Statute,
the assignment of all revenues, collections, claims, rights, payments, money or
proceeds of or arising from the Tariff or constituting the DRC Charge including
the DRC Charge pursuant to the Financing Order and the Issuance Advice
Letter).  Such sale, transfer,
assignment, set over and conveyance is hereby expressly stated to be a sale
and, pursuant to Section 848.4(a) of the PU Code, shall be treated as an
absolute transfer of all of the Seller’s right, title and interest (as in a
true sale), and not as a pledge or other financing, of the Recovery
Property.  This is the statement referred
to in Section 848.4(a) of the PU Code. 
If such sale, transfer, assignment, set over and conveyance is held not
to be an absolute transfer as contemplated by Section 848.4(a) of the PU
Code, then such sale, transfer, assignment, set over and conveyance shall be
treated as the grant of a security interest in the Recovery Property and the
Seller hereby grants to the Issuer a security interest in all of its right,
title, and interest, whether now owned or hereafter acquired, in and to the
Recovery Property and the proceeds thereof to secure its obligations hereunder.

 

(b)                                 The
Seller shall not deliver to the Issuer or its assignee any payments in respect
of the DRC Charges or any proceeds thereof that the Financing Order, the
Tariff, an order or decision of the CPUC, or CPUC Regulations provide are to be
retained by the Seller and not remitted to the Issuer. If at any time, an order
or decision of the CPUC shall provide that any such amounts retained by the
Seller are required to be delivered to the Issuer, then promptly after such
order or decision becoming final and non-appealable, the Seller shall pay such
amounts to the Issuer or its assignee.

 

7

 

SECTION 2.02.  Conditions to the Sale of Recovery Property.

 

The Issuer’s
obligation to purchase Recovery Property on the Closing Date is subject to the
satisfaction or waiver of each of the following conditions:

 

(a)  On or prior to the Closing Date, the Seller
must duly execute and deliver this Agreement to the Issuer;

 

(b)  On or prior to the Closing Date, the Seller
must have received the Financing Order from the CPUC in a form acceptable to
the Seller;

 

(c)  On or prior to the Closing Date, the Seller
must have filed the Issuance Advice Letter with the CPUC, and such Issuance
Advice Letter must be effective;

 

(d)  On the Closing Date, the Seller must not be
insolvent and must not be made insolvent by the sale of Recovery Property to
the Issuer, and the Seller must not be aware of any pending insolvency with
respect to itself;

 

(e)  On the Closing Date, the representations and
warranties made by the Seller in the this Agreement must be true and correct,
the Seller must not have breached any of its covenants in such Agreement, and
the Servicer must not be in default under the Servicing Agreement;

 

(f)  On the Closing Date, the Issuer must have
sufficient funds available to pay the purchase price set forth in Section 2.01,
and all conditions to the issuance of the Bonds intended to provide the funds to
purchase the Recovery Property must have been satisfied or waived;

 

(g) On or prior to
the Closing Date, the Seller must have taken all action required to transfer
ownership of the Recovery Property to the Issuer on the Closing Date, free and
clear of all Liens, and the Issuer must have taken any action required for it
to grant the Trustee a first priority perfected security interest in the
collateral described in the Indenture;

 

8

 

(h)  The Issuer and the Trustee for the Bonds must
receive an opinion of outside tax counsel in form and substance reasonably
satisfactory to the Issuer and that Trustee;

 

(i)  On the Closing Date, the Servicing Agreement,
this Agreement, the Indenture, the Statute, the Financing Order and the
Issuance Advice Letter must be in full force and effect; and

 

(j)  Officer’s Certificates confirming the
satisfaction of each of these conditions must be delivered to the Issuer and
the Trustee.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

 

The Seller makes
the following representations and warranties, as of the Closing Date, on which
the Issuer has relied in acquiring the Recovery Property.  The representations and warranties shall
survive the sale of the Recovery Property to the Issuer and the grant of a
security interest therein to the Trustee pursuant to the Indenture.

 

SECTION 3.01.  Organization and Good Standing.

 

(a)  The Seller is duly organized and validly
existing and in good standing under the laws of the State of California, with
requisite corporate power and authority to own its properties as owned on the
Closing Date and to conduct its business as conducted by it on the Closing
Date, to obtain the Financing Order and to own, sell and transfer the Recovery
Property and to execute, deliver and perform the terms of this Agreement.

 

(b)  After giving effect to the sale of the
Recovery Property under this Agreement, the Seller: (i) is solvent and expects
to remain solvent, (ii) is adequately capitalized to conduct its business and
affairs considering its size and the nature of its business and intended
purposes,

 

9

 

(iii) is not engaged and
does not expect to engage in a business for which its remaining property
represents an unreasonably small capital, and (iv) is able to pay its debts as
they mature and does not intend to incur, nor does it believe that it will
incur, indebtedness that it will not be able to repay at its maturity.

 

SECTION 3.02.  Due Qualification. 
The Seller is duly qualified to do business and is in good standing, and
has obtained all necessary licenses and approvals, in all jurisdictions in
which the ownership or lease of property or the conduct of its business shall
require such qualifications, licenses or approvals (except where a failure to
qualify or obtain such licenses and approvals would not be reasonably likely to
have a material adverse effect on the Seller’s business, operations, assets,
revenues,  or properties).

 

SECTION 3.03.  Power and Authority. 
The Seller has the requisite corporate power and authority to execute
and deliver this Agreement and to carry out its terms, and the execution,
delivery and performance by the Seller of this Agreement have been duly
authorized by all necessary action on the part of the Seller under its
organizational or governing documents and laws.

 

SECTION 3.04.  Binding Obligation.  This Agreement constitutes a legal, valid and
binding obligation of the Seller, enforceable against the Seller in accordance
with its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other laws relating to or affecting
creditors’ or secured parties’ rights generally from time to time in effect and
to general principles of equity (including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing), regardless of
whether considered in a proceeding in equity or law.

 

SECTION 3.05.  No Violation and Consistency.   The
consummation by the Seller

 

10

 

of the transactions contemplated by this
Agreement (a) do not conflict with the organizational documents of the Seller
or any indenture or other agreement or instrument to which the Seller is a
party or by which it is bound, nor will consummation by the Seller of the
transactions contemplated hereunder result in the creation or imposition of any
Lien upon its properties pursuant to the terms of such indenture, agreement or
other instrument (other than any that may be granted under the Basic Documents
or the lien arising under Section 848.3(g) of the PU Code, the Financing Order
and the Issuance Advice Letter) or violate any existing law or any existing
order, rule or regulation applicable to the Seller and (b) is consistent with
PU Code and the Financing Order.

 

SECTION 3.06.  No Proceedings.

 

(a)  No proceeding is pending and, to the Seller’s
knowledge, no proceeding is threatened, against the Seller, and, to the Seller’s
knowledge, no investigation is pending or threatened against the Seller before
any governmental authority: (i) asserting the invalidity of the Statute,
the Financing Order, this Agreement, the Bonds or the Basic Documents,
(ii) seeking to prevent the issuance of the Bonds or the consummation of
any of the transactions contemplated by the Basic Documents, (iii) that would
have an outcome that could reasonably be expected to materially and adversely
affect the performance by the Seller of its obligations under, or the validity
or enforceability of, the Statute, the Financing Order, the Bonds, this
Agreement or the other Basic Documents, or (iv) seeking to adversely affect the
Federal income tax or state income or franchise tax classification of the Bonds
as debt.

 

(b)  There is no order by any court or regulatory
agency providing for the revocation, alteration, limitation or other impairment
of the Statute, the Financing Order, the

 

11

 

Issuance Advice Letter,
the Recovery Property or the DRC Charges or any rights arising under any of
them or that seeks to enjoin the performance of any obligations under the
Financing Order.

 

SECTION 3.07.  Approvals.  No governmental approvals, authorizations,
consents, orders or other actions or filings, other than filings under the
Statute, are required for the Seller to execute, deliver and perform its
obligations under this Agreement except those that have been obtained or made
or are required to be made by the Seller in the future pursuant to this
Agreement.

 

SECTION 3.08.  The Recovery Property.

 

(a)  Information.  Subject to the assumptions used in
calculating the DRC Charges and any other forecasts, projections and
predictions about events in the future, as of the Closing Date, all written
information, as amended or supplemented from time to time, provided by the
Seller to the Issuer with respect to the Recovery Property is true, correct and
complete in all material respects.

 

(b)  Title.  It is the intention of the parties hereto
that the transfer and assignment herein contemplated constitute a sale of the
Recovery Property from the Seller to the Issuer and that the Recovery Property
not be part of the debtor’s estate in the event of the filing of a bankruptcy
petition by or against the Seller under any bankruptcy law.  No portion of the Recovery Property has been
sold, transferred, assigned, pledged or otherwise conveyed by the Seller to any
Person other than the Issuer, and immediately prior to the sale of such
Recovery Property, the Seller owns the Recovery Property free and clear of all
Liens and rights of any other Person, and no offsets, defenses or counterclaims
exist or have been asserted with respect to the Recovery Property.

 

12

 

(c)  Transfer
Filings.  Immediately upon the sale
under this Agreement, the Recovery Property transferred on the Closing Date
shall be validly transferred and sold to the Issuer, the Issuer shall own all
such Recovery Property, free and clear of all Liens, except for the lien
arising under Section 848.3(g) of the PU Code, the Financing Order and the
Issuance Advice Letter, and all filings (including filings with the Secretary
of State of California under the Statute) necessary in any jurisdiction to give
the Issuer a perfected ownership interest in the Recovery Property shall have
been made.

 

(d)  Financing
Order and Issuance Advice Letters; Other Approvals.  Under the laws of the State of California
(including the Statute) and the United States in effect on the Closing
Date: (i) the Financing Order and the Issuance Advice Letter pursuant to
which the rights and the interests of the Seller have been created, including
the right to impose, collect and receive the DRC Charges and the interest in
and to the Recovery Property is in full force and effect, and the Seller has
validly and irrevocably consented to the terms of the Financing Order,
(ii) subject to the limitations set forth in Section 848.1(g) of the PU
Code (that nothing contained in Section 848.1 shall preclude the limitation or
alteration if and when adequate provision shall be made by law for the
protection of PG&E, owners of Recovery Property and holders of recovery
bonds) and Section 848.7 of the PU Code (that authorizes the CPUC to credit
ratepayers for certain amounts notwithstanding Section 848.1(g) of the PU
Code), the Bonds are entitled to the protection provided in the first sentence
of Section 848.1(g) of the PU Code, (iii) notwithstanding any other
provision of the Statute, the Bonds are entitled to the protections provided in
the first sentence of Section 848.2(d) of the PU Code, (iv)  the
Tariff has been filed with the CPUC in accordance with the Financing Order,
(v) the process by which the Financing Order was approved and the
Financing Order, the Issuance Advice Letter and the Tariff comply

 

13

 

with all applicable laws
and regulations, (vi) the Issuance Advice Letter and the Tariff have been filed
in accordance with the Financing Order, (vii) no other approval,
authorization, consent, order or other action of, or filing with any
governmental authority is required on the part of the Seller in connection with
the creation of the Recovery Property, except those that have been obtained or
made, and (viii) under the “contract clause” of the U.S. Constitution and the “contract
clause” of the California Constitution, Holders of the Bonds could successfully
challenge the constitutionality of any law enacted by the State of California,
whether enacted by legislation or voter initiative, that, after the Bonds are
issued but prior to the time that the Bonds are fully paid, repeals, amends or
violates the State Pledge (as defined in the Indenture) in a manner that
substantially impairs the Bonds or the Indenture, unless the law is reasonable
and necessary to serve an important public purpose such as remedying a broad
and general social or economic problem.

 

(e)  Assumptions.  Based on information available to the Seller
on the Closing Date, the assumptions used in calculating the DRC Charges as of
the Closing Date are reasonable and are made in good faith.

 

(f)  Creation of Recovery Property.  Upon the filing of the Issuance Advice Letter
with respect to the Recovery Property pursuant to the Financing Order,
regardless of the outcome of the pending appeals in Aglet Consumer Alliance
v. Public Utilities Commission et al. and City and County of San
Francisco vs. Public Utilities Commission et al., Nos. A106157 and A106158,
pending before the California Court of Appeals First Appellate District, City
of Palo Alto v. Official Committee of Unsecured Creditors et al., No.
3:04-cv-00727-VRW, pending before the United States District Court for the
Northern District of California and Loretta M. Lynch et al. v. CPUC et
al., No. 04-16493, pending before the United States Court of Appeals for
the Ninth

 

14

 

Circuit (collectively,
the “Pending Appeals”):  (i) the related
rights and interests of the Seller under the Financing Order, including the
right to impose, collect and receive the DRC Charges established pursuant to
the Financing Order, will become Recovery Property, (ii) the Recovery Property
will constitute a current property right, (iii) the Recovery Property will
include the right, title and interest of the Seller to the Tariff imposing the
DRC Charges, and the right to obtain periodic true-up adjustments of the DRC
Charges, (iv) the owner of the Recovery Property will be legally entitled to
bill DRC Charges and collect payments in respect of the DRC Charges in the
aggregate amount sufficient to pay or fund, in accordance with the Indenture,
the principal of the Bonds, all interest thereon, any credit enhancements, and
all related fees and costs with respect to the scheduled payment of the Bonds,
as well as other amounts payable under the Indenture, and (v) the Recovery
Property will not be subject to any Lien, except for the lien arising under
Section 848.3(g) of the PU Code, the Financing Order and the Issuance Advice
Letter.

 

(g)                                 Taxes.  Under existing law as of the Closing Date,
Bondholders will not be responsible for, nor will payments to Bondholders be
reduced by, any sales tax, gross receipts tax, general corporation tax, single
business tax, personal property tax, privilege tax, franchise or license tax,
or other tax imposed on the Seller or the Issuer as a result of the sale and
assignment of the Recovery Property by the Seller to the Issuer, the
acquisition of the Recovery Property by the Issuer or the issuance and sale by
the Issuer of the Bonds, other than withholding of taxes applicable to Bond
payments and any taxes imposed as a result of a failure of the Issuer or the
Seller to properly withhold or remit taxes imposed with respect to payments on
any Bond.

 

SECTION 3.09.  Change in Law.  The representations and warranties in this
Agreement speak as of the Closing Date. 
Any change in the law by legislative enactment,

 

15

 

constitutional amendment or voter initiative
that renders untrue any of the representations or warranties in this Agreement
will not constitute a breach under this Agreement.   For purposes of this Section 3.09, the
outcome of appeals relating to the Settlement Agreement or the Plan of
Reorganization pending on the Closing Date in the Pending Appeals will not be
treated as a change in law.

 

SECTION 3.10 
Pending Litigation.  The
Pending Appeals are the only proceedings pending in any court on the Closing
Date seeking to overturn the Settlement Agreement or the order of the United
States Bankruptcy Court for the Northern District of California, San Francisco
Division, dated December 22, 2003 (the “Confirmation Order”), confirming the
Plan of Reorganization dated July 31, 2003, as amended by Modifications dated
November 6, 2003, December 19, 2003 and February 19, 2004 and as supplemented
by the Composite Plan Supplement filed as Exhibit B to the Confirmation Order
(the “Plan of Reorganization”).

 

SECTION 3.11.  Exemptions to DRC Charges.  The Statute provides for the exemption of
certain Consumers or categories of Consumers from the DRC Charge. The Statute
requires the CPUC to establish an effective mechanism that ensures recovery of
recovery costs through DRC Charges from other existing and future Consumers.
The Statute also includes a pledge that the State will neither limit nor alter
the Recovery Property nor any associated DRC Charges until the Bonds, together
with interest thereon, have been fully discharged; provided, however, the
Statute permits the State to avoid these requirements if and when adequate
provision shall be made by law for the protection of holders of the Bonds. Bay
Area Rapid Transit District (“BART”) has asserted that Chapter 613 of the
California Statutes of 2004 and associated legislative history evidence that
the California legislature intended that BART also be

 

16

 

exempted from the DRC Charge. To the best
knowledge of the Seller, after reasonable investigation, no existing laws would
exempt Consumers from the payment of the DRC Charge in a manner that would
materially and adversely affect the Recovery Property or the holders of Bonds.

 

SECTION 3.12.  Limitations on Representations and
Warranties.

 

(a)  Notwithstanding the above, the Seller makes
no representation or warranty that any amounts actually collected arising from
the DRC Charges will in fact be sufficient to meet payment obligations on the
Bonds or that the assumptions made in calculating the DRC Charges will in fact
be realized.

 

(b)  The representations and warranties made by
the Seller survive the execution and delivery of this Agreement and may not be
waived by the Issuer or the Seller except pursuant to a written agreement as to
which the Rating Agency Condition has been satisfied.

 

ARTICLE IV

COVENANTS OF THE SELLER

 

SECTION 4.01.  Corporate Existence.  Subject to its right to assign its rights and
obligations under this Agreement, so long as any of the Bonds are outstanding,
the Seller (a) will keep in full force and effect its existence and remain
in good standing under the laws of the jurisdiction of its organization and
(b) will obtain and preserve its qualifications to do business in those
jurisdictions necessary to protect the validity and enforceability of the Basic
Documents to which the Seller is a party or the extent necessary to perform its
obligations under the Basic Documents to which it is a party.

 

SECTION 4.02.  No Liens.  Except for the conveyances under this
Agreement or the

 

17

 

lien arising under Section 848.3(g) of the PU
Code, the Financing Order and the Issuance Advice Letter, the Seller will not
sell, pledge, assign or transfer, or grant, create, incur, assume or suffer to
exist any Lien, arising through or under the Seller, on any of the Recovery
Property, or any interest therein, and the Seller shall defend the right, title
and interest of the Issuer and of the Trustee in, to and under the Recovery
Property against all claims of third parties claiming through or under the
Seller.  The Seller also covenants that
it will not at any time assert any Lien against, or with respect to, any of the
Recovery Property.

 

SECTION 4.03.  Delivery of Payments.  If the Seller receives any payments in
respect of the DRC Charges or the proceeds thereof other than in its capacity
as the Servicer, the Seller agrees to pay all those payments to the Servicer
and to hold such amounts in trust for the Issuer prior to such payment;
provided, however, that notwithstanding any other provision of this Agreement,
the Seller shall not be obligated to remit to the Servicer or any other person
or entity, or to hold in trust, any payments in respect of the DRC Charges or
any proceeds thereof that the Financing Order, the Tariff, an order or decision
of the CPUC, or CPUC Regulations provide are to be retained by the Seller and
not remitted to the Issuer.

 

SECTION 4.04.  Notice of Liens.  The Seller shall notify the Issuer and the
Trustee promptly after becoming aware of any Lien arising through or under it
on any of the Recovery Property other than the conveyances hereunder or the
lien arising under Section 848.3(g) of the PU Code, the Financing Order and the
Issuance Advice Letter.

 

SECTION 4.05.  Compliance With Law.  The Seller hereby agrees to comply with its
organizational or governing documents and all laws, treaties, rules,
regulations and determinations of any governmental authority applicable to the
Seller, except to the extent that failure to so comply would not materially
adversely affect the Issuer’s or the Trustee’s interests

 

18

 

in the Recovery Property or under any of the
Basic Documents to which the Seller is a party or the Seller’s performance of
its obligations under any of the other Basic Documents to which it is party.

 

SECTION 4.06.  Covenants Related to Recovery Property.

 

(a)  So long as any of the Bonds are outstanding:
(i) the Seller shall disclose in its financial statements that the Issuer’s
assets are not available to creditors of the Seller and the Recovery Property
is not legally an asset of the Seller, and (ii) the Seller shall disclose the
effects of all transactions between the Issuer and the Seller in accordance
with generally accepted accounting principles.

 

(b)  The
Seller agrees that upon the sale by the Seller of the Recovery Property to the
Issuer pursuant to this Agreement, (i) the Issuer shall have all of the
rights originally held by the Seller with respect to the Recovery Property,
including the right to exercise any and all rights and remedies to collect any
amounts payable by any Consumer in respect of the Recovery Property,
notwithstanding any objection or direction to the contrary by the Seller and
(ii) any payment by any Consumer to the Issuer shall discharge such
Consumer’s obligations in respect of the Recovery Property to the extent of
such payment, notwithstanding any objection or direction to the contrary by the
Seller.

 

(c)  So
long as any of the Bonds are outstanding, (i) in all proceedings relating
directly or indirectly to the Recovery Property, the Seller shall affirmatively
certify and confirm that it has sold all of its rights and interests in and to
such property (other than for financial reporting or tax purposes),
(ii) the Seller shall not make any statement or reference in respect of
the Recovery Property that is inconsistent with the ownership interest of the
Issuer (other than for financial reporting or tax purposes), (iii) the
Seller shall not take any action in respect of the

 

19

 

Recovery Property except
solely in its capacity as Servicer pursuant to the Servicing Agreement or as
otherwise contemplated by the Basic Documents, and (iv) the Seller shall not
sell recovery property in connection with the issuance of additional bonds by
the Issuer unless the Rating Agency Condition has been satisfied.

 

(d)  The Seller agrees not to withdraw the filing
of the Issuance Advice Letter with the CPUC.

 

(e)  The Seller shall make all reasonable efforts
to keep each Tariff that relates to the Recovery Property in full force and
effect.

 

(f)  Promptly after obtaining knowledge of any
breach in any material respect of its representations and warranties in this
Agreement, the Seller shall notify the Issuer and the Rating Agencies of the
breach.

 

(g)  The Seller shall use the proceeds of the sale
of the Recovery Property in accordance with the Financing Order and the
Statute.

 

(h)  Upon the request of the Issuer, the Seller
shall execute and deliver such further instruments and do such further acts as
may be necessary to carry out the provisions and purposes of this Agreement.

 

20

 

SECTION 4.07.  Protection of Title.  The Seller shall execute and file the filings
required by law to perfect and continue the perfection of the interests of the
Issuer in the Recovery Property.  The
Seller also agrees to take those legal or administrative actions that may be
reasonably necessary to protect the Issuer from claims, state actions or other
actions or proceedings of third parties which, if successfully pursued, would
result in a breach of any representation or warranty of the Seller set forth in
Article III, and the costs of any such actions or proceedings will be paid
by the Seller.

 

SECTION 4.08.  Nonpetition Covenants.  Even if this Agreement or the Indenture is
terminated, the Seller shall not, prior to the date which is one year and one
day after the termination of all indentures under which the Issuer issues
energy recovery bonds, petition or otherwise invoke the process of any court or
government authority for the purpose of commencing or sustaining an involuntary
case against the Issuer under any Federal or state bankruptcy, insolvency or
similar law, appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official for any substantial part of the property
of the Issuer, or ordering the winding up or liquidation of the affairs of the
Issuer.

 

SECTION 4.09.  Taxes. 
So long as any of the Bonds are outstanding, except for taxes,
assessments and governmental charges which the Seller is contesting in good
faith by appropriate proceedings, the Seller shall pay all material taxes,
assessments and  governmental charges
imposed upon it or any of its properties or assets or with respect to any of
its franchises, business, income or property before any penalty accrues if the
failure to pay any such taxes, assessments and governmental charges would,
after any applicable grace periods, notices or other similar requirements, result
in a lien on the Recovery Property.

 

21

 

ARTICLE
V

THE SELLER

 

SECTION 5.01.  Liability of Seller; Indemnities.

 

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

 

(b)  The
Seller shall indemnify the Issuer and the Trustee (for itself and for the
benefit of the Bondholders) and each of the Issuer’s and the Trustee’s
respective officers, directors, members, employees and agents and defend and
hold harmless each such person from and against (i) any and all amounts of
principal of and interest on the Bonds not paid when due or when scheduled to
be paid in accordance with their terms, (ii) any other amounts payable to any
Person in connection with the Bonds or in connection with the Recovery
Property, including but not limited to Trustee’s fees and expenses, that are
not paid when due or when scheduled to be paid pursuant to the Indenture, (iii)
the amount of any other deposits to the Collection Account required to have
been made in accordance with the terms of the Basic Documents and retained in
the Capital Subaccount, in the Overcollateralization Subaccount or in the
Reserve Subaccount or released to the Issuer free of the lien of the Indenture,
which are not made when so required, (iv) any reasonable costs and
expenses incurred by such Person that are not recoverable pursuant to the
Indenture and (v) any taxes payable by Bondholders resulting in a breach of
Section 3.08(g), in each case to the extent resulting from the Seller’s breach
of any of its representations, warranties or covenants contained in this
Agreement, except to the extent of losses either resulting from the willful
misconduct, bad faith or gross negligence of such indemnified Persons or
resulting from a breach of representation or warranty made in any of the Basic
Documents by

 

22

 

the party seeking
indemnification.  The Seller’s obligation
to provide indemnification pursuant to this Section 5.01(b) shall survive the
resignation or removal of the Trustee.

 

(c)  Notwithstanding Section 5.01(b) above, the
Seller shall not be liable for any loss, damages, liability, obligation, claim,
action, suit or payment resulting solely from a downgrade in the ratings on the
Bonds or for any consequential damages, including any loss of market value of
the Bonds, resulting from any default or any downgrade of the ratings of the
Bonds.

 

(d)  The indemnities described in this Section
will survive the termination of this Agreement and include reasonable fees and
expenses of investigation and litigation, including reasonable attorneys’ fees
and expenses.

 

SECTION 5.02.  Merger or Consolidation of, or Assumption
of the Obligations of, Seller.  Any
Person (a) into which the Seller may be merged, converted or consolidated
and that succeeds to all or substantially all of the electric distribution
business of the Seller, (b) that results from the division of the Seller into
two or more Persons and succeeds that to all or substantially all of the
electric distribution business of the Seller, (c) that results from any
merger or consolidation to which the Seller shall be a party and that succeeds
to all or substantially all of the electric distribution business of the
Seller, (d) that succeeds to the properties and assets of the Seller
substantially as a whole, or succeeds to all or substantially all of the
electric distribution business of the Seller, or (e) that otherwise succeeds to
all or substantially all of the electric distribution business of the Seller,
shall be the successor to the Seller under this Agreement without further act
on the part of any of the parties to this Agreement; provided, further, that
(i) immediately after giving effect to any transaction referred to above,
no representation or warranty made by the Seller pursuant to Article III
shall have been breached and, to the extent the

 

23

 

Seller is the Servicer, no default under the
Servicing Agreement, and no event, that after notice or lapse of time, or both,
would become a default under the Servicing Agreement will have occurred and be
continuing, (ii) the successor to the Seller must execute an agreement of assumption
to perform every obligation of the Seller under this Agreement, (iii) the
Rating Agencies shall have received prior written notice of such transaction,
and (iv) the Seller shall have delivered to the Issuer and the Trustee an
Officer’s Certificate and an Opinion of Counsel each stating that such
consolidation, merger or succession and such agreement of assumption comply
with this Section and that all conditions precedent, if any, provided for in
this Agreement relating to such transaction have been complied with.

 

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

 

ARTICLE VI

MISCELLANEOUS PROVISIONS

 

SECTION 6.01.  Amendment.  This Agreement may be amended by the Seller
and the Issuer with the prior written consent of the Trustee.  In addition, any amendment will not be
effective unless the Rating Agency Condition is satisfied.  The Issuer shall notify the Rating Agencies
promptly after the execution of any such amendment.

 

SECTION 6.02.  Notices.  All demands, notices and communications upon
or to

 

24

 

the Seller, the Issuer, the Trustee or the
Rating Agencies under this Agreement shall be in writing, personally delivered,
mailed or sent by telecopy or other similar form of rapid transmission, and
shall be deemed to have been duly given upon receipt (a) in the case of
the Seller, to Pacific Gas and Electric Company, at 77 Beale Street,
San Francisco, California 94105, Attention of Treasurer, (b) in
the case of the Issuer, to PG&E Energy Recovery Funding LLC,
245 Market Street, Room 424, San Francisco,
California 94105, Attention of President, (c) in the case of the
Trustee, at the Corporate Trust Office, 60 Wall Street, Floor 26, New York, New
York 10005, Attention:  Structured
Finance Services, (d) in the case of Moody’s, to Moody’s Investors
Service, Inc., ABS Monitoring Department, 99 Church Street, New York,
New York 10007, (e) in the case of Standard & Poor’s,
to Standard & Poor’s Corporation, 55 Water Street, 40th Floor,
New York, New York 10041, Attention of Attention of Asset Backed
Surveillance Department, (f) in the case of Fitch, to Fitch, Inc.,
One State Street Plaza, New York, NY 10004, Attention of
Asset-Backed Securities Surveillance, or (g) as to each of the foregoing,
at such other address as shall be designated by written notice to the other
parties.

 

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

 

SECTION 6.04.  Limitations on Rights of Others.  The provisions of this Agreement are solely
for the benefit of the Seller, the Issuer, the Trustee and the Bondholders, and
nothing in this Agreement, whether express or implied, shall be construed to
give to any other Person any legal or equitable right, remedy or claim under or
in respect of this Agreement or any covenants, conditions or provisions
contained herein.

 

SECTION 6.05.  Severability.  Any provision of this Agreement that is
prohibited

 

25

 

or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.

 

SECTION 6.06.  Separate Counterparts.  This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.

 

SECTION 6.07.  Headings.  The headings of the various Articles and
Sections herein are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.

 

SECTION 6.08.  Governing Law.  This Agreement shall be construed in
accordance with the laws of the State of California, without reference to its
conflict of law provisions, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.

 

SECTION 6.09.  Assignment to Trustee.  The Seller hereby acknowledges and consents
to the grant of a security interest by the Issuer to the Trustee pursuant to
the Indenture of all right, title and interest of the Issuer in, to and under
the Recovery Property and the proceeds thereof and all of the Issuer’s rights
and obligations hereunder.

 

[Signature page follows]

 

26

 

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

 

	
   

  	
  PG&E ENERGY RECOVERY FUNDING
  LLC,

  
	
   

  	
  Issuer,

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael J. Donnelly

  	
   

  
	
   

  	
  Name:

  	
  Michael J. Donnelly

  
	
   

  	
  Title:

  	
  Treasurer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PACIFIC GAS AND ELECTRIC COMPANY,

  
	
   

  	
  Seller,

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kent M. Harvey

  	
   

  
	
   

  	
  Name:

  	
  Kent M. Harvey

  
	
   

  	
  Title:

  	
  Senior Vice President, Chief

  
	
   

  	
   

  	
  Financial Officer and Treasurer

  
					

 

 

[Signature page to
Recovery Property Purchase and Sale Agreement]

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