TRANSITION PROPERTY SERVICING AGREEMENT

E XHIBIT 99.1

Execution Copy

TRANSITION PROPERTY SERVICING AGREEMENT

by and between

AEP TEXAS CENTRAL TRANSITION FUNDING II LLC,

Issuer

and

AEP TEXAS CENTRAL COMPANY,

Servicer

Dated as of October 11, 2006

TABLE OF CONTENTS

 

 

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EXHIBITS AND SCHEDULES

 

 

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This TRANSITION PROPERTY SERVICING AGREEMENT (this “ Agreement ”), dated as of October 11, 2006, is between AEP TEXAS CENTRAL TRANSITION FUNDING II LLC, a Delaware limited liability company, as issuer (the “ Issuer ”), and AEP TEXAS CENTRAL COMPANY (“ TCC ”), a Texas corporation, as servicer (the “ Servicer ”).

RECITALS

WHEREAS, pursuant to the Securitization Law and the Initial Financing Order, TCC, in its capacity as seller (the “ Seller ”), and the Issuer are concurrently entering into the Sale Agreement pursuant to which the Seller is selling and the Issuer is purchasing certain Transition Property created pursuant to the Securitization Law and the Initial Financing Order described therein, and the Seller may sell other Transition Property to the Issuer pursuant to the Sale Agreement;

WHEREAS, in connection with its ownership of the Transition Property and in order to collect the associated Transition Charges, the Issuer desires to engage the Servicer to carry out the functions described herein (such functions or similar functions currently performed by the Servicer for itself with respect to its own charges to its customers and for AEP Texas Central Funding LLC with respect to a prior transaction under the Securitization Law) and the Servicer desires to be so engaged;

WHEREAS, the Issuer desires to engage the Servicer to act on its behalf in obtaining Annual True-Up Adjustments, Non-Standard True-Up Adjustments and Interim True-Up Adjustments from the PUCT and the Servicer desires to be so engaged;

WHEREAS, the TC Collections initially will be commingled with other funds collected by the Servicer;

WHEREAS, certain parties may have an interest in such commingled collections, and such parties have entered into an Intercreditor Agreement as of the date hereof that allows the Servicer to allocate the collected, commingled funds according to each party’s interest; and

WHEREAS, the PUCT, or its attorney, will enforce this Agreement for the benefit of the Customers to the extent permitted by law;

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 .

(a) Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in that certain Indenture (including Appendix A thereto) dated as of the date hereof between the Issuer and The Bank of New York, a New York banking corporation, in its capacity as the indenture trustee (the “ Indenture Trustee ”) and in its separate capacity as a

securities intermediary (the “ Securities Intermediary ”), as the same may be amended, restated, supplemented or otherwise modified from time to time.

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

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

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

(e) Non-capitalized terms used herein which are defined in the Utilities Code shall, as the context requires, have the meanings assigned to such terms in the Utilities Code, but without giving effect to amendments to the Utilities Code after the date hereof which have a material adverse effect on the Issuer or the Holders.

ARTICLE II

APPOINTMENT AND AUTHORIZATION

SECTION 2.01. Appointment of Servicer; Acceptance of Appointment. The Issuer hereby appoints the Servicer, and the Servicer hereby accepts such appointment, to perform the Servicer’s obligations pursuant to this Agreement on behalf of and for the benefit of the Issuer or any assignee thereof in accordance with the terms of this Agreement and applicable law. This appointment and the Servicer’s acceptance thereof may not be revoked except in accordance with the express terms of this Agreement.

SECTION 2.02. Authorization. With respect to all or any portion of the Transition Property, the Servicer shall be, and hereby is, authorized and empowered by the Issuer to (a) execute and deliver, on behalf of itself and/or the Issuer, as the case may be, any and all instruments, documents or notices, and (b) on behalf of itself and/or the Issuer, as the case may be, make any filing and participate in proceedings of any kind with any Governmental Authority, including with the PUCT. The Issuer shall execute and deliver to the Servicer such documents as have been prepared by the Servicer for execution by the Issuer and shall furnish the Servicer with such other documents as may be in the Issuer’s possession, in each case as the Servicer may determine to be necessary or appropriate to enable it to carry out its servicing and administrative duties hereunder. Upon the Servicer’s written request, the Issuer shall furnish the Servicer with any powers of attorney or other documents necessary or appropriate to enable the Servicer to carry out its duties hereunder.

SECTION 2.03. Dominion and Control Over the Transition Property. Notwithstanding any other provision herein, the Issuer shall have dominion and control over the Transition Property, and the Servicer, in accordance with the terms hereof, is acting solely as the

 

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servicing agent and custodian for the Issuer with respect to the Transition Property and the Transition Property Records. The Servicer shall not take any action that is not authorized by this Agreement, that would contravene the Utilities Code, the PUCT Regulations or the Applicable Financing Order, that is not consistent with its customary procedures and practices, or that shall impair the rights of the Issuer in the Transition Property, in each case unless such action is required by applicable law or court or regulatory order.

ARTICLE III

ROLE OF SERVICER

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

(a) Duties of Servicer Generally . The Servicer’s duties in general shall include management, servicing and administration of the Transition Property; obtaining meter reads, calculating usage (including demand and including any such usage by Customers served by a REP), billing, collections and posting of all payments in respect of the Transition Property; responding to inquiries by Customers, REPs, the PUCT, or any other Governmental Authority with respect to the Transition Property; delivering Bills to Customers or REPs; investigating and handling delinquencies (and furnishing reports with respect to such delinquencies to the Issuer), processing and depositing collections and making periodic remittances; furnishing periodic reports to the Issuer, the Indenture Trustee and the Rating Agencies; making all filings with the PUCT and taking such other action as may be necessary to perfect the Issuer’s ownership interests in and the Indenture Trustee’s first priority lien and security interest on the Transition Property; making all filings and taking such other action as may be necessary to perfect and maintain the perfection and priority of the Indenture Trustee’s lien on and security interest in all Transition Bond Collateral; selling as the agent for the Issuer as its interests may appear defaulted or written off accounts in accordance with the Servicer’s usual and customary practices; taking all necessary action in connection with True-Up Adjustments as set forth herein; and performing such other duties as may be specified under the Applicable Financing Order to be performed by it. Anything to the contrary notwithstanding, the duties of the Servicer set forth in this Agreement shall be qualified in their entirety by any PUCT Regulations, the Applicable Financing Orders, and the federal securities laws and the rules and regulations promulgated thereunder, including without limitation, Regulation AB, as in effect at the time such duties are to be performed. Without limiting the generality of this Section 3.01(a) , in furtherance of the foregoing, the Servicer hereby agrees that it shall also have, and shall comply with, the duties and responsibilities relating to data acquisition, usage and bill calculation, billing, customer service functions, collections, payment processing and remittance set forth in Annex I hereto, as it may be amended from time to time. For the avoidance of doubt, the term “usage” when used herein refers to both kilowatt hour consumption and kilowatt demand.

(b) Reporting Functions .

(i) Monthly Servicer’s Certificate . On or before the twenty-fifth calendar day of each month (or if such day is not a Servicer Business Day, on the immediately preceding Servicer Business Day), the Servicer shall prepare and deliver to the Issuer, the Indenture Trustee and the Rating Agencies a written

 

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report substantially in the form of Exhibit A hereto (a “ Monthly Servicer’s Certificate ”) setting forth certain information relating to TC Payments received by the Servicer during the Collection Period immediately preceding such date; provided , however , that for any month in which the Servicer is required to deliver a Servicer’s Certificate pursuant to Section 4.01(c)(ii) , the Servicer shall prepare and deliver the Monthly Servicer’s Certificate no later than the date of delivery of such Servicer’s Certificate.

(ii) Notification of Laws and Regulations . The Servicer shall immediately notify the Issuer, the Indenture Trustee and the Rating Agencies in writing of any Requirements of Law or PUCT Regulations hereafter promulgated that have a material adverse effect on the Servicer’s ability to perform its duties under this Agreement.

(iii) Other Information . Upon the reasonable request of the Issuer, the Indenture Trustee or any Rating Agency, the Servicer shall provide to the Issuer, the Indenture Trustee or such Rating Agency, as the case may be, any public financial information in respect of the Servicer, or any material information regarding the Transition Property to the extent it is reasonably available to the Servicer, as may be reasonably necessary and permitted by law to enable the Issuer, the Indenture Trustee or the Rating Agencies to monitor the performance by the Servicer hereunder. In addition, so long as any of the Transition Bonds of any Series are outstanding, the Servicer shall provide the Issuer and the Indenture Trustee, within a reasonable time after written request therefor, any information available to the Servicer or reasonably obtainable by it that is necessary to calculate the Transition Charges applicable to each TC Customer Class.

(iv) Preparation of Reports . The Servicer shall prepare and deliver such additional reports as required under this Agreement, including a copy of each Servicer’s Certificate described in Section 4.01(c)(ii) , the annual Certificate of Compliance described in Section 3.03 , and the Annual Accountant’s Report described in Section 3.04 . In addition, the Servicer shall prepare, procure, deliver and/or file, or cause to be prepared, procured, delivered or filed, any reports, attestations, exhibits, certificates or other documents required to be delivered or filed with the SEC (and/or any other Governmental Authority) by the Issuer or the Sponsor under the federal securities or other applicable laws or in accordance with the Basic Documents, including, but without limiting the generality of foregoing, filing with the SEC, if applicable, a copy or copies of (i) the Monthly Servicer’s Certificates described in Section 3.01(b) (under Form 10-D or any other applicable form), (ii) the Servicer’s Certificates described in Section 4.01(c)(ii) (under Form 10-D or any other applicable form), (iii) the annual statements of compliance, attestation reports and other certificates described in Section 3.03 , and (iv) the Annual Accountant’s Report (and any attestation required under Regulation AB) described in Section 3.04 . In addition, the appropriate officer or officers of the Servicer shall (in its separate capacity as Servicer) sign the Sponsor’s annual report on Form 10-K (and any other applicable SEC or other reports, attestations, certifications and other documents),

 

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to the extent that the Servicer’s signature is required by, and consistent with, the federal securities law and/or any other applicable law.

(c) Opinions of Counsel . The Servicer shall deliver to the Issuer and the Indenture Trustee:

(i) promptly after the execution and delivery of this Agreement and of each amendment hereto, promptly after the execution of each Sale Agreement and of each amendment thereto and on each Subsequent Transfer Date, an Opinion of Counsel from external counsel of the Issuer either (A) to the effect that, in the opinion of such counsel, all filings, including filings with the PUCT and the Texas Secretary of State and all filings pursuant to the UCC, that are necessary under the UCC and the Securitization Law to fully preserve, protect and perfect the Liens of the Indenture Trustee in the Transition Property have been authorized, executed and filed, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (B) to the effect that, in the opinion of such counsel, no such action shall be necessary to preserve and protect such Liens; and

(ii) within ninety (90) days after the beginning of each calendar year beginning with the first calendar year beginning more than three (3) months after the date hereof, an Opinion of Counsel from external counsel of the Issuer, dated as of a date during such ninety (90)-day period, either (A) to the effect that, in the opinion of such counsel, all filings, including filings with the PUCT and the Texas Secretary of State and all filings pursuant to the UCC, have been executed and filed that are necessary under the UCC and the Securitization Law to fully preserve, protect and perfect the Liens of the Indenture Trustee in the Transition Property, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (B) to the effect that, in the opinion of such counsel, no such action shall be necessary to preserve, protect and perfect such Liens.

Each Opinion of Counsel referred to in clause (i)  or (ii)  above shall specify any action necessary (as of the date of such opinion) to be taken in the following year to preserve and protect such interest or Lien.

SECTION 3.02. Servicing and Maintenance Standards . On behalf of the Issuer, the Servicer shall (a) manage, service, administer and make collections in respect of the Transition Property with reasonable care and in material compliance with applicable Requirements of Law, including all applicable PUCT Regulations and guidelines, using the same degree of care and diligence that the Servicer exercises with respect to similar assets for its own account and, if applicable, for others; (b) follow customary standards, policies and procedures for the industry in Texas in performing its duties as Servicer; (c) use all reasonable efforts, consistent with its customary servicing procedures, to enforce, and maintain rights in respect of, the Transition Property and to bill and collect the Transition Charges; (d) comply with all Requirements of Law, including all applicable PUCT Regulations and guidelines, applicable to and binding on it relating to the Transition Property; (e) file all PUCT notices described in the

 

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Securitization Law and file and maintain the effectiveness of UCC financing statements with respect to the property transferred from time to time under the Sale Agreement, and (f) take such other action on behalf of the Issuer to ensure that the Lien of the Indenture Trustee on the Transition Bond Collateral remains perfected and of first priority. The Servicer shall follow such customary and usual practices and procedures as it shall deem necessary or advisable in its servicing of all or any portion of the Transition Property, which, in the Servicer’s judgment, may include the taking of legal action, at the Issuer’s expense but subject to the priority of payment set forth in Section 8.02(e) of the Indenture.

SECTION 3.03. Annual Reports on Compliance with Regulation AB .

(a) The Servicer shall deliver to the Issuer, the Indenture Trustee and the Rating Agencies, on or before the earlier of (a) March 31 of each year or (b) with respect to each calendar year during which the Sponsor’s annual report on Form 10-K is required to be filed in accordance with the Exchange Act and the rules and regulations thereunder, the date on which the annual report on Form 10-K is required to be filed in accordance with the Exchange Act and the rules and regulations thereunder, certificates from a Responsible Officer of the Servicer (i) containing, and certifying as to, the statements of compliance required by Item 1123 (or any successor or similar items or rule) of Regulation AB, as then in effect and (ii) containing, and certifying as to, the statements and assessment of compliance required by Item 1122(a) (or any successor or similar items or rule) of Regulation AB, as then in effect.

(b) The Servicer shall use commercially reasonable efforts to obtain from each other party participating in the servicing function any additional certifications as to the statements and assessment required under Item 1122 or Item 1123 of Regulation AB to the extent required in connection with the filing of the annual report on Form 10-K; provided, however, that a failure to obtain such certifications shall not be a breach of the Servicer’s duties hereunder. The parties acknowledge that the Indenture Trustee’s certifications shall be limited to the Item 1122 certifications described in Exhibit E of the Indenture.

(c) The initial Servicer, in its capacity as Sponsor, shall post on its website and file with or furnish to the SEC, in periodic reports and other reports as are required from time to time under Section 13 or Section 15(d) of the Exchange Act (without regard to the number of Holders of Transition Bonds to the extent permitted by and consistent with the Sponsor’s obligations under applicable law), the information described in Section 3.07(g) of the Indenture with respect to each Series of Outstanding Transition Bonds to the extent such information is reasonably available to the Sponsor. The initial Servicer, in its capacity as Sponsor, shall not voluntarily suspend or terminate its filing obligations as Sponsor with the SEC as described in this Section 3.03(c) . The covenants of the initial Servicer, in its capacity as Sponsor, pursuant to this Section 3.03(c) shall survive the resignation, removal or termination of the initial Servicer as Servicer hereunder.

SECTION 3.04. Annual Report by Independent Registered Public Accountants .

(a) The Servicer, at its own expense in partial consideration of the Servicing Fee paid to it, shall cause a firm of Independent registered public accountants (which may

 

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provide other services to the Servicer or the Seller) to prepare annually, and the Servicer shall deliver annually to the Issuer, the Indenture Trustee and the Rating Agencies on or before the earlier of (a) March 31 of each year, beginning March 31, 2007, or (b) with respect to each calendar year during which the Sponsor’s annual report on Form 10-K is required to be filed in accordance with the Exchange Act and the rules and regulations thereunder, the date on which the annual report on Form 10-K is required to be filed in accordance with the Exchange Act and the rule and regulations thereunder, a report addressed to the Servicer (the “ Annual Accountant’s Report ”) to the effect that such firm has performed certain procedures, agreed between the Servicer and such accountants, in connection with the Servicer’s compliance with its obligations under this Agreement during the preceding twelve (12) months ended December 31 (or, in the case of the first Annual Accountant’s Report to be delivered on or before March 31, 2007, the period of time from the date of this Agreement until December 31, 2006), identifying the results of such procedures and including any exceptions noted. In the event that the accounting firm providing such report requires the Indenture Trustee to agree or consent to the procedures performed by such firm, the Issuer shall direct the Indenture Trustee in writing to so agree; it being understood and agreed that the Indenture Trustee will deliver such letter of agreement or consent in conclusive reliance upon the direction of the Issuer, and the Indenture Trustee will not make any independent inquiry or investigation as to, and shall have no obligation or liability in respect of the sufficiency, validity or correctness of such procedures.

(b) The Annual Accountant’s Report shall also indicate that the accounting firm providing such report is independent of the Servicer in accordance with the Rules of the Public Company Accounting Oversight Board, and shall include the attestation report required under Item 1122(b) of Regulation AB (or any successor or similar items or rule), as then in effect.

SECTION 3.05. Monitoring of Third-Party Collectors . From time to time, until the Retirement of the Transition Bonds, the Servicer shall, in accordance with the Servicing Standard, take all actions with respect to Third-Party Collectors required to be taken by the Servicer as set forth, if applicable, in any agreement with the Servicer, the Applicable Financing Orders, Tariffs, other tariffs and any other PUCT Regulations in effect from time to time and implement such additional procedures and policies as are necessary to ensure that the obligations of all Third-Party Collectors in connection with Transition Charges are properly enforced in accordance with, if applicable, the terms of any agreement with the Servicer, the Applicable Financing Orders, Tariffs, other tariffs and any other PUCT Regulations in effect from time to time. Such procedures and policies shall include the following:

(a) Maintenance of Records and Information . In addition to any actions required by the Tariffs, PUCT Regulations or other applicable law, the Servicer shall:

(i) maintain adequate records for promptly identifying and contacting each Third-Party Collector;

(ii) maintain records of end-user Customers which are billed by Third-Party Collectors to permit prompt transfer of billing responsibilities in the event of default by such Third-Party Collectors;

 

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(iii) maintain adequate records for enforcing compliance by all Third-Party Collectors with their obligations with respect to Transition Charges, including compliance with all Remittance Requirements, REP Credit Requirements and REP Deposit Requirements; and

(iv) provide to each Third-Party Collector such information necessary for such Third-Party Collector to confirm the Servicer’s calculation of Transition Charges and remittances, including, if applicable, charge-off amounts.

The Servicer shall update the records described above no less frequently than quarterly.

(b) Credit and Collection Policies . The Servicer shall, to the fullest extent permitted under the Initial Financing Order or any Subsequent Financing Order, as applicable, impose such terms with respect to credit and collection policies applicable to Third-Party Collectors as may be reasonably necessary to prevent the then-current rating of the Transition Bonds of any Series from being downgraded, withdrawn or suspended. The Servicer shall, in accordance with and to the extent permitted by the Utilities Code, applicable PUCT Regulations and the terms of the Initial Financing Order and any Subsequent Financing Order, include and impose the above-described terms in all tariffs filed under the Utilities Code which would allow REPs or other utilities to issue single bills which include Transition Charges to TCC’s Customers. The Servicer shall periodically review the need for modified or additional terms based upon, among other things, (i) the relative amount of TC Payments received through REPs relative to the Periodic Billing Requirement, (ii) the historical payment and default experience of each REP and (iii) such other credit and collection policies to which the REPs are subject, and if permitted by applicable law, will set out any such modified or additional terms in a supplemental tariff filed with the PUCT.

(c) Monitoring of Performance and Payment by REPs . In addition to any actions required by the Tariffs, PUCT Regulations or other applicable law, the Servicer shall undertake to do the following:

(i) The Servicer shall require each REP to pay all Transition Charges (less any applicable charge-off allowances) billed to such REP in accordance with the provisions of the Initial Tariff, each Subsequent Tariff and PUCT Regulations (whether or not disputed). The Servicer shall monitor compliance by each REP with all Remittance Requirements, REP Credit Requirements and REP Deposit Requirements and take prompt action to enforce such requirements.

(ii) Where a REP is responsible for billing the Customers, the Servicer shall, consistent with its customary billing practices, bill each Applicable REP no less frequently than the billing cycle otherwise applicable to such Customers.

(iii) The Servicer shall work with REPs to resolve any disputes using the dispute resolution procedures established in the Initial Tariff, each Subsequent Tariff and any PUCT Regulations, in accordance with the Servicing Standard.

(d) Enforcement of REP Obligations . The Servicer shall, in accordance with the terms of the Initial Tariff and each Subsequent Tariff, ensure that each REP remits all TC

 

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Payments which it is obligated to remit to the Servicer. In the event of any default by any REP, the Servicer shall enforce all rights set forth in and take all other steps permitted by, if applicable, the Applicable Financing Orders, Tariffs, other tariffs and any other PUCT Regulations as it determines, in accordance with the Servicing Standard, are reasonably necessary to ensure the prompt payment of TC Payments by such REP and to preserve the rights of the Holders with respect thereto, including, where appropriate, terminating the right of any REP to bill and collect Transition Charges or petitioning the PUCT to impose such other remedies or penalties as may be available under the circumstances. Any agreement entered into between the Servicer and a defaulted REP will be limited to the terms of this Agreement and will satisfy the Rating Agency Condition. In the event the Servicer has actual knowledge that a REP is in default, including due to the downgrade by the Rating Agencies of any party providing credit support for such REP, the Servicer shall promptly notify a Responsible Officer of the Indenture Trustee in writing of the same and, shall, if applicable, instruct the Indenture Trustee either to:

(i) withdraw from such REP’s REP Deposit Account and deposit into the applicable Collection Accounts the lesser of (x) the amount of cash on deposit in such REP Deposit Account and allocable to the Transition Property at such time and (y) the amount of any Transition Charges then due and payable by such REP; or

(ii) make demand under any letter of credit, guarantee or other credit support up to the lesser of (x) the amount of such letter of credit, guarantee or other credit support and (y) the amount of any Transition Charges then due and payable by such REP, and forward the amounts received, if any, as a result of such demand to the applicable Collection Accounts.

The Indenture Trustee shall, within two (2) Business Days of receipt of such written notice, withdraw such funds from the REP Deposit Account or make demand under such credit support, as applicable, and deposit such funds withdrawn or received, as applicable, into the applicable Collection Accounts.

(e) Maintenance of REP Deposit Accounts . The Servicer shall cause the entity acting as Indenture Trustee to maintain one or more REP Deposit Accounts as described in Section 8.02(g) of the Indenture. The Servicer shall provide written direction to the Indenture Trustee regarding the allocation and release of funds on deposit in the REP Deposit Accounts, as permitted or required by the Indenture, this Agreement, the Intercreditor Agreement, or any Applicable Financing Order, Tariff or PUCT Regulations. The Indenture Trustee shall be entitled to conclusively rely on any such written directions from the Servicer. The Servicer will seek and use reasonable best efforts to obtain, from any REP which wishes to satisfy its credit support requirements by making a deposit to a REP Deposit Account, a written security agreement stating that (i) by making such deposit the REP has granted a security interest in such deposit in favor of the Indenture Trustee, and (ii) the Indenture Trustee, in holding such deposit as collateral, will have the rights and remedies of a secured party under Article 9 of the UCC with respect to such collateral, and the Servicer will promptly forward any such agreement to the Indenture Trustee.

 

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(f) Affiliated Third-Party Collectors . In performing its obligations under this Section 3.05 , the Servicer shall deal with any Third-Party Collectors which are Affiliates of the Servicer on terms which are no more favorable in the aggregate to such affiliated Third-Party Collector than those used by the Servicer in its dealings with Third-Party Collectors that are not affiliates of the Servicer.

ARTICLE IV

SERVICES RELATED TO TRUE-UP ADJUSTMENTS

SECTION 4.01. True-Up Adjustments . From time to time, until the Retirement of the Transition Bonds, the Servicer shall identify the need for Annual True-Up Adjustments, Interim True-Up Adjustments and Non-Standard True-Up Adjustments for each Series and shall take all reasonable action to obtain and implement such True-Up Adjustments, all in accordance with the following:

(a) Expected Amortization Schedule . The Expected Amortization Schedule for the initial Series of Transition Bonds is attached hereto as Schedule 4.01(a) . In connection with the Issuer’s issuance of any additional Series of Transition Bonds after the Closing Date, the Servicer, on or prior to the Series Issuance Date therefor, shall revise the Expected Amortization Schedule to add a new schedule for each new Series of Transition Bonds and set forth, as of each Payment Date through the latest Scheduled Final Payment Date for any Series of Transition Bonds, the aggregate principal amounts of the Transition Bonds of all Series, including such additional Series, expected to be outstanding on such Payment Date. If the Expected Amortization Schedule is revised as set forth above, the Servicer shall send a copy of such revised Expected Amortization Schedule to the Issuer, the Indenture Trustee and the Rating Agencies promptly thereafter.

(b) True-Up Adjustments .

(i) Annual True-Up Adjustments and Filings . Each year no later than fifteen (15) days prior to the first billing cycle of September (or, in the case of any subsequent Series, the corresponding billing cycle for such Series based on its Series Issuance Date) the Servicer shall: (A) update the data and assumptions underlying the calculation of the Transition Charges, including projected electricity usage during the next Calculation Period for each TC Customer Class and including interest and estimated expenses and fees of the Issuer to be paid during such period, the Weighted Average Days Outstanding and write-offs; (B) determine the Periodic Payment Requirements and Periodic Billing Requirement for the next Calculation Period based on such updated data and assumptions; (C) determine the Transition Charges to be allocated to each TC Customer Class during the next Calculation Period based on such Periodic Billing Requirement and the terms of the Applicable Financing Orders and the Tariffs filed pursuant thereto and in doing so the Servicer shall use the method of allocating Transition Charges then in effect, including as applicable, the result of the implementation of the most recent Non-Standard True-Up Adjustment; (D) make all required notice and other filings with the PUCT to reflect the revised Transition Charges, including any Amendatory Tariffs, and (E) take all reasonable actions and make

 

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all reasonable efforts to effect such Annual True-Up Adjustment and to enforce the provisions of the Securitization Law and the Applicable Financing Orders; provided , however , that if the Servicer determines that the forecasted billing units for one or more of the TC Customer Classes for an upcoming period decreases by more than 10% compared to the billing units for the threshold period set forth in the Applicable Financing Order, the Servicer shall implement a Non-Standard True-Up Adjustment and, if such Non-Standard True-Up Adjustment shall be made in the time period provided for Annual True-Up Adjustments pursuant to this Section 4.01(b)(i) , such Non-Standard True-Up Adjustment shall also qualify as an Annual True-Up Adjustment for purposes of this Agreement. The Servicer shall implement the revised Transition Charges, if any, resulting from such Annual True-Up Adjustment as of the Annual True-Up Adjustment Date.

(ii) Non-Standard True-Up Adjustments and Filings . In the event that the Servicer determines that a Non-Standard True-Up Adjustment is required, the Servicer shall, no later than ninety (90) days prior to the first billing cycle of September (or, in the case of any subsequent Series of transition bonds, the corresponding billing cycle for each Series based on its Series Issuance Date) (A) recalculate the Transition Charges to reallocate such Transition Charges among TC Customer Classes in accordance with the procedures for Non-Standard True-Up Adjustments set forth in the Applicable Financing Order and TC Tariff; (B) make all required notice and other filings with the PUCT to reflect the revised Transition Charges, including any Amendatory Tariffs; and (C) take all reasonable actions and make all reasonable efforts to effect such Non-Standard True-Up Adjustment and to enforce the provisions of the Securitization Law and all Applicable Financing Orders. The Servicer shall implement the revised Transition Charges, if any, resulting from such Non-Standard True-Up Adjustment on the Non-Standard True-Up Adjustment Date. For the avoidance of doubt, no Annual True-Up Adjustment or Interim True-Up Adjustment shall be considered a Non-Standard True-Up Adjustment solely because Transition Charges are allocated under such Annual True-Up Adjustment or Interim True-Up Adjustment in the same manner as in a preceding Non-Standard True-Up Adjustment.

(iii) Interim True-Up Adjustments and Filings . Within the 30-day period ending on March 1, 2007 (or in the case of any subsequent Series, the corresponding period based on its Series Issuance Date) and, beginning in 2008, within the 30-day period preceding the date which is six months after the date of the Annual True-Up Adjustment described above (or three months, six months and nine months after the Annual True-Up Adjustment during the fourteenth (14 ^th ) and fifteenth (15 ^th ) year of any Series of Transition Bonds), the Servicer shall compare the anticipated Unrecovered Balance, as of the next Payment Date and after giving effect to payments to be made on such Payment Date, to the Projected Unrecovered Balance as of such Payment Date. The Servicer shall, no later than fifteen (15) days prior to the end of such thirty (30) day period, make a mandatory Interim True-Up Adjustment if the Servicer determines (i) that such Unrecovered Balance will be less than the Projected Unrecovered Balance as of such Payment Date, (ii) that the outstanding principal amount of the Transition Bonds

 

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plus amounts on deposit in the applicable Excess Funds Subaccount will exceed 105% of such Projected Unrecovered Balance as of such Payment Date, (iii) that any Outstanding Series or Tranche of Transition Bonds will not be paid in full by its Expected Final Payment Date or (iv) that an undercollection of Transition Charges exists and that such undercollection, regardless of cause, must be corrected in order to ensure timely payment of any Outstanding Series or Tranche of Transition Bonds based on Rating Agency and Bondholder considerations (including a mandatory Interim True-Up Adjustment in connection with each semi-annual Payment Date (or quarterly in the fourteenth and fifteenth years of such Transition Bonds) if the Servicer forecasts that TC Collections during the next semi-annual period or quarterly period, as applicable, will be insufficient (a) to make all scheduled payments of interest, principal and other amounts in respect of any Outstanding Series or Tranche of Transition Bonds and (b) to replenish the applicable Capital Subaccount for such Series to the Required Capital Level). If the Servicer determines that an Interim True-Up Adjustment is required under the immediately preceding sentence, then the Servicer shall: (A) update the data and assumptions underlying the calculation of the Transition Charges, including projected electricity usage during the next Calculation Period for each TC Customer Class and including interest and estimated expenses and fees of the Issuer to be paid during such period, the rate of delinquencies and write-offs; (B) determine the Periodic Payment Requirement and Periodic Billing Requirement for the next Calculation Period based on such updated data and assumptions; (C) determine the Transition Charges to be allocated to each TC Customer Class during the next Calculation Period based on such Periodic Billing Requirement and the terms of the Applicable Financing Orders and the Tariffs filed pursuant thereto, and in doing so the Servicer shall use the method of allocating Transition Charges then in effect, including as applicable, the result of the implementation of the most recent Non-Standard True-Up Adjustment; (D) make all required notice and other filings with the PUCT to reflect the revised Transition Charges, including any Amendatory Tariffs; and (E) take all reasonable actions and make all reasonable efforts to effect such Interim True-Up Adjustment and to enforce the provisions of the Securitization Law and the Applicable Financing Orders which relate thereto. The Servicer shall implement the revised Transition Charges, if any, resulting from such Interim True-Up Adjustment on the Interim True-Up Adjustment Date. The Servicer may not implement Interim True-Up Adjustments more frequently than every six (6) months; provided that the Servicer may implement Interim True-Up Adjustments quarterly for any Transition Bonds remaining Outstanding during the fourteenth (14 ^th ) and fifteenth (15 ^th ) years after the issuance of such Transition Bonds.

(c) Reports .

(i) Notification of Amendatory Tariff Filings and True-Up Adjustments . Whenever the Servicer files an Amendatory Tariff with the PUCT or implements revised Transition Charges with notice to the PUCT without filing an Amendatory Tariff if permitted by any Applicable Financing Order, the Servicer shall send a copy of such filing or notice (together with a copy of all notices and documents which, in the Servicer’s reasonable judgment, are material to the adjustments effected by such Amendatory Tariff or notice) to the Issuer, the Indenture Trustee and the Rating Agencies concurrently therewith. If, for any

 

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reason any revised Transition Charges are not implemented and effective on the applicable date set forth herein, the Servicer shall notify the Issuer, the Indenture Trustee and each Rating Agency by the end of the second Servicer Business Day after such applicable date.

(ii) Servicer’s Certificate . Not later than five (5) Servicer Business Days prior to each Payment Date or Special Payment Date, the Servicer shall deliver a written report, for each Series of Transition Bonds, substantially in the form of Exhibit C hereto (the “ Servicer’s Certificate ”) to the Issuer, the Indenture Trustee and the Rating Agencies which shall include all of the following information (to the extent applicable and including any other information so specified in the applicable Series Supplement) as to the Transition Bonds of such Series with respect to such Payment Date or Special Payment Date or the period since the previous Payment Date, as applicable:

 

(a)

the amount of the payment to Holder allocable to principal, if any;

 

(b)

the amount of the payment to Holders allocable to interest;

 

(c)

the aggregate Outstanding Amount of such Transition Bonds, before and after giving effect to any payments allocated to principal reported under clause (a)  above;

 

(d)

the difference, if any, between the amount specified in clause (c)  above and the Outstanding Amount specified in the related Expected Amortization Schedule;

 

(e)

any other transfers and payments to be made on such Payment Date or Special Payment Date, including amounts paid to the Indenture Trustee and to the Servicer; and

 

(f)

the amounts on deposit in the applicable Capital Subaccount and the applicable Excess Funds Subaccount, after giving effect to the foregoing payments.

(iii) Reports to Customers .

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

(B) The Servicer shall comply with the requirements of each Financing Order and Tariff with respect to the identification of Transition Charges on Bills. In addition, at least once each year, the Servicer shall (to the extent that it does not separately identify the Transition Charges as being owned by the Issuer in the

 

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Bills regularly sent to Customers or REPs) cause to be prepared and delivered to such Customers and REPs a notice stating, in effect, that the Transition Property and the Transition Charges are owned by the Issuer and not the Seller. Unless prohibited by applicable PUCT Regulations, the Servicer shall use reasonable efforts to cause each Applicable REP, at least once each year, to include similar notices in the bills sent by such Applicable REP to Customers indicating additionally that the Transition Charges are not owned by such Applicable REP (to the extent that such Applicable REP does not include such information in the Bills regularly sent to Customers). Such notice shall be included either as an insert to or in the text of the Bills delivered to such Customers or shall be delivered to Customers by electronic means or such other means as the Servicer or the Applicable REP may from time to time use to communicate with its respective Customers.

(C) Except to the extent that applicable PUCT Regulations make the Applicable REP responsible for such costs, or the Applicable REP has otherwise agreed to pay such costs, the Servicer shall pay from its own funds all costs of preparation and delivery incurred in connection with clauses (A)  and (B)  above, including printing and postage costs as the same may increase or decrease from time to time.

(iv) REP Reports . The Servicer shall provide to the Rating Agencies, upon request, any publicly available reports filed by the Servicer with the PUCT (or otherwise made publicly available by the Servicer) relating to REPs and any other non-confidential and non-proprietary information relating to REPs reasonably requested by the Rating Agencies to the extent such information is reasonably available to the Servicer.

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

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

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

(iii) Except to the extent that the Servicer is liable under Section 6.02 ,

 

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the Servicer shall have no liability whatsoever relating to the calculation of any revised Transition Charges and the scheduled adjustments thereto, including as a result of any inaccuracy of any of the assumptions made in such calculation regarding expected energy usage volume and the Weighted Average Days Outstanding, write-offs and estimated expenses and fees of the Issuer, so long as the Servicer has acted in good faith and has not acted in a negligent manner in connection therewith, nor shall the Servicer have any liability whatsoever as a result of any Person, including the Holders, not receiving any payment, amount or return anticipated or expected or in respect of any Transition Bond generally.

(b) Notwithstanding the foregoing, this Section 4.02 shall not relieve the Servicer of liability for any misrepresentation by the Servicer under Section 6.01 or for any breach by the Servicer of its other obligations under this Agreement.

ARTICLE V

THE TRANSITION PROPERTY

SECTION 5.01. Custody of Transition Property Records . To assure uniform quality in servicing the Transition Property and to reduce administrative costs, the Issuer hereby revocably appoints the Servicer, and the Servicer hereby accepts such appointment, to act as the agent of the Issuer as custodian of any and all documents and records that the Seller shall keep on file, in accordance with its customary procedures, relating to the Transition Property, including copies of any Financing Orders, Issuance Advice Letters, Tariffs and Amendatory Tariffs relating thereto and all documents filed with the PUCT in connection with any True-Up Adjustment and computational records relating thereto (collectively, the “ Transition Property Records ”), which are hereby constructively delivered to the Indenture Trustee, as pledgee of the Issuer (or, in the case of the Subsequent Transition Property, will as of the applicable Subsequent Transfer Date be constructively delivered to the Indenture Trustee, as pledgee of the Issuer) with respect to all Transition Property.

SECTION 5.02. Duties of Servicer as Custodian .

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

 

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(b) Maintenance of and Access to Records . The Servicer shall maintain the Transition Property Records at 212 East 6 ^th Street, Tulsa, Oklahoma 74119 or at such other office as shall be specified to the Issuer and the Indenture Trustee by written notice at least thirty (30) days prior to any change in location. The Servicer shall make available for inspection, audit and copying to the Issuer and the Indenture Trustee or their respective duly authorized representatives, attorneys or auditors the Transition Property Records at such times during normal business hours as the Issuer or the Indenture Trustee shall reasonably request and which do not unreasonably interfere with the Servicer’s normal operations. Nothing in this Section 5.02(b) shall affect the obligation of the Servicer to observe any applicable law (including any PUCT Regulation) prohibiting disclosure of information regarding the Customers, and the failure of the Servicer to provide access to such information as a result of such obligation shall not constitute a breach of this Section 5.02(b) .

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

(d) Defending Transition Property Against Claims . The Servicer shall institute any action or proceeding necessary to compel performance by each REP (at the earliest possible time) and each party to the Intercreditor Agreement of any of their respective obligations or duties under the Securitization Law, any Financing Order or the Intercreditor Agreement with respect to the Transition Property, and the Servicer agrees to take such legal or administrative actions, including without limitation defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary to block or overturn any attempts to cause a repeal of, modification of or supplement to the Securitization Law or any Financing Order. The costs of any action described in this Section 5.02(d) shall be payable from TC Collections as an Operating Expense (and shall not be deemed to constitute a portion of the Servicing Fee) in accordance with the Indenture. The Servicer’s obligations pursuant to this Section 5.02(d) shall survive and continue notwithstanding that payment of such Operating Expense may be delayed pursuant to the terms of the Indenture (it being understood that the Servicer may be required initially to advance its own funds to satisfy its obligations hereunder).

(e) Additional Litigation to Defend Transition Property . In addition to the above, the Servicer shall, at its own expense, institute any action or proceeding necessary to compel performance by the PUCT or the State of Texas of any of their respective obligations or duties under the Securitization Law or any Financing Order with respect to the Transition Property, and to compel performance by REPs with any of their respective obligations or duties under any Tariffs or any agreement with the Servicer entered into pursuant to such Tariffs. In any proceedings related to the exercise of the power of eminent domain by any municipality to acquire a portion of TCC’s electric distribution facilities, the Servicer shall assert that the court ordering such condemnation must treat such municipality as a successor to TCC under the Securitization Law and Financing Order.

 

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SECTION 5.03. Custodian’s Indemnification . The Servicer as custodian shall indemnify the Issuer, the Independent Managers and the Indenture Trustee (for itself and for the benefit of the Holders) and each of their respective officers, directors, employees and agents for, and defend and hold harmless each such Person from and against, any and all liabilities, obligations, losses, damages, payments and claims, and reasonable costs or expenses, of any kind whatsoever (collectively, “ Losses ”) that may be imposed on, incurred by or asserted against each such Person as the result of any negligent act or omission in any way relating to the maintenance and custody by the Servicer, as custodian, of the Transition Property Records; provided , however , that the Servicer shall not be liable for any portion of any such amount resulting from the willful misconduct, bad faith or negligence of the Issuer, the Independent Managers or the Indenture Trustee, as the case may be.

Indemnification under this Section 5.03 shall survive resignation or removal of the Indenture Trustee or any Independent Manager and shall include reasonable out-of-pocket fees and expenses of investigation and litigation (including reasonable attorney’s fees and expenses).

SECTION 5.04. Effective Period and Termination . The Servicer’s appointment as custodian shall become effective as of the Closing Date and shall continue in full force and effect until terminated pursuant to this Section 5.04 . If the Servicer shall resign as Servicer in accordance with the provisions of this Agreement or if all of the rights and obligations of the Servicer shall have been terminated under Section 7.01 , the appointment of the Servicer as custodian shall be terminated effective as of the date on which the termination or resignation of the Servicer is effective. Additionally, if not sooner terminated as provided above, the Servicer’s obligations as Custodian shall terminate one year and one day after the date on which no Transition Bonds of any Series are Outstanding.

ARTICLE VI

THE SERVICER

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

(a) Organization and Good Standing . The Servicer is duly organized and validly existing and is in good standing under the laws of the State of Texas, with the requisite corporate or other power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted and to execute, deliver and carry out the terms of this Agreement, and had at all relevant times, and has, the requisite power, authority and legal right to service the Transition Property and to hold the Transition Property Records as custodian.

 

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(b) Due Qualification . The Servicer 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 (including the servicing of the Transition Property as required by this Agreement) shall req