<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1997
REGISTRATION STATEMENT NO. 333-30785
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SCE-1
(Issuer of Securities)
SCE FUNDING LLC
(Depositor of the Trust described herein)
(Exact Name of Registrant as Specified in Its Certificate of Formation)
<TABLE>
<S> <C>
DELAWARE 95-4640661
(State or Other Jurisdiction of Organization) (I.R.S. Employer Identification Number)
</TABLE>
SCE FUNDING LLC
2244 WALNUT GROVE AVENUE, ROOM 180, ROSEMEAD, CA 91770, (626) 302-1850
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
KENNETH S. STEWART
SECRETARY
SCE FUNDING LLC
2244 WALNUT GROVE AVENUE, ROOM 180, ROSEMEAD, CA 91770, (626) 302-1850
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies to:
<TABLE>
<S> <C> <C>
DAVID B. ROGERS ERIC D. TASHMAN GREGORY M. SHAW
JOHN M. JAMESON CATHY M. KAPLAN CRAVATH, SWAINE & MOORE
GEOFFREY K. HURLEY BROWN & WOOD LLP WORLDWIDE PLAZA
LATHAM & WATKINS 555 CALIFORNIA STREET, 50TH FLOOR 825 EIGHTH AVENUE
633 WEST FIFTH STREET, SUITE 4000 SAN FRANCISCO, CALIFORNIA 94104 NEW YORK, NEW YORK 10019
LOS ANGELES, CALIFORNIA 90071
</TABLE>
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ------------------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(2) PER UNIT OFFERING PRICE FEE(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rate Reduction Certificates............... $1,000,000 100%(1) $1,000,000(1) $303.03
- ------------------------------------------------------------------------------------------------------
Notes..................................... $1,000,000 (2) (2) None
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) No additional consideration will be paid by the purchasers of the Rate
Reduction Certificates for the Notes which secure the Rate Reduction
Certificates.
(3) Fee of $303.03 paid in connection with original Registration Statement
filed on July 3, 1997.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION +
+PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF 1933. A REGISTRATION +
+STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE +
+SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415 UNDER THE SECURITIES +
+ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS WILL BE DELIVERED +
+TO PURCHASERS OF THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT AND THE +
+ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[FORM OF PROSPECTUS SUPPLEMENT]
SUBJECT TO COMPLETION DATED , 199
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1997)
CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SCE-1
RATE REDUCTION CERTIFICATES, SERIES 199 -
$ ORIGINAL PRINCIPAL BALANCE
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
[$ CLASS FLOATING RATE CERTIFICATES]
SCE FUNDING LLC
(ISSUER OF THE NOTES)
SOUTHERN CALIFORNIA EDISON COMPANY
(SELLER AND SERVICER)
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES. NONE OF THE OFFERED
CERTIFICATES, THE UNDERLYING NOTES OR THE TRANSITION PROPERTY WILL BE
GUARANTEED OR INSURED BY THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, THE
TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER OR
ITS AFFILIATES.
The California Infrastructure and Economic Development Bank Special Purpose
Trust SCE-1 Rate Reduction Certificates, Series 199 - (the "Offered
Certificates"), offered hereby will consist of the following Classes:
. Each Class of Offered Certificates represents an undivided interest in
the related class of SCE Funding LLC Notes, Series 199 - (the "Underlying
Notes"), issued by SCE Funding LLC, a Delaware special purpose limited
liability company (the "Note Issuer") [and, with respect to the Class
Certificates, payments pursuant to the Swap Agreement]. Each Underlying Note
will be secured primarily by the Transition Property owned by the Note Issuer,
as described under "Description of the Transition Property" herein and in the
Prospectus; the Underlying Notes will also be secured by the other Note
Collateral described under "Description of the Notes--Security" in the
Prospectus. The Underlying Notes, together with other Series of notes issued
from time to time by the Note Issuer under the Note Indenture (together with
the Underlying Notes, the "Notes"), are owned by the California Infrastructure
and Economic Development Bank Special Purpose Trust SCE-1 (the "Trust").
(Continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE OFFERED CERTIFICATES,
AND THERE IS NO ASSURANCE THAT ONE WILL DEVELOP.
-----------
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE 22 IN THE
PROSPECTUS.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT TRUST(1)(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class [ ] Certificate............................. % % %
- ---------------------------------------------------------------------------------------------
Per Class [ ] Certificate............................. % % %
- ---------------------------------------------------------------------------------------------
Total................................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)Plus accrued interest, if any, at the applicable Certificate Interest Rate
from , 199 .
(2)Before deduction of expenses estimated to be $ .
-----------
THE OFFERED CERTIFICATES ARE OFFERED BY THE UNDERWRITERS WHEN, AS AND IF
ISSUED BY THE TRUST AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO THE
UNDERWRITERS' RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT
THE OFFERED CERTIFICATES WILL BE DELIVERED ON OR ABOUT , 199 , IN BOOK-
ENTRY FORM THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY[, CEDEL BANK,
SOCIETE ANONYME, AND THE EUROCLEAR SYSTEM].
[UNDERWRITERS]
The date of this Prospectus Supplement is , 199
<PAGE>
(Continued from previous page)
Interest on each Class of Offered Certificates at the applicable Certificate
Interest Rate will be distributable quarterly on or about the 25th day of
March, June, September and December or, if any such day is not a Certificate
Business Day, the next succeeding Certificate Business Day (each, a
"Distribution Date") commencing , 199 . INTEREST AND PRINCIPAL ON ANY
CLASS OF OFFERED CERTIFICATES WILL BE DISTRIBUTABLE ONLY TO THE EXTENT OF
PAYMENTS RECEIVED BY THE TRUST ON THE RELATED CLASS OF UNDERLYING NOTES. See
"Description of the Notes" herein.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN
THE PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF
THE NOTE ISSUER ARE THE SOLE SOURCE OF PAYMENTS ON THE UNDERLYING NOTES.
PAYMENT ON THE UNDERLYING NOTES RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF
DISTRIBUTIONS ON THE OFFERED CERTIFICATES. NONE OF THE STATE OF CALIFORNIA,
THE INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES (OTHER THAN THE NOTE
ISSUER) WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE OFFERED CERTIFICATES, THE
UNDERLYING NOTES OR THE UNDERLYING TRANSITION PROPERTY, EXCEPT AS EXPRESSLY
SET FORTH HEREIN AND IN THE PROSPECTUS.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF IS
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, PURCHASE PRICE
OF, OR INTEREST ON, THE OFFERED CERTIFICATES OR THE UNDERLYING NOTES, OR TO
THE PAYMENTS IN RESPECT OF THE TRANSITION PROPERTY, NOR IS THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION OR AGENCY OR INSTRUMENTALITY THEREOF
IN ANY MANNER OBLIGATED TO MAKE ANY APPROPRIATION FOR THE PAYMENT THEREOF.
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page S-29 herein and which begins on page 77 in the Prospectus
for the location of the definitions of capitalized terms that appear in the
Prospectus and this Prospectus Supplement.
S-2
<PAGE>
REPORTS TO HOLDERS
Unless and until the Offered Certificates are no longer issued in book-entry
form, the Servicer indirectly will provide to Cede & Co., as nominee of The
Depository Trust Company ("DTC") and registered holder of the Offered
Certificates and, upon request, to Participants of DTC, periodic reports
concerning the Offered Certificates. See "Description of the Certificates--
Reports to Certificateholders" herein. Such reports may be made available to
the holders of interests in the Offered Certificates (the
"Certificateholders") upon request to their Participants. Such reports will
not constitute financial statements prepared in accordance with generally
accepted accounting principles. The financial information provided to
Certificateholders will not be examined and reported upon, nor will an opinion
thereon be provided by, any independent public accountant.
The Note Issuer will file with the Securities and Exchange Commission (the
"Commission") such periodic reports as are required by the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules, regulations or
orders of the Commission thereunder. Copies of the Registration Statement and
exhibits thereto may be obtained at the locations specified in the Prospectus
under "Available Information" at prescribed rates. Information filed with the
Commission can also be inspected at the Commission's site on the World Wide
Web at http://www.sec.gov. The Note Issuer may discontinue filing periodic
reports under the Exchange Act at the beginning of the fiscal year following
the issuance of the Offered Certificates if there are fewer than 300 holders
of such Offered Certificates.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following Prospectus Supplement Summary is qualified in its entirety by
reference to the detailed information appearing elsewhere herein and in the
Prospectus. Certain capitalized terms used but not defined in this Prospectus
Supplement Summary have the meanings ascribed to such terms elsewhere in this
Prospectus Supplement or, to the extent not defined herein, have the meanings
assigned to such terms in the Prospectus. The Index of Principal Definitions
included in this Prospectus Supplement which begins on page S-29 sets forth the
pages on which the definitions of certain principal terms appear.
Transaction Overview... For a brief summary of the statutes and
proceedings which form the basis for the issuance
and sale of the Offered Certificates by the
Trust, investors are directed to the discussion
under the heading "Prospectus Summary--
Transaction Overview" in the Prospectus.
The Note Issuer will issue the Underlying Notes,
which will be secured by the Transition Property
and the other Note Collateral described under
"Description of the Notes--Security" herein, and
sell the Underlying Notes to the Trust in
exchange for the proceeds of the sale of the
Offered Certificates. The Trust has been
established by the Infrastructure Bank. The
Trust, whose sole assets will be the Underlying
Notes and other Notes issued under the Indenture
[and its rights under the Swap Agreement (and any
other comparable interest rate swap agreements)
to which it is a party], will issue the Offered
Certificates, which will be sold to the
Underwriters. The Offered Certificates of each
Class represent an undivided interest in the
related Class of Underlying Notes and the
proceeds thereof [, together with the proceeds of
the Swap Agreement].
The charges included in the Transition Property
described in the Prospectus are calculated to be
sufficient over time to pay principal and
interest on the Offered Certificates, all related
fees and expenses and the Overcollateralization
Amount described herein. These charges will be
subject to adjustment pursuant to the true-up
mechanism described in the Prospectus over the
life of the Offered Certificates to enhance the
likelihood of timely recovery of such amounts,
although there can be no assurance that the true-
up mechanism will operate as intended or that any
of the Offered Certificates will mature as
scheduled.
Risk Factors........... Investors should consider the risks associated
with an investment in the Offered Certificates.
For a discussion of certain material risks
associated therewith, investors should review the
discussion under "Risk Factors" which begins on
page 22 of the Prospectus. [In addition, an
investment in the Class Certificates involves
the additional risks discussed herein under
"Additional Risk Factors Relating to the Class
Certificates."]
The Offered Certificates.... The California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-1 Rate
Reduction Certificates, Series 199 - (the
"Offered Certificates"). The Offered Certificates
are comprised of the following classes
(each, a "Class"): .
S-4
<PAGE>
As of the Series Issuance Date for the Offered
Certificates, the aggregate principal balance
thereof (the "Original Certificate Principal
Balance") will be $ . Each Class of
Offered Certificates will have a principal
balance (the "Class Principal Balance") equal to
the initial amount of principal allocable to such
Class, reduced by principal distributed to such
Class in accordance with the terms of the Trust
Agreement. See "Description of the Certificates"
herein and in the Prospectus.
None of the Offered Certificates, the Underlying
Notes or the Transition Property will be
guaranteed or insured by the State of California,
the Infrastructure Bank, the Trust or any other
governmental agency or instrumentality or by the
Seller or any of its affiliates. Neither the full
faith and credit nor the taxing power of the
State of California or any agency or
instrumentality thereof is pledged to the
distributions of principal of, or interest on,
the Offered Certificates or the Underlying Notes
or to the payments in respect of the Transition
Property. The issuance and sale of the Offered
Certificates is contingent upon the effectiveness
of the Issuance Advice Letter related thereto.
Seller and Servicer.........
Southern California Edison Company, a California
corporation ("Edison" or, in its capacity as
seller of the Transition Property, the "Seller"
or, in its capacity as servicer of the Transition
Property, the "Servicer"). For a more complete
discussion of Edison and its roles as Seller and
Servicer, see "The Seller and Servicer" herein
and in the Prospectus.
Issuer of Certificates......
California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-1 (the
"Trust") established by the California
Infrastructure and Economic Development Bank (the
"Infrastructure Bank"). The Trust will not be an
agency or instrumentality of the State of
California. The Infrastructure Bank will not
guarantee or insure the Offered Certificates, the
Underlying Notes or the Transition Property. For
a more complete discussion of the Trust, see "The
Trust" in the Prospectus, and for a more complete
discussion of the Infrastructure Bank, see "The
Infrastructure Bank" in the Prospectus.
Certificate Trustee......... , a (the "Certificate
Trustee").
Delaware Trustee............ , a (the "Delaware
Trustee").
Note Issuer................. SCE Funding LLC, a Delaware special purpose
limited liability company whose single member is
Edison (the "Note Issuer").
The principal executive office of the Note Issuer
is located at 2244 Walnut Grove Avenue, Room 180,
Rosemead, CA 91770, and its telephone number is
(626) 302-1850.
The Underlying Notes........ SCE Funding LLC Notes, Series 199 - (the
"Underlying Notes"), issued by the Note Issuer.
The Underlying Notes are comprised of
classes (each, a "Class"). As of the Series
Issuance Date for the Underlying Notes, the
aggregate principal balance thereof (the
"Original Note Principal Balance") will be
$ . Each
S-5
<PAGE>
Class of Underlying Notes secures the payment of
the corresponding Class of Offered Certificates
and will have the same Class Principal Balance as
the corresponding Class of Offered Certificates.
See "Description of the Notes" herein and in the
Prospectus.
Note Trustee................ , a (the "Note Trustee").
Transition Property.........
As more fully described under "Description of the
Transition Property" herein and in the
Prospectus, the property right created under the
PU Code including, without limitation, the right,
title and interest of an electrical corporation
or its transferee (i) in and to the FTA Charges,
as adjusted from time to time, (ii) to be paid
the FTA Payments, and (iii) to obtain adjustments
to the FTA Charges as provided in the PU Code.
FTA Charges............ As more fully described under "Description of the
Transition Property" herein and in the
Prospectus, the amounts permitted to be recovered
from the Customers which are necessary to provide
for the amortization of all Certificates in
accordance with the applicable Expected
Amortization Schedules, together with all costs
and expenses related thereto and the
Overcollateralization Amount.
Distribution Dates.......... Each March 25, June 25, September 25 and December
25 (or, if any such date is not a Certificate
Business Day, the next succeeding Certificate
Business Day) commencing , ,
the dates on which distributions will be made to
holders of Offered Certificates (each, a
"Distribution Date"). Each Distribution Date with
respect to the Certificates will also be a date
on which payments are made with respect to the
Notes (each, a "Payment Date").
Record Date................. With respect to any Distribution Date, the last
day of the preceding calendar month (each, a
"Record Date").
Final Distribution Date..... The Scheduled Final Distribution Date for each
Class of the Offered Certificates, which is the
date when all principal and interest on such
Class of Offered Certificates is expected to be
distributed in full, based on certain assumptions
described herein, and the Termination Date for
each Class of Offered Certificates are specified
herein under "Description of the Certificates."
Failure to pay principal of and interest on any
Class of Offered Certificates in full by the
related Termination Date shall constitute an
Event of Default, and the Certificate Trustee may
and, upon the written direction of the holders of
a majority in principal amount of all
Certificates of all Series then outstanding,
shall declare the unpaid principal amount of all
the Notes of all Series then outstanding to be
due and payable. See "Description of the
Certificates--Certificate Events of Default;
Rights Upon Certificate Event of Default" and
"Ratings" in the Prospectus.
Issuance of New Series...... The Trust may issue new Series of Certificates
from time to time. A new Series may be issued
only upon satisfaction of the conditions
described under "Description of the
Certificates--Conditions of Issuance of
Additional Series" herein.
S-6
<PAGE>
[Swap Agreement........ The Trust will enter into a swap agreement dated
the Closing Date (the "Swap Agreement") with
, as swap counterparty (the "Swap
Counterparty"). Pursuant to the Swap Agreement,
on each Distribution Date, the Trust will be
obligated to pay to the Swap Counterparty, solely
from payments received with respect to the Class
Notes, an amount equal to the interest due on
the Class Notes on such Distribution Date, and
the Swap Counterparty will be obligated to pay to
the Trust an amount equal to the product of the
(a) Floating Rate and (b) the Class Principal
Balance as of the close of business on the
preceding Distribution Date after giving effect
to all payments of principal made to the Class
Certificateholders on such preceding Distribution
Date.
The Swap Agreement will terminate or may be
terminated upon the occurrence of certain events
of default or termination events as described
herein under "Summary of Certain Provisions of
the Swap Agreement." If, upon or prior to the
termination of the Swap Agreement, the
Infrastructure Bank, using its best efforts, is
unable to find a successor swap counterparty
satisfying the requirements specified in the
Trust Agreement, the Certificate Interest Rate
payable with respect to the Class Certificates
will automatically convert to a fixed rate equal
to the interest rate payable on the Class
Notes. See "Description of the Certificates--
Floating Rate on Class Certificates" and
"Additional Risk Factors Relating to the Class
Certificates."]
Interest.................... On each Distribution Date, the Certificate
Trustee shall distribute pro rata to the
Certificateholders of each Class as of the
related Record Date interest in an amount equal
to one-fourth of the product of (a) the
applicable Certificate Interest Rate and (b) the
applicable Class Principal Balance as of the
close of business on the preceding Distribution
Date after giving effect to all payments of
principal made to the Certificateholders on such
preceding Distribution Date; provided, however,
that with respect to the initial Distribution
Date, interest on each outstanding Class
Principal Balance will accrue from and including
the Series Issuance Date to, but excluding, the
following Distribution Date. Interest will be
calculated on the basis of a 360-day year of
twelve 30-day months [except that with respect to
the Class Certificates interest will be
calculated as described under "Description of the
Certificates--Floating Rate on Class
Certificates."] Interest on any Class of Offered
Certificates will be payable only to the extent
interest has been paid on the related Class of
Underlying Notes [and, in the case of the Class
Certificates, interest will be paid based upon
the variable rate payable pursuant to the Swap
Agreement (the "Floating Rate") so long as
payments are received under the terms of the Swap
Agreement]. See "Description of the
Certificates--Distributions of Interest" herein
and "Description of the Certificates--Interest
and Principal" in the Prospectus.
S-7
<PAGE>
Principal................... On each Distribution Date, the Certificate
Trustee shall distribute to the
Certificateholders as of the related Record Date
amounts distributable as principal, in the
following order and priority: [TO BE DETERMINED
UPON ISSUANCE]. The principal amounts payable
with respect to any Class of Offered Certificates
will be payable only to the extent of payments of
principal made on the related Class of Underlying
Notes. See "Description of the Certificates--
Distributions of Principal" herein and
"Description of the Certificates--Interest and
Principal" in the Prospectus.
Optional Redemption.........
The Note Issuer may redeem the Underlying Notes
relating to the Offered Certificates, and
accordingly cause the Trust to redeem the Offered
Certificates, if the Outstanding Note Principal
Balance has been reduced to five percent of the
Original Note Principal Balance. See "Description
of the Certificates--Optional Redemption" herein.
Collection Account and
Subaccounts............ Upon issuance of the initial Series of Notes, the
Note Issuer will establish the Collection
Account, which will be held by the Note Trustee
for the benefit of the Noteholders. The
Collection Account will consist of four
subaccounts: a general subaccount (the "General
Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the
Overcollateralization Amount (the
"Overcollateralization Subaccount") and a capital
subaccount (the "Capital Subaccount"). Unless the
context indicates otherwise, references herein to
the Collection Account include each of the
subaccounts contained therein. Withdrawals from
and deposits to these subaccounts will be made as
described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
Credit Enhancement.......... The Offered Certificates will benefit from the
following forms of credit enhancement:
Overcollateralization. In order to enhance the
likelihood that distributions on each Class of
the Offered Certificates will be made in
accordance with their Expected Amortization
Schedules, the Financing Order permits the
Servicer to set the FTA Charges at levels that
are expected to produce FTA Collections in an
aggregate of $ in excess of the amounts
expected to be required to make all distributions
on all outstanding Classes of Offered
Certificates in a timely manner and to pay all
related fees and expenses. Such excess is the
Overcollateralization Amount related to the
Offered Certificates and will be allocated to the
Overcollateralization Subaccount. The
Overcollateralization Amount will be collected
ratably over the life of the Certificates and is
expected to represent percent of the FTA
Collections for each Billing Period. See also
"Description of the Notes--Overcollateralization
Amount" herein and in the Prospectus.
Capital Subaccount. Upon the issuance of the
Underlying Notes, the Seller will make a capital
contribution of $ to the Note Issuer.
Such amount is equal to 0.50 percent of the
initial principal amount of the Underlying Notes.
Such amount, less $100,000 in the
S-8
<PAGE>
aggregate for all Series of Notes, is the
Required Capital Level with respect to the
Underlying Notes and will be deposited into the
Capital Subaccount. Withdrawals from and deposits
to the Capital Subaccount will be made as
described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
Reserve Subaccount. FTA Collections available
with respect to any Payment Date in excess of
amounts payable as (a) expenses of the Note
Issuer and the Trust, (b) payments of principal
of and interest on the Underlying Notes, (c)
allocations to the Overcollateralization
Subaccount and (d) allocations to the Capital
Subaccount (all as described under "Description
of the Notes--Allocations; Payments" in the
Prospectus), will be allocated to the Reserve
Subaccount. On each Payment Date, the Note
Trustee will draw on amounts in the Reserve
Subaccount, to the extent amounts available in
the General Subaccount are insufficient to make
scheduled payments on the Underlying Notes.
Other. See "Description of the Certificates--
Other Credit Enhancement" herein and in the
Prospectus.
Collections; Allocations;
Distributions............... On each Distribution Date, amounts on deposit in
the Collection Account will be applied in the
manner described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
Servicing Compensation...... The Servicer will be entitled to receive a
Servicing Fee for each calendar quarter with
respect to the Offered Certificates in an amount
equal to one-fourth of [ ] percent per annum of
the then outstanding principal balance of the
Underlying Notes (the "Servicing Fee"). The
Servicing Fee will be paid prior to the
distribution of any amounts in respect of
interest on and principal of the Underlying
Notes. The Servicer will be entitled to retain as
additional compensation net investment income on
FTA Payments received by the Servicer prior to
remittance thereof to the Collection Account, and
the portion of late fees, if any, paid by
Customers relating to the Offered Certificates.
See "Servicing--Servicing Compensation" herein
and in the Prospectus.
No Servicer Advances........ The Servicer will not make any advances of
interest or principal on the Underlying Notes.
Maturity and Weighted
Average Life
Considerations......... The actual dates on which principal is
distributed on each Class of Certificates will be
affected by, among other things, the amount and
timing of receipt of FTA Collections. Since each
FTA Charge will consist of a charge per kilowatt
hour of usage by the applicable class of
Customers in the Territory, the aggregate amount
and timing of FTA Collections (and the resulting
amount and timing of principal amortization on
the Offered Certificates) could depend, in part,
on actual usage of electricity by Customers and
the rate of delinquencies and charge-offs.
Although the amount of the FTA Charges will
adjust from time to time based in part on the
actual rate
S-9
<PAGE>
of FTA Collections during prior Billing Periods,
no assurances can be given that the Servicer will
be able to forecast accurately actual Customer
energy usage and the rate of delinquencies and
charge-offs and implement adjustments to the FTA
Charges that will cause FTA Payments to be made
at any particular rate. See "Risk Factors--
Unusual Nature of the Transition Property--
Reliance on FTA Adjustments" in the Prospectus.
If FTA Collections are received at a slower rate
than expected, distributions on a Certificate may
be made later than expected. Because principal
will only be distributed in accordance with the
Expected Amortization Schedules, except in the
event of an early redemption, the Certificates
are not expected to be retired earlier than
scheduled. See "Certain Distribution and Weighted
Average Life Considerations" and "Description of
the Transition Property--Adjustments to the FTA
Charges" in the Prospectus.
Each Class of Offered Certificates will be issued
Denominations............... in minimum initial denominations of [$1,000] and
in integral multiples thereof.
Registration of the The [Offered] [Class ] Certificates will
Certificates................ initially be represented by one or more
certificates registered in the name of Cede & Co.
("Cede") ("Book-Entry Certificates"), the nominee
of The Depository Trust Company ("DTC"), and
available only in the form of book-entries on the
records of DTC, its Participants and its Indirect
Participants. For a more complete discussion of
the Book-Entry Certificates, see "Risk Factors"
and "Description of the Certificates--Book-Entry
Registration" in the Prospectus.
Ratings.....................
It is a condition of issuance of the Offered
Certificates that the Class Certificates be
rated " " by , " " by ,
" " by and " " by (each of
, , and , a
"Rating Agency") and that the Class
Certificates be rated " " by " " by
, " " by and " " by .
Each Class of Underlying Notes will receive the
same rating from each Rating Agency as the
corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time. No person is
obligated to maintain any rating on any Offered
Certificate and, accordingly, there can be no
assurance that the ratings assigned to any Class
of Offered Certificates upon initial issuance
thereof will not be revised or withdrawn by a
Rating Agency at any time thereafter. If a rating
of any Class of Offered Certificates is revised
or withdrawn, the liquidity of such Class of
Offered Certificates may be adversely affected.
In general, the ratings address credit risk and
do not represent any assessment of the rate of
FTA Collections. See "Risk Factors--Uncertain
Distribution Amounts and Weighted Average Life
Considerations" in the Prospectus "Certain
Distribution and Weighted Average Life
Considerations" herein and in the Prospectus and
"Ratings" herein and in the Prospectus.
S-10
<PAGE>
Tax Status of the
Certificates................ The Offered Certificates will be treated as
representing ownership of debt for federal income
tax purposes. Interest and original issue
discount, if any, on the Offered Certificates
generally will be included in gross income for
federal income tax purposes. See "Certain Federal
Income Tax Consequences" in the Prospectus and
herein.
Interest and original issue discount, if any, on
the Offered Certificates will be exempt from
California personal income tax, but not exempt
from the California franchise tax applicable to
banks and corporations. See "State Taxation" in
the Prospectus and herein.
ERISA Considerations........
Subject to the considerations described in "ERISA
Considerations" herein and in the Prospectus, the
Offered Certificates are eligible for purchase
with "plan assets" of any Plan (as defined below)
("Plan Assets"). A fiduciary or other person
contemplating purchasing the Offered Certificates
on behalf of or with Plan Assets of any employee
benefit plan or other plan or arrangement
(including but not limited to an insurance
company general account) that is subject to Title
I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code") (collectively, "Plans"), should
carefully review with its legal advisors whether
the purchase or holding of the Offered
Certificates could give rise to a transaction
prohibited or not otherwise permissible under
ERISA or Section 4975 of the Code.
S-11
<PAGE>
[ADDITIONAL RISK FACTORS RELATING TO THE CLASS CERTIFICATES
As described herein under "Summary of Certain Provisions of the Swap
Agreement," upon the occurrence of certain events of default or termination
events, the Swap Agreement will terminate or may be terminated. Such
termination events include the right of the Infrastructure Bank and the
Certificate Trustee to terminate the Swap Agreement if the long-term unsecured
debt rating of the Swap Counterparty is withdrawn or suspended by either S&P
or Moody's or falls below the rating of "A" of either such Rating Agency. If
the Swap Agreement is terminated, the Infrastructure Bank will use its best
efforts to find a successor swap counterparty satisfying the qualifications
described in the Trust Agreement. If, upon or prior to such termination, the
Infrastructure Bank is unable to find such a successor swap counterparty, the
Certificate Interest Rate payable with respect to the Class Certificates
will convert to a fixed rate equal to the interest rate on the Class Notes,
which is percent. Distributions of interest with respect to the Class
Certificates will continue at this fixed interest rate until a successor swap
counterparty has been found, and no assurances are given that a successor swap
counterparty will be found. In such event, both the liquidity and the market
value of the Class Certificates may be adversely affected.]
DESCRIPTION OF THE CERTIFICATES
The California Infrastructure and Economic Development Bank Special Purpose
Trust SCE-1 Rate Reduction Certificates, Series 199 - (the "Offered
Certificates") together with the Certificates of other Series issued by the
Trust (collectively, the "Certificates"), will be issued by the Trust pursuant
to the Trust Agreement and the Series 199 - Supplement thereto. Pursuant to
the Trust Agreement, the Infrastructure Bank and the Certificate Trustee may
execute further series supplements in order to issue additional Series of
Certificates. This summary should be read together with the material under the
heading "Description of the Certificates" in the Prospectus.
GENERAL
The Offered Certificates will be issued on the Series Issuance Date. The
Offered Certificates will be comprised of the following Classes:
<TABLE>
<CAPTION>
CERTIFICATE
SCHEDULED FINAL INTEREST
CLASS DISTRIBUTION DATE TERMINATION DATE RATE
- ----- --------------------- --------------------- -----------
<S> <C> <C> <C>
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %(1)
</TABLE>
- --------
(1) Calculated as described under "Floating Rate on Class Certificates."
[FLOATING RATE ON CLASS CERTIFICATES
(i) Determination of Class Certificate Interest Rate. The Certificate
Interest Rate applicable from time to time to Class Certificates will be
determined by the (together with any successor Agent Bank under the Trust
Agreement the "Agent Bank") in accordance with the following provisions:
(a) On the second London banking day immediately preceding the first day
of each Interest Accrual Period (as defined below) and on the Closing Date
with respect to the first Interest Accrual Period (each such day, an
"Interest Determination Date"), the Agent Bank will determine "LIBOR" based
on the offered rate for deposits in U.S. Dollars for a period of [three
months] commencing on the first day of such Interest Accrual Period that
appears on the display page of the Dow Jones Telerate Service for the
purpose of displaying the London Interbank offered rate of major banks for
U.S. Dollars as of 11:00 a.m., London time, on such Interest Determination
Date (such display page being the "Telerate Page"). Notwithstanding
S-12
<PAGE>
the foregoing, if no offered rate appears, LIBOR for such Interest Accrual
Period will be determined as if the parties had specified the rate
described in clause (b) below. The Certificate Interest Rate applicable to
the Class Certificates for the Interest Accrual Period relating to an
Interest Determination Date shall be the sum of LIBOR as determined by the
Agent Bank on the most recent Interest Determination Date plus percent.
(b) With respect to an Interest Determination Date on which no offered
rate appears on the Telerate Page, the Agent Bank will request the
principal London office of each of four major banks in the London interbank
market, selected by the Agent Bank (after consultation with the
Infrastructure Bank), to provide the Agent Bank with its offered quotation
for deposits in U.S. Dollars for a period of three months, commencing on
the second London banking day immediately following such Interest
Determination Date, to prime banks in the London interbank market at
approximately 11:00 a.m., London time, on such Interest Determination Date
and in a principal amount that is representative for a single transaction
in U.S. Dollars in such market at such time. If at least two such
quotations are provided, LIBOR for the relevant Interest Accrual Period
will be the arithmetic mean of such quotations. If fewer than two
quotations are provided, LIBOR for such Interest Accrual Period will be the
arithmetic mean of the rates quoted at approximately 11:00 a.m. in The City
of New York, on such Interest Determination Date by three major banks in
The City of New York selected by the Agent Bank (after consultation with
the Infrastructure Bank) for loans in U.S. Dollars to leading European
banks, for the period of three months, commencing on the second London
banking day immediately following such Interest Determination Date and in a
principal amount that is representative for a single transaction in U.S.
Dollars in such market at such time; provided, however, that if any of the
banks so selected by the Agent Bank are not quoting as mentioned in this
sentence, the Certificate Interest Rate in effect for such Interest Accrual
Period will be the rate of interest in effect on such Interest
Determination Date.
(c) Subject to applicable usury laws, there will be no maximum or minimum
Certificate Interest Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, and the Swap Counterparty has not been replaced with a successor
swap counterparty satisfying the requirements of the Trust Agreement, the
interest rate with respect to the Class Certificates shall be percent
per annum (calculated on the basis of a 360-day year consisting of twelve 30-
day months), effective as of the first day of the Interest Accrual Period
immediately preceding the termination of the Swap Agreement.
(ii) Calculation of Quarterly Interest. The Agent Bank will, as soon as
practicable after 11:00 a.m. (London time) on each Interest Determination
Date, determine the Certificate Interest Rate applicable to, and calculate the
amount of interest payable on, each of the Class Certificates for the
relevant Interest Accrual Period. Interest payments will be made in an amount
equal to the product of (a) (1) the actual number of days in the related
Interest Accrual Period (as defined herein) divided by 360, multiplied by (2)
the applicable Certificate Interest Rate and (b) the Class Principal
Balance (as defined herein) as of the close of business on the preceding
Distribution Date after giving effect to all payments of principal made to the
Class Certificateholders on such preceding Distribution Date (or, in the
case of the first Distribution Date, as of the Closing Date) (such amount, the
"Quarterly Interest" with respect to such Class). The "Interest Accrual
Period" with respect to any Distribution Date shall be the period from and
including the preceding Distribution Date (or, in the case of the first
Distribution Date, from and including the Closing Date) to and excluding such
Distribution Date. The determination of the Certificate Interest Rate and the
Quarterly Interest by the Agent Bank shall (in the absence of manifest error)
be final and binding upon all parties.
(iii) Notice of Certificate Interest Rate and Interest Payments. The Agent
Bank will notify the Infrastructure Bank, the Certificate Trustee and any
Paying Agents of the Certificate Interest Rate and the Quarterly Interest due
on the Class Certificates for each Interest Accrual Period and the relevant
Distribution Date as soon as possible after their determination but in no
event later than the [first] business day of any Interest Accrual Period.
S-13
<PAGE>
(iv) Determination or Calculation by Certificate Trustee. If the Agent Bank
fails to determine a Certificate Interest Rate or calculate Quarterly Interest
in accordance with paragraph (ii) above at any time or for any reason, the
Certificate Trustee shall determine the Certificate Interest Rate in
accordance with paragraph (ii) above, and each such determination or
calculation shall be deemed to have been made by the Agent Bank. The
determination by the Agent Bank or the Certificate Trustee (as the case may
be) of any Certificate Interest Rate and calculation thereby of any Quarterly
Interest shall, in the absence of manifest error, be final and binding on all
parties.
(v) Agent Bank. The Infrastructure Bank will agree that, so long as any of
the Certificates remain outstanding, there will at all times be an Agent Bank.
The Infrastructure Bank may (with the prior written approval of the
Certificate Trustee) terminate the appointment of the Agent Bank for any
reason. Notice of any such termination will be given to Certificateholders
within ten days of such termination. If (a) any person is unable or unwilling
to continue to act as the Agent Bank, (b) the appointment of the Agent Bank is
terminated or (c) the Agent Bank fails duly to determine the Certificate
Interest Rate and/or the Quarterly Interest for any Interest Accrual Period,
then the Infrastructure Bank will, with the approval of the Certificate
Trustee, appoint a successor Agent Bank to act as such in its place, provided
that neither the resignation nor removal of the Agent Bank shall take effect
until a successor approved by the Certificate Trustee has been appointed.
Notice of any such appointment of a successor Agent Bank will be given to the
Certificateholders within ten days of such appointment.]
DISTRIBUTIONS OF INTEREST
Interest on each Class of the Offered Certificates will accrue from the
Series Issuance Date at the rates indicated above (each, a "Certificate
Interest Rate"), in each case distributable quarterly on March 25, June 25,
September 25 and December 25 (or, if any such date is not a Certificate
Business Day, the next succeeding Certificate Business Day) each year (each, a
"Distribution Date"), commencing .
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of the related Record Date interest
to the extent paid on such date with respect to the Class of Underlying Notes
with the same alphabetical [or alphanumeric] designation, as described below
under "Description of the Notes--Interest" [or, with respect to the Class
Certificates, payments received from the Swap Counterparty pursuant to the
Swap Agreement.]
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of the close of business on the
related Record Date principal to the extent paid on such date with respect to
the Class of Underlying Notes with the same alphabetical [or alphanumeric]
designation, as described below under "Description of the Notes--Principal."
The entire unpaid principal amount of the Offered Certificates will be due
and distributable on the date on which a Certificate Event of Default has
occurred and is continuing, if the Certificate Trustee or holders of a
majority in principal amount of the Offered Certificates of all Series then
outstanding have declared the Certificates to be immediately due and payable.
See "Description of the Certificates--Certificate Events of Default; Rights
Upon Certificate Event of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Trust shall be required to redeem the Offered Certificates if the Note
Issuer elects to redeem the Underlying Notes, which the Note Issuer may elect
to do at any time on or after the Payment Date on which the Outstanding Note
Principal Balance has been reduced to five percent of the Original Note
Principal Balance. Such Payment Date will correspond to the Distribution Date
on which the Outstanding Certificate Principal Balance has been reduced to
five percent of the Original Certificate Principal Balance. Notice of such
redemption will be given by the Trust to each holder of Certificates to be
redeemed by first-class mail, postage prepaid, mailed not less than five days
nor more than 25 days prior to the date of redemption.
S-14
<PAGE>
SUMMARY OF CERTAIN PROVISIONS OF THE SERIES
SUPPLEMENT TO THE TRUST AGREEMENT
[TO BE PREPARED UPON ISSUANCE]
[SUMMARY OF CERTAIN PROVISIONS OF THE SWAP AGREEMENT]
[TO BE PREPARED UPON ISSUANCE]
[THE SWAP COUNTERPARTY]
[TO BE PREPARED UPON ISSUANCE]
DESCRIPTION OF THE NOTES
GENERAL
The SCE Funding LLC Notes, Series 199 - (the "Underlying Notes"), will be
issued by the Note Issuer to the Trust on (the "Series Issuance
Date"), pursuant to the Note Indenture and the Series 199 - Supplement
thereto. Pursuant to the Note Indenture, the Note Issuer and the Note Trustee
may execute further series supplements in order to issue additional Series of
Notes. This summary should be read together with the material under the
heading "Description of the Notes" in the Prospectus.
The Underlying Notes, together with the Notes of other Series issued by the
Note Issuer (collectively, the "Notes"), will be issued pursuant to the Note
Indenture. The Underlying Notes will be comprised of the following
Classes:
<TABLE>
<CAPTION>
NOTE
SCHEDULED MATURITY INTEREST
CLASS DATE FINAL MATURITY DATE RATE
- ----- ---------------------- ---------------------- --------
<S> <C> <C> <C>
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
</TABLE>
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer has granted to the Note Trustee, for the benefit of the holders of the
Notes (the "Noteholders"), a security interest in all of the Note Issuer's
right, title and interest in and to the Note Collateral. The Note Collateral
is described more specifically under "Description of the Notes--Security" in
the Prospectus.
INTEREST
Interest on each Class of the Underlying Notes will accrue from the Series
Issuance Date at the rates indicated above (each, a "Note Interest Rate"), in
each case payable quarterly on March 25, June 25, September 25 and December 25
(or, if any such date is not a Certificate Business Day, the next succeeding
Certificate Business Day) each year (each, a "Payment Date"), commencing
, to the persons in whose names the Underlying Notes are registered
at the close of business on the related Record Date.
On each Payment Date, Noteholders of each Class will be entitled to receive
an amount equal to one-fourth of the product of (a) the applicable Note
Interest Rate and (b) the applicable Class Principal Balance as of the
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<PAGE>
close of business on the preceding Distribution Date after giving effect to
all payments of principal made to the Noteholders on such preceding
Distribution Date; provided, however, that with respect to the initial
Distribution Date, interest on each outstanding Class Principal Balance will
accrue from and including the Series Issuance Date to but excluding the
following Distribution Date. Interest will be calculated on the basis of a
360-day year of twelve 30-day months. See "Description of the Notes--Interest
and Principal" in the Prospectus.
PRINCIPAL
On each Payment Date, each Class of the Underlying Notes will be entitled to
receive payments of principal as follows: [TO BE PREPARED AT ISSUANCE].
Principal will be payable at the Corporate Trust Office of the Note Trustee in
the City of , or at the office or agency of the Note Issuer maintained
for such purposes in the Borough of Manhattan, the City of New York.
The following Expected Amortization Schedule sets forth the scheduled
outstanding percentage of the initial Class Principal Balance for each Class
of the Underlying Notes at each Payment Date from the Series Issuance Date to
the Scheduled Maturity Date for such Class. In preparing the following table,
it has been assumed that (i) the Offered Certificates are issued on the Series
Issuance Date, (ii) payments on the Offered Certificates are made on each
Distribution Date, commencing , 199 , (iii) the initial Class
Principal Balance is $ and the initial Class Principal Balance
is $ , (iv) all FTA Collections are deposited in the Collection Account
in accordance with the Seller's forecasts, (v) the Note Issuer does not redeem
the Underlying Notes and ( ) [other assumptions].
EXPECTED AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS
PRINCIPAL BALANCE OUTSTANDING
---------------------------------------
PAYMENT DATE CLASS CLASS CLASS CLASS CLASS
- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Initial Percentage......................
, 199 ..........................
, 199 ..........................
, 199 ..........................
, 199 ..........................
, 199 ..........................
, 199 ..........................
[Etc.]
</TABLE>
There can be no assurance that the Class Principal Balances of the
Underlying Notes and the related Offered Certificates will be reduced at the
rates indicated in the foregoing table, and the actual reductions in such
Class Principal Balances may be slower than those indicated in the chart. See
"Risk Factors" in the Prospectus for a discussion of various factors which
may, individually or in the aggregate, affect the rate of reductions of the
Class Principal Balances of the Underlying Notes and the Offered Certificates.
The entire unpaid principal amount of the Underlying Notes will be due and
payable on the date on which a Note Event of Default has occurred and is
continuing, if the Note Trustee or holders of a majority in principal amount
of the Notes of all Series then outstanding have declared the Underlying Notes
to be immediately due and payable. See "Description of the Notes--Note Events
of Default; Rights Upon Note Event of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, the Underlying Notes, and
accordingly cause the Trust to redeem the Offered Certificates, at any time on
or after the Payment Date on which the Outstanding Note Principal Balance has
been reduced to five percent of the Original Note Principal Balance. Notice of
such redemption will be given by the Note Issuer to each holder of Underlying
Notes by first-class mail, postage prepaid, mailed not less than five days nor
more than 25 days prior to the date of redemption.
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<PAGE>
OVERCOLLATERALIZATION AMOUNT
In order to enhance the likelihood that distributions on each Class of the
Offered Certificates will be made in full by their respective Scheduled Final
Distribution Dates, the Financing Order and the Issuance Advice Letter
relating to the Offered Certificates permit the recovery of $
through FTA Payments in excess of the amount expected to be required to pay
interest on and principal of all outstanding Classes of Offered Certificates
and related fees and expenses. Such excess is the Overcollateralization Amount
related to the Offered Certificates and will be allocated to the
Overcollateralization Subaccount. The Overcollateralization Amount will be
collected ratably over the life of the Certificates and is expected to
represent percent of the FTA Collections for each Billing Period. For a
further discussion of the Overcollateralization Amount, see "Description of
the Notes--Overcollateralization Amount" in the Prospectus.
OTHER CREDIT ENHANCEMENT
Reserve Subaccount. FTA Collections available with respect to any Payment
Date in excess of amounts payable as (a) expenses of the Note Issuer and the
Trust, (b) payments of principal of and interest on the Underlying Notes, (c)
allocations to the Overcollateralization Subaccount and (d) allocations to the
Capital Subaccount (all as described under "Description of the Notes--
Allocations; Payments" in the Prospectus), will be allocated to the Reserve
Subaccount. On each Payment Date, the Note Trustee will draw on amounts in the
Reserve Subaccount, to the extent amounts available in the General Subaccount
are insufficient to make scheduled payments on the Underlying Notes.
Capital Subaccount. Upon the issuance of the Underlying Notes, the Seller
will make a capital contribution of $ to the Note Issuer. Such amount
is equal to 0.50 percent of the initial principal amount of the Underlying
Notes. Such amount, less $100,000 in the aggregate for all Series of Notes, is
the Required Capital Level with respect to the Underlying Notes and will be
deposited into the Capital Subaccount. Withdrawals from and deposits to the
Capital Subaccount will be made as described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
[OTHER TO BE PREPARED AT ISSUANCE]
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will at the direction of the Servicer
apply all amounts on deposit in the Collection Account with respect to the
prior Billing Period in the manner described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
The Certificate Trustee will then apply all amounts paid by the Note Trustee
on the related Payment Date with respect to the Underlying Notes in the
following priority:
[TO BE PREPARED AT ISSUANCE]
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<PAGE>
DESCRIPTION OF THE TRANSITION PROPERTY
FINANCING ORDER AND ADVICE LETTERS
The Financing Order requires the Seller to submit an Issuance Advice Letter
to the CPUC with respect to each Series of Certificates issued. The first
Issuance Advice Letter [, which was filed in connection with the Offered
Certificates,] established the FTA Charges pursuant to which nonbypassable
charges will be payable by the applicable classes of Customers in an amount
sufficient to recover, within the time period specified in the Issuance Advice
Letter, the FTA Charges designated in the Issuance Advice Letter based on
factors including, but not limited to, the actual electricity usage of each
such Customer and the rate of delinquencies and charge-offs. These charges are
nonbypassable in that applicable consumers cannot avoid paying them if they
purchase electricity from a supplier other than the Seller. [Subsequent
Issuance Advice Letters have modified the FTA Charges to support the issuance
of additional Series of Certificates, including the Offered
Certificates.]
The Issuance Advice Letter which was filed in connection with the Offered
Certificates establishes the following FTA Charges:
<TABLE>
<CAPTION>
CLASS OF
CUSTOMERS FTA CHARGE PER KILOWATT HOUR
--------- ----------------------------
<S> <C>
RESIDENTIAL
SMALL
COMMERCIAL
</TABLE>
Initially, the FTA Charge for an average Residential Customer will amount to
approximately $ per month, and the FTA Charge for an average Small
Commercial Customer will amount to approximately $ per month. The average
monthly bill (excluding local taxes) during 1996 was $64.98 for a Residential
Customer and $114.15 for a Small Commercial Customer.
ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that the FTA Collections are neither more
nor less than the amount necessary to amortize the Certificates in accordance
with the Expected Amortization Schedule, the Servicing Agreement and the
Financing Order require the Servicer to seek periodic adjustments to the FTA
Charges based on actual FTA Collections and updated assumptions by the
Servicer as to, among other factors, electricity usage by Customers and the
rate of delinquencies and charge-offs. The date as of which any calculation is
performed and which forms the basis for a requested adjustment to the FTA
Charges is referred to as a "Calculation Date." The adjustments to the FTA
Charges will continue until all interest and principal on all Series of Notes
and corresponding Series of Certificates have been paid or distributed in
full.
The "Variance Trigger" means [ ].
[The following table reflects information regarding the changes to the FTA
Charges which have been requested through Advice Letters since the Financing
Order was issued:]
FTA CHARGE FOR RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
REQUESTED ADJUSTMENT RESULTING
ADJUSTMENT TO FTA CHARGE AGGREGATE
TO FTA CHARGE GRANTED BY CPUC FTA CHARGE EFFECTIVE DATE OF
FILING DATE PER KILOWATT HOUR PER KILOWATT HOUR PER KILOWATT HOUR ADJUSTMENT
----------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
[TO BE PREPARED UPON ISSUANCE]
FTA CHARGE FOR SMALL COMMERCIAL CUSTOMERS
<TABLE>
<CAPTION>
REQUESTED ADJUSTMENT RESULTING
ADJUSTMENT TO FTA CHARGE AGGREGATE
TO FTA CHARGE GRANTED BY CPUC FTA CHARGE EFFECTIVE DATE OF
FILING DATE PER KILOWATT HOUR PER KILOWATT HOUR PER KILOWATT HOUR ADJUSTMENT
----------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
[TO BE PREPARED UPON ISSUANCE]
See "Description of the Transition Property--Adjustments to the FTA Charges"
in the Prospectus.
S-18
<PAGE>
CERTAIN DISTRIBUTION AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The rate of principal distributions on each Class of Offered Certificates,
the aggregate amount of each interest distribution on each Class of Offered
Certificates and the actual maturity date of each Class of Offered
Certificates will be related to the rate and timing of FTA Collections.
The actual distributions on each date for each Class of Offered Certificates
and the weighted average life thereof will be affected primarily by the rate
of FTA Collections and the timing of receipt of such FTA Collections. Since
the FTA Charges will consist of a charge per kilowatt hour of usage by the
applicable classes of Customers, the aggregate amount of FTA Collections and
the rate of principal amortization on the Offered Certificates will depend, in
part, on actual energy usage by Customers and the rate of delinquencies and
charge- offs. Although the amounts of the FTA Charges will be adjusted from
time to time based in part on the actual rate of FTA Collections, no
assurances are given that the Servicer will be able to forecast accurately
actual energy usage and the rate of delinquencies and charge-offs or implement
adjustments to the FTA Charges that will cause FTA Collections to be received
at any particular rate. If FTA Collections are received at a slower rate than
expected an Offered Certificate may be retired later than expected. Because
principal will only be distributed in accordance with the Expected
Amortization Schedules, except in the event of an early redemption, the
Offered Certificates are not expected to mature earlier than scheduled. A
distribution on a date that is earlier than forecasted will result in a
shorter weighted average life, and a distribution on a date that is later than
forecasted will result in a longer weighted average life. In addition, if a
larger portion of the delayed distributions on the Offered Certificates are
received in later years, this will result in a longer weighted average life of
the Offered Certificates.
No representation is made as to the particular factors that will affect the
rate of FTA Collections, as to the relative importance of such factors, as to
the percentage of the principal balance of the Offered Certificates that will
be distributed as of any date or as to the overall rate of FTA Collections.
S-19
<PAGE>
THE SELLER AND SERVICER
The following is information which supplements that provided under the
heading "The Seller and Servicer" in the Prospectus. For a more complete
discussion of the Seller and Servicer, see "The Seller and Servicer" in the
Prospectus.
Southern California Edison Company reported net income of $ on
revenues of $ for the [quarter][year] ended , 199 , as
compared with net income of $ on revenues of $ for the
[quarter][year] ended , 199 .
SERVICING
GENERAL
The Servicer, as agent for the Note Issuer, will manage, service and
administer, and make collections in respect of, the Transition Property
pursuant to the Servicing Agreement between the Servicer and the Note Issuer.
For a detailed discussion of the Servicer's procedures, the manner in which
payments from Customers are remitted to the Collection Account, and related
matters, see "Servicing" in the Prospectus.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Underlying Notes.
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each Billing
Period, in an amount equal to one-fourth of percent per annum of the then
outstanding principal balance of the Underlying Notes. The Servicing Fee
(together with any portion of the Servicing Fee that remains unpaid from prior
Distribution Dates) will be paid solely to the extent funds are available
therefor as described under "Description of the Notes--Allocations; Payments"
in the Prospectus. The Servicing Fee will be paid prior to the distribution of
any amounts in respect of interest on and principal of the Underlying Notes.
The Servicer will be entitled to retain as additional compensation net
investment income on FTA Payments received by the Servicer prior to remittance
thereof to the Collection Account and the portion of late fees, if any, paid
by Customers relating to the FTA Payments.
AGGREGATORS AND ALTERNATIVE ENERGY SUPPLIERS
As part of the deregulation of the California electric industry described in
the Prospectus, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPs") to elect to present a consolidated bill to
their retail customers covering amounts owed to the ESP for electricity,
amounts owed to the Utilities for distribution and the applicable FTA Charge.
Any ESP who elects consolidated billing, including monthly amounts with
respect to the FTA Charges, will be responsible for paying the Servicer
periodic amounts payable by customers of the ESP regardless of the ESP's
ability to collect the FTA Charges from its Customers. Neither the Seller nor
the Servicer will pay any shortfalls resulting from the failure of any ESPs to
forward FTA Payments to Edison, as Servicer, which may result in delays in
distributions to Certificateholders. See "Risk Factors--Potential Servicing
Issues--Reliance on Aggregators and Other Suppliers" in the Prospectus.
STATEMENTS BY SERVICER
For each Remittance Date and each Distribution Date, the Servicer will
provide the statements and reports described under "Servicing--Statements by
Servicer" in the Prospectus.
S-20
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Offered Certificates will be included in gross income for
federal income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of an Offered
Certificate, and is based on the opinion of Brown & Wood LLP, counsel to the
Trust ("Special Counsel"). This discussion represents the opinion of Special
Counsel, subject to the qualifications set forth therein or herein. This
discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), currently applicable Treasury regulations and
judicial and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax
consequences to Offered Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Offered Certificateholder in light of that Offered
Certificateholder's circumstances, and some Offered Certificateholders may be
subject to special tax rules and limitations not discussed below (e.g., life
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers). CONSEQUENTLY, EACH PROSPECTIVE OFFERED CERTIFICATEHOLDER IS
URGED TO CONSULT ITS OWN TAX ADVISOR IN DETERMINING THE FEDERAL, STATE, LOCAL
AND FOREIGN INCOME AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF AN OFFERED CERTIFICATE.
For purposes of this discussion, "U.S. Person" means a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
United States persons has the authority to control all substantial decisions
of the trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source). The term "U.S. Offered Certificateholder" means any U.S. Person
and any other person to the extent that income attributable to its interest in
an Offered Certificate is effectively connected with that person's conduct of
a U.S. trade or business. The term "non-U.S. Offered Certificateholder" means
any person other than a U.S. Offered Certificateholder.
The discussion assumes that an Offered Certificate is issued in registered
form, has all payments denominated in U.S. dollars and not determined by
reference to the value of any other currency and has a term that exceeds one
year. Moreover, the discussion assumes that any original issue discount
("OID") on the Offered Certificate (i.e., any excess of the stated redemption
price at maturity of the Offered Certificate over its issue price) is less
than a de minimis amount (i.e., 0.25 percent of its stated redemption price at
maturity multiplied by the Offered Certificate's weighted average maturity),
all within the meaning of the OID regulations. Moreover, the discussion
assumes that the Offered Certificates are of a type, as set forth below, which
Special Counsel is of the opinion will represent ownership of debt for federal
income tax purposes.
TREATMENT OF THE OFFERED CERTIFICATES AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Offered Certificates will represent ownership of debt
and the Trust will not be treated as an association or publicly traded
partnership taxable as a corporation.
S-21
<PAGE>
TAXATION OF INTEREST INCOME OF U.S. OFFERED CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
Offered Certificates represent ownership of debt obligations for federal
income tax purposes, stated interest on a beneficial interest in an Offered
Certificate will be taxable as ordinary income when received or accrued by
U.S. Offered Certificateholders in accordance with their method of accounting.
Generally, interest received on the Offered Certificates will constitute
"investment income" for purposes of certain limitations of the Code concerning
the deductibility of investment interest expense.
Market Discount. A U.S. Offered Certificateholder who purchases (including a
purchase at original issuance for a price less than the issue price) an
interest in an Offered Certificate at a discount that exceeds any unamortized
OID may be subject to the "market discount" rules of sections 1276 through
1278 of the Code. These rules generally provide that, subject to a
statutorily-defined de minimis exception, if a U.S. Offered Certificateholder
acquires an Offered Certificate at a market discount (i.e., at a price below
its stated redemption price at maturity or its revised issue price if it was
issued with OID) and thereafter recognizes gain upon a disposition of the
Offered Certificate (or disposes of it in certain non-recognition
transactions, including by gift), the lesser of such gain (or appreciation, in
the case of an applicable non-recognition transaction) or the portion of the
market discount that accrued while the Offered Certificate was held by such
holder will be treated as ordinary interest income at the time of the
disposition. In addition, a U.S. Offered Certificateholder who acquired an
Offered Certificate at a market discount would be required to treat as
ordinary interest income the portion of any principal payment attributable to
accrued market discount on such Offered Certificate. Generally, market
discount accrues ratably over the life of a debt instrument unless the debt
holder elects to accrue market discount on a constant yield to maturity basis.
It is not clear how either the ratable accrual or constant yield accrual
methodologies apply to instruments such as the Offered Certificates where the
timing of principal payments is uncertain. Investors should consult their own
tax advisors concerning the accrual of market discount. The market discount
rules also provide that a U.S. Offered Certificateholder who acquires an
Offered Certificate at a market discount may be required to defer a portion of
any interest expense that otherwise may be deductible on any indebtedness
incurred or maintained to purchase or carry the Offered Certificate until the
holder disposes of the Offered Certificate in a taxable transaction.
A U.S. Offered Certificateholder who acquired an Offered Certificate at a
market discount may elect to include market discount in income as the discount
accrues, either on a ratable basis or, if elected, on a constant yield basis.
The current inclusion election, once made, applies to all market discount
obligations acquired on or after the first day of the first taxable year to
which the election applies, and may not be revoked without the consent of the
Internal Revenue Service (the "IRS"). If a holder elects to include market
discount in income in accordance with the preceding sentence, the foregoing
rules with respect to the recognition of ordinary income on sales, principal
payments and certain other dispositions of the Offered Certificates and the
deferral of interest deductions on indebtedness related to the investor
certificates will not apply.
Amortizable Bond Premium. A U.S. Offered Certificateholder who purchases an
interest in an Offered Certificate at a premium may elect to offset the
premium against interest income under the constant yield method over the
remaining term of the Offered Certificate in accordance with the provisions of
Section 171 of the Code. A holder that elects to amortize bond premium must
reduce the tax basis in the related Offered Certificate by the amount of bond
premium used to offset interest income. If an Offered Certificate purchased at
a premium is redeemed in full prior to its maturity, a holder who has elected
to amortize bond premium should be entitled to a deduction in the taxable year
of redemption in an amount equal to the excess, if any, of the adjusted basis
of the Offered Certificate over the greater of the redemption price or the
amount payable on maturity.
S-22
<PAGE>
SALE OF EXCHANGE OF OFFERED CERTIFICATES
Upon a disposition of an interest in an Offered Certificate, a U.S. Offered
Certificateholder generally will recognize gain or loss equal to the
difference between (i) the amount of cash and the fair market value of any
other property received (other than amounts attributable to, and taxable as,
accrued stated interest) and (ii) the U.S. Offered Certificateholder's
adjusted basis in its interest in the Offered Certificate. The adjusted basis
in the interest in the Offered Certificate will equal its cost, increased by
any OID or market discount included in income with respect to the interest in
the Offered Certificate prior to its disposition and reduced by any payments
reflecting principal or OID previously received with respect to the interest
in the Offered Certificate and any amortized premium. Subject to the OID and
market discount rules, gain or loss will generally be capital gain or loss if
the interest in the Offered Certificate was held as a capital asset. Capital
losses generally may be used by a corporate taxpayer only to offset capital
gains and by an individual taxpayer only to the extent of capital gains plus
$3,000 of other income.
NON-U.S. OFFERED CERTIFICATEHOLDERS
In general, a non-U.S. Offered Certificateholder will not be subject to U.S.
federal income tax on interest (including OID) on a beneficial interest in an
Offered Certificate unless (i) the non-U.S. Offered Certificateholder actually
or constructively owns ten percent or more of the total combined voting power
of all classes of stock of the Seller entitled to vote (or of a profits or
capital interest of the Trust characterized as a partnership), (ii) the non-
U.S. Offered Certificateholder is a controlled foreign corporation that is
related to the Seller (or the Trust treated as a partnership) through stock
ownership, (iii) the non-U.S. Offered Certificateholder is a bank which
receives interest as described in Code Section 881(c)(3)(A), or (iv) such
interest is contingent interest described in Code Section 871(h)(4). To
qualify for the exemption from taxation, the last U.S. Person in the chain of
payment prior to payment to a non-U.S. Offered Certificateholder (the
"Withholding Agent") must have received (in the year in which a payment of
interest or principal occurs or in either of the two preceding years) a
statement that (i) is signed by the non-U.S. Offered Certificateholder under
penalties of perjury, (ii) certifies that the non-U.S. Offered
Certificateholder is not a U.S. Person and (iii) provides the name and address
of the non-U.S. Offered Certificateholder. The statement may be made on a Form
W-8 or substantially similar substitute form, and the non-U.S. Offered
Certificateholder must inform the Withholding Agent of any change in the
information on the statement within 30 days of the change. If an Offered
Certificate is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide a
signed statement to the Withholding Agent. However, in that case, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
non-U.S. Offered Certificateholder to the organization or institution holding
the Offered Certificate on behalf of the non-U.S. Offered Certificateholder.
The U.S. Treasury Department is considering implementation of further
certification requirements aimed at determining whether the issuer of a debt
obligation is related to holders thereof.
Generally, any gain or income realized by a non-U.S. Offered
Certificateholder upon retirement or disposition of an interest in an Offered
Certificate (other than gain attributable to accrued interest or OID, which is
addressed in the preceding paragraph) will not be subject to U.S. federal
income tax, provided that in the case of an Offered Certificateholder that is
an individual, such Offered Certificateholder is not present in the United
States for 183 days or more during the taxable year in which such retirement
or disposition occurs. Certain exceptions may be applicable, and an individual
non-U.S. Offered Certificateholder should consult a tax advisor.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of an Offered Certificate to a registered
owner who is not an "exempt recipient" and who fails to provide certain
identifying information (such as the registered owner's taxpayer
identification number) in the manner required. Generally, individuals are not
exempt recipients whereas corporations and certain other entities are exempt
recipients. Payments made in respect of a U.S. Offered Certificateholder must
be reported to the IRS, unless the U.S. Offered Certificateholder is an exempt
recipient or otherwise establishes an exemption.
S-23
<PAGE>
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) investor certificates to non-U.S. Offered
Certificateholders, temporary Treasury regulations provide that backup
withholding and information reporting will not apply to payments with respect
to which either requisite certification has been received or an exemption has
otherwise been established (provided that neither the Certificate Trustee nor
a paying agent has actual knowledge that the holder is a U.S. Person or that
the conditions of any other exemption are not in fact satisfied). Payments of
the proceeds of the sale of an Offered Certificate to or through a foreign
office of a broker that is a U.S. Person, a controlled foreign corporation for
United States federal income tax purposes or a foreign person 50 percent or
more of whose gross income is effectively connected with the conduct of a
trade or business within the United States for the specified three-year period
are currently subject to certain information reporting requirements, unless
the payee is an exempt recipient or such broker has evidence in its records
that the payee is not a U.S. Person and no actual knowledge that such evidence
is false and certain other conditions are met. Temporary Treasury regulations
indicate that such payments are not currently subject to backup withholding.
Under current Treasury regulations, payments of the proceeds of a sale to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the payee certifies under penalties of
perjury as to his or her status as a non-U.S. Person and certain other
qualifications (and no agent of the broker who is responsible for receiving or
reviewing such statement has actual knowledge that it is incorrect) and
provides his or her name and address or the payee otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules from a payment to an
Offered Certificateholder would be allowed as a refund or a credit against
such Offered Certificateholder's U.S. federal income tax, provided that the
required information is furnished to the IRS.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Offered
Certificates will be exempt from California personal income tax, but not
exempt from the California franchise tax applicable to banks and corporations.
Gain or loss, if any, resulting from an exchange or redemption of Offered
Certificates will be recognized in the year of the exchange or redemption.
Present California law taxes both long-term and short-term capital gains at
the rates applicable to ordinary income. Interest on indebtedness incurred or
continued by an Offered Certificateholder in connection with the purchase of
Offered Certificates will not be deductible for California personal income tax
purposes.
OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Offered Certificates under any state or local tax law other than that of the
State of California. Each investor should consult its own tax advisor
regarding state and local tax consequences.
S-24
<PAGE>
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and/or Section 4975 of the Code impose certain requirements on employee
benefit plans and certain other plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which
such plans, accounts or arrangements are invested, that are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA and/or
Section 4975 of the Code (collectively, "Plans"), and on persons who are
fiduciaries with respect to Plans, in connection with the investment of assets
that are treated as "plan assets" of any Plan for purposes of applying Title I
of ERISA and Section 4975 of the Code ("Plan Assets"). ERISA imposes on Plan
fiduciaries certain general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Generally, any person who has discretionary authority or control respecting
the management or disposition of Plan Assets, and any person who provides
investment advice with respect to Plan Assets for a fee or other
consideration, is a fiduciary with respect to such Plan Assets.
Subject to the considerations described below, the Offered Certificates are
eligible for purchase with Plan Assets of any Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to
a Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject
to penalties imposed under ERISA and/or excise taxes imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transaction rules generally are set forth in
Section 406 of ERISA and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Offered Certificates of any Class on behalf of or with Plan Assets of any Plan
should determine whether such purchase is consistent with its fiduciary duties
and whether such purchase would constitute or result in a non-exempt
prohibited transaction under ERISA and/or Section 4975 of the Code because any
of Edison, the Certificate Trustee, the Underwriters or their respective
affiliates may be deemed to be benefiting from the issuance of the Offered
Certificates and is a Party in Interest with respect to the investing Plan. In
particular, the Offered Certificates may not be purchased with Plan Assets of
any Plan if any of Edison, the Certificate Trustee, the Underwriters or their
respective affiliates (a) has investment or administrative discretion with
respect to the Plan Assets used to effect such purchase; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan Assets, for a fee and pursuant to an agreement or understanding that
such advice (1) will serve as a primary basis for investment decisions with
respect to such Plan Assets, and (2) will be based on the particular
investment needs of such Plan; or (c) is an employer maintaining or
contributing to such Plan. Each purchaser of the Offered Certificates will be
deemed to have represented and warranted that its purchase of the Offered
Certificates or any interest therein does not violate the foregoing
limitations.
PLAN ASSET REGULATION
Because the Offered Certificates are likely to be treated as "equity
interests" in the Trust under a regulation (the "Plan Asset Regulation")
issued by the U.S. Department of Labor (the "DOL"), which provides that
beneficial interests in a trust are equity interests, purchasing the Offered
Certificates with Plan Assets may cause the assets of the Trust to be deemed
Plan Assets of the investing Plan which, in turn, would subject the Trust and
its assets to the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Code. A
violation of the prohibited transaction rules could occur if the Offered
Certificates are purchased with Plan Assets of any Plan and any of Edison, the
Certificate Trustee, the
S-25
<PAGE>
Underwriters or their respective affiliates is a Party in Interest with
respect to such Plan, unless a statutory or administrative exemption is
available or an exception applies under the Plan Asset Regulation. However,
the possibility that prohibited transactions may occur by reason of the
operation of the Trust is substantially less than in other pass-through trusts
because each Class of Offered Certificates represents an interest in the
corresponding Class of Underlying Notes and only minimal administrative
activity is expected to occur at the Trust level.
Before purchasing any Class of Offered Certificates of this Series, a
fiduciary or other Plan investor should consider whether a prohibited
transaction might arise by reason of any such relationship between the
investing Plan and any of Edison, the Certificate Trustee, the Underwriters or
their respective affiliates and consult its legal advisors regarding the
purchase in light of the considerations described herein and in the
Prospectus. The DOL has issued six class exemptions that may afford exemptive
relief for otherwise prohibited transactions arising from the purchase or
holding of the Offered Certificates, i.e., DOL Prohibited Transaction
Exemptions 96-23 (Class Exemption for Plan Asset Transactions Determined by
In-House Investment Managers), 95-60 (Class Exemption for Certain Transactions
Involving Insurance Company General Accounts), 91-38 (Class Exemption for
Certain Transactions Involving Bank Collective Investment Funds), 90-1 (Class
Exemption for Certain Transactions Involving Insurance Company Pooled Separate
Accounts), 84-14 (Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers), and 75-1 (Part III) (Class
Exemption for Certain Underwriting Transactions). A purchaser of the Offered
Certificates should be aware, however, that even if the conditions specified
in one or more of the above exemptions are met, the scope of the relief
provided by the exemption might not cover all acts which might be construed as
prohibited transactions.
CONCLUSION
In light of the foregoing, fiduciaries or other Plan investors considering
whether to purchase the Offered Certificates with Plan Assets of any Plan
should consult their own legal advisors regarding whether the Trust assets
would be considered Plan Assets of Plan investors, the consequences that would
apply if the Trust's assets were considered Plan Assets, and the availability
of exemptive relief from the prohibited transaction rules or an exception
under the Plan Asset Regulation. Fiduciaries and other Plan investors should
also consider the fiduciary standards under ERISA or other applicable law in
the context of the Plan's particular circumstances before authorizing an
investment of Plan Assets in the Offered Certificates. Among other factors,
such persons should consider whether the investment (a) satisfies the
diversification requirement of ERISA or other applicable law, (b) is in
accordance with the Plan's governing instruments, and (c) is prudent in light
of the "Risk Factors" and other factors discussed herein and in the
Prospectus.
For further information see "ERISA Considerations" in the Prospectus.
S-26
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Trust has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters, for whom are
acting as representatives, has severally agreed to purchase, the respective
principal amounts of the Offered Certificates set forth opposite its name
below.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NAME CERTIFICATES
---- ------------
<S> <C>
[Underwriter]................................................. $
[Underwriter].................................................
[Underwriter].................................................
[Others]......................................................
-----------
Total....................................................... $
===========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Offered
Certificates offered hereby, if any are taken.
The Underwriters propose to offer the Offered Certificates in part directly
to retail purchasers at the initial public offering price set forth on the
cover page of this Prospectus Supplement, and in part to certain securities
dealers at such price less a concession not in excess of percent of the
principal amount of the Offered Certificates. The Underwriters may allow and
such dealers may reallow a concession not in excess of percent of the
principal amount of the Offered Certificates to certain brokers and dealers.
After the Offered Certificates are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Offered Certificates are a new issue of securities with no established
trading market. [The Certificates will not be listed on any securities
exchange.] The Trust has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Offered Certificates.
The Note Issuer and the Seller have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
RATINGS
It is a condition of issuance of the Offered Certificates that the Class
Certificates be rated " " by , " " by , " " by
and " " by (each of , and , a
"Rating Agency") and that the Class Certificates be rated " " by
, " " by , " " by and " " by . Each
Class of Underlying Notes will receive the same ratings from each Rating
Agency as the corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any Offered
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Certificates upon initial issuance will not
be revised or withdrawn by a Rating Agency at any time thereafter. If a rating
of any Class of Offered Certificates is revised or withdrawn, the liquidity of
such Class of Offered Certificates may be adversely affected. In general,
ratings address credit risk and do not represent any assessment of the rate of
FTA Payments.
S-27
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the Underlying Notes and certain federal
income tax consequences of the issuance of the Underlying Notes will be passed
upon by Latham & Watkins, Los Angeles, California, counsel to the Seller and
the Note Issuer. Certain legal matters relating to the Offered Certificates
and certain federal income tax consequences of the issuance of the Offered
Certificates will be passed upon by Special Counsel. Certain legal matters
relating to the Offered Certificates will be passed upon by Cravath, Swaine &
Moore, New York, New York, counsel to the Underwriters.
S-28
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definitions of such
terms may be found herein. Certain defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal Definitions"
in the Prospectus.
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C>
Agent Bank .................................................... S-
Book-Entry Certificates........................................ S-
Calculation Date............................................... S-
Capital Subaccount.............................................
Cede........................................................... S-
Certificate Interest Rate...................................... S-
Certificate Trustee............................................ S-
Certificateholders............................................. S-
Certificates................................................... S-
Class.......................................................... S- , S-
Class Principal Balance........................................ S-
Code...........................................................
CPUC........................................................... S-
Distribution Date.............................................. S- , S- , S-
DTC............................................................ S- , S-
Edison......................................................... S-
Exchange Act................................................... S-
Floating Rate.................................................. S-
General Subaccount.............................................
Infrastructure Bank............................................ S-
Interest Accrual Period........................................
Interest Determination Date....................................
IRS............................................................
Non-U.S. Certificateholder.....................................
Note Issuer.................................................... S- , S-
Note Trustee................................................... S-
Noteholder..................................................... S-
Notes.......................................................... S-
Offered Certificates........................................... S- , S-
OID............................................................
Original Certificate Principal Balance......................... S-
Original Note Principal Balance................................ S-
Overcollateralization Subaccount............................... S-
Payment Date................................................... S- , S-
Rating Agency.................................................. S- , S-
Record Date.................................................... S-
Reserve Fund...................................................
Seller......................................................... S-
Series Issuance Date........................................... S-
Servicer....................................................... S-
Servicing Fee.................................................. S-
Special Counsel................................................
Swap Agreement.................................................
Swap Counterparty..............................................
Statute........................................................ S-
Telerate Page..................................................
</TABLE>
S-29
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C>
Trust.......................................................... S-
U.S. Certificateholder.........................................
U.S. Person....................................................
Underlying Notes............................................... S- , S- , S-
Underwriters................................................... S-
Utilities...................................................... S-
Variance Trigger...............................................
Withholding Agent..............................................
</TABLE>
S-30
<PAGE>
FINANCIAL STATEMENTS
SCE FUNDING LLC
BALANCE SHEET
, 1997
[TO BE PREPARED UPON ISSUANCE]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED , 1997
PROSPECTUS
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SCE-1
RATE REDUCTION CERTIFICATES
ISSUABLE IN SERIES
-----------
SCE FUNDING LLC
(ISSUER OF THE NOTES)
-----------
SOUTHERN CALIFORNIA EDISON COMPANY
(SELLER AND SERVICER)
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE STATE
OF CALIFORNIA, THE INFRASTRUCTURE BANK, ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES. NONE OF THE
CERTIFICATES, THE NOTES OR THE UNDERLYING TRANSITION PROPERTY WILL BE
GUARANTEED OR INSURED BY THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, THE
TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER OR
ITS AFFILIATES.
The California Infrastructure and Economic Development Bank Special Purpose
Trust SCE-1 Rate Reduction Certificates (the "Certificates") offered hereby in
an aggregate principal amount of up to $ may be sold from time to time in
series (each, a "Series"), each of which may be comprised of one or more
classes (each, a "Class"), as described in the related Prospectus Supplement.
Each Series of Certificates will be issued by the California Infrastructure and
Economic Development Bank Special Purpose Trust SCE-1 (the "Trust") established
by the California Infrastructure and Economic Development Bank (the
"Infrastructure Bank").
The assets of the Trust will consist solely of the SCE Funding LLC Notes (the
"Notes") issued by SCE Funding LLC, a Delaware special purpose limited
liability company (the "Note Issuer"), and the proceeds thereof. The sole
member of the Note Issuer is Southern California Edison Company, a California
corporation ("Edison"). The Notes will be secured primarily by the Transition
Property, as described under "Prospectus Summary--Transition Property" and
"Description of the Transition Property" herein; the Notes will also be secured
by the other Note Collateral described under "Description of the Notes--
Security" herein.
Edison will sell the Transition Property (in such capacity, the "Seller") to
the Note Issuer pursuant to the Transition Property Purchase and Sale Agreement
between the Seller and the Note Issuer. See "Description of the Transition
Property--Sale and Assignment of Transition Property" herein. The Seller will
also service the Transition Property (in its capacity as servicer, the
"Servicer") pursuant to the Transition Property Servicing Agreement between the
Servicer and the Note Issuer. See "Servicing" herein.
(Continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE 22 HEREIN.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF
THE NOTE ISSUER WILL BE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. PAYMENTS
ON THE NOTES RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF DISTRIBUTIONS ON
THE CERTIFICATES. NONE OF THE STATE OF CALIFORNIA, THE INFRASTRUCTURE
BANK, THE TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
ANY OF THE SELLER OR ITS AFFILIATES (OTHER THAN THE NOTE ISSUER) WILL
HAVE ANY OBLIGATIONS IN RESPECT OF THE CERTIFICATES, THE NOTES OR THE
TRANSITION PROPERTY, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF IS
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, PURCHASE PRICE
OF, OR INTEREST ON, THE CERTIFICATES OR THE NOTES, OR TO THE PAYMENTS IN
RESPECT OF THE TRANSITION PROPERTY, NOR IS THE STATE OF CALIFORNIA OR ANY
POLITICAL SUBDIVISION OR AGENCY OR INSTRUMENTALITY THEREOF IN ANY MANNER
OBLIGATED TO MAKE ANY APPROPRIATION FOR THE PAYMENT THEREOF.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OFFERED
HEREBY UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page 77 herein for the location of the definitions of
capitalized terms that appear in this Prospectus.
, 1997
<PAGE>
(Continued from previous page)
The Note Issuer will issue Notes from time to time in series to the Trust,
and the Trust will issue to investors separate Series of Certificates from
time to time upon terms determined at the time of sale and described in the
related Prospectus Supplement. Each Series of Notes (each, a "Series") may be
issuable in one or more classes (each, a "Class"). A Series may include
Classes which differ as to the interest rate, timing, sequential order and
amount of distributions of principal or interest or both or otherwise. As more
specifically described under "Description of the Notes--Allocations; Payments"
herein, the Note Issuer will use all payments made with respect to Transition
Property to pay certain expenses described herein, interest due on the Notes
and principal payable on the Notes, allocated among the Series and Classes of
Notes based on the priorities described herein and in the related Prospectus
Supplement. All principal not previously paid, if any, on any Note is due and
payable on the Final Maturity Date of such Note. Each Class of Certificates
will correspond to a Class of Notes and will represent undivided interests in
such underlying Class of Notes, the proceeds thereof and payments pursuant to
any related Swap Agreement. As such, each Class of Certificates will entitle
the holders thereof to receive the payments received by the Trust in respect
of the corresponding Class of Notes. The funds received by the Trust from the
payments on each Class of Notes will be the only source of distributions on
the Certificates of the corresponding Class. While the specific terms of any
Series of Certificates (and the Classes, if any, thereof) will be described in
the related Prospectus Supplement, the terms of such Series and any Classes
thereof will not be subject to prior review by, or consent of, the holders of
the Certificates of any previously issued Series.
Offers of the Certificates of a Series may be made through one or more
different methods, including offerings through underwriters, as described
under "Plan of Distribution" herein and "Underwriting" in the related
Prospectus Supplement. There will have been no secondary market for the
Certificates of any Series prior to the offering thereof. There can be no
assurance that a secondary market for any Series of Certificates will develop
or, if one does develop, that it will continue. It is not anticipated that any
of the Certificates will be listed on any securities exchange.
2
<PAGE>
No dealer, salesperson, or any other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Seller, the Note Issuer, the Trust, the Infrastructure Bank
or any dealer, salesperson, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof.
This Prospectus and the related Prospectus Supplement do not constitute an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SERIES OF CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Note Issuer has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (as amended, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Certificates and the Notes. This Prospectus, which
forms a part of the Registration Statement, and any Prospectus Supplement
describe the material terms of each document filed as an exhibit to the
Registration Statement; however, this Prospectus and any Prospectus Supplement
do not contain all of the information contained in the Registration Statement
and the exhibits thereto. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission are not necessarily complete, and in
each instance reference is made to the copy of such document so filed. Each
such statement is qualified in its entirety by such reference. For further
information, reference is made to the Registration Statement and the exhibits
thereto, which are available for inspection without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement and exhibits thereto may be obtained at the above locations at
prescribed rates. Information filed with the Commission can also be inspected
at the Commission's site on the World Wide Web at http://www.sec.gov.
The Note Issuer will file with the Commission such periodic reports with
respect to each Series of Certificates as are required by the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules,
regulations or orders of the Commission thereunder. The Note Issuer may
discontinue filing periodic reports under the Exchange Act at the beginning of
the fiscal year following the issuance of the Certificates of any Series if
there are fewer than 300 holders of such Certificates.
REPORTS TO HOLDERS
Unless and until the Certificates are no longer issued in book-entry form,
the Servicer will provide to Cede & Co., as nominee of The Depository Trust
Company ("DTC") and registered holder of the Certificates and, upon request,
to Participants of DTC, periodic reports concerning the Certificates. See
"Description of the Certificates--Reports to Certificateholders" herein. Such
reports may be made available to the holders of interests in the Certificates
(the "Certificateholders") upon request to their Participants. Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. The financial information provided to
Certificateholders will not be examined and reported upon, nor will an opinion
thereon be provided, by any independent public accountant.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Note Issuer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference in this Prospectus and to be part
hereof. Any statement contained herein or in a Prospectus Supplement, or in a
document incorporated or deemed to be incorporated by reference herein or
therein shall be deemed to be modified or superseded for purposes of this
Prospectus and any Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed document that also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
or any Prospectus Supplement.
The Note Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such
person, a copy of any of or all the documents incorporated herein by reference
(other than exhibits to such documents). Requests for such copies should be
directed to the Note Issuer at 2244 Walnut Grove Avenue, Room 180, Rosemead,
CA 91770 or by telephone at (626) 302-1850.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Certificates will describe the
following terms of such Series and, if applicable, the Classes thereof: (a)
the designation of the Series and, if applicable, the Classes thereof, (b) the
principal amount, (c) the annual rate at which interest accrues or, if the
Trust has entered into a Swap Agreement with respect to such Series, the index
on which a variable rate of interest will be based, (d) the dates on which
distributions of interest and principal will occur, (e) the Scheduled Final
Distribution Date, (f) the Termination Date of the Series, (g) the issuance
date of the Series, (h) the place or places for the payment of principal and
interest, (i) the authorized denominations, (j) the provisions for redemption
by the Trust as a result of an optional redemption by the Note Issuer of the
underlying Notes which will, in no event, be permitted unless the outstanding
principal balance thereof is less than five percent of the initial principal
balance thereof, (k) the Expected Amortization Schedule for principal of such
Series and, if applicable, the Classes thereof, (l) the terms, if any, on
which any Class of Certificates will be subordinated to any other Class of
Certificates, (m) the FTA Charges as of the date of issuance of such Series of
Certificates, and the portion of the FTA Charges attributable to such Series
of Certificates, (n) any other terms of such Series and any Class thereof that
are not inconsistent with the provisions of the Certificates and that will not
result in any Rating Agency reducing or withdrawing its then current rating of
any outstanding Series or Class of Notes or Certificates, (o) the identity of
the Certificate Trustee and the Delaware Trustee and (p) the terms of any
interest rate exchange agreement executed solely to permit the issuance of
variable rate Certificates.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION...................................................... 3
REPORTS TO HOLDERS......................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 4
PROSPECTUS SUPPLEMENT...................................................... 4
PROSPECTUS SUMMARY......................................................... 7
RISK FACTORS............................................................... 22
Unusual Nature of the Transition Property................................ 22
Potential Servicing Issues............................................... 24
Uncertainties Related to the Electric Industry Generally................. 25
Bankruptcy and Creditors' Rights Issues.................................. 27
Nature of the Certificates............................................... 29
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE.................... 32
DESCRIPTION OF THE TRANSITION PROPERTY..................................... 32
General.................................................................. 32
Financing Order and Advice Letters....................................... 33
Transition Property...................................................... 34
Nonbypassable FTA Charges................................................ 34
Adjustments to the FTA Charges........................................... 35
Sale and Assignment of Transition Property............................... 36
Seller Representations and Warranties.................................... 37
CERTAIN DISTRIBUTION AND WEIGHTED AVERAGE LIFE CONSIDERATIONS.............. 38
THE TRUST.................................................................. 39
THE INFRASTRUCTURE BANK.................................................... 40
THE NOTE ISSUER............................................................ 41
Officers................................................................. 41
THE SELLER AND SERVICER.................................................... 42
General.................................................................. 42
Edison Customer Base and Electric Energy Consumption..................... 42
Forecasting Consumption.................................................. 43
Forecast Variance........................................................ 43
Credit Policy; Billing; Collections; Restoration of Service.............. 44
Loss Experience.......................................................... 45
Aging.................................................................... 45
Delinquencies............................................................ 46
Revenue.................................................................. 46
SERVICING.................................................................. 47
Servicing Procedures..................................................... 47
Servicing Standards and Covenants........................................ 47
Remittances to Collection Account........................................ 48
No Servicer Advances..................................................... 48
Servicing Compensation................................................... 48
Aggregators and Other Suppliers.......................................... 48
Servicer Representations and Warranties.................................. 49
Statements by Servicer................................................... 49
Evidence as to Compliance................................................ 49
Certain Matters Regarding the Servicer................................... 50
Servicer Defaults........................................................ 50
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rights Upon Servicer Default............................................. 51
Waiver of Past Defaults.................................................. 51
Amendment................................................................ 51
Termination.............................................................. 51
DESCRIPTION OF THE NOTES................................................... 52
General.................................................................. 52
Security................................................................. 52
Collection Account....................................................... 52
Interest and Principal................................................... 53
Optional Redemption...................................................... 54
Overcollateralization Amount............................................. 54
Other Credit Enhancement................................................. 54
Allocations; Payments.................................................... 55
Actions by Noteholders................................................... 57
Note Events of Default; Rights Upon Note Event of Default................ 57
Certain Covenants of the Note Issuer..................................... 59
Reports to Noteholders................................................... 60
Annual Compliance Statement.............................................. 60
DESCRIPTION OF THE CERTIFICATES............................................ 61
General.................................................................. 61
State Pledge............................................................. 61
Payments and Distributions............................................... 61
Voting of the Notes...................................................... 63
Events of Default........................................................ 63
Optional Redemption...................................................... 65
Reports to Certificateholders............................................ 65
Amendments............................................................... 65
List of Certificateholders............................................... 66
Registration and Transfer of the Certificates............................ 66
Book-Entry Registration.................................................. 66
Definitive Certificates.................................................. 69
Conditions of Issuance of Additional Series.............................. 70
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 71
General.................................................................. 71
Treatment of the Certificates as Debt.................................... 71
Taxation of Interest Income of U.S. Certificateholders................... 72
Sale or Exchange of Certificates......................................... 72
Non-U.S. Certificateholders.............................................. 73
Information Reporting and Backup Withholding............................. 73
STATE TAXATION............................................................. 74
California Taxation...................................................... 74
Other States............................................................. 74
ERISA CONSIDERATIONS....................................................... 74
USE OF PROCEEDS............................................................ 75
PLAN OF DISTRIBUTION....................................................... 75
RATINGS.................................................................... 76
LEGAL MATTERS.............................................................. 76
INDEX OF PRINCIPAL DEFINITIONS............................................. 77
</TABLE>
6
<PAGE>
PROSPECTUS SUMMARY
The following Prospectus Summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus and by
reference to the information with respect to each Series of Certificates
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Prospectus Summary have the meanings ascribed to such terms
elsewhere in this Prospectus. The Index of Principal Definitions which begins
on page 77 sets forth the pages on which the definitions of certain principal
terms appear.
Transaction Overview... Assembly Bill 1890, Chapter 854, California
Statutes of 1996 (as amended, the "Statute"),
permits the California investor-owned utilities
(collectively, the "Utilities"), including
Edison, to finance the recovery of a portion of
their respective "Transition Costs" through the
issuance of the Certificates, in conjunction with
a reduction in electricity rates for Residential
Customers and Small Commercial Customers.
Transition Costs consist of the costs of
generation-related assets and obligations that
may become uneconomic as a result of a
competitive generation market, together with
certain other costs associated therewith.
The Seller will sell to the Note Issuer the
Transition Property, which represents the right
to receive payments made in respect of certain
nonbypassable charges included in the regular
utility bills of residential and small commercial
consumers located in the historical service
territory of the Seller. These charges are
nonbypassable in that applicable consumers cannot
avoid paying them if they purchase electricity
from a supplier other than the Seller. The Seller
will sell the Transition Property to the Note
Issuer in exchange for the proceeds of the Notes.
The Note Issuer will issue the notes (the
"Notes"), which will be secured by the Transition
Property and the other Note Collateral described
under "Description of the Notes--Security"
herein, and sell the Notes to the Trust in
exchange for the proceeds of the sale of the
Certificates. The Trust is being established by
the Infrastructure Bank. The Trust, whose sole
assets will be the Notes and any interest rate
exchange agreement executed solely to permit the
issuance of variable rate Certificates (a "Swap
Agreement"), will issue the Certificates, which
will be sold to the underwriters named in each
Prospectus Supplement. The Certificates of each
Class represent an undivided interest in the
related Class of Notes, the proceeds thereof and
payments pursuant to any related Swap Agreement.
The charges represented by the Transition
Property are calculated to be sufficient over
time to pay principal of and interest on the
Notes and, in turn, the Certificates, all related
fees and expenses and the Overcollateralization
Amount described herein. These charges will be
subject to adjustment pursuant to the true-up
mechanism described under "Description of the
Transition Property-- Adjustments to the FTA
Charges" herein over the term of each Series of
Certificates to enhance the likelihood of timely
recovery
7
<PAGE>
of such amounts, although there can be no
assurance that the true-up mechanism will operate
as intended or that principal of and interest on
any Series or Class of Certificates will be paid
as scheduled.
Risk Factors........... Investors should consider the risks associated
with an investment in the Certificates. For a
discussion of certain material risks associated
therewith, investors should review the discussion
under "Risk Factors" which begins on page .
Seller and Servicer.........
Southern California Edison Company, a California
corporation ("Edison"). Edison will sell the
Transition Property (in its capacity as seller,
the "Seller") to SCE Funding LLC, a Delaware
limited liability company of which the Seller is
the sole member (the "Note Issuer"), pursuant to
a Transition Property Purchase and Sale Agreement
between the Seller and the Note Issuer (together
with any subsequent sale agreement relating to
Subsequent Transition Property, the "Sale
Agreement").
The Seller will also act as the servicer of the
Transition Property (in its capacity as servicer,
the "Servicer") pursuant to a Transition Property
Servicing Agreement between the Note Issuer and
the Servicer (the "Servicing Agreement").
Edison is a public utility primarily engaged in
the business of supplying electric energy to
customers in an approximately 50,000 square-mile
area of central and southern California,
excluding the City of Los Angeles and certain
other cities.
See "The Seller and Servicer" herein.
Issuer of Certificates......
A trust entitled "California Infrastructure and
Economic Development Bank Special Purpose Trust
SCE-1" (the "Trust") to be established by the
California Infrastructure and Economic
Development Bank (the "Infrastructure Bank"). The
Trust will not be an agency or instrumentality of
the State of California. The Trust will be
governed by an amended and restated Declaration
and Agreement of Trust among the Infrastructure
Bank, the Delaware Trustee and the Certificate
Trustee (the "Trust Agreement"). The
Certificateholders will be the beneficiaries of
the Trust upon the issuance of the Certificates.
See "The Trust" herein.
Infrastructure Bank.........
A public body established within the state
government of the State of California. Under the
Statute, the Infrastructure Bank must approve the
issuance of Certificates by the Trust. However,
the Infrastructure Bank will not guarantee,
insure or otherwise support payments or
distributions on, as applicable the Certificates,
the Notes or the Transition Property, nor will
the Infrastructure Bank have any other
obligations with respect thereto. See "The
Infrastructure Bank" herein.
Certificate Trustee.........
The entity named as co-trustee under the Trust
Agreement, as set forth in each Prospectus
Supplement (the "Certificate Trustee").
8
<PAGE>
Delaware Trustee............
The Delaware entity named as co-trustee under the
Trust Agreement, as set forth in each Prospectus
Supplement (the "Delaware Trustee").
The Certificates............
The California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-1 Rate
Reduction Certificates (the "Certificates"),
issuable in Series. The Certificates will be
issuable under the terms of the Trust Agreement.
The Certificates may be issued in one or more
series (each, a "Series"), and the Certificates
of each Series may be issued in one or more
classes (each, a "Class"). Each Class of
Certificates will correspond to a Class of Notes
and will represent undivided interests in such
underlying Class of Notes, the proceeds thereof
and payments pursuant to any related Swap
Agreement. Accordingly, each Class of
Certificates will entitle the holders thereof to
receive the payments received by the Trust in
respect of the corresponding Class of Notes. The
funds received by the Trust from the payments on
each Class of Notes will be the only source of
distributions on the Certificates of the
corresponding Class. Each Note will be secured by
all of the Transition Property owned by the Note
Issuer and the other Note Collateral described
under "Description of the Notes--General" herein.
The Certificates are entitled to all of the
benefits accorded to "rate reduction bonds" by
the Statute. The issuance and sale of any Series
or Class of Certificates is contingent upon the
effectiveness of the Financing Order and the
applicable Issuance Advice Letter.
A Series may include two or more Classes of
Certificates which differ as to the interest
rate, timing, sequential order and amount of
distributions of principal or interest or both or
otherwise.
While the specific terms of any Series of
Certificates (and the Classes thereof, if any) in
respect of which this Prospectus is being
delivered will be described in the related
Prospectus Supplement, the terms of such Series
and any Classes thereof will not be subject to
prior review by, or consent of, the holders of
the Certificates of any previously issued Series.
The assets of the Trust will be allocated among
the Certificateholders of each Series of
Certificates issued by the Trust in the manner
described herein. If a Series includes two or
more Classes of Certificates, the assets of the
Trust allocable to the Certificates of such
Series will be further allocated among each Class
in such Series in the manner described in the
Prospectus Supplement.
All Certificates of the same Series will be
identical in all respects except for the
denominations thereof, unless such Series is
comprised of two or more Classes, in which case
all Certificates of the same Class will be
identical in all respects except for the
denominations thereof.
9
<PAGE>
So long as any Certificates are outstanding, the
Certificateholders will direct the Certificate
Trustee, as sole Noteholder, as to matters in
which the Noteholders are permitted or required
to take action; provided, however, that the
Certificate Trustee will be permitted to take
certain actions specified in the Trust Agreement
without the direction of the Certificateholders.
See "Description of the Notes--Actions by
Noteholders" herein.
None of the Certificates, the Notes issued by the
Note Issuer (the "Notes") or the underlying
Transition Property will be guaranteed or insured
by any governmental agency or instrumentality or
by the Seller or any of its affiliates. Neither
the full faith and credit nor the taxing power of
the State of California is pledged to the payment
of principal of or interest on the Certificates
or the Notes or to the payments in respect of the
Transition Property.
See "Description of the Certificates" and
"Description of the Notes" herein.
Note Issuer.................
SCE Funding LLC, a Delaware special purpose
limited liability company whose single member is
Edison. The assets of the Note Issuer will
consist of the Transition Property and the other
Note Collateral, including capital contributed by
Edison in an amount specified in each Prospectus
Supplement, which will equal 0.50 percent of the
initial principal amount of all Notes issued and
outstanding pursuant to the Indenture.
The principal executive office of the Note Issuer
is located at 2244 Walnut Grove Avenue, Room 180,
Rosemead, CA 91770, and its telephone number is
(626) 302-1850.
The Notes...................
The Notes of each Series and Class issued by the
Note Issuer will be in an initial aggregate
principal amount equal to the initial aggregate
principal amount of the related Series and Class
of Certificates, and the Notes of each Series and
Class will bear interest at an interest rate
equal to the interest rate of the related Series
and Class of Certificates, unless a Swap
Agreement is entered into in connection with the
issuance of any Series or Class of Certificates,
as described in the related Prospectus
Supplement.
The Note Issuer will use all collections received
with respect to the Transition Property (FTA
Collections, as more specifically defined below)
to pay fees payable to the Note Trustee, the
Certificate Trustee, the Delaware Trustee, the
Servicer and the Administrator, other Operating
Expenses, interest due on the Notes and principal
payable on the Notes, allocated among the Series
and Classes of Notes based on the priorities
described herein and in the Prospectus
Supplement, until each outstanding Series and
Class of Notes is retired. However, as described
under "Description of the Notes--Interest and
Principal" herein, principal of any Series or
Class of Notes on any Payment Date will only be
paid until the outstanding principal balance of
such Series or Class has been reduced to the
principal balance specified in the applicable
Expected Amortization
10
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Schedule for such Distribution Date. Any FTA
Collections remaining with respect to such
Distribution Date will be allocated to the
various subaccounts of the Collection Account, as
described below. All principal not previously
paid, if any, on a Note is due and payable on the
Final Maturity Date of such Note, which will
correspond with the Termination Date of the
related Class of Certificates.
Each Series of Notes represents a non-recourse
obligation of the Note Issuer, and will be
secured only by Transition Property owned by the
Note Issuer, together with the other Note
Collateral.
See "Description of the Notes" herein.
Note Trustee................
The entity named as trustee under the Note
Indenture, as set forth in each Prospectus
Supplement (the "Note Trustee").
Transition Costs....... In connection with the restructuring of the
electric utility industry in California to
facilitate increased competition among providers
of electricity, Sections 367 and 369 of the
California Public Utilities Code (the "PU Code")
provide the Seller, as well as the other
Utilities providing electricity to consumers in
California, with an opportunity to recover
certain costs. These costs, commonly known as
stranded costs and referred to herein and in the
Statute as "Transition Costs," consist of the
costs of generation-related assets and
obligations that may become uneconomic as a
result of a competitive generation market,
together with certain other costs associated
therewith. Examples of generation-related assets
include generation facilities, generation-related
regulatory assets, amounts recoverable in
electric rates pursuant to settlement agreements
with the California Public Utilities Commission
(the "CPUC") in connection with nuclear power
plants, power purchase contracts with third-party
generators of electricity (including voluntary
restructuring, renegotiations or terminations
thereof). These assets may become uneconomic in a
competitive generation market, since they are
obligations that were undertaken either pursuant
to legal requirements or with the understanding
that they would be recoverable in rates approved
by the CPUC. Since other participants in a
competitive market, unburdened by these
uneconomic assets, may be able to offer
electricity at lower rates, the costs relating to
these uneconomic assets may not be recoverable in
a competitive market.
FTA Charges............ Under Section 840 of the PU Code, the Seller has
obtained from the CPUC a Financing Order (the
"Financing Order") designating the amount of the
Seller's Transition Costs to be financed, along
with the costs of providing, recovering,
financing or refinancing the Transition Costs,
including the costs of issuing, servicing and
retiring the Certificates. The total amount
specified in the Financing Order which may be
financed, including associated costs, is
$3,000,000,000. In order to enable the Seller to
recover the Transition Costs and associated
costs, the CPUC has authorized, in
11
<PAGE>
the Financing Order, the establishment of
nonbypassable, usage-based, per kilowatt hour
charges on designated consumers of electricity
(the "FTA Charges"). The FTA Charges will be
payable by existing and future Residential
Customers and Small Commercial Customers (each,
as defined below and collectively, the
"Customers") of electricity in the territory of
the Seller specified by the Statute. The
territory specified by the Statute is the
territory in which the Seller provided
electricity services as of December 20, 1995 (the
"Territory"). The two defined classes of
consumers comprising the Customers are (i)
residential consumers (the "Residential
Customers") and (ii) small commercial consumers,
which are defined as commercial consumers whose
peak demand did not exceed 20 kilowatts for any
three of the twelve billing periods prior to
October 1, 1997 and new commercial customers
since that time whose peak demand is estimated
not to exceed 20 kilowatts for any three of the
twelve billing periods since that time ("Small
Commercial Customers"). Because of differences in
the tariff rate for each class of Customers, the
FTA Charge payable by Residential Customers is
expected to be different from the FTA Charge
payable by Small Commercial Customers. The
initial FTA Charges are expected to result in FTA
Payments by the Residential Customers and Small
Commercial Customers representing approximately
percent and percent, respectively, of the
aggregate FTA Payments. The foregoing percentages
may change from time to time based on
fluctuations in Customer composition.
The FTA Charges will be calculated and adjusted
from time to time to generate projected revenues
sufficient to provide for the amortization of
each Series of Certificates in accordance with
the related Expected Amortization Schedule,
together with the Overcollateralization Amount
described herein and fees and expenses related to
the issuance and servicing of the Certificates.
The FTA Charges are, specifically, separate
charges that will be assessed on (i) the class of
electricity consumers comprised of Residential
Customers and (ii) the class of electricity
consumers comprised of Small Commercial
Customers. In each case, the FTA Charges will be
assessed for the benefit of the Note Issuer as
owner of the Transition Property based on the
applicable Customer's actual consumption of
electricity. Such amounts will be collected by
the Servicer as part of its normal collection
activities and will be deposited into the
Collection Account under the terms of the Note
Indenture on each Remittance Date (as defined
herein).
The Financing Order requires a notification
letter (each, an "Issuance Advice Letter") to be
submitted to the CPUC prior to the issuance of
each Series of Certificates. The first Issuance
Advice Letter will establish the initial FTA
Charges, calculated using the Base Calculation
Model which is described under "Description of
the Transition Property--Financing Order and
Advice Letters" herein. Subsequent Issuance
Advice Letters may modify the FTA
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<PAGE>
Charges to support the issuance of additional
Series of Certificates. The Issuance Advice
Letters and the True-Up Mechanism Advice Letters
(as defined herein) are collectively referred to
as "Advice Letters." The Servicing Agreement
requires the Servicer to calculate adjustments to
the FTA Charges and to file the True-Up Mechanism
Advice Letters from time to time as needed.
Transition Property.... The right to collect payments based on the FTA
Charges from the Customers (such payments being
the "FTA Payments") gives rise to a separate
property right under California law and is
referred to herein generally as the "Transition
Property." FTA Payments received by the Servicer
and remitted to the Collection Account are
referred to generally herein as the "FTA
Collections." "Transition Property" is defined
more specifically in Section 840(g) of the
PU Code as the property right created under the
PU Code including, without limitation, the right,
title and interest of an electrical corporation
or its transferee (i) in and to the FTA Charges,
as adjusted from time to time, (ii) to be paid
the FTA Payments, and (iii) to obtain adjustments
to the FTA Charges, as provided in the PU Code.
Adjustments to FTA Charges.. In order to enhance the likelihood that the
actual FTA Collections are neither more nor less
than the amount necessary to amortize the
Certificates in accordance with the Expected
Amortization Schedules and fund the
Overcollateralization Subaccount, the Servicing
Agreement requires the Servicer to seek, and the
Statute and the Financing Order require the CPUC
to approve, periodic adjustments to the FTA
Charges based on actual FTA Collections and
updated assumptions by the Servicer as to
projected future usage of electricity by
Customers, future expenses relating to the
Transition Property, the Notes and the
Certificates, and expected delinquencies and
charge-offs. Each Advice Letter relating to an
adjustment to the FTA Charges is referred to as a
"True-Up Mechanism Advice Letter." The
adjustments to the FTA Charges will continue
until all interest on and principal of all Series
of Notes and corresponding Series of Certificates
have been paid or distributed in full.
The Servicer will file a routine True-Up
Mechanism Advice Letter annually, requesting
modifications to the FTA Charges. Calculations of
appropriate modifications to the FTA Charges will
be made based on the True-Up Mechanism
Calculation Model, which is described under
"Description of the Transition Property--
Adjustments to the FTA Charges" herein. The
Servicer will also file a routine True-Up
Mechanism Advice Letter quarterly if as of any
Distribution Date (i) the sum of (a) the amount
(positive or negative) by which the aggregate
outstanding principal balance of the Certificates
varies from the Expected Amortization Schedule
for all outstanding Certificates, plus (b) the
amount by which the Required
Overcollateralization Level exceeds the amount
actually on deposit in the Overcollateralization
Subaccount, plus (c) the amount, if any,
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<PAGE>
by which the Required Capital Level exceeds the
amount actually on deposit in the Capital
Subaccount, less (ii) the amount on deposit in
the Reserve Subaccount, exceeds an amount
specified in the Prospectus Supplement (the
"Variance Trigger"). The Servicer may also file a
non-routine True-Up Mechanism Advice Letter as
often as quarterly, to revise the Base
Calculation Model or True-Up Mechanism
Calculation Model, if either of such models no
longer accurately forecasts required collections.
True-Up Mechanism Advice Letters will take into
account amounts available in the General
Subaccount and Reserve Subaccount, and amounts
necessary to replenish the Overcollateralization
Subaccount and Capital Subaccount to required
levels, in addition to amounts payable on the
Notes.
See "Description of the Transition Property--
Adjustments to the FTA Charges" herein.
State Pledge........... Pursuant to Section 841(c) of the PU Code, the
Infrastructure Bank, on behalf of the State of
California, pledges and agrees with the Trust and
the holders of the Certificates that the State of
California shall neither limit nor alter the FTA
Charges, the Transition Property, or the
Financing Order or Advice Letters relating
thereto, or any rights thereunder, until the
Certificates, together with the interest thereon,
are fully paid and discharged, provided nothing
contained in such pledge and agreement precludes
such limitation or alteration if and when
adequate provision shall be made by law for the
protection of the holders (the "State Pledge").
Customers................... The Customers consist of Residential Customers
and Small Commercial Customers in the Territory.
The sole source of payments on the Certificates
will be payments on the Notes and payments
pursuant to any related Swap Agreement; the sole
sources of payments on the Notes will be FTA
Charges collected from the Customers and amounts
available or realized from the other Note
Collateral (which is not expected to be
substantial). Of amounts collected from the
Customers, only the portion of amounts collected
that is attributable to the FTA Charges, as
adjusted from time to time, will be available for
distributions on the Certificates.
Distribution and Payment Unless otherwise specified in the related
Dates...................... Prospectus Supplement, each March 25, June 25,
September 25 and December 25 (or, if any such
date is not a Certificate Business Day, the next
succeeding Certificate Business Day) following
the Closing Date for a Series of Certificates,
the quarterly dates on which distributions will
be made to specified holders of Certificates of
such Series (each, a "Distribution Date"). Each
Distribution Date with respect to the
Certificates will also be a date on which
payments are made with respect to the Notes
(each, a "Payment Date").
Record Dates................ With respect to any Distribution Date, the last
day of the preceding calendar month (each, a
"Record Date").
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<PAGE>
Final Distribution and
Termination Dates..........
For each Class of Certificates, the related
Prospectus Supplement will specify a Scheduled
Final Distribution Date and a Termination Date.
The "Scheduled Final Distribution Date" will be
the date when all principal and interest on the
related Class of Certificates is expected to be
distributed in full, based on various assumptions
described herein. Failure to pay principal of and
interest on any Class of Certificates in full by
the "Termination Date," which will be a date
specified in the related Prospectus Supplement
after the related Scheduled Final Distribution
Date, shall constitute an Event of Default and
the Certificate Trustee may, and upon the written
direction of the holders of not less than a
majority in principal amount of all Certificates
of all Series then outstanding shall, declare the
unpaid principal amount of all the Notes of all
Series then outstanding to be due and payable.
The Scheduled Final Distribution Date and the
Termination Date for any Class of Certificates
will coincide with the Scheduled Maturity Date
and Final Maturity Date, respectively, for the
related Class of Notes. See "Description of the
Certificates--Events of Default" and "Ratings"
herein.
Issuance of New Series......
The Trust is authorized to issue new Series of
Certificates from time to time. See "Description
of the Transition Property--Financing Order and
Advice Letters." A new Series may be issued only
upon satisfaction of the conditions described
under "Description of the Certificates--
Conditions of Issuance of Additional Series"
herein. Each Series of Certificates will
represent an interest in payments to be made on a
Series of Notes, which in turn will be secured by
the Transition Property and the other Note
Collateral. Because the Transition Property will
secure each Series or Class of Notes ratably, a
Certificate Event of Default with respect to one
Series of Certificates (or one or more Classes
thereof) may adversely affect other outstanding
Classes or Series of Certificates.
Interest....................
Unless otherwise specified in the related
Prospectus Supplement, interest on each Class of
Certificates will accrue and be distributable in
arrears at the interest rate for such Class
specified in the related Prospectus Supplement.
Interest accrued on each Class of Certificates at
the applicable interest rate will be distributed,
to the extent monies are available therefor, on
each Distribution Date, commencing on the day
specified in the related Prospectus Supplement
and will be distributed in the manner specified
in such Prospectus Supplement, to the extent of
payments received with respect to the related
Class of Notes or any related Swap Agreement on
the Payment Date for the Notes occurring on the
same day as such Distribution Date. Note Events
of Default will include failure to make any
payment of interest within five days after the
Payment Date on which such payment is due.
Principal................... Principal of each Class of Certificates will be
distributed to the Certificateholders of such
Class in the amounts and on the Distribution
Dates specified in the related Prospectus
Supplement,
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<PAGE>
but only to the extent that amounts in the
Collection Account are available therefor, and
subject to the other limitations described below.
See "Description of the Notes--Allocations;
Payments" and "Description of the Certificates--
Payments and Distributions" herein. The related
Prospectus Supplement will set forth a schedule
of the expected amortization of principal of the
related Series of Certificates and, if
applicable, the Classes thereof (for any Series
or Class, the "Expected Amortization Schedule").
On any Payment Date, the Note Issuer will make
principal payments on the Notes only until the
outstanding principal balances thereof have been
reduced to the principal balances specified in
the applicable Expected Amortization Schedules
for such Payment Date; accordingly, on the
related Distribution Date, the Trust similarly
will only make principal distributions on the
Certificates in such amounts. Any FTA Collections
in excess of amounts payable as (a) expenses of
the Note Issuer and the Trust, (b) payments of
interest on and principal of the Notes, (c)
allocations to the Overcollateralization
Subaccount and (d) allocations to the Capital
Subaccount (all as described herein under
"Description of the Notes--Allocations; Payments"
herein) will be retained by the Note Trustee in
the Reserve Subaccount for payment on subsequent
Payment Dates. However, if insufficient FTA
Collections are received with respect to any
Payment Date, and amounts in the Collection
Account are not sufficient to make up the
shortfall, principal of any Series or Class of
Certificates may be distributed later than
reflected in the related Expected Amortization
Schedule, as described herein and in the related
Prospectus Supplement. See "Risk Factors--
Uncertain Distribution Amounts and Weighted
Average Life" and "Certain Distribution and
Weighted Average Life Considerations" herein.
If an event of default under the Trust Agreement
(a "Certificate Event of Default") has occurred
and is continuing with respect to any Series or
Class of Certificates, the Certificate Trustee
may and, upon the written direction of the
holders of a majority in principal amount of all
Series of Certificates then outstanding shall,
declare the unpaid principal amount of all the
Notes of all Series then outstanding to be due
and payable. A Certificate Event of Default is
defined as the occurrence and continuance of an
Event of Default under the Notes (a "Note Event
of Default") or a breach by the State of
California of the State Pledge (collectively,
"Certificate Event of Default," and, together
with a Note Event of Default, an "Event of
Default"). See "Description of the Certificates--
Events of Default" herein.
Optional Redemption.........
The Note Issuer may redeem any Series of Notes
relating to a Series of Certificates, and
accordingly cause the Trust to redeem the related
Series of Certificates, if the outstanding
principal balance of such Series of Notes has
been reduced to less than five percent of the
initial principal balance thereof. See
"Description of the Certificates--Optional
Redemption" herein.
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<PAGE>
Collection Account and
Subaccounts........... Upon issuance of the initial Series of Notes, the
Note Issuer will establish the Collection
Account, which will be held by the Note Trustee
for the benefit of the Noteholders. The
Collection Account will consist of four
subaccounts: a general subaccount (the "General
Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the
Overcollateralization Amount (the
"Overcollateralization Subaccount") and a capital
subaccount (the "Capital Subaccount"). Unless the
context indicates otherwise, references herein to
the Collection Account include each of the
subaccounts contained therein. Withdrawals from
and deposits to these subaccounts will be made as
described under "Description of the Notes--
Allocations; Payments" herein.
Overcollateralization.......
In order to enhance the likelihood that
distributions on each Series of the Certificates
will be made in accordance with their Expected
Amortization Schedules, the Financing Order
permits the Servicer to set the FTA Charges at
levels that are expected to produce FTA
Collections in amounts that exceed the amounts
expected to be required to make all distributions
on the related Series of Certificates in a timely
manner and to pay all related fees and expenses.
The required amount of such excess, as of any
Payment Date (the "Required Overcollateralization
Level"), will be specified in the related
Prospectus Supplement. Any such excess amount
will be held in the Overcollateralization
Subaccount, as described further under
"Description of the Notes--Overcollateralization
Amount" herein, and will be available to pay any
periodic shortfalls in amounts available for
scheduled payments on the Notes.
Capital Subaccount.......... Upon the issuance of each Series of Notes, the
Seller will contribute capital to the Note Issuer
in an amount specified in each Prospectus
Supplement, which will equal 0.50 percent of the
initial principal amount of each such Series of
Notes. Such amount, less $100,000 in the
aggregate for all Series of Notes (with respect
to each Series, the "Required Capital Level"),
will be deposited into the Capital Subaccount.
Withdrawals from the deposits to the Capital
Subaccount will be made as described under
"Description of the Notes--Allocations; Payments"
herein.
Reserve Subaccount..... FTA Collections available with respect to any
Payment Date in excess of amounts payable as (a)
expenses of the Note Issuer and the Trust, (b)
payments of principal of and interest on the
Notes, (c) allocations to the
Overcollateralization Subaccount and
(d) allocations to the Capital Subaccount (all as
described under "Description of the Notes--
Allocations; Payments" herein), will be allocated
to the Reserve Subaccount. On each Payment Date,
the Note Trustee will draw on amounts in the
Reserve Subaccount, to the extent amounts
available in the General Subaccount are
insufficient to make scheduled payments on the
Notes.
Other Credit Enhancement....
Although the true-up adjustment mechanism and
amounts available in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital
Subaccount are expected to provide sufficient
credit enhancement for the Notes, other types of
credit enhancement may
17
<PAGE>
be provided with respect to one or more Series or
Classes of Notes, as specified in the related
Prospectus Supplement. See "Description of the
Notes--Other Credit Enhancement" herein.
Collections; Allocations;
Distributions..............
Except as otherwise specified herein, on the
twentieth calendar day of each calendar month
(or, if such day is not a Certificate Business
Day, the following Certificate Business Day), the
Servicer will remit to the Collection Account FTA
Payments expected to have been received during
the preceding Billing Period (as defined herein).
Because of billing system limitations, the amount
remitted will be based on the Collections Curve,
increased or reduced as described herein under
"Servicing--Remittances to Collection Account." A
"Billing Period" is a period created by dividing
the calendar year into twelve consecutive periods
of 21 Servicer Business Days each.
On each Payment Date, amounts in the Collection
Account, including net earnings thereon (subject
to the priority of withdrawals described in the
following paragraph), will be allocated to the
following (in the priority indicated): (1) all
amounts owed by the Note Issuer or the Trust to
the Note Trustee, the Delaware Trustee and the
Certificate Trustee will be paid to such persons;
(2) the Servicing Fee and all unpaid Servicing
Fees from prior Billing Periods will be paid to
the Servicer; (3) the Quarterly Administration
Fee payable under the Administrative Services
Agreement between the Note Issuer and Edison, as
administrator (the "Administrator"), and all
unpaid Quarterly Administration Fees from prior
Payment Dates will be paid to the Administrator;
(4) so long as no Event of Default has occurred
or would be caused by such payment, all other
fees, costs, expenses and indemnities of the Note
Issuer and the Trust ("Operating Expenses") will
be paid to the persons entitled thereto; (5)
Quarterly Interest and any overdue Quarterly
Interest with respect to each Series of Notes
will be transferred to the Certificate Trustee,
as Noteholder, for distribution to the
Certificateholders; (6) principal on any Series
of Notes payable as a result of a Note Event of
Default or on the Final Maturity Date for such
Series of Notes will be transferred to the
Certificate Trustee, as Noteholder, for
distribution to the Certificateholders; (7) funds
necessary to pay Quarterly Principal for any
Series of Notes based on priorities described in
each Prospectus Supplement will be transferred to
the Certificate Trustee, as Noteholder, for
distribution to the applicable
Certificateholders; (8) unpaid Operating Expenses
will be paid to the persons entitled thereto; (9)
an amount up to the excess of the Required
Overcollateralization Level with respect to all
outstanding Series of Certificates over the
amount in the Overcollateralization Subaccount as
of such Payment Date will be allocated to the
Overcollateralization Subaccount; (10) an amount
up to the excess of the Required Capital Level
with respect to all outstanding Series of Notes
over the amount in the Capital Subaccount as of
such Payment Date will be allocated to the
Capital Subaccount; (11) funds up to the net
earnings on amounts in the Collection
18
<PAGE>
Account for the prior quarter without cumulation
will be released to the Note Issuer; (12) if any
Series of Notes has been retired as of such
Payment Date, the excess of the amount in the
Overcollateralization Subaccount over the
aggregate Required Overcollateralization Level
with respect to all Series of Notes remaining
outstanding will be released to the Note Issuer;
(13) if any Series of Notes has been retired as
of such Payment Date, the excess of the amount in
the Capital Subaccount over the aggregate
Required Capital Level with respect to all Series
of Notes remaining outstanding will be released
to the Note Issuer; (14) the balance, if any,
will be allocated to the Reserve Subaccount for
distribution on subsequent Payment Dates; and
(15) following the repayment of all outstanding
Series of Notes, the balance, if any, will be
released to the Note Issuer.
If on any Payment Date funds on deposit in the
General Subaccount are insufficient to make the
transfers contemplated by clauses (1) through (7)
above, the Note Trustee will (i) first, draw from
amounts on deposit in the Reserve Subaccount,
(ii) second, draw from amounts on deposit in the
Overcollateralization Subaccount, and
(iii) third, draw on amounts on deposit in the
Capital Subaccount, up to the amount of such
shortfall, in order to make the transfers
described above. See "Description of the Notes--
Allocations; Payments" herein.
Servicing...................
The Servicer is responsible for servicing,
managing and receiving FTA Payments in the same
manner that it services and administers bill
collections for its own account and the accounts
it services for others. On each Remittance Date,
the Servicer will remit FTA Payments expected to
have been received during the preceding Billing
Period (or, if Remittance Dates are more
frequent, for the period since the preceding
Remittance Date). Because of billing system
limitations, the amounts remitted will be based
on the Collections Curve, increased or reduced as
described under "Servicing--Remittances to
Collection Account" herein. Subject to certain
conditions described herein, pending deposit into
the Collection Account, actual FTA Payments
received by the Servicer may be invested by the
Servicer at its own risk and for its own benefit,
and will not be segregated from other funds of
the Servicer. See "Servicing--Remittances to
Collection Account" herein.
Servicing Compensation......
The Servicer will be entitled to receive a
Servicing Fee for each calendar quarter in an
amount equal to one-fourth of the percent per
annum specified in the related Prospectus
Supplement of the then outstanding principal
amount of the Notes (the "Servicing Fee"). The
Servicing Fee will be paid prior to the
distribution of any amounts in respect of
interest on and principal of the Notes. The
Servicer will be entitled to retain as additional
compensation net investment income on FTA
Payments received by the Servicer prior to
remittance thereof to the Collection Account and
the portion of late fees, if any, paid by
Customers relating to the FTA Payments. See
"Servicing--Servicing Compensation" herein.
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<PAGE>
No Servicer Advances........ The Servicer will not make any advances of
interest or principal on the Notes.
Denominations...............
Each Class of Certificates will be issued in the
minimum initial denominations set forth in the
related Prospectus Supplement and in integral
multiples thereof.
Registration of the Each Class of Certificates may be issued in
Certificates............... definitive form or initially may be represented
by one or more certificates registered in the
name of Cede & Co. ("Cede") ("Book-Entry
Certificates"), the nominee of The Depository
Trust Company ("DTC"), and available only in the
form of book-entries on the records of DTC,
participating members thereof ("Participants")
and other entities, such as banks, brokers,
dealers and trust companies, that clear through
or maintain custodial relationships with a
Participant, either directly or indirectly
("Indirect Participants"). If so indicated in the
applicable Prospectus Supplement,
Certificateholders may also hold Book-Entry
Certificates of a Series through CEDEL or
Euroclear (in Europe), if they are participants
in such systems or indirectly through
organizations that are participants in such
systems. Certificates representing Book-Entry
Certificates will be issued in definitive form
only under the limited circumstances described
herein and in the related Prospectus Supplement.
With respect to the Book-Entry Certificates, all
references herein to "holders" reflect the rights
of owners of the Book-Entry Certificates as they
may indirectly exercise such rights through DTC
and Participants, except as otherwise specified
herein. See "Risk Factors" and "Description of
the Certificates--Book-Entry Registration"
herein.
Ratings.....................
It is a condition of issuance of each Class of
Certificates that at the time of issuance such
Class receive the rating indicated in the related
Prospectus Supplement, which will be in one of
the four highest categories, from one or more
nationally recognized statistical rating agencies
(each, a "Rating Agency") specified therein. Each
Class of Notes will receive the same rating from
the applicable Rating Agencies as the
corresponding Class of Certificates. See
"Ratings" in the related Prospectus Supplement.
A security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time. No person is
obligated to maintain any rating on any
Certificate and, accordingly, there can be no
assurance that the ratings assigned to any Class
of Certificates upon initial issuance thereof
will not be revised or withdrawn by a Rating
Agency at any time thereafter. If a rating of any
Class of Certificates is revised or withdrawn,
the liquidity of such Class of Certificates may
be adversely affected. In general, the ratings
address credit risk and do not represent any
assessment of the rate of FTA Collections. See
"Risk Factors--Uncertain Distribution Amounts and
Weighted Average Life," "Certain Distribution and
Weighted Average Life Considerations" and
"Ratings" herein.
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Tax Status of the
Certificates............... The Certificates will be treated as representing
ownership interests in debt for federal income
tax purposes. Interest and original issue
discount, if any, on the Certificates generally
will be included in gross income for federal
income tax purposes. See "Certain Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
Interest and original issue discount, if any, on
the Certificates will be exempt from California
personal income tax, but not exempt from the
California franchise tax applicable to banks and
corporations. See "State Taxation" herein.
ERISA Considerations........
A fiduciary of any employee benefit plan or other
plan or arrangement that is subject to the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code"), should carefully review with its legal
advisors whether the purchase or holding of the
Certificates of any Class or Series could give
rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates:
UNUSUAL NATURE OF THE TRANSITION PROPERTY
RELIANCE ON FTA ADJUSTMENTS
The Servicer will be obligated to submit True-Up Mechanism Advice Letters to
the CPUC at least annually, and as often as quarterly, seeking adjustments to
the FTA Charges to reflect amounts available in the General Subaccount and
Reserve Subaccount and amounts required to replenish the Overcollateralization
Subaccount and Capital Subaccount to required levels, as well as the actual
rate of FTA Collections, which will vary from projections upon which the FTA
Charges were based, primarily as a result of variations from projected
electricity usage by Customers and expected delinquencies and charge-offs. PU
Code Section 841(c) requires the CPUC to approve adjustments requested by
True-Up Mechanism Advice Letters necessary to assure timely recovery of
Transition Costs, including interest on and principal in accordance with the
related Expected Amortization Schedule of, and the costs of issuance of, the
Certificates. Despite the Statute and the Financing Order, there can be no
assurance that the CPUC will approve such requests in a timely manner. Any
delay in adjustments to the FTA Charges, and any litigation that might ensue
as a consequence, might adversely affect the price and liquidity of the
Certificates and the dates of maturity thereof, and, accordingly, the weighted
average lives thereof.
POSSIBLE STATE AMENDMENT OR REPEAL OF THE STATUTE
Under the Statute, the State of California pledged and agreed with the
owners of Transition Property and the holders of the Certificates, and the
Infrastructure Bank as agent for the State of California will pledge and
undertake in the Trust Agreement for the benefit of Certificateholders, that
the State will neither limit nor alter the fixed transition amounts,
transition property, financing orders and all rights thereunder until all
obligations under the Certificates are fully met and discharged, provided
nothing contained in the Statute or the Trust Agreement precludes such
limitation or alteration by the State if and when adequate provision shall be
made by law for the protection of the Certificateholders. It is unclear what
"adequate provision" would be afforded to Certificateholders by the State if
such limitation or alteration were attempted. Accordingly, no assurance can be
given that any such provision would not adversely affect the price of the
Certificates, or the timing of payments with respect to the Certificates.
Under California law, the electorate has the right, through its initiative
powers, to propose statutes as well as amendments to the California
Constitution. Generally, any matter that is a proper subject of legislation
can become the subject of an initiative. Among other procedural requirements,
in order for an initiative measure to qualify for an election, the initiative
measure must be submitted to the State Attorney General and a petition signed
by electors constituting five percent, in the case of a statutory initiative,
and eight percent, in the case of a constitutional initiative, of the votes
cast at the immediately preceding gubernatorial election must be submitted to
the Secretary of State. To become effective, the initiative must then be
approved by a majority vote of the electors voting at the next general
election.
Consumer advocacy groups have publicly announced their opposition to certain
elements of the restructuring plan embodied in the Statute, including the
ability of the Utilities to recover fully their stranded costs and the
issuance of the Certificates. These opponents have indicated their intent to
commence litigation to prevent the sale of the Certificates. In addition,
opponents have announced their intention to draft a ballot initiative to
eliminate the recoveries of stranded costs, including the FTA Charges. To date
no such initiative measure has been submitted to the State Attorney General,
the first step in commencing the initiative qualification process.
In the opinion of Brown & Wood LLP, counsel to the Trust ("Special
Counsel"), under applicable United States and State of California
Constitutional principles relating to the impairment of contracts, the State
of California could not repeal or amend the Statute (by way of either
legislative process or California voter
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initiative) or take, or refuse to take, any action required by the State of
California under its pledge and agreement with the Certificateholders
(described above) if such action or inaction would substantially impair the
rights of the Certificateholders, unless such action or inaction would
constitute a reasonable and necessary exercise of the State's sovereign
powers. There have been numerous cases in which legislative or popular
concerns with the burden of taxation or governmental charges have led to
adoption of legislation reducing or eliminating taxes or charges which
supported bonds or other contractual obligations entered into by public
instrumentalities. However, such concerns have not been considered by the
courts to provide sufficient justification for a substantial impairment of the
security for such bonds or obligations provided by the taxes or governmental
charges involved. Based upon such analogous case law (which, however, does not
address these particular circumstances directly), it would appear unlikely
that the State could reduce, modify or alter the Transition Property, or take,
or refuse to take, any action with respect to the Transition Property in a
manner which would substantially impair the rights of the Note Issuer, as
owner of the Transition Property, or of Certificateholders. Nonetheless, no
assurance can be given that a repeal of or amendment to the Statute will not
be sought or adopted or that any action, or refusal to act, by the State may
not occur, any of which might constitute a violation of the State's pledge and
undertaking with the Certificateholders. In any such event, costly and time
consuming litigation might ensue. Any such litigation might adversely affect
the price and liquidity of the Certificates and the dates of maturity thereof,
and, accordingly, the weighted average lives thereof. Moreover, given the lack
of judicial precedent directly on point, and the novelty of the security for
the Certificates, the outcome of any such litigation cannot be predicted with
certainty and, accordingly, Certificateholders may fail to receive
distributions of principal and interest.
Furthermore, Section 3 of Article XIIIC of the California Constitution
("Proposition 218") provides that the initiative process shall not be
prohibited or otherwise limited in matters of reducing or repealing any
"local" tax, assessment, fee or charge. There is no controlling precedent
interpreting Proposition 218, given its recent adoption. However, in the
opinion of Special Counsel, the FTA Charges are not a "local" tax, assessment
fee or charge to which Proposition 218 applies, and the initiative power
described in Proposition 218 is therefore inapplicable to the FTA Charges, the
Transition Property, the Notes and the Certificates.
POSSIBLE FEDERAL PREEMPTION OF THE STATUTE
At least one bill was introduced in the current session of the 105th
Congress, First Session, prohibiting the recovery of stranded costs such as
the Transition Costs, which could negate the existence of the Transition
Property that is the source of payments on the Notes and the Certificates. The
bill is H.R. 1230 (The Consumers Electric Power Act of 1997) ("H.R. 1230"),
which was introduced on April 8, 1997, and has been referred to the House
Commerce Committee, where no further action has been taken. However, the
entire 52-member California delegation to the House of Representatives is on
record opposing any federal bill that does not grandfather the provisions of
the Statute. No prediction can be made as to whether H.R. 1230, or any future
proposed bill that would prohibit the recovery of stranded costs, will become
law or, if it becomes law, what its final form or effect will be. See "Energy
Deregulation and the New California Market Structure" herein.
POSSIBLE LEGAL CHALLENGES
The existence of the Transition Property and its adequacy as a source of
distributions on the Certificates are dependent on relevant provisions of the
PU Code, the Financing Order and applicable Advice Letters. If the relevant
provisions of the PU Code, the Financing Order or any such Advice Letters were
challenged in a lawsuit and determined to be invalid or unenforceable in whole
or in part, such determination could adversely affect the ability of the Note
Issuer to make timely payments on the Notes, and the Certificateholders could
suffer a loss on their investment.
UNCERTAINTIES ASSOCIATED WITH NEW ASSET TYPE
There are no historical performance data for an asset type such as the
Transition Property, although energy usage records are available. Furthermore,
the Servicer does not have any experience administering this specific type of
regulatory asset. In addition, in the event of a foreclosure, there is likely
to be a limited market, if any, for the Transition Property.
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POTENTIAL SERVICING ISSUES
RELIANCE ON SERVICER
The Trust relies on the Servicer for the determination of any adjustments to
the FTA Charges and for the Customer billing and collection that is necessary
to recover the FTA Payments and, therefore, necessary to make distributions on
the Certificates. If, as a result of its insolvency or liquidation or
otherwise, Edison were to cease servicing the Transition Property, determining
any adjustments to the FTA Charges or collecting FTA Payments, it may be
difficult to find a substitute Servicer. In such an event, the timing of
recovery of payment on the Transition Property could be delayed. See
"Servicing" herein.
INACCURATE USAGE AND CREDIT PROJECTIONS
The ability of the Servicer to forecast accurately the electricity usage of
Customers and the delinquency and charge-off experience relating to FTA
Payments will affect significantly whether Certificateholders will receive
timely distributions on the Certificates. Actual energy usage may differ from
projections as a result of weather during the relevant period that is warmer
or cooler than expected. In addition, actual energy usage, delinquencies and
charge-offs may differ from projections as a result of general economic
conditions, trends in demographics that are not precisely as predicted,
unexpected catastrophes, and other causes. During the past five years, the
Servicer's forecasts for energy consumption have averaged a 0.3 percent
overestimate of usage for Residential Customers and a 2.7 percent
underestimate of usage for Small Commercial Customers. See "The Seller and
Servicer--Forecast Variance" herein. The accuracy of the Servicer's historical
forecasts is not necessarily indicative of the accuracy of the Servicer's
future forecasts, and there can be no assurances that actual usage,
delinquencies and charge-offs will not be significantly different from future
forecasts thereof. The adjustment mechanism for the FTA Charges described
under "Description of the Transition Property--Adjustments to the FTA
Charges," as well as the Overcollateralization Amount and the amounts
deposited in the Capital Subaccount, are intended to mitigate these risks,
although the frequency of the adjustments to the FTA Charges is limited, and,
accordingly, delays in distributions to Certificateholders might result. See
"The Seller and the Servicer--Credit Policy; Billing; Collections; Restoration
of Service" herein.
DELAYS CAUSED BY CHANGES IN PAYMENT TERMS
The Servicer is permitted to alter the terms of billing and collection
arrangements and modify amounts due from Customers. While Edison has no
current intention of taking actions that would change the billing and
collection arrangements in a manner which would affect adversely the
collection of FTA Payments, there can be no assurance that changes in Edison's
customary and usual practices for comparable assets it services for itself
might not result in a determination to do so or that a successor Servicer may
not make such a determination. It is possible that any such changes could
delay collections from Customers or result in lower collections, and
accordingly could adversely affect the distribution of interest on the
Certificates on a timely basis or the distribution of the principal of the
Certificates pursuant to the Expected Amortization Schedules or in full by the
applicable Scheduled Final Distribution Dates. See "Certain Distribution and
Weighted Average Life Considerations" herein.
LIMITED CREDIT POLICY AND PROCEDURES
The ability of the Servicer to collect amounts billed to Customers under the
FTA Charges, as adjusted from time to time, will depend in part on the
creditworthiness of the Customers. Edison generally is obligated to provide
service to new Customers under California law, and generally no outside credit
investigations are performed on new Customers. Edison's information regarding
the credit status of new Customers is limited to information regarding prior
service, if any, by Edison to such Customers. Edison relies on the information
provided by Customers and its customer information system audits to indicate
whether a new Customer has had previous service from Edison. If Edison
evaluates the creditworthiness of a significant number of its Customers
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incorrectly, resulting in significant increases in delinquencies and write-
offs, delays in distributions to Certificateholders may occur. It is expected
that in late 1997, the creditworthiness of new Customers will be verified
using an on-line credit bureau database. If a Customer falls below a specific
credit score, a security deposit will be required. See "The Seller and
Servicer--Credit Policy; Billing; Collections; Restoration of Service" herein.
RELIANCE ON AGGREGATORS AND OTHER SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy services providers ("ESPs") to elect to present a consolidated bill to
their retail customers covering amounts owed to the ESP for electricity,
amounts owed to the Utilities for distribution and applicable FTA Charges. Any
ESP who elects consolidated billing, including monthly amounts with respect to
the FTA Charges, will be responsible for paying the Servicer periodic amounts
payable by customers of the ESP regardless of the ESP's ability to collect the
FTA Charges from its customers. The CPUC has not yet made a final
determination regarding the appropriate credit standards to be required of
ESPs, or the appropriate form of the necessary agreement between Edison and
each ESP. There can be no assurance that each ESP will have the same credit
standards as the Servicer, or that the Servicer will be able to mitigate
credit risks relating to ESPs in the same manner in which it mitigates such
risks relating to its Customers. Neither the Seller nor the Servicer will pay
any shortfalls resulting from the failure of any ESPs to forward FTA Payments
to Edison, as Servicer. The true-up adjustment mechanism for the FTA Charges,
as well as the Overcollateralization Amount and the amounts deposited in the
Capital Subaccount, are intended to mitigate this risk. However, delays in
distributions to Certificateholders might occur as a result of delays in
implementation of the adjustment mechanism.
COMMINGLING OF FTA PAYMENTS WITH SERVICER'S OTHER FUNDS; INVESTMENT OF FTA
PAYMENTS FOR SERVICER'S ACCOUNT
Except as described under "Servicing--Remittances to Collection Account"
herein, on each Remittance Date the Servicer will remit to the Collection
Account FTA Payments expected to have been received during the preceding
Collection Period. Accordingly, FTA Payments received by the Servicer will not
be segregated from the Servicer's general funds until they are remitted to the
Collection Account, and the Servicer will invest FTA Payments received but not
yet remitted for its own account. A failure or inability of the Servicer to
remit the full amount of the estimated FTA Payments on any Remittance Date,
whether voluntary or involuntary, might result in delays in distributions to
Certificateholders. The true-up adjustment mechanism as well as the
Overcollateralization Amount and the amounts deposited in the Capital
Subaccount, are intended to mitigate this risk. However, delays in
distributions to Certificateholders may occur as a result of delays in
implementation of the adjustment mechanism.
UNCERTAINTIES RELATED TO THE ELECTRIC INDUSTRY GENERALLY
UNTRIED NEW CALIFORNIA MARKET STRUCTURE
The California electric industry will change dramatically in the near
future, as a result of recent decisions by the CPUC and enactment of the
Statute. See "Energy Deregulation and New California Market Structure" herein.
The new California electric market structure, scheduled to begin January 1,
1998, has neither been tested nor implemented. Many elements of the new market
structure present novel regulatory issues yet to be resolved as well as many
practical issues of implementation such as the development of systems,
software and procedures for each of (a) the independent power exchange (the
"PX"), which will provide an auction process to match electricity supply and
demand, (b) the independent system operator (the "ISO"), which will have
operational control of the Utilities' transmission facilities and (c) all of
the market participants who will transact with the PX and ISO. If the new
market structure is not implemented in a timely and orderly fashion,
electricity generation, transmission and distribution may be adversely
affected, FTA Payments may not be made as expected, the Servicer's business
may be impacted or Certificateholders may fail to receive distributions of
principal and interest.
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CHANGING REGULATORY ENVIRONMENT
In addition to actions taken by the California Legislature and regulation by
the CPUC, the electric industry is also subject to federal law and regulation
by the Federal Energy Regulatory Commission (the "FERC"). At least five bills
were introduced into the 105th Congress, First Session, mandating the
deregulation of the electric utility industry on the state level. In general,
the bills provide for open competition in the furnishing of electricity to all
retail customers. As described above under "--Transition Property--Federal
Preemption of the Statute," at least one of the bills may prohibit the
recovery of FTA Charges; however; none of the bills has passed in committee.
No prediction can be made as to whether these bills, or any future proposed
bills to mandate the deregulation of the electric industry, will become law
or, if they become law, what their final form or effect would be. Any changes
in the existing legal structure regulating the electric industry might have an
impact on the manner in which electricity is distributed and payments therefor
are collected, or on the Servicer and its business, and thus the likelihood
that Certificateholders will receive distributions in the amounts and at the
times scheduled.
CHANGES IN GENERAL ECONOMIC CONDITIONS AND ELECTRICITY USAGE
General economic conditions and technological changes that would
significantly alter power consumption or reduce the residential and small
commercial consumer base in the Seller's historical service area may affect
payments on the Notes and, accordingly, distributions on the Certificates.
Changes in business cycles, departures of Customers from the Seller's
historical service area, weather, occurrence of natural disasters such as
earthquakes and floods, implementation of energy conservation efforts and
increased efficiency of equipment all affect energy usage. If a sufficient
number of Customers reduce significantly their electricity consumption or
cease consuming electricity altogether, the FTA Charge, as adjusted from time
to time through True-Up Mechanism Advice Letters, as described herein,
required to be paid by each remaining Customer may become burdensome. See "--
Transition Property--Reliance on FTA Adjustments" herein.
RELIANCE ON BROAD BASE OF CUSTOMERS
The FTA Charges are relatively modest in amount on an individual Customer
basis, when imposed on the Seller's current base of Customers. However, if one
or more of the risks described under the heading "--Uncertainties Relating to
the Electric Industry Generally" or an unforeseen catastrophe were to occur,
the number of Customers on whom the FTA Charges would be levied might be
reduced significantly. Such a reduction would increase the amount of the
applicable FTA Charge for each Customer, which might cause more Customers to
avoid paying the applicable FTA Charge after the Rate Freeze Period by leaving
the Territory. If the number of Customers were to be substantially reduced,
the remaining Customers might be unable or unwilling to pay the FTA Charges.
Alternatively, a reduced number of Customers and corresponding higher per
kilowatt hour FTA Charges might increase the reluctance of the CPUC to allow
adjustments to the FTA Charges or provide greater incentive for the California
legislature to amend the Statute in a manner intended to reduce or eliminate
the FTA Charges in respect of the Transition Property. Although the Note
Issuer believes that the likelihood of this scenario occurring is remote, this
result might cause Certificateholders to fail to receive the full amount of
distributions to which they are entitled. The Note Issuer expects that the
applicable FTA Charge (which will be based on historic usage) will be imposed
on Customers who self-generate; however, the ability of the Servicer to
collect such FTA Charge may be reduced because the Servicer will not be able
to exercise shut-off rights as an enforcement tool against a self-generator.
Nevertheless, the Servicer's current forecasts of future electricity demand do
not include any shift by Customers to self-generation, because self-generation
of electricity by Customers is not expected to be economically viable during
the period in which the Certificates will be outstanding.
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BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
POTENTIAL BANKRUPTCY OF SELLER
The Seller will represent and warrant in the Sale Agreement that the
transfer of the Transition Property pursuant thereto to the Note Issuer is a
valid sale and assignment of such Transition Property from the Seller to the
Note Issuer. The Seller and the Note Issuer will also represent and warrant
that they will each take the appropriate actions under the PU Code to perfect
this sale. The Statute provides that the transactions described in the Sale
Agreement shall constitute a sale of the Transition Property to the Note
Issuer, and the Seller and the Note Issuer will treat the transactions as a
sale under applicable law, although for financial reporting purposes the
transactions will be treated as debt of the Seller. If the Seller were to
become a debtor in a bankruptcy case, and a creditor or bankruptcy trustee of
the Seller or the Seller itself as debtor in possession were to take the
position that the sale of the Transition Property to the Note Issuer should be
recharacterized as a pledge of such Transition Property to secure a borrowing
of the Seller, and a court were to adopt such position, then delays or
reductions in distributions on the Certificates could result.
The Seller and the Note Issuer have taken steps to minimize the risk that in
the event the Seller or an affiliate of the Seller were to become the debtor
in a bankruptcy case, a court would order that the assets and liabilities of
the Seller or such affiliate be substantively consolidated with those of the
Note Issuer. The Note Issuer is a separate, limited purpose limited liability
company, the organizational documents of which provide that it shall not
commence a voluntary bankruptcy case without the unanimous affirmative vote of
all of its directors, and pursuant to the Trust Agreement, each holder of a
Certificate agrees that it will not commence an involuntary bankruptcy case
against the Note Issuer. Nonetheless, no assurance can be given that if the
Seller or an affiliate of the Seller were to become a debtor in a bankruptcy
case, a court would not order that the assets and liabilities of the Note
Issuer be consolidated with those of the Seller or such affiliate, thus
resulting in delays or reductions in distributions on the Certificates.
Should the transfer of the Transition Property to the Note Issuer be
recharacterized as a borrowing by the Seller, the Statute provides that there
is a perfected first priority statutory lien on the Transition Property that
secures all obligations to the holders of the Certificates. In addition, in
the Sale Agreement, the Seller grants to the Note Issuer a security interest
in the Transition Property, and the appropriate actions will be taken to
perfect such security interest.
The Statute provides that any Transition Property constitutes a current
property right on the date that the Financing Order and the related Issuance
Advice Letter have become effective and that it thereafter exists continuously
for all purposes. Nonetheless, no assurances can be given that if the Seller
were to become the debtor in a bankruptcy case, a creditor of, or a bankruptcy
trustee for, the Seller or the Seller itself as debtor in possession would not
attempt to take the position that, because the payments based on the FTA
Charges are usage-based charges, Transition Property comes into existence only
as Customers use electricity. If a court were to adopt this position, no
assurances can be given that either the statutory lien created by the Statute
or the security interest granted in the Sale Agreement would attach to FTA
Payments in respect of electricity consumed after the commencement of a
bankruptcy case for the Seller. If it were determined that the Transition
Property has not been sold to the Note Issuer, and that the statutory lien
created by the Statute and the security interest granted in the Sale Agreement
do not attach to FTA Payments in respect of electricity consumed after the
commencement of a bankruptcy case of the Seller, then the Certificate Trustee,
as Noteholder and for the benefit of holders of the Certificates, would be an
unsecured creditor of the Seller, and delays or reductions in distributions on
the Certificates could result. Whether or not the court determined that the
Transition Property had been sold to the Note Issuer, no assurances can be
given that the court would not rule that any FTA Payments relating to
electricity consumed after the commencement of the Seller's bankruptcy cannot
be transferred to the Note Issuer or the Certificate Trustee, thus resulting
in delays or reductions of distributions on the Certificates.
Because the payments based on the FTA Charges arise from usage-based
charges, if the Seller were to become the debtor in a bankruptcy case, a
creditor of, or a bankruptcy trustee for, the Seller, or the Seller itself
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as debtor in possession could take the position that the Note Issuer should
pay a portion of the costs of the Seller associated with the generation,
transmission, or distribution by the Seller of the electricity whose
consumption gave rise to the FTA Collections that are used to make
distributions on the Certificates. If a court were to adopt this position, the
result could initially be a reduction in the amounts paid to the Note Issuer,
and thus to the holders of the Certificates. The FTA Charges may be adjusted
through True-Up Mechanism Advice Letters, although delays in implementation
thereof may cause delays or reductions in receipt of scheduled distributions.
Regardless of whether the Seller is the debtor in a bankruptcy case, if a
court were to accept the arguments of a creditor of the Seller that Transition
Property comes into existence only as Customers use electricity, a tax or
government lien or other nonconsensual lien on property of the Seller arising
before the Transition Property came into existence may have priority over the
Note Issuer's interest in such Transition Property, thereby possibly initially
resulting in a reduction of amounts distributed to the holders of the
Certificates. The FTA Charges may be adjusted through True-Up Mechanism Advice
Letters, although delays in implementation thereof may cause a delay in
receipt of scheduled distributions.
POTENTIAL BANKRUPTCY OF SERVICER
For so long as the Servicer maintains a short-term debt rating of at least
"A-1" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P") and "P-1" by Moody's Investors Service, Inc. ("Moody's") or certain
other conditions are satisfied, the Servicer is entitled to commingle FTA
Payments with its own funds until the relevant Remittance Date. In the event
of a bankruptcy of the Servicer, the Note Trustee will likely not have a
perfected interest in such commingled funds and the inclusion thereof in the
bankruptcy estate of the Servicer may result in delays in distributions due on
the Certificates. See "--Servicing--Reliance on Servicer" herein.
POTENTIAL BANKRUPTCY OF INFRASTRUCTURE BANK
The Infrastructure Bank is a public body established within the state
government of the State of California. The State of California cannot be a
debtor in a case under the Bankruptcy Code. If a court were to determine that
the Infrastructure Bank is an "instrumentality" of the State, rather than an
integral part of the State, then the Infrastructure Bank could become a debtor
in a case commenced under Chapter 9 of the Bankruptcy Code if the requirements
set forth in the Bankruptcy Code for the commencement of a voluntary case
under Chapter 9 were met. An involuntary case cannot be commenced against the
Infrastructure Bank under Chapter 9 and neither a voluntary nor an involuntary
case can be commenced by or against the Infrastructure Bank under any other
chapter of the Bankruptcy Code.
The Certificates will be issued by the Trust, which is a business trust
formed by the Infrastructure Bank under Title 12, Chapter 38 of the Laws of
the State of Delaware (the "Delaware Business Trust Act"). The Trust may be
subject to a voluntary or involuntary case under the Bankruptcy Code. However,
the Trust will be created solely to issue and administer the Certificates, and
the only assets of the Trust will consist of the Notes. The Trust and the
Infrastructure Bank have taken steps to minimize the risk that in the event
the Infrastructure Bank becomes a debtor in a case under Chapter 9 of the
Bankruptcy Code, a bankruptcy court having jurisdiction over such case should
not order that the assets and liabilities of the Trust be substantively
consolidated with those of the Infrastructure Bank. These steps include (a)
creating the Trust as a separate business trust under the Delaware Business
Trust Act which includes provisions preventing creditors of the Infrastructure
Bank from having any right to the assets of the Trust, (b) limiting
interaction between the Infrastructure Bank and the Trust, (c) maintaining
accounting, bookkeeping, business forms and financial statements for the Trust
separate from those of the Infrastructure Bank, and (d) restricting the nature
of the Trust's business and its ability to commence a voluntary case under the
Bankruptcy Code.
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NATURE OF THE CERTIFICATES
LIMITED LIQUIDITY
There is no assurance that a secondary market for any of the Certificates
will develop or, if one does develop, that it will provide the
Certificateholders with liquidity of investment or that it will continue for
the life of such Certificates. It is not anticipated that any Certificates
will be listed on any securities exchange.
RESTRICTIONS ON BOOK-ENTRY REGISTRATION
The Certificates will be initially represented by one or more Certificates
registered in Cede's name, as nominee for DTC, and will not be registered in
the names of the Certificateholders or their nominees. Therefore, unless and
until Definitive Certificates are issued, Certificateholders will not be
recognized by the Certificate Trustee as Certificateholders. Hence, until such
time, Certificateholders will only be able to receive distributions from, and
exercise the rights of Certificateholders indirectly through, DTC and
participating organizations, and, unless a Certificateholder requests a copy
of any such report from the Certificate Trustee or the Servicer, will receive
reports and other information provided for under the Servicing Agreement only
if, when and to the extent provided to Certificateholders by DTC and its
participating organizations. In addition, the ability of Certificateholders to
pledge Certificates to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Certificates, may be
limited due to the lack of physical certificates for such Certificates. See
"Description of the Certificates--Book-Entry Registration" herein.
LIMITED OBLIGATIONS
Neither the Notes nor the Certificates will represent an interest in or
obligation of the Seller, the State of California or the Infrastructure Bank.
The Transition Property owned by the Note Issuer and the other Note
Collateral, which is expected to be relatively small, are the sole source of
payments on the Notes. It is anticipated that the Note Collateral, which is
described under "Description of the Notes--Security" herein, will with limited
exceptions specified therein constitute the Note Issuer's only asset. The Note
Issuer's organizational documents will restrict its right to acquire other
assets unrelated to the transaction described herein. The Notes are limited
obligations of the Note Issuer, and are the sole assets of the Trust other
than the Trust's rights under any Swap Agreement. The Certificates represent
undivided interests in the Trust, and the sole source of distributions thereon
is the payments on the Notes and, in the event of variable-rate Certificates,
the proceeds of any Swap Agreement. If distributions are not made on the
Certificates in a timely manner as a result of nonpayment of the related
Notes, the Certificateholders may direct the Certificate Trustee to bring an
action against the Note Issuer to foreclose upon the Transition Property and
the other Note Collateral securing the Notes and, if the Certificate Trustee
fails to bring such action, the Certificateholders may bring such an action
themselves, as described under "Description of the Certificates--Events of
Default" herein. None of the Certificates, the Notes or the underlying
Transition Property will be guaranteed or insured by the State of California,
the Infrastructure Bank, the Trust or any other governmental agency or
instrumentality or by the Seller or its affiliates. Neither the full faith and
credit nor the taxing power of the State of California is pledged to the
payment of principal of or interest on the Certificates or the Notes or
payments in respect of the Transition Property.
ISSUANCE IN SERIES
The Note Issuer expects to issue new Series of Notes from time to time, and
accordingly the Trust is expected to issue new corresponding Series of
Certificates from time to time. While the terms of any Series of Notes and the
corresponding Series of Certificates will be specified in supplements to the
Note Indenture and the Trust Agreement, respectively, and described in the
related Prospectus Supplement, the provisions of supplements to the Note
Indenture and the Trust Agreement and, therefore, the terms of any new Series,
will not be subject to the prior review or consent of holders of the Notes or
Certificates of any previously issued Series. The terms of a new Series of
Certificates may include without limitation the matters described under
"Description of the Certificates--General" herein. The ability of the Trust to
issue any new Series of Certificates
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is subject to the condition, among others, that such issuance will not result
in any Rating Agency reducing or withdrawing its then existing rating of the
Certificates of any outstanding Class. There can be no assurance, however,
that the issuance of any other Series of Certificates, including any Series
issued from time to time hereafter, might not have an impact on the timing or
amount of distributions received by a Certificateholder. See "Description of
the Certificates--Conditions of Issuance of Additional Series" herein.
LIMITED NATURE OF RATINGS
It is a condition of issuance of each Class of Certificates that they
receive from the Rating Agencies the respective ratings set forth in the
applicable Prospectus Supplement. The ratings of the Certificates address the
likelihood of the ultimate distribution of principal and the timely
distribution of interest on the Certificates. The ratings do not represent an
assessment of the likelihood that the rate of FTA Collections might differ
from that originally anticipated; as a result of such differences, any Series
or Class of Certificates might mature later than scheduled, resulting in a
weighted average life of such Certificates which is more than expected. A
security rating is not a recommendation to buy, sell or hold securities. There
can be no assurance that a rating will remain in effect for any given period
of time or that a rating will not be revised or withdrawn entirely by a Rating
Agency if, in its judgment, circumstances so warrant.
UNCERTAIN DISTRIBUTION AMOUNTS AND WEIGHTED AVERAGE LIFE
The actual dates on which principal is paid on each Class of Certificates
might be affected by, among other things, the amount and timing of receipt of
FTA Collections. Since each FTA Charge will consist of a charge per kilowatt
hour of usage by the applicable class of Customers in the Territory, the
aggregate amount and timing of FTA Collections (and the resulting amount and
timing of principal amortization on the Certificates) could depend, in part,
on actual usage of electricity by Customers and the rate delinquencies and
charge-offs. See "--Inaccurate Usage and Credit Projections" herein. Although
the amount of the FTA Charges will adjust from time to time based in part on
the actual rate of FTA Collections during prior Billing Periods, no assurances
can be given that the Servicer will be able to forecast accurately actual
Customer energy usage and the rate of delinquencies and charge-offs and
implement adjustments to the FTA Charges that will cause FTA Payments to be
made at any particular rate. If FTA Collections are received at a slower rate
than expected, distributions on a Certificate may be made later than expected.
Because principal will only be distributed in accordance with the Expected
Amortization Schedules, except in the event of an early redemption, the
Certificates are not expected to be retired earlier than scheduled. A
distribution on a date that is earlier than forecasted will result in a
shorter weighted average life, and a distribution on a date that is later than
forecasted will result in a longer weighted average life. See "Certain
Distribution and Weighted Average Life Considerations" and "Description of the
Transition Property--Adjustments to the FTA Charges" herein.
EFFECT OF OPTIONAL REDEMPTION ON WEIGHTED AVERAGE LIFE
As described more fully under "Description of the Notes--Optional
Redemption" herein, the Note Issuer has the option to redeem all of the
outstanding Notes of any Series at any time after the outstanding principal
balance thereof has been reduced to less than five percent of the initial
outstanding principal balance. Redemption of a Series of Notes will require
the Certificate Trustee to redeem the related Series of Certificates.
Redemption will cause such Certificates to be retired earlier than would
otherwise be expected, and if the payment schedule otherwise does not differ
from that originally anticipated, will result in a shorter than expected
weighted average life for such Certificates. There can be no assurance as to
whether the Note Issuer will exercise the option to redeem any Series of
Notes, or as to whether Certificateholders will be able to receive an equally
attractive rate of return upon reinvestment of the proceeds resulting from any
such redemption.
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LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENTS
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of shortfalls or losses.
Credit enhancement will be provided in one or more forms, including but not
limited to subordination of other Classes of Certificates of the same Series,
a letter of credit or any combination thereof. Regardless of the form of
credit enhancement provided, the amount of coverage will be limited in amount
and in most cases will be subject to periodic reduction in accordance with a
schedule or formula. Furthermore, such credit enhancements may provide only
very limited coverage as to certain types of shortfalls, losses or risks, and
may provide no coverage as to certain other types of shortfalls, losses or
risks. All or a portion of the credit enhancement for any Series or Class of
Certificates will generally be permitted to be reduced, terminated or
substituted for, if the Rating Agency Condition is satisfied. The rating of
any Series or Class of Certificates by any applicable Rating Agency may be
lowered following the initial issuance thereof as a result of the downgrading
of the obligations of any applicable credit support provider, or as a result
of shortfalls or losses on the Transition Property in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
Neither the Seller, the Servicer, the Note Issuer, the Infrastructure Bank,
the Trust nor any of their affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other action to maintain any
rating of any Series or Class of Certificates. In the event shortfalls or
losses exceed the amount of coverage provided by any credit enhancement or
shortfalls or losses of a type not covered by any credit enhancement occur,
such shortfalls or losses will be borne by the holders of the related
Certificates (or certain Classes thereof).
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ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE
The electric industry is experiencing intensifying competitive pressures,
particularly in the wholesale generation and industrial customer markets.
Historically, electric utilities operated as regulated monopolies in their
service territories, pursuant to which they were the sole suppliers of
electricity, and in California their rates were set by the CPUC based upon the
utilities' cost of providing services and a reasonable return on their capital
investments. Changes to the traditional market structure are occurring at both
the federal and state levels.
At the federal level, the National Energy Policy Act of 1992 was designed to
increase competition in the wholesale electric generation market by easing
regulatory restrictions on producers of wholesale power and by authorizing the
FERC to mandate access to electric transmission systems by wholesale power
generators. In addition, at least five bills have been introduced in the 105th
Congress, First Session, which would mandate the deregulation of the electric
industry on the state level; however, none of these bills has passed in
committee. In their current forms, some but not all of the bills contain
provisions recognizing the validity of prior state actions relating to
deregulation. At least one of the bills, H.R. 1230, prohibits the recovery of
stranded costs such as the Transaction Costs. The entire California delegation
to Congress has signed a letter to the chairman of the House Subcommittee
responsible for holding hearings regarding the bills, which expresses the
shared concern that the effect of the Statute should not be impacted by
federal legislation. No prediction can be made as to whether any of these
bills, or any future proposed bills to deregulate the electric industry, will
become law or, if they become law, what their final form or effect will be.
At the state level, the California electric industry will change
dramatically in the near future as a result of recent decisions by the CPUC
and enactment of the Statute. Among other things, the PX will create a
competitive market for electric energy in California through the creation of a
competitive auction where all suppliers, including the Utilities, municipal
utilities, power marketing agencies, independent power producers, and out-of-
state generators, will have the opportunity to sell electricity according to
established competitive bidding procedures with winning bids awarded to those
suppliers that bid to supply electricity at the lowest price. In addition, the
Utilities will be required, and other transmission owners will be permitted,
to place certain of their transmission facilities under the operational
control of the ISO. Ownership and maintenance of the transmission lines will
remain with the transmission line owners. All power suppliers will receive
nondiscriminatory access to the transmission grid under the control of the ISO
and will be subject to the same protocols and pricing procedures. Customers
will have the opportunity to choose the generators from whom they purchase
their electricity. Notwithstanding these changes, the Utilities are expected
to continue to be the sole providers of electricity distribution services
within their service territories. The Utilities will be encouraged, through
CPUC-established incentives, to divest at least 50 percent of their fossil-
fueled electricity generation assets, in order to address market power issues.
Edison is in the process of undertaking to divest all twelve of its natural
gas-fired generating stations.
The changes which are occurring at both the federal and the California
levels will have a significant impact on Edison and the other Utilities, as
well as other entities in the industry. Edison faces greater competition for
resources and for customers. Competitors include privately owned independent
power producers, exempt wholesale power generators, industrial customers
developing their own generation resources, suppliers of natural gas and other
fuels, other investor-owned electric utilities and municipal generators. There
can be no assurance that such trends will not have a significant adverse
impact on Edison's business in the future.
DESCRIPTION OF THE TRANSITION PROPERTY
GENERAL
In September 1996, legislation implementing an electric industry
restructuring program for the State of California became law. The Statute was
adopted to provide, among other things, subject to the timely and sufficient
issuance of rate reduction bonds which are the Certificates issued hereunder,
a ten percent reduction in rates for services charged to Residential Customers
and Small Commercial Customers, effective as of January 1,
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1998 and generally continuing until the earlier of March 31, 2002 or the date
on which transition costs have been fully recovered (the "Rate Freeze
Period"). As part of the Statute, Sections 367 and 369 of the PU Code
generally provide the Seller an opportunity to recover the Transition Costs.
The Transition Costs consist of the costs of generation-related assets and
obligations that may become uneconomic as a result of a competitive generation
market, together with costs for capital additions to generating facilities
that the CPUC determines to be reasonable, costs of refinancing or retiring of
debt or equity capital, and associated federal and state tax liabilities.
Examples of generation-related assets include such things as generation
facilities, generation-related regulatory assets, amounts recoverable in
electric rates pursuant to settlement agreements with the CPUC in connection
with nuclear power plants, and power purchase contracts with third-party
generators of electricity (including voluntary restructuring, renegotiations
or terminations thereof). These assets may become uneconomic in a competitive
generation market, since they are obligations that were undertaken either
pursuant to legal requirements or with the understanding that they would be
recoverable in rates approved by the CPUC. Since other participants in a
competitive market, unburdened by these uneconomic assets, may be able to
offer electricity at lower rates, the costs relating to these uneconomic
assets may not be recoverable in market prices in a competitive market.
The Statute created the Transition Property, which is the right to be paid
the FTA Payments based on the FTA Charges in order to recover the Transition
Costs.
FINANCING ORDER AND ADVICE LETTERS
The Statute authorizes the CPUC to issue the Financing Order, a regulatory
order which allows the Seller to reduce electricity rates for the Customers by
ten percent, and approves the amount of the Seller's Transition Costs which
the Seller is permitted to finance through the issuance of rate reduction
bonds. On May 6, 1997, Edison filed its application for the Financing Order
with the CPUC. The CPUC issued the Financing Order as of September 3, 1997.
The Financing Order also permits the sale of Certificates in an aggregate
principal amount not to exceed $3,000,000,000. As issued, the Financing Order
also requires the Seller to reduce electricity rates for the Customers by ten
percent through the Rate Freeze Period. The principal amount of the
Certificates approved in the Financing Order was calculated so as to result in
a reduction in revenue requirements for the Seller sufficient to finance the
ten percent rate reduction. The principal amount of the Certificates was
derived based upon a number of variables, including sales forecasts and the
expected interest rate and amortization schedule for the Certificates. If
estimated usage exceeds the assumptions used in the Financing Order, the
Seller intends to issue additional Certificates to finance the rate reduction
resulting from this increased usage. The issuance of additional Certificates
will result in a corresponding increase in the FTA Charges, and thus in the
amounts payable with respect thereto by Customers. See "Description of the
Certificates--Conditions of Issuance of Additional Series" herein.
The Financing Order, together with the effectiveness of the applicable
Issuance Advice Letter, establishes the FTA Charges which constitute separate
nonbypassable charges payable by Residential Customers and Small Commercial
Customers in an aggregate amount sufficient to repay in full the Certificates
and associated costs and fees. The FTA Charges are stated to be nonbypassable
on the basis that the Statute authorizes the Note Issuer, as owner of the
Transition Property, to continue to collect payments based on the FTA Charges
from all Customers notwithstanding any of the circumstances described under
"--Nonbypassable FTA Charges" below. The Statute provides that the right to
collect payments based on the FTA Charges is a property right which may be
pledged, assigned or sold in connection with the issuance of the Certificates.
The Customers consist of those persons whose service falls under the tariffs
described below in "The Seller and Servicer--Edison Customer Base and Electric
Energy Consumption."
The Financing Order entitles the Note Issuer, as the owner of the Transition
Property, to receive the payments made pursuant to the FTA Charges from all
Residential Customers and Small Commercial Customers. Such payments are
referred to herein as the FTA Payments. The Financing Order requires the
Seller to submit an Issuance Advice Letter to the CPUC with respect to each
Series of Certificates issued. The first Issuance Advice Letter will establish
the initial FTA Charges. The Financing Order provides that Issuance Advice
Letters
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become effective five business days after filing with the CPUC. Subsequent
Issuance Advice Letters may increase the FTA Charges to support the issuance
of additional Series of Certificates. The Financing Order permits the Servicer
to file True-Up Mechanism Advice Letters to modify the FTA Charges from time
to time, in order to enhance the likelihood of retirement of each Series and
Class of Certificates on a timely basis. See "--Adjustments to the FTA
Charges" herein.
The initial FTA Charges will be calculated by determining (i) projected
monthly electricity sales for the Customers and the timing and extent of
receipt of payments therefor for the first year following its creation, and
(ii) the FTA Collections on a projected basis, including interest on the
Notes, ongoing transaction expenses including the Servicing Fee, the related
Overcollateralization Amount and scheduled principal payments on the Notes.
Based on the figures determined for the two foregoing amounts, the lowest
aggregate charge which will be adequate to cover all of the amounts to be
covered by FTA Collections will be calculated (the "Base Calculation Model").
Because of differences in the tariff rate for each class of Customers, the FTA
Charge payable by Residential Customers is expected to be different from the
FTA Charge payable by Small Commercial Customers. The initial FTA Charges are
expected to result in FTA Payments by Residential Customers and Small
Commercial Customers representing approximately percent and percent,
respectively, of the aggregate FTA Payments. The foregoing percentages may
change from time to time based on fluctuations in Customer composition.
The Prospectus Supplement related to a Series of Certificates will specify,
based on the applicable Issuance Advice Letter, the amount of each of the FTA
Charges as of the date thereof.
TRANSITION PROPERTY
The right to be paid the FTA Payments gives rise to a separate property
right under California law and is referred to herein generally as the
"Transition Property." "Transition Property" is defined more specifically in
Section 840(g) of the PU Code as the property right created under the PU Code
including, without limitation, the right, title and interest of an electrical
corporation or its transferee (i) in and to the FTA Charges, as adjusted from
time to time, (ii) to be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges, as provided in the PU Code.
Each Class of Notes will be issued in connection with a specific issuance of
a Class of Certificates. Each Note will be secured by Transition Property, as
well as the other Note Collateral described under "Description of the Notes--
Security" herein. Following the initial Issuance Advice Letter, each
subsequent Issuance Advice Letter will authorize the creation of additional
Transition Property to support payments on the related Series or Class of
Notes. Any additional Transition Property acquired by the Note Issuer pursuant
to a Sale Agreement will be combined into a single asset with all other
Transition Property acquired by the Note Issuer pursuant to previous Sale
Agreements. Accordingly, the aggregate amount of Transition Property will
increase as additional Issuance Advice Letters become effective.
NONBYPASSABLE FTA CHARGES
The Financing Order provides that the FTA Charges are nonbypassable, meaning
that Customers still will be required to make payments with respect to the
applicable FTA Charge even if the Customer purchases power from a third party
or generates its own power or if another entity takes over a portion of
Edison's existing service territory. In such events the applicable FTA Charge
will be based on (i) the last twelve months of the Customer's recorded pre-
departure use, (ii) an average derived from the last three years of recorded
use or (iii) actual use. The Note Issuer expects that the applicable FTA
Charge (which will be based on historic usage) will be imposed on Customers
who self-generate; however, the ability of the Servicer to collect such FTA
Charge may be reduced because the Servicer will not be able to exercise shut-
off rights as an enforcement tool against a self-generator. Nevertheless, the
Servicer's current forecasts of future electricity demand do not include any
shift by Customers to self-generation, because self-generation of electricity
by Customers is not expected to be economically viable during the period in
which the Certificates will be outstanding.
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ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that the actual FTA Collections are
neither more nor less than the amount necessary to amortize the Certificates
in accordance with the Expected Amortization Schedule and fund the
Overcollateralization Subaccount, the Servicing Agreement requires the
Servicer to seek, and the Financing Order and the Statute require the CPUC to
approve, periodic adjustments to the FTA Charges based on actual FTA
Collections and updated assumptions by the Servicer as to future usage of
electricity by Customers, future expenses relating to the Transition Property,
the Notes and the Certificates, and the rate of delinquencies and charge-offs.
The date as of which any calculation is performed and which forms the basis
for a requested adjustment to the FTA Charges is referred to as a "Calculation
Date." The adjustments to the FTA Charges will continue until all interest and
principal on all Series of Notes and corresponding Series of Certificates have
been paid or distributed in full.
The Financing Order provides that the Servicer will file a routine True-Up
Mechanism Advice Letter annually, requesting modifications to the FTA Charges
which are intended to return the projected principal balance of each
outstanding Series of Certificates to the amount provided for in the Expected
Amortization Schedule within a twelve month period or, if earlier, by the
Scheduled Final Distribution Date and to fund the Overcollateralization
Subaccount as scheduled. Calculations of appropriate modifications to the FTA
Charges will be made based on the Base Calculation Model, except that (i) the
amount of debt service and related expenses including funding of the
Overcollateralization Subaccount for the following year shall be increased or
decreased to reflect the amount by which actual FTA Collections remitted to
the Collection Account through the end of the month preceding the month of
calculation was less than or exceeded the aggregate actual portion of the debt
service on the Certificates and related expenses for such period, (ii)
forecasted electricity sales for the remaining period of the transaction will
be revised based on the methodology described in the Financing Order, (iii)
estimated transaction expenses will be modified to reflect changed
circumstances, (iv) assumed delinquencies and charge-offs will be modified to
reflect changed circumstances and (v) an adjustment will be made to reflect
any collections which are expected to be received at the existing tariff rate
from the end of the month preceding the month of calculation through the end
of the month in which the new FTA Charges become effective (the "True-Up
Mechanism Calculation Model").
The Financing Order also provides that the Servicer will file a routine
True-Up Mechanism Advice Letter quarterly if as of any Distribution Date (i)
the sum of (a) the amount (positive or negative) by which the aggregate
outstanding principal balance of the Certificates varies from the Expected
Amortization Schedule for all outstanding Certificates, plus (b) the amount by
which the Required Overcollateralization Level exceeds the amount actually on
deposit in the Overcollateralization Subaccount, plus (c) the amount, if any,
by which the Required Capital Level exceeds the amount actually on deposit in
the Capital Subaccount less (ii) the amount on deposit in the Reserve
Subaccount, exceeds the Variance Trigger specified in the Prospectus
Supplement. Furthermore, the Financing Order provides that the Servicer may
file a non-routine True-Up Mechanism Advice Letter as often as quarterly, to
reflect any changes to the Base Calculation Model or True-Up Mechanism
Calculation Model which are necessary to meet any Expected Amortization
Schedule. Finally, the Statute requires the Servicer to file a True-Up
Mechanism Advice Letter with the CPUC annually, prior to each anniversary of
the issuance of the Financing Order (a "Financing Order Anniversary"). True-Up
Mechanism Advice Letters will take into account amounts available in the
General Subaccount and Reserve Subaccount, and amount necessary to replenish
the Overcollateralization Subaccount and Captial Subaccount to required
levels, in addition to amounts payable on the Notes.
The Servicing Agreement will require the Servicer to deliver a written copy
of each True-Up Mechanism Advice Letter, together with a copy of all
supporting calculations, to the Note Issuer, the Note Trustee, the
Infrastructure Bank and the Certificate Trustee upon filing such True-Up
Mechanism Advice Letter with the CPUC.
The Financing Order provides that (i) routine True-Up Mechanism Advice
Letters shall be filed with the CPUC annually at least fifteen days before the
end of each calendar year, with resulting adjustments to the FTA Charges to
become effective at the beginning of the next calendar year, (ii) routine
True-Up Mechanism Advice
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Letters may be filed with the CPUC quarterly at least fifteen days before the
end of each calendar quarter, with resulting adjustments to the FTA Charges to
become effective at the beginning of the next calendar quarter, (iii) non-
routine True-Up Mechanism Advice Letters may be filed with the CPUC quarterly
at least 90 days before the end of each calendar quarter, with resulting
adjustments to the FTA Charges to become effective at the beginning of the
next calendar quarter, and (iv) True-Up Mechanism Advice Letters shall be
filed with the CPUC at least fifteen days before each Financing Order
Anniversary, with resulting adjustments to the FTA Charges, if necessary, to
become effective within 90 days of such Financing Order Anniversary.
SALE AND ASSIGNMENT OF TRANSITION PROPERTY
On the date on which the initial Series of Certificates is issued and sold
(the "Closing Date"), pursuant to the Sale Agreement the Seller will sell and
assign to the Note Issuer, without recourse, its entire interest in the
Transition Property which is described in the first Issuance Advice Letter
submitted by the Servicer (the "Initial Transition Property"). The net
proceeds received by the Note Issuer from the sale of the Notes will be
applied to the purchase of the Initial Transition Property. Thereafter, in
order to finance the cost of the ten percent rate reduction the Seller may
agree with the Note Issuer to sell additional Transition Property ("Subsequent
Transition Property") to the Note Issuer, subject to the satisfaction of
certain conditions. Such Subsequent Transition Property will be sold to the
Note Issuer effective on a date (a "Subsequent Transfer Date") specified in
the written agreement between the Seller and the Note Issuer. The Note Issuer
will issue and sell additional Notes to the Trust, and the Trust will issue
and sell additional Certificates, in connection therewith.
To promote uniform quality in servicing the Transition Property and to
reduce administrative costs, the Note Issuer will appoint the Servicer as
custodian of the documentation relating to the Transition Property. The
Seller's data systems will reflect the sale and assignment of the Transition
Property to the Note Issuer. The Seller's financial statements will indicate
that the Transition Property has been sold to the Note Issuer and will not be
available to creditors, although for financial reporting purposes the Seller
will treat the Transition Property as representing debt of the Seller.
Subsequent Transition Property may be sold by the Seller to the Note Issuer
from time to time, solely in connection with the issuance and sale of
additional Notes by the Note Issuer and of corresponding additional
Certificates by the Trust. Any conveyance of Subsequent Transition Property is
subject to the following conditions, among others:
(a) the Seller shall have entered into a written sale agreement with the
Note Issuer;
(b) the Seller shall have filed an Issuance Advice Letter with the CPUC
relating to such Subsequent Transition Property, which Issuance Advice Letter
shall have become effective;
(c) as of the applicable Subsequent Transfer Date, the Seller shall not be
insolvent and shall not be made insolvent by such conveyance;
(d) the Rating Agency Condition shall have been satisfied with respect to
such conveyance;
(e) such conveyance will not result in an adverse tax consequence to the
Trust or the Certificateholders;
(f) as of the applicable Subsequent Transfer Date, no breach by the Seller
of its representations, warranties or covenants in the applicable Sale
Agreement shall exist; and
(g) as of the applicable Subsequent Transfer Date, the Note Issuer shall
have sufficient funds available to pay the purchase price for the Subsequent
Transition Property to be transferred on such date and all conditions to the
issuance of new series of Notes and Certificates shall have been satisfied or
waived.
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SELLER REPRESENTATIONS AND WARRANTIES
In the initial Sale Agreement and each subsequent Sale Agreement, the Seller
will make representations and warranties to the Note Issuer to the effect,
among other things, that: (a) the information provided by the Seller to the
Note Issuer with respect to the applicable Transition Property is correct in
all material respects; (b) at the Closing Date, the applicable Transition
Property is owned by the Seller and is free and clear of all security
interests, liens, charges and encumbrances, no offsets, defenses or
counterclaims exist or have been asserted or threatened with respect thereto
and the Seller, in its capacity as Seller or Servicer, will not at any time
assert any security interest, lien, charge or encumbrance against or with
respect to any applicable Transition Property; (c) at the Closing Date, the
applicable Transition Property has been validly transferred and sold to the
Note Issuer and all filings (including filings with the CPUC under the PU
Code) necessary in any jurisdiction to give the Note Issuer a first perfected
ownership interest in the applicable Transition Property shall have been made;
(d) the Financing Order and each Issuance Advice Letter pursuant to which any
applicable Transition Property has been created are valid, binding and
irrevocable; (e) the assumptions used in calculating the FTA Charges related
to the applicable Transition Property are reasonable and made in good faith;
(f) the Seller is a corporation duly organized and in good standing under the
laws of the State of California, with power and authority to own its
properties and conduct its business as currently owned or conducted and to
execute, deliver and perform the terms of the Sale Agreement; (g) the
execution, delivery and performance of the Sale Agreement have been duly
authorized by the Seller by all necessary corporate action; (h) the Sale
Agreement constitutes a legal, valid and binding obligation of the Seller,
enforceable against the Seller in accordance with its terms; (i) the
consummation of the transactions contemplated by the Sale Agreement do not
conflict with the Seller's articles of incorporation or bylaws or any material
agreement to which the Seller is a party or bound, result in the creation or
imposition of any lien upon the Seller's properties or violate any law or any
order, rule or regulation applicable to the Seller; (j) no governmental
approvals, authorizations or filings are required for the Seller to execute,
deliver and perform its obligations under the Sale Agreement except those
which have previously been obtained or made; and (k) except as disclosed to
the Note Issuer, no court or administrative proceeding or investigation is
pending or, to the Seller's knowledge, threatened (i) asserting the invalidity
of, or seeking to prevent the consummation of the transactions contemplated
by, the Sale Agreement, the Note Indenture, the Trust Agreement or any of the
other Basic Documents, (ii) seeking a determination that might materially and
adversely affect the performance by the Seller of its obligations thereunder,
or (iii) which might adversely affect the federal or state income tax
attributes of the Notes or the Certificates.
In the event of a breach by the Seller of any of its representations and
warranties described in the preceding paragraph, the Seller will indemnify,
defend and hold harmless the Note Issuer, the Trust, the Noteholders, the Note
Trustee, the Delaware Trustee, the Certificate Trustee, the Certificateholders
and the Infrastructure Bank against any costs, expenses, losses, claims,
damages and liabilities incurred as a result thereof.
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CERTAIN DISTRIBUTION AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The rate of principal distributions on each Class of Certificates, the
aggregate amount of each interest distribution on each Class of Certificates
and the actual maturity date of each Class of Certificates will be related to
the rate and timing of FTA Collections.
The actual distributions on each date for each Class of Certificates and the
weighted average life thereof will be affected primarily by the rate of FTA
Collections and the timing of receipt of such FTA Collections. Since the FTA
Charges will consist of a charge per kilowatt hour of usage by the applicable
classes of Customers, the aggregate amount of FTA Collections and the rate of
principal amortization on the Certificates will depend, in part, on actual
energy usage by Customers and the rate of delinquencies and charge-offs.
Although the amount of the FTA Charges will be adjusted from time to time
based in part on the actual rate of FTA Collections, no assurances are given
that the Servicer will be able to forecast accurately actual energy usage and
the rate of delinquencies and charge-offs or implement adjustments to the FTA
Charges that will cause FTA Collections to be received at any particular rate.
See "Risk Factors--Unusual Nature of the Transition Property--Reliance on FTA
Adjustments" herein. If FTA Collections are received at a slower rate than
expected a Certificate may be retired later than expected. Because principal
will only be distributed in accordance with the Expected Amortization
Schedules, except in the event of an early redemption, the Certificates are
not expected to mature earlier than scheduled. A distribution on a date that
is earlier than forecasted will result in a shorter weighted average life, and
a distribution on a date that is later than forecasted will result in a longer
weighted average life. In addition, if a larger portion of the delayed
distributions on the Certificates are received in later years, this will
result in a longer weighted average life of the Certificates.
No representation is made as to the particular factors that will affect the
rate of FTA Collections, as to the relative importance of such factors, as to
the percentage of the principal balance of the Certificates that will be
distributed as of any date or as to the overall rate of FTA Collections.
38
<PAGE>
THE TRUST
The Trust will be specifically created for the purpose of acquiring the
Notes. The Trust will be formed under the laws of the State of Delaware
pursuant to the Trust Agreement to be entered into among the Infrastructure
Bank, the Delaware Trustee and the Certificate Trustee, each such trustee not
in its individual capacity but acting as trustee on behalf of the holders of
the Certificates. The Trust will not be an agency or instrumentality of the
State of California. The Trust will have no assets other than the Notes and
the Trust's rights under any Swap Agreement. The Trust Agreement will not
permit the Trust to engage in any activities other than holding such assets,
issuing the Certificates, acting as paying agent and engaging in certain other
activities related thereto.
Each Class of Certificates offered hereby will represent a fractional
undivided interest in the corresponding Class of Notes, including all monies
due and to become due under such corresponding Class of Notes, and will
represent the right to receive a portion of the payments of principal of and
interest on the corresponding Class of Notes, together with payments pursuant
to any related Swap Agreement. See "The Certificates--Payments and
Distributions" herein.
The Fee and Indemnity Agreement among the Note Issuer, the Note Trustee, the
Infrastructure Bank, the Delaware Trustee and the Certificate Trustee (the
"Fee Agreement") will provide that the Note Issuer will pay the Delaware
Trustee's and the Certificate Trustee's fees and expenses. The Fee Agreement
will further provide that the Delaware Trustee, the Certificate Trustee and
the Infrastructure Bank will be entitled to indemnification by the Note Issuer
for, and will be held harmless against, any loss, liability or expense
incurred by the Delaware Trustee, the Certificate Trustee and the
Infrastructure Bank, as applicable, arising from the issuance of the
Certificates and any ongoing responsibilities associated therewith (other than
through such party's own willful misconduct, bad faith or negligence or by
reason of a breach of any of its representations or warranties set forth in
the Trust Agreement).
The fiscal year of the Trust will be the calendar year.
The Trust will be formed shortly prior to the first offering of Certificates
as a special purpose Delaware business trust and, as of the date of this
Prospectus, has not carried on any business activities and has no operating
history. Because the Trust does not have any operating history, this
Prospectus does not include any financial statements or related information
for the Trust.
39
<PAGE>
THE INFRASTRUCTURE BANK
The Infrastructure Bank is a public body organized within the government of
the State of California and created pursuant to the Bergeson-Peace
Infrastructure and Economic Development Bank Act, codified at (S) 63000 et
seq. of the California Government Code, as amended (the "Act"). The
Infrastructure Bank is governed, and its corporate powers are exercised, by a
Board of Directors consisting of the State Director of Finance, the State
Treasurer and the State Secretary of Trade and Commerce.
Pursuant to the Act and the Statute, the Infrastructure Bank may authorize a
"special purpose trust" created by the Bank to issue "rate reduction bonds"
and to purchase with the proceeds of such "rate reduction bonds" notes issued
by the Utilities or their affiliates secured by Transition Property. For the
purposes of the Act and the Statute, the Trust will constitute a "special
purpose trust" and each Series of Certificates issued by the Trust will
constitute "rate reduction bonds" entitled to the benefit of the Statute.
Pursuant to the Act, the Infrastructure Bank has no authority to alter or
modify any term or condition related to the Transition Costs or the Transition
Property as set forth in the Financing Order, and has no authority over any
matter that is subject to the approval of the CPUC.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates. None of the
Certificates, the Notes or the underlying Transition Property will be
guaranteed or insured by the State of California, the Infrastructure Bank, the
Trust or any other governmental agency or instrumentality or by the Seller or
any of its affiliates. None of such entities will have any obligations in
respect of the Certificates, except as expressly set forth herein or in the
related Prospectus Supplement.
Neither the full faith and credit nor the taxing power of the State of
California or any agency or instrumentality thereof is pledged to the
distributions of principal of, or interest on, the Certificates or the Notes
or to the payments in respect of the Transition Property.
40
<PAGE>
THE NOTE ISSUER
The Note Issuer is a special purpose, single member limited liability
company organized under the laws of the State of Delaware. The Seller is the
sole member of the Note Issuer. The principal executive office of the Note
Issuer is located at 2244 Walnut Grove Avenue, Room 180, Rosemead, CA 91770.
The telephone number of the Note Issuer is (626) 302-1850. The Note Issuer was
organized for the limited purpose of holding and servicing the Transition
Property and issuing Notes secured by the Transition Property and the other
Note Collateral and related activities, and is restricted by its
organizational documents from engaging in other activities. The assets of the
Note Issuer will consist primarily of the Transition Property and the other
Note Collateral, including capital contributed by Edison as described under
"Description of the Notes--Other Credit Enhancement--Capital Subaccount." In
addition, the Note Issuer's organizational documents require it to operate in
a manner such that it should not be consolidated in the bankruptcy estate of
Edison in the event Edison becomes subject to such a proceeding.
The Note Issuer is a recently formed special purpose limited liability
company and, as of the date of this Prospectus, has not carried on any
business activities and has no operating history. Because the Note Issuer does
not have any operating history, this Prospectus does not include any income
statements, selected financial data or historical or pro forma ratio of
earnings to fixed charges for the Note Issuer, although a balance sheet will
be included in any Prospectus Supplement.
OFFICERS
The following is a list of the principal officers of the Note Issuer. All
such persons have served in the capacities set forth below since July 1, 1997.
The officers will devote such time as is necessary to the affairs of the Note
Issuer. The Note Issuer will have sufficient officers and employees to carry
on its business.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Theodore F. Craver, Jr. .... 46 President
Mary C. Simpson............. 46 Vice President and Treasurer
Kenneth S. Stewart.......... 46 Secretary
George T. Tabata............ 39 Assistant Treasurer and Assistant Secretary
</TABLE>
Theodore F. Craver, Jr. is President of the Note Issuer. Mr. Craver has
served as Vice President and Treasurer of Edison since September 1, 1996.
Mary C. Simpson is Vice President and Treasurer of the Note Issuer. Dr.
Simpson has served as Director of Corporate Finance and Investments of Edison
since July 1, 1996.
Kenneth S. Stewart is Secretary of the Note Issuer. Mr. Stewart has served
as Assistant General Counsel of Edison since March 1, 1992.
George T. Tabata is Assistant Treasurer and Assistant Secretary of the Note
Issuer. Mr. Tabata has served as Project Manager of Edison since March 18,
1996.
No compensation has been paid by the Note Issuer to any officer of the Note
Issuer since the Note Issuer was formed. The officers of the Note Issuer will
not be compensated by the Note Issuer for their services on behalf of the Note
Issuer. The Note Issuer's organizational documents limit, to the extent
permitted by Delaware law, the personal liability of each officer of the Note
Issuer to the Note Issuer for monetary damages resulting from breaches of such
officer's duty of care. The Note Issuer's organizational documents provide
that officers of the Note Issuer shall be indemnified against liabilities
incurred in connection with their services on behalf of the Note Issuer,
including liabilities under applicable securities laws.
41
<PAGE>
THE SELLER AND SERVICER
GENERAL
The Seller was incorporated under California law in 1909. The Seller is a
public utility primarily engaged in the business of supplying electric energy
to an approximately 50,000 square-mile area of central and southern
California, excluding the City of Los Angeles and certain other cities. This
area includes some 800 cities and communities and a population of more than
11,000,000 people. During 1996, 39 percent of the Seller's total operating
revenue was derived from residential customers, 37 percent from commercial
customers, twelve percent from industrial customers, seven percent from public
authorities, four percent from agricultural and other customers and one
percent from resale customers. The Seller comprises the major portion of the
assets and revenues of Edison International, its parent holding company.
As an investor-owned electric utility, the Seller is regulated by the CPUC
and the FERC.
EDISON CUSTOMER BASE AND ELECTRIC ENERGY CONSUMPTION
Edison's customer base is divided into several categories, including the
residential and small commercial categories covered by the Statute.
Residential Customers are all customers served on rate schedules in Edison's
"Domestic" rate group, including all customers on Schedules D, D-APS, D-CARE,
DE, DM, DMS-1, DMS-2, DMS-3, DS, TOU-D-1, TOU-D-2, TOU-EV-1 and TOU-EV-2.
These rates are available for residential uses such as lighting, heating,
cooking and other domestic purposes. Small Commercial Customers are all
customers on Edison's rate schedules GS-1, TOU-GS-1, TOU-EV-3 and GS-1
customers taking service on GS-APS. These rates are available to general
service customers whose monthly maximum demand does not exceed twenty
kilowatts for any three billing periods during the preceding twelve month
period. General service usage is service to any lighting or power installation
except those eligible for service on single-family and multi-family domestic,
street lighting, outdoor area lighting, traffic control, resale or standby
schedules.
Factors influencing the number of customers and kilowatt-hour consumption
include the general economic climate in Edison's service territory as it
impacts net migration of Residential Customers and Small Commercial Customers.
Another factor influencing kilowatt-hour sales is temperature through its
impact on air conditioning and cooling usage. The number of Small Commercial
Customers and kilowatt-hour consumption would also be influenced by the level
of business activity associated with the particular Small Commercial Customer.
Other factors impacting the kilowatt-hour consumption of both Residential
Customers and Small Commercial Customers, primarily over the longer term,
would include the availability of more energy efficient appliances, new energy
consuming technologies and the customer's ability to acquire these new
products.
For each of the two categories of Customers specified by the Statute, the
table below sets forth the number of Customers and electric energy consumption
in recent years.
CUSTOMERS AND ENERGY CONSUMPTION
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average Number of Customers:
Residential............... 3,527,410 3,546,065 3,560,951 3,586,918 3,618,734
Small Commercial.......... 380,104 389,917 394,992 400,824 404,577
Energy Consumption (GWh):
Residential............... 22,136 21,375 22,163 22,070 22,751
Small Commercial.......... 4,048 3,866 3,965 4,000 4,142
--------- --------- --------- --------- ---------
Total................... 26,184 25,241 26,128 26,070 26,893
========= ========= ========= ========= =========
Average Revenue per Customer
(c/kWh) :
Residential............... 12.061 12.029 12.264 12.833 12.402
Small Commercial.......... 13.264 13.171 13.387 14.065 13.379
</TABLE>
42
<PAGE>
FORECASTING CONSUMPTION
The Base Calculation Model and the True-Up Mechanism Calculation Model rely
on Edison's electric sales forecast. The short-term forecast uses statistical
methods to relate kilowatt-hour sales growth by customer class to key economic
and demographic variables. The statistical method used is multiple linear
regression. The customer classes included in the forecast are residential,
commercial, industrial, public authorities and agricultural. The key variables
used have included: number of customers, employment, personal income, price of
electricity and weather (temperature and rainfall). The economic variables
used are developed specific to the Edison service territory by using county
employment data. The forecast of California economic growth is based upon the
forecasts provided by the UCLA Economic Forecasting Project. Other factors
which are included in the forecast are the effects of military base shutdowns,
the effects of energy conservation programs (including Edison programs,
Federal appliance and lighting standards, and State building standards),
specific trends in certain industries, and bypass cogeneration (self-
generation). Data on a quarterly basis are used in the model. These short-term
models are relatively easy to implement and can be updated more than once a
year if needed. These forecasts also will be used in calculating the FTA
Charges for any given period, in order to determine the revenues required (in
the form of FTA Payments) to meet the Expected Amortization Schedules.
FORECAST VARIANCE
Edison conducts sales forecast variance analyses on a regular basis to
monitor the accuracy of forecasts against recorded consumption. This is
important for short-term resource procurement functions as well as budgeting
and financial reporting.
The table below presents the forecasts of retail sales of Edison for the
years 1992 through 1996. Each forecast was made in the prior year. For
example, the annual 1992 variance is based on a forecast prepared in 1991.
<TABLE>
<CAPTION>
ANNUAL FORECAST VARIANCES (GWH)
--------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL
Forecast............................. 22,298 22,389 22,021 22,111 22,068
Actual............................... 22,136 21,375 22,163 22,070 22,751
Variance........................... 0.7% 4.5% -0.6% 0.2% -3.1%
SMALL COMMERCIAL
Forecast............................. 4,330 3,851 3,591 3,780 4,002
Actual............................... 4,048 3,866 3,965 4,000 4,142
Variance........................... 6.5% -0.4% -10.4% -5.8% -3.5%
</TABLE>
During the last five years, no discernible trend is apparent with respect to
the historical forecast variance relating to the Residential Customers or the
Small Commercial Customers. With respect to the Residential Customers, the
variance has ranged from a 4.5 percent overestimate of usage to a 3.1 percent
underestimate of usage, with an average 0.3 percent overestimate of usage.
With respect to the Small Commercial Customers the variance has ranged from a
6.5 percent overestimate of usage to a 10.4 percent underestimate of usage,
with an average 2.7 percent underestimate of usage.
Actual usage depends on several factors, including weather and economic
conditions. For example, while Edison's forecast methodology assumes normal
conditions, abnormally hot summers can add an extra 2 percent in sales. In
addition, regional economic conditions, like the recent Southern California
recession, can affect sales. Accordingly, variations in conditions will affect
the accuracy of a forecast.
43
<PAGE>
CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
The credit, billing, collections and restoration of service policies and
procedures of Edison are subject to CPUC guidelines which may, from time to
time, change. In addition, Edison may change such policies and procedures from
time to time. It is expected that any such change would be designed to enhance
Edison's ability to make timely recovery of amounts billed to Customers. Under
the Servicing Agreement, the changes so instituted by Edison will also apply
to the servicing by Edison, as the Servicer, of the Transition Property.
Credit Policy. Edison is obligated to provide service to all customers in
its historical service territory under California law. Edison relies on the
information provided by the customer and its customer information system
audits to indicate whether the customer has been previously served by Edison.
It is expected that in late 1997, the creditworthiness of new Customers will
be verified using an on-line credit bureau database. If a Customer falls below
a specific credit score, a security deposit will be required.
Certain accounts are secured with deposits or guarantees to prevent losses.
The amount of the deposit reflects the potential use over a two-month period,
which is the average time period required to take billing action on past-due
billings. Since the vast majority of customers pay their bills within the
allotted time, it is not necessary to require deposits from all customers.
Specific criteria have been developed for establishing credit. These criteria
are based on such factors as prior service, property ownership, or providing
an acceptable guarantor.
As a rule, Residential Customers may establish credit by depositing cash
equal to twice the average monthly bill, furnishing a satisfactory guarantor,
or owning the premises to be served or other property in the service
territory. Deposits or guarantees may not be required if the applicant has
been an Edison customer during the past two years, and (a) the applicant has
not had more than two past-due billings during the last twelve consecutive
months, (b) the applicant has paid all bills for domestic service previously
supplied to the applicant and has proof of payment, or (c) the applicant's
credit is otherwise established to the satisfaction of Edison. Credit that is
"established to the satisfaction of Edison" is a broad category that includes
options such as acceptable payment records with other utilities, credit
scoring, and other factors that would establish creditworthiness.
Small Commercial Customers may establish credit by depositing cash equal to
twice the maximum monthly bills, owning substantial equity in the location to
be served, furnishing a satisfactory guarantor or otherwise establishing
credit to the satisfaction of Edison.
Deposits or guarantees may not be required if the applicant has been an
Edison customer during the past two years with like service, during the past
twelve consecutive months of that prior service has not had more than two past
due bills, the billing for the previous service was equal to at least 50
percent of that estimated for the new service, and the customer has paid all
prior Edison bills.
Billing Process. Edison bills its customers once every 27 to 33 days, with
approximately an equal number of bills being distributed each Servicer
Business Day. Any day other than a Saturday, a Sunday or a day on which the
Servicer's offices are open for business is a "Servicer Business Day." For the
year ending December 31, 1996, Edison mailed out an average of 200,000 bills
daily to its various customer categories.
For accounts with potential billing errors exception reports are generated
for manual review. This review examines accounts that have abnormally high or
low bills, potential meter-reading errors and possible meter malfunctions.
Collection Process. Edison receives approximately 76 percent of total bill
payments via the U.S. mail. Approximately nineteen percent are received at
authorized payment agencies and one percent of bill payments are received at
local offices. Edison receives the remainder of payments via electronic
payment options, electronic funds transfer, credit card payments and
electronic data interchange.
Two days after the meter is scheduled to be read, bills are processed and
mailed to customers. Bills are due on presentation, and are considered past
due after nineteen calendar days for both small commercial and residential
accounts. Timing and collection follow-up is based on customer type, as
follows.
44
<PAGE>
For Residential Customers, an overdue notice is sent with the second month's
bill if a payment has not been received by the time the second month's bill is
prepared for presentation to the Customer on a monthly basis. Eight days after
the overdue notice is issued, a final call notice is mailed directly to the
Customer if the past due amount is still outstanding. The due date on the
final call is approximately 50 days after the initial bill is presented to the
Customer. The Customer is subject to service disconnection if the amount owing
is unpaid upon expiration of the final call notice. A telephone contact, or
reasonable attempt at making a telephone contact, is made to all Residential
Customers prior to service shut off as required by the PU Code.
For Small Commercial Customers, twenty calendar days after the first
billing, a fifteen day notice is mailed directly to Small Commercial
Customers. A 24-hour notice, although not required, is often given to notify
Small Commercial Customers that shut-off is scheduled.
Restoration of Service. Once service has been shut-off for non-payment,
Edison has the right to require the payment of all of the following charges:
(i) the total amount owing on an account including any past-due balance, the
current billing, and a credit deposit, if requested; (ii) any miscellaneous
charges associated with the reconnection of service (i.e., reconnection
charges, field collection charges, and/or returned check charges); (iii) any
charges assessed for unusual costs incidental to the termination or
restoration of service which have resulted from the customer's action or
negligence; and (iv) any unpaid closing bills from other accounts in the name
of the customer of record.
LOSS EXPERIENCE
The following table sets forth information relating to the historical net
write-offs of the Servicer for Residential Customers and Small Commercial
Customers for each of the five preceding years.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Residential.................................... 0.60% 0.82% 0.56% 0.51% 0.55%
Small Commercial(1)............................ 0.33% 0.54% 0.39% 0.36% 0.39%
</TABLE>
- --------
(1) Edison has not historically maintained information regarding write-offs
for Small Commercial Customers. The percentages disclosed in this table
are Edison's best estimate based on available information.
During the last five years, the historical net write-offs for both
Residential Customers and Small Commercial Customers have remained relatively
constant with no discernible trend upwards or downwards. The historical net
write-offs for both categories of Customers are statistically insignificant.
AGING
The following table sets forth information relating to the average number of
days bills remain outstanding, measured from the midpoint of customer usage
(rather than when the bill is rendered) with respect to Residential Customers
and commercial customers (including Small Commercial Customers).
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Residential......................................... 41.3 40.9 39.8 39.9 40.9
Commercial(1)....................................... 43.0 42.3 42.2 42.5 41.0
</TABLE>
- --------
(1) Commercial customers include both large commercial customers and Small
Commercial Customers. Small Commercial Customers constitute approximately
19.6 percent (based on revenues) of the commercial customer class.
During the last five years, the aging of billings for both Residential
Customers and commercial customers has remained relatively constant with no
discernible trend upwards or downwards.
45
<PAGE>
DELINQUENCIES
The following table sets forth information relating to the delinquency
experience of Edison for (i) Residential Customers and (ii) commercial
customers for each of the five preceding years:
RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Percentage Collected After:
30 days............................... 77.75% 77.45% 79.02% 78.44% 78.08%
60 days............................... 93.33% 94.02% 96.10% 95.68% 93.37%
COMMERCIAL CUSTOMERS(1)
<CAPTION>
1992 1993 1994 1995(2) 1996(3)
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Percentage Collected After:
30 days............................... 83.58% 83.61% 83.74% 83.34% N/A
60 days............................... 96.07% 96.45% 96.22% 96.65% N/A
</TABLE>
- --------
(1) Commercial customers include both large commercial customers and Small
Commercial Customers. Small Commercial Customers constitute approximately
19.6 percent (based on revenues) of the commercial customer class.
(2) The information for 1995 is based on collections for the period beginning
January 1995 to September of 1995. Delinquency information for the
commercial customer class from September 1995 and after is not available.
(3) Delinquency information for the commercial customer class during 1996 is
not available.
During the last five years, the delinquency experience for both Residential
Customers and commercial customers have remained relatively constant with no
discernible trend upwards or downwards. The Note Issuer does not believe that
the delinquency experience with respect to FTA Payments will differ
substantially from the approximate rates indicated above.
REVENUE
The following table indicates the total revenues from electricity sales to
each of Residential Customers and Small Commercial Customers during the last
five years:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Residential.......... $2,669,818 $2,571,229 $2,718,206 $2,832,280 $2,821,633
Small Commercial..... 536,912 509,237 530,856 562,549 554,213
---------- ---------- ---------- ---------- ----------
Total.............. $3,206,730 $3,080,466 $3,249,062 $3,394,829 $3,375,846
========== ========== ========== ========== ==========
</TABLE>
46
<PAGE>
SERVICING
SERVICING PROCEDURES
General. The Servicer, as agent for the Note Issuer, will manage, service
and administer, and make collections in respect of, the Transition Property
pursuant to the Servicing Agreement between the Servicer and the Note Issuer.
Except to the extent that ESPs elect to engage in consolidated billing (as
described herein under "Risk Factors--Potential Servicing Issues--Reliance on
Aggregators and Other Suppliers"), the Servicer's duties will include
calculation and billing of all amounts based on the FTA Charges, receipt and
posting of all FTA Payments, responding to inquiries of Customers and the CPUC
with respect to the Transition Property and the FTA Charges, obtaining usage
calculations, accounting for collections and furnishing monthly, quarterly and
annual statements to the Note Issuer, the Note Trustee and the Certificate
Trustee and taking action in connection with periodic revisions to the FTA
Charges as described below.
Each FTA Charge will be expressed as an amount per kilowatt hour of
electricity usage by the applicable Customer, regardless of whether the
Customer purchases its electricity from the Servicer or from another
electricity provider. The Servicer expects the applicable FTA Charge to be
separately identified on each Customer's bill, with an aggregate amount to be
paid to the Servicer for all services provided by the Servicer. Bills are sent
to Customers every 27 to 33 days.
Any amounts collected by the Servicer that represent partial payments of the
total amount billed will be proportionately allocated between the Note Issuer
and Edison based on the portion of the amount billed which is based on the
applicable FTA Charge and the charges due to Edison. If such amounts are
billed and collected for an ESP or the Servicer pursuant to a consolidated
billing arrangement, the total charges due to the ESP will also be included in
the proportionate allocation of any partial payment.
SERVICING STANDARDS AND COVENANTS
The Servicing Agreement will require the Servicer, in servicing and
administering the Transition Property, to employ or cause to be employed
procedures and exercise the same care it customarily employs and exercises in
servicing and administering bill collections for its own account and for
others.
Consistent with the foregoing, the Servicer may in its own discretion waive
any late payment charge or any other fee or charge relating to delinquent
payments, if any, and may waive, vary or modify any terms of payment of any
amounts payable by a Customer, in each case, if such waiver or action (a)
would be in accordance with the Servicer's customary practices or those of any
successor Servicer with respect to comparable assets that it services for
itself and for others, (b) would not materially adversely affect the
Certificateholders and (c) would comply with applicable law.
In the Servicing Agreement, the Servicer will covenant that, in servicing
the Transition Property it will: (a) manage, service, administer and make
collections in respect of the Transition Property with reasonable care and in
accordance with applicable law, including all applicable guidelines of the
CPUC, using the same degree of care and diligence that the Servicer exercises
with respect to bill collections for its own account and for others; (b)
follow customary standards, policies and procedures for the industry in
performing its duties as Servicer; (c) use all reasonable efforts, consistent
with its customary servicing procedures, to enforce, and maintain rights in
respect of, the Transition Property; (d) comply with all laws applicable to
and binding on it relating to the Transition Property; and (e) submit True-Up
Mechanism Advice Letters to the CPUC seeking adjustments to the FTA Charges as
described herein.
In the event of a breach by the Servicer of any of these covenants, the
Servicer will indemnify, defend and hold harmless the Note Issuer[, the Trust,
the Noteholders, the Note Trustee, the Certificate Trustee, the Delaware
Trustee, the Certificateholders and the Infrastructure Bank] against any
costs, expenses, losses, claims, damages and liabilities incurred as a result
thereof.
47
<PAGE>
REMITTANCES TO COLLECTION ACCOUNT
Periodically, the Servicer will prepare a forecast of the percentages of
amounts billed in a particular month that are expected to be received during
each of the following six months (the "Collections Curve"). For so long as (a)
no Servicer Default shall have occurred and be continuing and (b) the Rating
Agency Condition shall have been satisfied (and any conditions or limitations
imposed by the Rating Agencies in connection therewith are complied with), the
Servicer is required to remit FTA Payments expected to have been received
during the preceding Billing Period, based on the Collections Curve then in
effect, to the Collection Account on or before the twentieth day of each
calendar month (or, if such twentieth day is not a Certificate Business Day,
the Certificate Business Day immediately following such twentieth day). The
sum of the amounts remitted with respect to a Billing Period during the six
months following such Billing Period based on the Collections Curve is
referred to as the "Estimated FTA Payments" herein. Pending remittance to the
Collection Account, FTA Payments received by the Servicer may be invested by
the Servicer at its own risk and for its own benefit, and will not be
segregated from funds of the Servicer. If any of the conditions described
above are not satisfied, the Servicer will remit to the Collection Account
within two Servicer Business Days of receipt thereof all Estimated FTA
Payments. The date on which FTA Payments received by the Servicer with respect
to the FTA Charges are required to be deposited in the Collection Account is
referred to herein as the "Remittance Date."
On or prior to the Remittance Date in the seventh month following a monthly
Billing Period, the Servicer will compare actual FTA Payments received with
respect to that Billing Period (the "Actual FTA Payments") to the Estimated
FTA Payments for that Billing Period previously remitted to the Collection
Account. If Estimated FTA Payments remitted with respect to a Billing Period
exceed Actual FTA Payments attributable to such Billing Period (such excess,
an "Excess Remittance"), the Servicer shall be entitled to reduce the amount
which the Servicer remits to the Collection Account on such Remittance Date by
the amount of such Excess Remittance, the amount of such reduction becoming
the property of the Servicer. If Estimated FTA Payments remitted with respect
to a Billing Period are less than Actual FTA Payments attributable to such
Billing Period (such deficiency, a "Remittance Shortfall"), the amount which
the Servicer remits to the Collection Account on such Remittance Date will be
increased by the amount of such Remittance Shortfall, such increase coming
from the Servicer's own funds. The Estimated FTA Payments calculated for any
Remittance Date shall not be affected by any Excess Remittance or Remittance
Shortfall which modifies the actual amount remitted by the Servicer on such
Remittance Date.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Notes.
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each calendar
quarter on each Payment Date, in an amount equal to one-fourth of the percent
per annum specified in the related Prospectus Supplement of the then
outstanding principal amount of the Notes. The Servicing Fee (together with
any portion of the Servicing Fee that remains unpaid from prior Payment Dates)
will be paid solely to the extent funds are available therefor as described
under "Description of the Notes--Allocations; Payments." The Servicing Fee
will be paid prior to the distribution of any amounts in respect of interest
on and principal of the Notes. The Servicer will be entitled to retain as
additional compensation net investment income on FTA Payments received by the
Servicer prior to remittance thereof to the Collection Account and the portion
of late fees, if any, paid by Customers relating to the FTA Payments.
AGGREGATORS AND OTHER SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows ESPs to elect
to present a consolidated bill to their retail customers covering amounts owed
to the ESP for electricity, amounts owed to the Utilities for distribution,
and the applicable FTA Charge. Any ESP who elects consolidated
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billing, including monthly amounts with respect to the FTA Charges, will be
responsible for paying the Servicer periodic amounts payable by customers of
the ESP regardless of the ESP's ability to collect the FTA Charges from its
customers. Neither the Seller nor the Servicer will pay any shortfalls
resulting from the failure of any ESPs to forward FTA Payments to Edison, as
Servicer, which may result in delays in distributions to Certificateholders.
See "Risk Factors--Potential Servicing Issues--Reliance on Aggregators and
Other Suppliers" herein.
SERVICER REPRESENTATIONS AND WARRANTIES
In the Servicing Agreement, the Servicer will make representations and
warranties to the Note Issuer to the effect, among other things, that: (a) the
Servicer is a corporation duly organized and in good standing under the laws
of the State of California, with power and authority to own its properties and
conduct its business as currently owned or conducted and to execute, deliver
and carry out the terms of the Servicing Agreement; (b) the execution,
delivery and carrying out of the Servicing Agreement have been duly authorized
by the Servicer by all necessary corporate action; (c) the Servicing Agreement
constitutes a legal, valid and binding obligation of the Servicer, enforceable
against the Servicer in accordance with its terms; (d) the consummation of the
transactions contemplated by the Servicing Agreement does not conflict with
the Servicer's articles of incorporation or bylaws or any agreement to which
the Servicer is a party or bound, result in the creation or imposition of any
lien upon the Servicer's properties or violate any law or any order, rule or
regulation applicable to the Servicer; (e) the Servicer has all licenses
necessary for it to perform its obligations under the Servicing Agreement; (f)
no governmental approvals, authorizations or filings are required for the
Servicer to execute, deliver and perform its obligations under the Servicing
Agreement except those which have previously been obtained or made; and (g)
except as disclosed to the Note Issuer, no court or administrative proceeding
or investigation is pending or, to the Servicer's knowledge, threatened (i)
asserting the invalidity of, or seeking to prevent the consummation of the
transactions contemplated by, the Servicing Agreement or (ii) seeking a
determination that might materially and adversely affect the performance by
the Servicer of its obligations thereunder.
In the event of a breach by the Servicer of any of its representations and
warranties described in the preceding paragraph, the Servicer will indemnify,
defend and hold harmless the Note Issuer, the Trust, the Noteholders, the Note
Trustee, the Certificate Trustee, the Delaware Trustee, the Certificateholders
and the Infrastructure Bank against any costs, expenses, losses, claims,
damages and liabilities incurred as a result thereof.
STATEMENTS BY SERVICER
On or before each Remittance Date, the Servicer will prepare and furnish to
the Note Trustee, the Certificate Trustee, the Infrastructure Bank and the
Note Issuer a statement for the applicable Billing Period (the "Monthly
Servicer's Certificate") setting forth the aggregate amount remitted, the FTA
Collections and the Excess Remittance or the Remittance Shortfall. In
addition, the Servicer will prepare, and the Note Trustee will furnish to the
Noteholders on each Payment Date the Quarterly Servicer's Certificate
described under "Description of the Notes--Reports to Noteholders." The
Servicer will also prepare and the Certificate Trustee will furnish to the
Certificateholders on each Payment Date the report described under
"Description of the Certificates--Reports to Certificateholders" herein.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement will provide that a firm of independent public
accountants will furnish to the Note Issuer, the Note Trustee and the
Certificate Trustee on or before a date specified in each Prospectus
Supplement a statement as to compliance by the Servicer during the preceding
twelve months ended December 31 with certain standards relating to the
servicing of the Transition Property. This report (the "Annual Accountant's
Report") shall state that such firm has performed certain procedures in
connection with the Servicer's compliance with the servicing procedures of the
Servicing Agreement, identifying the results of such procedures and including
any exceptions noted. The Annual Accountant's Report will also indicate that
the accounting firm providing such report is independent of the Servicer
within the meaning of the Code of Professional Ethics of the American
Institute of Certified Public Accountants.
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The Servicing Agreement will also provide for delivery to the Note Issuer,
the Infrastructure Bank, the Note Trustee and the Certificate Trustee, on or
before January 31 of each year, commencing January 31, 1998, of a certificate
signed by an officer of the Servicer stating that the Servicer has fulfilled
its obligations under the Servicing Agreement throughout the preceding twelve
months ended December 31 (or in the case of the first such certificate, the
period from the Closing Date to December 31, 1997) or, if there has been a
default in the fulfillment of any such obligation, describing each such
default. The Servicer has agreed to give the Note Issuer, the Infrastructure
Bank, the Note Trustee and the Certificate Trustee notice of certain Servicer
Defaults under the Servicing Agreement.
Copies of such statements and certificates may be obtained by
Certificateholders by a request in writing addressed to the Certificate
Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreement will provide that Edison may not resign from its
obligations and duties as Servicer thereunder, except upon either (a) a
determination that Edison's performance of such duties is no longer
permissible under applicable law or (b) satisfaction of the Rating Agency
Condition, consent of the CPUC and an arrangement with a successor servicer
which provides that there is no increase in the Servicing Fee. No such
resignation will become effective until a successor Servicer has assumed
Edison's servicing obligations and duties under the Servicing Agreement.
The Servicing Agreement will further provide that neither the Servicer nor
any of its directors, officers, employees, and agents will be under any
liability to the Note Issuer, the Note Trustee, the Infrastructure Bank, the
Trust, the Noteholders, the Certificate Trustee, the Delaware Trustee, the
Certificateholders or any other person, except as provided under the Servicing
Agreement, for taking any action or for refraining from taking any action
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misconduct, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. In
addition, the Servicing Agreement will provide that the Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under the Servicing Agreement and
that, in its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in the Servicing Agreement, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any
entity succeeding to the business of the Servicer or, with respect to its
obligations as Servicer, which corporation or other entity in each of the
foregoing cases assumes the obligations of the Servicer, will be the successor
of the Servicer under the Servicing Agreement.
SERVICER DEFAULTS
"Servicer Defaults" under the Servicing Agreement will include (a) any
failure by the Servicer to make any required deposit into the Collection
Account, which failure continues unremedied for three Servicer Business Days
after written notice from the Note Issuer or the Note Trustee is received by
the Servicer or after discovery by the Servicer; (b) any failure by the
Servicer or the Seller, as the case may be, duly to observe or perform in any
material respect any other covenant or agreement in the Servicing Agreement,
the Sale Agreement or any other Basic Document to which it is a party which
failure materially and adversely affects the rights of Noteholders and which
continues unremedied for 60 days after the giving of notice of such failure
(i) to the Servicer or the Seller, as the case may be, by the Note Issuer or
the Note Trustee or (ii) to the Servicer by holders of Notes evidencing not
less than 25 percent in principal amount of the outstanding Notes of all
Series; (c) any representation or warranty made by the Servicer in the
Servicing Agreement shall prove to have been incorrect when made, which has a
material adverse effect on the Note Issuer or the Certificateholders and which
material adverse effect continues unremedied for a period of 60 days after the
giving of notice to the Servicer by the Note Issuer or the Note Trustee; and
(d) certain events of insolvency, readjustment of debt, marshaling of assets
and
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liabilities, or similar proceedings with respect to the Servicer or the Seller
and certain actions by the Servicer or the Seller indicating its insolvency,
reorganization pursuant to bankruptcy proceedings, or inability to pay its
obligations.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under the Servicing Agreement remains
unremedied, either the Note Trustee or holders of Notes evidencing not less
than 25 percent in principal amount of then outstanding Notes of all Series
may terminate all the rights and obligations of the Servicer (other than the
Servicer's indemnity obligation) under the Servicing Agreement, whereupon a
successor servicer appointed by the Note Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to similar compensation arrangements. In
addition, upon a Servicer Default, each of the following shall be entitled to
apply to the CPUC for sequestration and payment of revenues arising with
respect to the Transition Property: (1) the Certificateholders and the
Certificate Trustee as beneficiary of any statutory lien permitted by the PU
Code; (2) the Note Issuer or its assignees; or (3) pledgees or transferees,
including transferees under PU Code (S) 844, of the Transition Property. If,
however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than such appointment has occurred,
such trustee or official may have the power to prevent the Note Trustee or the
Noteholders from effecting a transfer of servicing. The Note Trustee may
appoint, or petition a court of competent jurisdiction for the appointment of,
a successor servicer which satisfies criteria specified by the Rating
Agencies. The Note Trustee may make such arrangements for compensation to be
paid, which in no event may be greater than the servicing compensation to the
Servicer under the Servicing Agreement.
WAIVER OF PAST DEFAULTS
Holders of Notes evidencing at least a majority in principal amount of the
then outstanding Notes of all Series, on behalf of all Noteholders, may waive
any default by the Servicer in the performance of its obligations under the
Servicing Agreement and its consequences, except a default in making any
required deposits to the Collection Account in accordance with the Servicing
Agreement. The Servicing Agreement provides that no such waiver will impair
the Noteholders' rights with respect to subsequent defaults.
AMENDMENT
The Servicing Agreement may be amended by the parties thereto, without the
consent of the Noteholders (or, accordingly, the Certificateholders), but with
the consent of the Note Trustee, for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of that
agreement or of modifying in any manner the rights of the Noteholders (or,
accordingly, the Certificateholders), provided that such action will not, as
certified in a certificate of an officer of the Servicer delivered to the Note
Trustee and the Note Issuer, materially and adversely affect the interest of
any Noteholder (or, accordingly, any Certificateholder). The Servicing
Agreement may also be amended by the Servicer and the Note Issuer with the
consent of the Note Trustee and the holders of Notes evidencing at least a
majority in principal amount of the then outstanding Notes of all Series and
Classes for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such agreement or of modifying in any
manner the rights of the Noteholders or the Certificateholders; provided,
however, that no such amendment may (i) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, FTA Collections or (ii)
reduce the aforesaid percentage of the Notes the holders of which are required
to consent to any such amendment, without the consent of the holders of all
the outstanding Notes.
TERMINATION
The obligations of the Servicer and the Note Issuer pursuant to the
Servicing Agreement will terminate upon the payment to the Noteholders and
corresponding distribution to the Certificateholders of all amounts required
to be paid or distributed to them pursuant to the Servicing Agreement, the
Notes, the Note Indenture, the Certificates and the Trust Agreement.
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DESCRIPTION OF THE NOTES
The Notes of any Class will be issued by the Note Issuer to the Trust (as
such, the "Noteholder") pursuant to the terms of an Indenture (the "Note
Indenture") between the Note Issuer and the Note Trustee, in a principal
amount equal to the initial aggregate principal amount of the related Class of
Certificates. The following summary describes the material terms and
provisions of the Note Indenture. The particular terms of the Notes of any
Class will be established in a supplement to the Note Indenture and the
material terms thereof will be described in the Prospectus Supplement for the
related Series of Certificates. This summary does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the terms
and provisions of the Note Indenture and related supplements thereto, forms of
which are filed as exhibits to the Registration Statement.
GENERAL
The Notes may be issued in one or more Series, any one or more of which may
be comprised of one or more Classes. All Notes of the same Series will be
identical in all respects except for the denominations thereof, unless such
Series is comprised of more than one Class, in which case all Notes of the
same Class will be identical in all respects except for the denominations
thereof.
The Prospectus Supplement for a Series of Certificates will describe the
following terms of the related Series of Notes and, if applicable, the Classes
thereof: (a) the designation of the Series and, if applicable, the Classes
thereof, (b) the principal amount, (c) the annual rate at which interest
accrues (the "Note Interest Rate"), (d) the Payment Dates, (e) the scheduled
maturity date (the "Scheduled Maturity Date"), (f) the final termination date
of the Series (the "Final Maturity Date"), (g) the issuance date of the Series
(the "Series Issuance Date"), (h) the place or places for the payment of
principal, (i) the authorized denominations, (j) the provisions for optional
redemption by the Note Issuer, (k) the Expected Amortization Schedule for
principal of such Series and, if applicable, the Classes thereof, (l) the
terms, if any, on which any Series or Class of Notes will be subordinated to
any other Series or Class of Notes, (m) the FTA Charges as of the date of
issuance of such Series of Notes, and the portion of the FTA Charges
attributable to such Series or Class of Notes and (n) any other terms of such
Class that are not inconsistent with the provisions of the Notes and that will
not result in any Rating Agency reducing or withdrawing its then current
rating of any outstanding Class of Notes or Certificates (the notification in
writing by each Rating Agency to the Seller, the Servicer, the Note Trustee
and the Note Issuer that any action will not result in such a reduction or
withdrawal is referred to herein as the "Rating Agency Condition").
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer will grant to the Note Trustee a security interest in all of the Note
Issuer's right, title and interest in and to (a) all of the Transition
Property and all proceeds thereof, (b) the Sale Agreement, (c) the Servicing
Agreement, (d) the Collection Account and all amounts or investment property
on deposit therein or credited thereto from time to time, (e) all other
property of whatever kind owned from time to time by the Note Issuer, which
such other property is expected to be relatively small, (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 and (g) all proceeds in respect
of any or all of the foregoing; provided, however, that (1) the cash
contributed to the Note Issuer by the Seller which is not held in the Capital
Subaccount, including cash that has been released to the Note Issuer following
retirement of a related Series of Certificates, (2) net investment earnings
which have been released to the Note Issuer by the Note Trustee pursuant to
the terms of the Indenture and (3) the Overcollateralization Amount with
respect to a Series of Certificates that has been released to the Note Issuer
following retirement of such Series will not be covered by the foregoing
security interest. The foregoing assets to which the Note Issuer will grant
the Note Trustee a security interest are referred to collectively as the "Note
Collateral" herein.
COLLECTION ACCOUNT
The Note Issuer will establish, in the name of the Note Trustee, a
segregated identifiable account (the "Collection Account") with an Eligible
Institution. The Collection Account will be held by the Note Trustee for
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the benefit of the Noteholders. The Collection Account will consist of four
subaccounts: a general subaccount (the "General Subaccount"), a reserve
subaccount (the "Reserve Subaccount"), a subaccount for the
Overcollateralization Amount (the "Overcollateralization Subaccount") and a
capital subaccount (the "Capital Subaccount"). All amounts in the Collection
Account not allocated to any other subaccount will be allocated to the General
Subaccount. Unless the context indicates otherwise, references herein to the
Collection Account include each of the subaccounts contained therein.
An "Eligible Institution" means (a) the corporate trust department of the
Note Trustee or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) has either (A)
a long-term unsecured debt rating of "A" by S&P and Moody's or (B) a
certificate of deposit rating of "A-1" by S&P and "P-1" by Moody's, or any
other long-term, short-term or certificate of deposit rating acceptable to the
Rating Agencies and (ii) whose deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC").
Funds in the Collection Account may be invested in any of the following: (a)
direct obligations of, or 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 certain
depository institutions or trust companies, (c) commercial paper having, at
the time of investment, a rating in the highest rating category from each
Rating Agency, (d) money market funds which have the highest rating from each
Rating Agency, (e) demand deposits, time deposits and certificates of deposit
which are fully insured by the FDIC, (f) repurchase obligations with respect
to any security that is a direct obligation of, or fully guaranteed by, the
United States of America or certain agencies or instrumentalities thereof,
entered into with certain depository institutions or trust companies, or (g)
any other investment permitted by each Rating Agency (collectively, the
"Eligible Investments"), in each case which mature on or before the
Certificate Business Day preceding the next Payment Date. The Note Trustee and
the Certificate Trustee will have access to the Collection Account for the
purpose of making deposits in and withdrawals from the Collection Account in
accordance with the Note Indenture.
The Servicer will remit to the Collection Account, on each Remittance Date,
FTA Payments expected to have been received during the preceding Billing
Period, based on the Collections Curve, modified by the Excess Remittance or
Remittance Shortfall, if any, as described under "Servicing--Remittances to
Collection Account" herein.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of Notes of a Class of Notes
at the per annum rate either specified in or determined in the manner
specified in the related Prospectus Supplement and will be payable on the
Payment Dates specified in the related Prospectus Supplement. FTA Collections
and, if necessary, the amounts on deposit in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital Subaccount, will be used to
make interest payments to the Noteholders of each Class on each Payment Date
with respect thereto.
Principal of the Notes of each Class will be payable in the amounts and on
the Payment Dates specified in the related Prospectus Supplement, but only to
the extent that amounts in the Collection Account are available therefor, and
subject to the other limitations described below. See "--Allocations;
Payments" herein. Each Prospectus Supplement will set forth the Expected
Amortization Schedule for the related Series of Notes and, if applicable, the
Classes of such Series. On any Payment Date, the Note Issuer will make
payments on the Notes only until the outstanding principal balances thereof
have been reduced to the principal balances specified in the applicable
Expected Amortization Schedule for such Distribution Date. Any FTA Collections
in excess of amounts payable as (a) expenses of the Note Issuer and the Trust,
(b) payments of interest on and principal of the Notes, (c) allocations to the
Overcollateralization Subaccount and (d) allocations to the Capital Subaccount
(all as described herein under "Description of the Notes--Allocations;
Payments" herein) will be retained by the Note Trustee in the Reserve
Subaccount for payment on subsequent Payment Dates. However, if insufficient
FTA Collections are received with respect to any Payment Date, and amounts in
the Collection Account are not
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sufficient to make up the shortfall, principal of any Class of Notes may be
payable later than expected as described herein. See "Risk Factors--Unusual
Nature of the Transition Property" and "--Uncertain Distribution Amounts and
Weighted Average Life" herein. The entire unpaid principal amount of the Notes
of a Class will be due and payable on the date on which a Note Event of
Default has occurred and is continuing with respect to such Class, if the
holders of a majority in principal amount of the Notes of all Series then
outstanding have declared the Notes to be immediately due and payable. See "--
Note Events of Default; Rights Upon Note Event of Default" herein.
Unless the context requires otherwise, all references in this Prospectus to
principal of the Notes of a Series includes any premium that might be payable
thereon if Notes of such Series are redeemed, as described in the related
Prospectus Supplement.
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, any Series of Notes and
accordingly cause the Trust to redeem the related Series of Certificates if
the outstanding principal balance of the Series of Notes has been reduced to
less than five percent of the initial principal balance thereof. Unless
otherwise specified in the related Prospectus Supplement, notice of such
redemption will be given by the Note Issuer to each holder of Notes to be
redeemed by first-class mail, postage prepaid, mailed not less than five days
nor more than 25 days prior to the date of redemption.
OVERCOLLATERALIZATION AMOUNT
The Financing Order and Advice Letters give the Seller (or its assignee) the
right to recover from Customers an amount equal to the aggregate Transition
Costs together with designated amounts included therewith, including without
limitation amounts necessary to pay principal of and interest on each Series
of Notes at the applicable Note Interest Rate and all related fees and
expenses, and an additional amount (for any Series, the "Overcollateralization
Amount"). The required amount of such excess, as of any Payment Date (the
"Required Overcollateralization Level"), will be specified in the related
Prospectus Supplement. The Overcollateralization Amount will be collected
ratably over the life of the Certificates. The portion of FTA Collections
relating to the Overcollateralization Amount received with respect to any
Payment Date is referred to as the "Quarterly Overcollateralization
Collection" herein.
On each Payment Date, all FTA Collections will be applied first to pay or
provide for fees and expenses and interest on each Series of Notes at the
applicable Note Interest Rate. All other FTA Collections will be applied to
pay or provide for principal of the Notes, with a corresponding reduction in
the aggregate recoverable amount payable with respect to the FTA Charges. See
"--Allocations; Payments" herein. On any Payment Date, an amount equal to the
lesser of the Quarterly Overcollateralization Collection and amounts remaining
after payment of scheduled amounts due on the Notes will be deposited in the
Overcollateralization Subaccount. Amounts in the Overcollateralization
Subaccount will be invested in Eligible Investments, and the Note Issuer will
be entitled to earnings thereon, subject to the limitations described under
"--Allocations; Payments" herein. Amounts in the Overcollateralization
Subaccount are intended to cover any shortfall in FTA Collections that might
otherwise occur on any Payment Date or at the last Scheduled Maturity Date for
any Series or Class of Notes. Any amounts remaining in the
Overcollateralization Subaccount with respect to a particular Series of Notes
in excess of the amounts required to make distributions on the related Series
of Certificates in full at the Termination Date will be returned to the Note
Issuer, which may distribute such amounts to its members under the
circumstances described under "--Certain Covenants of the Note Issuer."
OTHER CREDIT ENHANCEMENT
Capital Subaccount. Upon the issuance of each Series of Notes, the Seller
will contribute capital to the Note Issuer in an amount specified in each
Prospectus Supplement, which will equal 0.50 percent of the initial principal
amount of each such Series of Notes. Such amount, less $100,000 in the
aggregate for all Series of Notes (with respect to each Series, the "Required
Capital Level"), will be deposited into the Capital Subaccount.
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On each Payment Date, the Note Trustee will draw on amounts in the Capital
Subaccount, if any, to the extent amounts available in the General Subaccount,
the Overcollateralization Subaccount and the Reserve Subaccount are
insufficient to make scheduled payments on the Notes and pay expenses of the
Note Issuer and the Trust. Deposits to the Capital Subaccount will be made as
described under "Description of the Notes--Allocations; Payments" herein.
Reserve Subaccount. FTA Collections available with respect to any Payment
Date in excess of amounts payable as expenses of the Note Issuer and the
Trust, as payments of interest and principal on the Notes, as allocations to
the Overcollateralization Subaccount and as allocations to the Capital
Subaccount (all as described under "--Allocations; Payments" herein), will be
allocated to the Reserve Subaccount. On each Payment Date, the Note Trustee
will draw on amounts in the Reserve Subaccount, if any, to the extent amounts
available in the General Subaccount are insufficient to make scheduled
payments on the Notes and pay expenses of the Note Issuer and the Trust.
Amounts in the Reserve Subaccount will be invested in Eligible Investments,
and the Note Issuer will be entitled to earnings thereon, subject to the
limitations described under "--Allocations; Payments" herein.
Other. For any Class of Notes, credit enhancement in addition to the true-up
adjustment mechanism, the Overcollateralization Amount, the Reserve Subaccount
and the Capital Subaccount may be provided with respect thereto. The amounts
and types of credit enhancement, and the provider of any credit enhancement,
if any, with respect to each Class of Notes will be described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
credit enhancement for a Class of Notes may cover one or more other Classes of
Notes.
If any such additional credit enhancement is provided with respect to a
Class of Notes offered hereby, the related Prospectus Supplement will include
a description of (a) the amount payable under such credit enhancement, (b) any
conditions to payment thereunder not otherwise described herein, (c) the
conditions (if any) under which the amount payable under such credit
enhancement may be reduced and under which such credit enhancement may be
terminated or replaced, (d) the priority of reimbursement to the provider of
the credit enhancement of amounts paid pursuant to the credit enhancement and
(e) any material provisions of any applicable agreement relating to such
credit enhancement. Additionally, in certain cases, the related Prospectus
Supplement may set forth certain information with respect to the provider of
any third-party credit enhancement, including (i) a brief description of its
principal business activities, (ii) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed to
do business, (iii) if applicable, the identity of regulatory agencies which
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders' equity or policyholders' surplus, if
applicable, as of a date specified in the related Prospectus Supplement.
The presence of any such additional credit enhancement is intended to
enhance the likelihood of receipt by the credit enhanced Noteholders of the
full amount of principal and interest due thereon in a timely manner and to
decrease the likelihood that such Noteholders will experience losses or delays
in payment. Any such additional credit enhancement for a Class of Notes will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal and interest thereon. If losses occur which
exceed the amount covered by any credit enhancement or which are not covered
by any credit enhancement, Noteholders will bear their allocable share of
deficiencies. In addition, if a form of additional credit enhancement covers
more than one Class of Notes, Noteholders of any such Class will be subject to
the risk that such credit enhancement will be exhausted by the claims of
Noteholders of other Classes or Notes.
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will apply, at the direction of the
Servicer, all amounts on deposit in the Collection Account, including net
earnings thereon (subject to the priority of withdrawals described in the
following paragraph), to pay the following amounts in the following priority:
(a) all amounts owed by the Note Issuer or the Trust to the Note Trustee,
the Delaware Trustee and the Certificate Trustee will be paid to such persons;
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(b) the Servicing Fee and all unpaid Servicing Fees from prior Payment Dates
will be paid to the Servicer;
(c) the Quarterly Administration Fee and all unpaid Quarterly Administration
Fees from prior Payment Dates will be paid to the Administrator;
(d) so long as no Event of Default has occurred or would be caused by such
payment, all other Operating Expenses will be paid to the persons entitled
thereto;
(e) Quarterly Interest and any overdue Quarterly Interest (together with, to
the extent lawful, interest on such overdue Quarterly Interest at the
applicable Note Interest Rate) with respect to each Series of Notes will be
transferred to Certificate Trustee, as Noteholder, for distribution to the
Certificateholders;
(f) principal on the Notes payable as a result of a Note Event of Default or
on the Final Maturity Date for any Notes will be transferred to the
Certificates Trustee, as Noteholder, for distribution to the
Certificateholders;
(g) funds necessary to pay Quarterly Principal for any Series of Notes based
on priorities described in each Prospectus Supplement will be transferred to
the Certificate Trustee, as Noteholder, for distribution to the applicable
Certificateholders;
(h) unpaid Operating Expenses will be paid to the persons entitled thereto;
(i) an amount up to the excess of the Required Overcollateralization Level
with respect to all outstanding Series of Certificates over the amount in the
Overcollateralization Subaccount as of such Payment Date will be allocated to
the Overcollateralization Subaccount;
(j) an amount up to the excess of the Required Capital Level with respect to
all outstanding Series of Notes over the amount in the Capital Subaccount as
of such Payment Date will be allocated to the Capital Subaccount;
(k) funds up to the net earnings on amounts in the Collection Account for
the prior quarter without cumulation will be released to the Note Issuer;
(l) if any Series of Notes has been retired as of such Payment Date, the
excess of the amount in the Overcollateralization Subaccount over the
aggregate Required Overcollateralization Level with respect to all Series of
Notes remaining outstanding will be released to the Note Issuer;
(m) if any Series of Notes has been retired as of such Payment Date, the
excess of the amount in the Capital Subaccount over the aggregate Required
Capital Level with respect to all Series of Notes remaining outstanding will
be released to the Note Issuer;
(n) the balance, if any, will be allocated to the Reserve Subaccount for
distribution on subsequent Payment Dates; and
(o) following the repayment of all outstanding Series of Notes, the balance,
if any, will be released to the Note Issuer.
If on any Payment Date funds on deposit in the General Subaccount are
insufficient to make the transfers contemplated by clauses (a) through (g)
above, the Note Trustee will (x) first, draw from amounts on deposit in the
Reserve Subaccount, (y) second, draw from amounts on deposit in the
Overcollateralization Subaccount, and (z) third, draw from amounts on deposit
in the Capital Subaccount, up to the amount of such shortfall, in order to
make the transfers described above. If on any Payment Date when there is more
than one Series of Notes outstanding, funds on deposit in the Collection
Account are insufficient to make the transfers contemplated by clauses (e) and
(f) above, such funds will be allocated among the various Series pro rata, as
specified in the related Prospectus Supplement.
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For purposes of the foregoing allocations:
"Quarterly Administration Fee" means the quarterly fee payable to Edison
as the Administrator under the Administrative Services Agreement between
Edison and the Note Issuer, which will be specified in each Prospectus
Supplement.
"Quarterly Interest" means, with respect to any Payment Date and any
Series of Notes, the quarterly interest for such date and Series as
specified in the related Prospectus Supplement.
"Quarterly Principal" means, with respect to any Payment Date and any
Series of Notes, the excess, if any, of the then outstanding principal
balance of such Series of Notes over the outstanding principal balance
specified for such Payment Date on the applicable Expected Amortization
Schedule.
Payments to the Noteholders of a Series will be made to such holders as
specified in the related Prospectus Supplement.
ACTIONS BY NOTEHOLDERS
The Certificate Trustee, on behalf of the Trust as sole initial holder of
the Notes, has the right to vote and give consents and waivers in respect of
modifications to any Class or Series of Notes thereunder and to the provisions
of certain Basic Documents under the Note Indenture. Subject to certain
exceptions, the holders of a majority of the aggregate outstanding amount of
the Certificates of all Series (or, if less than all Series or Classes are
affected, the affected Series or Class or Classes) shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Certificate Trustee, or exercising any trust or power
conferred on the Certificate Trustee under the Trust Agreement, including any
right of the Certificate Trustee as holder of the Notes of the corresponding
Series or Class or Classes, in each case unless a different percentage is
specified in the Trust Agreement; provided that: (1) such direction shall not
be in conflict with any rule of law or with the Trust Agreement and would not
involve the Certificate Trustee in personal liability or expense; (2) the
Certificate Trustee shall not have determined that the action so directed
would be unjustly prejudicial to the holders of Certificates of such Series or
Class or Classes not taking part in such direction; (3) the Certificate
Trustee may take any other action deemed proper by the Certificate Trustee
which is not inconsistent with such direction; and (4) if a Note Event of
Default with respect to such Series or Class or Notes shall have occurred and
be continuing, such direction shall not obligate the Certificate Trustee to
vote more than a corresponding majority of the related Notes held by the Trust
in favor of declaring the unpaid principal amount of the Notes of all Series
and accrued interest thereon to be due and payable or directing any action by
the Note Trustee with respect to such Note Event of Default. In circumstances
under which the Certificate Trustee is required to seek instructions from the
holders of the Certificates of any Class with respect to any such action or
vote, the Certificate Trustee will take such action or vote for or against any
proposal in proportion to the principal amount of the corresponding Class, as
applicable, of Certificates taking the corresponding position. See
"Description of the Certificates--Voting of Notes" herein.
NOTE EVENTS OF DEFAULT; RIGHTS UPON NOTE EVENT OF DEFAULT
An "Event of Default" with respect to any Series of Notes (a "Note Event of
Default") is defined in the Note Indenture as being: (a) a default for five
days or more in the payment of any interest on any Note; (b) a default in the
payment of the then unpaid principal of any Note of any Series on the Final
Maturity Date for such Series; (c) a default in the payment of the redemption
price for any Note on the redemption date therefor; (d) a default in the
observance or performance of any covenant or agreement of the Note Issuer made
in the Note Indenture and the continuation of any such default for a period of
30 days after notice thereof is given to the Note Issuer by the Note Trustee
or to the Note Issuer and the Note Trustee by the holders of at least
25 percent in principal amount of the Notes of such Series then outstanding;
(e) any representation or warranty made by the Note Issuer in the Note
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured
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within 30 days after notice thereof is given to the Note Issuer by the Note
Trustee or to the Note Issuer and the Note Trustee by the holders of at least
25 percent in principal amount of the Note Indenture of such Series then
outstanding; or (f) certain events of bankruptcy, insolvency, receivership or
liquidation of the Note Issuer.
If a Note Event of Default should occur and be continuing with respect to
any Series of Notes, the Note Trustee or holders of not less than a majority
in principal amount of the Notes of all Series then outstanding may declare
the principal of the Notes of all Series to be immediately due and payable.
Such declaration may, under certain circumstances set forth in the Note
Indenture, be rescinded by the holders of a majority in principal amount of
the Notes of all Series then outstanding.
If the Notes of all Series have been declared to be due and payable
following a Note Event of Default, the Note Trustee may, in its discretion,
either sell the Transition Property or elect to have the Note Issuer maintain
possession of the Transition Property and continue to apply FTA Collections as
if there had been no declaration of acceleration. There is likely to be a
limited market, if any, for the Transition Property following a foreclosure
thereon, in light of the preceding default, the unique nature of the
Transition Property as an asset and other factors discussed herein. In
addition, the Note Trustee is prohibited from selling the Transition Property
following a Note Event of Default with respect to any Series, other than a
default in the payment of any principal or redemption price or a default for
five days or more in the payment of any interest on any Note of any Series
unless (a) the holders of all the outstanding Notes of all Series consent to
such sale, (b) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding Notes of all Series
or (c) the Note Trustee determines that the proceeds of the Transition
Property would not be sufficient on an ongoing basis to make all payments on
the Notes of all Series as such payments would have become due if the Notes
had not been declared due and payable, and the Note Trustee obtains the
consent of the holders of 66 2/3 percent of the aggregate outstanding amount
of the Notes of all Series.
Subject to the provisions of the Note Indenture relating to the duties of
the Note Trustee, in case a Note Event of Default will occur and be
continuing, the Note Trustee will be under no obligation to exercise any of
the rights or powers under the Notes at the request or direction of any of the
holders of Notes of any Series if the Note Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities
which might be incurred by it in complying with such request. Subject to such
provisions for indemnification and certain limitations contained in the Note
Indenture, the holders of a majority in principal amount of the outstanding
Notes of all Series (or, if less than all Classes are affected, the affected
Class or Classes) will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Note Trustee and the
holders of a majority in principal amount of the Notes of all Series then
outstanding may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the Note Indenture that cannot be
modified without the waiver or consent of all of the holders of the
outstanding Notes of all Classes affected thereby.
With respect to the Notes, no holder of any Note of any Series will have the
right to institute any proceeding with respect to the Notes, unless (a) such
holder previously has given to the Note Trustee written notice of a continuing
Event of Default with respect to such Series, (b) the holders of not less than
25 percent in principal amount of the outstanding Notes of all Series have
made written request of the Note Trustee to institute such proceeding in its
own name as Note Trustee, (c) such holder or holders have offered the Note
Trustee reasonable indemnity, (d) the Note Trustee has for 60 days failed to
institute such proceeding and (e) no direction inconsistent with such written
request has been given to the Note Trustee during such 60-day period by the
holders of a majority in principal amount of the outstanding Notes of all
Series.
In addition, the Servicer, the Note Trustee, each Noteholder, the
Certificate Trustee and the Certificateholders will covenant that they will
not at any time institute against the Note Issuer or the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law.
Neither the Certificate Trustee nor the Note Trustee in its individual
capacity, nor any holder of any ownership interest in the Note Issuer, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable
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for the payment of the principal of or interest on the Notes of any Series or
for the agreements of the Note Issuer contained in the Note Indenture.
CERTAIN COVENANTS OF THE NOTE ISSUER
The Note Issuer may not consolidate with or merge into any other entity,
unless (a) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state thereof or the
District of Columbia, (b) such entity expressly assumes by an indenture
supplemental to the Note Indenture the Note Issuer's obligation to make due
and punctual payments upon the Notes and the performance or observance of
every agreement and covenant of the Note Issuer under the Note Indenture, (c)
no Event of Default will have occurred and be continuing immediately after
such merger or consolidation, (d) the Rating Agency Condition will have been
satisfied with respect to such transaction, (e) the Note Issuer has received
an opinion of counsel to the effect that such consolidation or merger would
have no material adverse tax consequence to the Note Issuer, the Trust, any
Noteholder or any Certificateholder and such consolidation or merger complies
with the Notes and all conditions precedent therein provided for relating to
such transaction have been complied with and (f) any action as is necessary to
maintain the lien and security interest created by the Note Indenture will
have been taken.
The Note Issuer may not convey or transfer substantially all of its
properties or assets to any person or entity, unless (a) the person or entity
acquiring the properties and assets (i) is a United States citizen or an
entity organized under the laws of the United States, any state thereof or the
District of Columbia, (ii) expressly assumes by an indenture supplemental to
the Note Indenture the Note Issuer's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement
and covenant of the Note Issuer under the Notes, (iii) expressly agrees by
such supplemental indenture that all right, title and interest so conveyed or
transferred will be subject and subordinate to the rights of Noteholders, (iv)
unless otherwise specified in the supplemental indenture referred to in clause
(ii) above, expressly agrees to indemnify, defend and hold harmless the Note
Issuer against and from any loss, liability or expense arising under or
related to the Note Indenture and the Notes, and (v) expressly agrees by means
of such supplemental indenture that such person (or if a group of persons,
then one specified person) shall make all filings with the Commission (and any
other appropriate person) required by the Exchange Act in connection with the
Notes, (b) no Event of Default will have occurred and be continuing
immediately after such transaction, (c) the Rating Agency Condition will have
been satisfied with respect to such transaction, (d) the Note Issuer has
received an opinion of counsel to the effect that such transaction will not
have any material adverse tax consequence to the Note Issuer, the Trust, any
Noteholder or any Certificateholder and such conveyance or transfer complies
with the Note Indenture and all conditions precedent therein provided for
relating to such transaction have been complied with and (e) any action as is
necessary to maintain the lien and security interest created by the Note
Indenture shall have been taken.
The Note Issuer will not, among other things, (a) except as expressly
permitted by the Note Indenture, sell, transfer, exchange or otherwise dispose
of any of the assets of the Note Issuer, unless directed to do so by the Note
Trustee, (b) claim any credit on, or make any deduction from the principal or
interest payable in respect of, the Notes (other than amounts properly
withheld under the Code) or assert any claim against any present or former
Noteholder because of the payment of taxes levied or assessed upon any part of
the Transition Property and the other Note Collateral, (c) terminate its
existence, dissolve or liquidate in whole or in part, (d) permit the validity
or effectiveness of the Notes to be impaired, (e) permit the lien of the Note
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 Notes except as may be expressly permitted by the Indenture,
(f) permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance, other than the lien and security interest created by the
Indenture, to be created on or extend to or otherwise arise upon or burden the
collateral or any part thereof or any interest therein or the proceeds thereof
or (g) permit the lien of the Note Indenture not to constitute a valid first
priority security interest in the Transition Property and the other Note
Collateral.
The Note Issuer may not engage in any business other than financing,
purchasing, owning and managing the Transition Property in the manner
contemplated by the Notes, the Sale Agreement, the Servicing Agreement,
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the Trust Agreement, the Note Purchase Agreement between the Note Issuer and
the Trust, or certain related documents (collectively, the "Basic Documents")
and activities incidental thereto.
The Note Issuer will not issue, incur, assume, guarantee or otherwise become
liable for any indebtedness except for the Notes.
The Note Issuer will not, except for any Eligible Investments as
contemplated by the Basic Documents, make any loan or advance or credit to, or
guarantee, endorse or otherwise become contingently liable 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. The Note Issuer will not, except as contemplated by the
Basic Documents, make any expenditure (by long-term or operating lease or
otherwise) for capital assets (either realty or personalty). The Note Issuer
will not, directly or indirectly, make payments to or distributions from the
Collection Account except in accordance with the Basic Documents.
The Note Issuer will not make any payments, distributions or dividends to
any holder of beneficial interests in the Note Issuer in respect of such
beneficial interest for any Billing Period unless no Note Event of Default
shall have occurred and be continuing and any such distributions do not cause
the book value of the remaining equity in the Note Issuer to decline below
0.50 percent of the initial principal amount of all Notes issued and
outstanding pursuant to the Indenture.
The Note Issuer will cause the Servicer to deliver to the Note Trustee and
the Certificate Trustee the annual accountant's certificates, compliance
certificates, reports regarding distributions and statements to Noteholders
and the Certificateholders required by the Servicing Agreement.
REPORTS TO NOTEHOLDERS
With respect to each Series of Notes, on or prior to each Payment Date, the
Servicer will prepare and provide to the Note Issuer, the Infrastructure Bank,
the Note Trustee and the Certificate Trustee a statement (the "Quarterly
Servicer's Certificate") to be delivered to the Noteholders on such Payment
Date. With respect to each Series of Notes, each such statement to be
delivered to Noteholders will include (to the extent applicable) the following
information (and any other information so specified in the related Prospectus
Supplement) as to the Notes of such Series with respect to such Payment Date
or the period since the previous Payment Date, as applicable:
(a) the amount of the distribution to Noteholders allocable to principal;
(b) the amount of the distribution to Noteholders allocable to interest;
(c) the aggregate outstanding principal balance of the Notes, after giving
effect to payments allocated to principal reported under (a) above; and
(d) the difference, if any, between the amount specified in (c) above and
the principal amount scheduled to be outstanding on such date according to the
Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Note Trustee will
mail to each person who at any time during such calendar year has been a
Noteholder and received any payment thereon, a statement containing certain
information for the purposes of such Noteholder's preparation of Federal and
state income tax returns. See "Certain Federal Income Tax Consequences" and
"State Taxation" herein.
ANNUAL COMPLIANCE STATEMENT
The Note Issuer will be required to file annually with the Note Trustee, the
Certificate Trustee and the Rating Agencies a written statement as to the
fulfillment of its obligations under the Notes.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trust will issue the Certificates pursuant to the Trust Agreement, the
form of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary describes the material terms
and provisions of the Trust Agreement. The particular terms of the
Certificates of any Class will be established in a supplement to the Trust
Agreement, and the material terms thereof will be described in the related
Prospectus Supplement. The following summary description of the Certificates
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Trust Agreement and the Certificates, a form of which is
also filed as an exhibit to the Registration Statement.
The Certificates will be issued in fully registered form only. Each Class of
Certificates offered hereby will represent a fractional undivided interest in
the corresponding Class of Notes, all monies due and to become due under such
corresponding Class of Notes, payments pursuant to any related Swap Agreement
and funds from time to time deposited with the Trustee in certain accounts
relating to the Trust. Each Certificate of each Class will correspond to a pro
rata share of the outstanding principal amount of the corresponding Class of
the Notes held in the Trust and will be issued in minimum denominations
specified in the applicable Prospectus Supplement.
Each Class of Certificates will bear interest at the rate per annum borne by
the corresponding Class of the Notes, unless a Swap Agreement is entered into
in connection with the issuance of any Class of Certificates, as described in
the related Prospectus Supplement, in which case a Series or Class of
Certificates may bear interest at a variable rate. See "Description of the
Notes--Interest and Principal" herein. Payments of interest and principal made
in respect of any Class of Notes are required to be passed through to holders
of the corresponding Class of Certificates at the times and in the manner
described herein. See "--Payments and Distributions" below and "Description of
the Notes--Interest and Principal" herein.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates. The Certificates will
not be guaranteed or insured by the State of California, the Infrastructure
Bank, the Trust or any other governmental agency or instrumentality or by the
Seller or any of its affiliates. Neither the full faith and credit nor the
taxing power of the State of California or any agency or instrumentality
thereof is pledged to the distributions of principal of, or interest on, the
Certificates. The Certificates represent beneficial interests in the Trust
only.
STATE PLEDGE
Pursuant to Section 841(c) of the PU Code, the Infrastructure Bank, on
behalf of the State of California, pledges and agrees with the Trust and the
Holders of the Certificates that the State of California shall neither limit
nor alter the FTA Charges, the Transition Property, or the Financing Order or
Advice Letters relating thereto, or any rights thereunder, until the
Certificates, together with interest thereon, are fully paid and discharged,
provided nothing contained in this pledge and agreement shall preclude such
limitation or alteration if and when adequate provision shall be made by law
for the protection of the Holders (the "State Pledge").
PAYMENTS AND DISTRIBUTIONS
The Certificate Trustee is scheduled to receive payments of interest on and
principal of the Notes (in each case, the amounts paid to any Series or Class
of the Notes will be determined from time to time in accordance with the
provisions described under "Description of the Notes--Allocations; Payments"
herein) on each Payment Date.
The Certificate Trustee will distribute on each Distribution Date to the
holders of each Class of Certificates all payments of principal and interest
with respect to the corresponding Class of Notes (other than payments
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received following a payment default in respect of such Class of Notes), or,
in lieu of such interest, payments under the related Swap Agreement with
respect to interest, the receipt of which is confirmed by the Certificate
Trustee by 1:00 p.m. (New York City time) on such Distribution Date or, if
such receipt is confirmed after 1:00 p.m. (New York City time) on such
Distribution Date, then on the following business day. Each such distribution
other than the final distribution with respect to any Certificate will be made
by the Certificate Trustee to the holders of record of the Certificates of the
applicable Class on the Record Date in respect of such Distribution Date. If a
payment of principal or interest on any Class of the Notes (other than a
payment received following a payment default in respect of such Class of
Notes) is not received by the Certificate Trustee on a Distribution Date but
is received within five days thereafter, it will be distributed to such
holders of record on the date receipt thereof is confirmed by the Certificate
Trustee, if such receipt is confirmed by the Certificate Trustee by 1:00 p.m.
(New York City time) or, if such receipt is confirmed after 1:00 p.m. (New
York City time), then on the following business day. If such payment is
received by the Certificate Trustee after such five-day period, it will be
treated as a payment received following a payment default in respect of such
Class of Notes and distributed as described below. The final distribution with
respect to any Certificate, however, will be made only upon presentation and
surrender of such Certificate at the office or agency of the Certificate
Trustee specified in the notice given by the Certificate Trustee with respect
to such final distribution.
Any payment received by the Certificate Trustee following a payment default
in respect of any Class of the Notes ("Special Payments") will be distributed
on the later of (i) the date such receipt is confirmed by the Certificate
Trustee and (ii) the date on which any Special Payment is scheduled to be
distributed by the Certificate Trustee (a "Special Distribution Date").
However, in the case of any such Special Payment receipt of which is confirmed
after 1:00 p.m. (New York City time), such Special Payment will be distributed
on the following day. The Certificate Trustee will mail notice to the holders
of record of Certificates of the applicable Class as of the most recent Record
Date not less than 20 days prior to the Special Distribution Date on which any
Special Payment is scheduled to be distributed in respect of Certificates of
such Class stating such anticipated Special Distribution Date. Each
distribution of any such Special Payment will be made by the Certificate
Trustee on the Special Distribution Date to the holders of record of the
Certificates of such Class as of the most recent Record Date. See "--Events of
Default" below.
The Trust Agreement requires that the Certificate Trustee establish and
maintain, for the Trust and for the benefit of the holders of each Class of
Certificates, one or more non-interest bearing accounts (a "Certificate
Account") for the deposit of payments on the Notes corresponding to such
Class. Pursuant to the terms of the Trust Agreement, the Certificate Trustee
is required to deposit any payments received by it with respect to any Class
of Notes in the corresponding Certificate Account. All amounts so deposited
will be distributed by the Certificate Trustee to holders of the applicable
Class of Certificates on a Distribution Date or a Special Distribution Date,
as appropriate, unless a different date for distribution of such amount is
specified herein.
At such time, if any, as the Certificates of any Class are issued in the
form of Definitive Certificates and not to DTC or its nominee, distributions
by the Certificate Trustee from the Certificate Account with respect to such
Class on a Distribution Date or a Special Distribution Date will be made by
check mailed to each holder of a Definitive Certificate of such Class of
record on the applicable Record Date at its address appearing on the register
maintained with respect to the Certificates of such Series, or, upon
application by a holder of any Class of Certificates in the principal amount
of $1,000,000 or more to the Certificate Trustee not later than the applicable
Record Date, by wire transfer to an account maintained by the payee in New
York, New York. The final distribution for each Class of Certificates,
however, will be made only upon presentation and surrender of the Certificates
of such Class at the office or agency of the Certificate Trustee specified in
the notice or agency given by the Certificate Trustee of such final
distribution. The Certificate Trustee will mail such notice of the final
distribution to the Certificateholders of such Class, specifying the date set
for such final distribution and the amount of such distribution.
If any Special Distribution Date or other date specified herein for
distribution of any distributions to Certificateholders is not a Certificate
Business Day, distributions scheduled to be made on such Special Distribution
Date or other date may be made on the next succeeding Certificate Business Day
and no interest
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shall accrue upon such distribution during the intervening period.
"Certificate Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions or trust companies in New York, New York or
San Francisco, California are authorized or obligated by law, regulation or
executive order to remain closed.
VOTING OF THE NOTES
The Certificate Trustee, as sole initial holder of the Notes, has the right
to vote and give consents and waivers in respect of modifications to any Class
of Notes. Subject to certain exceptions, the holders of a majority of the
aggregate outstanding amount of the Certificates of all Series (or, if less
than all Series or Classes are affected, the affected Series or Class or
Classes) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Certificate Trustee,
or exercising any trust or power conferred on the Certificate Trustee under
the Trust Agreement, including any right of the Certificate Trustee as holder
of the Notes of the corresponding Series or Class or Classes, in each case
unless a different percentage is specified in the Trust Agreement; provided
that: (1) such direction shall not be in conflict with any rule of law or with
the Trust Agreement and would not involve the Certificate Trustee in personal
liability or expense; (2) the Certificate Trustee shall not have determined
that the action so directed would be unjustly prejudicial to the holders of
Certificates of such Series or Class or Classes not taking part in such
direction; and (3) the Certificate Trustee may take any other action deemed
proper by the Certificate Trustee which is not inconsistent with such
direction. If the Certificate Trustee is required to seek instructions from
the holders of the Certificates of any Class with respect to any such action
or vote, the Certificate Trustee will take such action or vote for or against
any proposal in proportion to the principal amount of the corresponding Class,
as applicable, or Certificates taking the corresponding position.
EVENTS OF DEFAULT
An event of default with respect to any Class of Certificates under the
Trust Agreement (a "Certificate Event of Default") is defined as the
occurrence and continuance of a Note Event of Default or a breach by the State
of California of the State Pledge. For a description of the Note Events of
Default, see "Description of the Notes--Note Events of Default; Rights Upon
Note Event of Default" herein.
The Trust Agreement provides that, if a Note Event of Default shall have
occurred and be continuing with respect to any Class of Certificates, the
Certificate Trustee may and, upon the written direction of holders
representing not less than a majority of the aggregate outstanding principal
amount of the Certificates of all Series, shall vote all the Notes of all
Series in favor of declaring the unpaid principal amount of all Series of
Notes and accrued interest thereon to be due and payable. In addition, the
Trust Agreement provides that, if a Note Event of Default with respect to any
Class of Certificates shall have occurred and be continuing, the Certificate
Trustee may and, upon the written direction of holders representing not less
than a majority of the aggregate outstanding principal amount of the
Certificates of all Series, shall vote all the Notes of all Series in favor of
directing the Note Trustee as to the time, method and place of conducting any
proceeding for any remedy available to the Note Trustee or of exercising any
trust or power conferred on the Note Trustee under the Note Indenture.
As an additional remedy, if a Note Event of Default shall have occurred and
be continuing with respect to a particular Series or Class of Certificates,
the Trust Agreement provides that the Certificate Trustee may and, upon the
written direction of the holders of Certificates representing not less than a
majority of the aggregate outstanding principal amount of the Certificates of
such Series or Class, will sell any Note or Notes, without recourse to or
warranty by the Certificate Trustee or any Certificateholder, to any person.
The Certificate Trustee may, but shall not be obligated to refrain, in its
sole discretion, from liquidating any Notes if (i) the Certificate Trustee
determines that amounts receivable from the Note Collateral with respect to
the applicable Class of Notes will be sufficient to pay (a) all principal of
and interest on that Class of Notes in accordance with its terms without
regard to any declaration of acceleration thereof and (b) all sums due to the
Certificate Trustee and any other administrative expenses specified in the
Trust Agreement, and (ii) holders of Certificates representing not
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less than a majority of the aggregate outstanding principal amount of the
Certificates of all Series have not directed the Certificate Trustee to sell
any Note or Notes. In addition, the Certificate Trustee is prohibited from
selling any Notes following certain nonpayment Note Events of Default unless
(x) the Certificate Trustee determines that the amounts receivable from the
Note Collateral with respect to each Class of Notes are not sufficient to pay
in full the principal of and accrued interest on the Notes of each such Class
and to pay all sums due to the Certificate Trustee and other administrative
expenses specified in the Trust Agreement and the Certificate Trustee obtains
the written consent of holders of Certificates of each such Class representing
66 2/3 percent of the aggregate outstanding principal amount of each such
Class of Certificates or (y) the Certificate Trustee obtains the consent of
100 percent of the aggregate outstanding principal amount of each such Class
of Certificates. Any proceeds received by the Certificate Trustee upon any
such sale will be deposited in the Certificate Account for such Class and will
be distributed to the holders of Certificates of such Class on a Special
Distribution Date.
If a Certificate Event of Default in the form of a breach by the State of
California of the State Pledge has occurred, then, as the sole and exclusive
remedy for such breach, the Certificate Trustee, in its own name and as
trustee of an express trust, as holder of the Notes, shall be, to the extent
permitted by State and Federal law, entitled and empowered to institute any
suits, actions or proceedings at law, in equity or otherwise, to enforce the
State Pledge and to collect any monetary damages as a result of a breach
thereof, and may prosecute any such suit, action or proceeding to final
judgment or decree.
Any funds (a) representing payments received with respect to any Series or
Class of Notes in default, (b) representing the proceeds from the sale by the
Certificate Trustee of any Class of Notes or (c) otherwise arising from a
Certificate Event of Default, held by the Certificate Trustee in a Certificate
Account shall, to the extent practicable, be invested and reinvested by the
Certificate Trustee in Eligible Investments permitted under the Trust
Agreement maturing in not more than 60 days or such lesser time as is required
for the distribution of any such funds on a Special Distribution Date, pending
the distribution of such funds to Certificateholders as described herein.
The Trust Agreement provides that, with respect to the Certificates of any
Class, within 30 days after the occurrence of any event that is, or after
notice or lapse of time or both would become, a Certificate Event of Default
with respect to such Class of Certificates (a "Default"), the Certificate
Trustee will give to the Infrastructure Bank, the Note Trustee and the holders
of such Certificates notice, transmitted by mail, of all such uncured or
unwaived Defaults known to it. However, except in the case of a Default
relating to the payment of principal of or interest on any of the Notes, the
Certificate Trustee will be protected in withholding such notice if in good
faith it determines that the withholding of such notice is in the interests of
the holders of the Certificates of such Class.
The Trust Agreement contains a provision entitling the Certificate Trustee
to be indemnified by the holders of the Certificates before proceeding to
exercise any right or power under the Trust Agreement at the request or
direction of Certificateholders.
In certain cases, the holders of Certificates representing not less than a
majority of the outstanding aggregate principal amount of the Certificates of
all Series may waive any past Default or Certificate Event of Default under
the Trust Agreement and thereby annul any previous direction given by the
Certificate Trustee with respect thereto, except a Default (i) in the deposit
or distribution of any payment on the Notes or Special Payment required to be
made with respect to any Class of Certificates, (ii) in the payment of
principal of or interest on any of the Notes, and (iii) in respect of any
covenant or provision of the Trust Agreement that cannot be modified or
amended without the consent of the holder of each Certificate of all Classes
affected hereby. Upon any such direction, the Certificate Trustee shall vote a
corresponding percentage of the corresponding Class of Notes in favor of such
waiver. The Notes provide that, with certain exceptions, the holders of not
less than a majority in aggregate unpaid principal amount of the Notes of all
Series may waive any Note Event of Default or any event that is, or after
notice or passage of time, or both, would be, a Note Event of Default.
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The Trust may hold two or more Classes of Notes, each of which may have a
different interest rate and, in the case of different Classes, a different or
potentially different schedule of the repayment of principal and different
rights in the security therefor. Accordingly, the holders of Certificates of
each Class may have divergent or conflicting interests from the holders of
Certificates of other Classes.
OPTIONAL REDEMPTION
The Trust shall redeem any Series of Certificates if the related of Series
Notes is redeemed. Unless otherwise specified in the related Prospectus
Supplement, notice of such redemption will be given by the Trust to each
holder of Certificates to be redeemed by first-class mail, postage prepaid,
mailed not less than five days nor more than 25 days prior to the date of
redemption.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, Special Distribution Date or any other date
specified in the Trust Agreement for distribution of any payments with respect
to any Class of Certificates, the Certificate Trustee will include with each
distribution to holders of Certificates of such Class a statement with respect
to such distribution to be made on such Distribution Date, Special
Distribution Date or other date, as the case may be, setting forth the
following information, in each case, to the extent received by the Certificate
Trustee from the Note Trustee, no later than two Certificate Business Days
prior to such Distribution Date, Special Distribution Date or other date
specified herein for such distribution:
(a) the amount of the distribution to Certificateholders allocable to (i)
principal and (ii) interest, in each case per $1,000 original principal amount
of each Class of Certificates;
(b) the aggregate outstanding principal balance of the Certificates, after
giving effect to distributions allocated to principal reported under (a)
above; and
(c) the difference, if any, between the amount specified in (b) above and
the principal amount scheduled to be outstanding on such date according to the
Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Certificate
Trustee will mail to each person who at any time during such calendar year has
been a Certificateholder and received any distribution thereon, a statement
containing certain information for the purposes of such Certificateholder's
preparation of Federal and state income tax returns. See "Certain Federal
Income Tax Consequences" and "State Taxation" herein.
AMENDMENTS
The Infrastructure Bank (with the prior written approval of the Note Issuer)
and the Certificate Trustee may amend the Trust Agreement from time to time,
without the consent of the Certificateholders of any Series, (1) to add to the
covenants of the Infrastructure Bank for the benefit of the
Certificateholders, or to surrender any right or power conferred upon the
Infrastructure Bank; (2) to correct or supplement any provision in the Trust
Agreement or in any supplemental agreement which may be defective or
inconsistent with any other provision in the Trust Agreement or in any
supplemental agreement or to make any other provisions with respect to matters
or questions arising under the Trust Agreement; provided that any such action
shall not adversely affect the interests of the Certificateholders; (3) to
cure any ambiguity or correct any mistake; (4) to qualify, if necessary, the
Trust Agreement (including any supplement thereto) under the Trust Indenture
Act of 1939, as amended, or (5) to provide for the issuance of the
Certificates of any Series or Class, or to provide for the execution and
delivery of any Swap Agreement.
In addition, the Infrastructure Bank (with the prior written approval of the
Note Issuer) and the Certificate Trustee may amend the Trust Agreement with
the consent of Certificateholders holding not less than a majority
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of the aggregate outstanding principal amount of the Certificates of all
affected Classes. No amendment, however, may, without the consent of each
Certificateholder affected thereby, (a) reduce in any manner the amount of, or
delay the timing of, deposits or distributions on any Certificate, (b) permit
the disposition of any Note held by the Trust except as permitted by the Trust
Agreement, or otherwise deprive any Certificateholder of the benefit of the
ownership of the related Notes held by the Trust, (c) reduce the aforesaid
percentage of the aggregate outstanding principal amount of the Certificates
the holders of which are required to consent to any such amendment, (d) modify
the provisions in the Trust Agreement relating to amendments with the consent
of Certificateholders, except to increase the percentage vote necessary to
approve amendments or to add further provisions which cannot be modified or
waived without the consent of all Certificateholders, or (e) adversely affect
the status of the Trust as a grantor trust taxable as a corporation for
federal income tax purposes. Promptly following the execution of any amendment
to the Trust Agreement (other than an amendment described in the preceding
paragraph), the Certificate Trustee will furnish written notice of the
substance of such amendment to each Certificateholder.
Any supplement to the Trust Agreement executed in connection with the
issuance of one or more new Series of Certificates will not be considered an
amendment to the Trust Agreement.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder or group of Certificateholders
of any Series or of all outstanding Series of record holding Certificates
evidencing not less than ten percent of the aggregate outstanding principal
amount of the Certificates of such Series or all Series, as applicable, the
Certificate Trustee will afford such Certificateholder or Certificateholders
access during business hours to the current list of Certificateholders of such
Series or of all outstanding Series, as the case may be, for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Agreement.
The Trust Agreement does not provide for any annual or other meetings of
Certificateholders.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates will be issued in definitive form and will be transferable and
exchangeable at the office of the registrar identified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no service charge will be made for any such registration or
transfer of such Certificates, but the owner may be required to pay a sum
sufficient to cover any tax or other governmental charge.
Each Class of Certificates will be issued in the minimum initial
denominations set forth in the related Prospectus Supplement and, except as
otherwise provided in the related Prospectus Supplement, in integral multiples
thereof.
Distributions of interest and principal will be made on each Distribution
Date to the Certificateholders in whose names the Certificates were registered
on the related Record Date.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates initially may be Book-Entry Certificates, which are initially
represented by one or more certificates registered in the name of Cede, as
nominee of DTC, or another securities depository, and are available only in
the form of book-entries. Any Book-Entry Certificates will initially be
registered in the name of Cede, the nominee of DTC. Holders may also hold
Certificates of a Class through Centrale de Livraison de Valeurs Mobilieres
S.A. ("CEDEL") or the Euroclear System ("Euroclear") (in Europe), if they are
participants in such systems or indirectly through organizations that are
participants in such systems.
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Cede, as nominee for DTC, will hold the global Certificate or Certificates.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective Depositaries (as defined herein) which
in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York will act as depositary
for Euroclear (in such capacities, the "Depositaries").
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations, which are the Participants, and facilitate the
settlement of securities transactions between Participants through electronic
book-entry changes in accounts of its Participants, thereby eliminating the
need for physical movement of securities. Participants include underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system also is available to Indirect Participants, which are others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants (as defined herein) and Euroclear
Participants (as defined herein) will occur in accordance with their
respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing
system by its Depositary. Cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving bonds in DTC, and
making or receiving distributions in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent settlement processing and dated the Certificate Business Day
following the DTC settlement date. Such credits or any transactions in such
Certificates settled during such processing will be reported to the relevant
Euroclear or CEDEL Participant on such Certificate Business Day. Cash received
in CEDEL or Euroclear as a result of sales of Certificates by or through a
CEDEL Participant or a Euroclear Participant to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the Certificate Business
Day following settlement in DTC.
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Certificates may do so only through Participants and Indirect
Participants. In addition, Certificateholders will receive all distributions
of principal and interest on the Certificates from the Certificate Trustee
through DTC and its Participants. Under a book-entry format,
Certificateholders will receive distributions after the related Distribution
Date, as the case may be, because, while distributions are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward
such distributions to its Participants, which thereafter will be required to
forward them to Indirect Participants or holders of beneficial interests in
the Certificates. The Certificate Trustee, the Seller, the Servicer and any
paying agent, transfer agent or registrar may treat the registered holder in
whose name any Certificate is registered (expected to be Cede) as the absolute
owner thereof (whether or not such Certificate is overdue and notwithstanding
any notice of ownership or writing thereon or any notice to the contrary) for
the purpose of making distributions and for all other purposes.
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Unless and until Definitive Certificates (as defined herein) are issued, it
is anticipated that the only "holder" of Book-Entry Certificates of any Series
will be Cede, as nominee of DTC. Certificateholders will only permitted to
exercise their rights as Certificateholders indirectly through Participants
and DTC. All references herein to actions by Certificateholders thus refer to
actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders refer to distributions, notices, reports and statement to
Cede, as the registered holder of the Certificates, for distribution to the
beneficial owners of the Certificate in accordance with DTC procedures.
While any Book-Entry Certificates of a Series are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Book-Entry Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Book-Entry
Certificates. Participants with whom Certificateholders have accounts with
respect to Book-Entry Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificateholders. Accordingly, although Certificateholders will
not possess physical certificates, the Rules provide a mechanism by which
Certificateholders will receive distributions and will be able to transfer
their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of holders of
beneficial interests in the Certificates to pledge Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of such Certificates, may be limited due to the lack of a
Definitive Certificate for such Certificates.
DTC has advised the Certificate Trustee that it will take any action
permitted to be taken by a Certificateholder under the Trust Agreement and the
related Prospectus Supplement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC has advised the Certificate Trustee that it may take actions
with respect to the Certificateholders' Interest that might conflict with
other of its actions with respect thereto.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to a Series of Certificates offered hereby. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of securities and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 29 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium
office (the "Euroclear Operator"), under contract with Euroclear Clearance
System S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative. The Cooperative
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establishes policy for Euroclear on behalf of Euroclear Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" herein. CEDEL or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Trust Agreement or the
relevant Prospectus Supplement on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
Certificates of a Class will be issued in registered form to
Certificateholders, or their nominees, rather than to DTC (such Certificates
being referred to herein as "Definitive Certificates") only under the
circumstances provided in the Trust Agreement, which will include if (a) DTC
advises the Certificate Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Certificates of such Class and the Certificate
Trustee or the Infrastructure Bank is unable to locate a qualified successor,
(b) the Infrastructure Bank (with the prior written approval of the Note
Issuer) elects to terminate the book-entry system through DTC or (c) after the
occurrence of an Event of Default under the terms of the Trust Agreement,
holders of Certificates representing not less than 50 percent of the aggregate
outstanding principal amount of the Certificates of all Series advise DTC in
writing that the continuation of a book-entry system through DTC (or a
successor thereto) to the exclusion of any physical certificates being issued
to Certificateholders is no longer in the best interests of
Certificateholders. Upon issuance of Definitive Certificates of a Class, such
Certificates will be transferable directly (and not exclusively on a book-
entry basis) and registered holders will deal directly with the Certificate
Trustee with respect to transfers, notices and distributions.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive securities representing the Certificates and instructions for
registration, the Certificate Trustee will issue the Certificates in the form
of Definitive Certificates, and thereafter the Certificate Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Trust Agreement and the related Prospectus Supplement.
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Distribution of principal of and interest on the Certificates will be made
by the Certificate Trustee directly to Certificateholders in accordance with
the procedures set forth herein and in the Trust Agreement and the related
Prospectus Supplement. Interest distributions and principal distributions will
be made to Certificateholders in whose names the Definitive Certificates were
registered at the close of business on the related Record Date. Distributions
will be made by check mailed to the address of such Certificateholder as it
appears on the register maintained by the Certificate Trustee. The final
distribution on any Certificate (whether Definitive Certificates or
Certificates registered in the name of Cede), however, will be made only upon
presentation and surrender of such Certificate on the final distribution date
at such office or agency as is specified in the notice of final distribution
to Certificateholders. The Certificate Trustee will provide such notice to
registered Certificateholders not later than the fifth day of the month of the
final distribution.
Definitive Certificates will be transferable and exchangeable at the offices
of the transfer agent and registrar, which initially will be the Certificate
Trustee. No service charge will be imposed for any registration of transfer or
exchange, but the transfer agent and registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
CONDITIONS OF ISSUANCE OF ADDITIONAL SERIES
The issuance of any additional Series of Certificates is subject to the
following conditions, among others:
(a) appropriate documentation required by the Note Indenture and Trust
Agreement, including supplements thereto, shall have been authorized, executed
and delivered by all parties required to do so by the terms of the relevant
documents;
(b) an Issuance Advice Letter shall have been submitted to the CPUC and
shall have become effective;
(c) the Rating Agency Condition shall have been satisfied with respect to
such issuance;
(d) such issuance will not result in an adverse tax consequence to the Trust
or the Certificateholders;
(e) no Event of Default shall have occurred and be continuing under the Note
Indenture or the Trust Agreement;
(f) as of the date of issuance, the Trust shall have sufficient funds
available to pay the purchase price for the related Series of Notes, and all
conditions to the issuance of a new series of Notes and Certificates shall
have been satisfied or waived; and
(g) delivery by the Note Issuer to the Note Trustee of certain certificates
and opinions specified in the Note Indenture.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Certificates will be included in gross income for federal
income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of a
Certificate, and is based on the opinion of Special Counsel. This discussion
represents the opinion of Special Counsel, subject to the qualifications set
forth therein or herein. Additional federal income tax considerations relevant
to a particular Series may be set forth in the related Prospectus Supplement.
This discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), currently applicable Treasury regulations and
judicial and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax
consequences to Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Certificateholder in light of that Certificateholder's
circumstances, and some Certificateholders may be subject to special tax rules
and limitations not discussed below (e.g., life insurance companies, tax-
exempt organizations, financial institutions or broker-dealers). CONSEQUENTLY,
EACH PROSPECTIVE CERTIFICATEHOLDER IS URGED TO CONSULT ITS OWN TAX ADVISER IN
DETERMINING THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND ANY OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF A CERTIFICATE.
For purposes of this discussion, "U.S. Person" means a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
United States persons has the authority to control all substantial decisions
of the trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source). The term "U.S. Certificateholder" means any U.S. Person and any
other person to the extent that income attributable to its interest in a
Certificate is effectively connected with that person's conduct of a U.S.
trade or business. The term "non-U.S. Certificateholder" means any person
other than a U.S. Certificateholder.
The discussion assumes that a Certificate is issued in registered form, has
all payments denominated in U.S. dollars and not determined by reference to
the value of any other currency and has a term that exceeds one year.
Moreover, the discussion assumes that any original issue discount ("OID") on
the Certificate (i.e., any excess of the stated redemption price at maturity
of the Certificate over its issue price) is less than a de minimis amount
(i.e., 0.25 percent of its stated redemption price at maturity multiplied by
the Certificate's weighted average maturity), all within the meaning of the
OID regulations. Moreover, the discussion assumes that the Certificates are of
a type, as set forth below, which Special Counsel is of the opinion will
represent ownership of debt for federal income tax purposes. The applicable
Prospectus Supplement will set forth a discussion of any additional material
tax consequences with respect to Certificates not conforming to the foregoing
assumptions.
TREATMENT OF THE CERTIFICATES AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Certificates will represent ownership of debt and the
Trust will not be treated as an association or publicly traded partnership
taxable as a corporation.
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TAXATION OF INTEREST INCOME OF U.S. CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
Certificates represent ownership of debt obligations for federal income tax
purposes, stated interest on a beneficial interest in a Certificate will be
taxable as ordinary income when received or accrued by U.S. Certificateholders
in accordance with their method of accounting. Generally, interest received on
the Certificates will constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense.
Market Discount. A U.S. Certificateholder who purchases (including a
purchase at original issuance for a price less than the issue price) an
interest in a Certificate at a discount that exceeds any unamortized OID may
be subject to the "market discount" rules of sections 1276 through 1278 of the
Code. These rules generally provide that, subject to a statutorily-defined de
minimis exception, if a U.S. Certificateholder acquires a Certificate at a
market discount (i.e., at a price below its stated redemption price at
maturity or its revised issue price if it was issued with OID) and thereafter
recognizes gain upon a disposition of the Certificate (or disposes of it in
certain non-recognition transactions, including by gift), the lesser of such
gain (or appreciation, in the case of an applicable non-recognition
transaction) or the portion of the market discount that accrued while the
Certificate was held by such holder will be treated as ordinary interest
income at the time of the disposition. In addition, a U.S. Certificateholder
who acquired a Certificate at a market discount would be required to treat as
ordinary interest income the portion of any principal payment attributable to
accrued market discount on such Certificate. Generally, market discount
accrues ratably over the life of a debt instrument unless the debt holder
elects to accrue market discount on a constant yield to maturity basis. It is
not clear how either the ratable accrual or constant yield accrual
methodologies apply to instruments such as the Certificates where the timing
of principal payments is uncertain. Investors should consult their own tax
advisors concerning the accrual of market discount. The market discount rules
also provide that a U.S. Certificateholder who acquires a Certificate at a
market discount may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry the Certificate until the holder disposes of the Certificate
in a taxable transaction.
A U.S. Certificateholder who acquired a Certificate at a market discount may
elect to include market discount in income as the discount accrues, either on
a ratable basis or, if elected, on a constant yield basis. The current
inclusion election, once made, applies to all market discount obligations
acquired on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the Internal
Revenue Service (the "IRS"). If a holder elects to include market discount in
income in accordance with the preceding sentence, the foregoing rules with
respect to the recognition of ordinary income on sales, principal payments and
certain other dispositions of the Certificates and the deferral of interest
deductions on indebtedness related to the investor certificates will not
apply.
Amortizable Bond Premium. A U.S. Certificateholder who purchases an interest
in a Certificate at a premium may elect to offset the premium against interest
income under the constant yield method over the remaining term of the
Certificate in accordance with the provisions of section 171 of the Code. A
holder that elects to amortize bond premium must reduce the tax basis in the
related Certificate by the amount of bond premium used to offset interest
income. If a Certificate purchased at a premium is redeemed in full prior to
its maturity, a holder who has elected to amortize bond premium should be
entitled to a deduction in the taxable year of redemption in an amount equal
to the excess, if any, of the adjusted basis of the Certificates over the
greater of the redemption price or the amount payable on maturity.
SALE OR EXCHANGE OF CERTIFICATES
Upon a disposition of an interest in a Certificate, a U.S. Certificateholder
generally will recognize gain or loss equal to the difference between (i) the
amount of cash and the fair market value of any other property received (other
than amounts attributable to, and taxable as, accrued stated interest) and
(ii) the U.S. Certificateholder's adjusted basis in its interest in the
Certificate. The adjusted basis in the interest in the Certificate will equal
its cost, increased by any OID or market discount included in income with
respect to the
72
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interest in the Certificate prior to its disposition and reduced by any
payments reflecting principal or OID previously received with respect to the
interest in the Certificate and any amortized premium. Subject to the OID and
market discount rules, gain or loss will generally be capital gain or loss if
the interest in the Certificate was held as a capital asset. Capital losses
generally may be used by a corporate taxpayer only to offset capital gains and
by an individual taxpayer only to the extent of capital gains plus $3,000 of
other income.
NON-U.S. CERTIFICATEHOLDERS
In general, a non-U.S. Certificateholder will not be subject to U.S. federal
income tax on interest (including OID) on a beneficial interest in a
Certificate unless (i) the non-U.S. Certificateholder actually or
constructively owns ten percent or more of the total combined voting power of
all classes of stock of the Seller entitled to vote (or of a profits or
capital interest of the Trust characterized as a partnership), (ii) the non-
U.S. Certificateholder is a controlled foreign corporation that is related to
the Seller (or the Trust treated as a partnership) through stock ownership,
(iii) the non-U.S. Certificateholder is a bank which receives interest as
described in Code Section 881(c)(3)(A) or (iv) such interest is contingent
interest described in Code Section 871(h)(4). To qualify for the exemption
from taxation, the last U.S. Person in the chain of payment prior to payment
to a non-U.S. Certificateholder (the "Withholding Agent") must have received
(in the year in which a payment of interest or principal occurs or in either
of the two preceding years) a statement that (i) is signed by the non-U.S.
Certificateholder under penalties of perjury, (ii) certifies that the non-U.S.
Certificateholder is not a U.S. Person and (iii) provides the name and address
of the non-U.S. Certificateholder. The statement may be made on a Form W-8 or
substantially similar substitute form, and the non-U.S. Certificateholder must
inform the Withholding Agent of any change in the information on the statement
within 30 days of the change. If a Certificate is held through a securities
clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the Withholding
Agent. However, in that case, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the non-U.S. Certificateholder to the
organization or institution holding the Certificate on behalf of the non-U.S.
Certificateholder. The U.S. Treasury Department is considering implementation
of further certification requirements aimed at determining whether the issuer
of a debt obligation is related to holders thereof.
Generally, any gain or income realized by a non-U.S. Certificateholder upon
retirement or disposition of an interest in a Certificate (other than gain
attributable to accrued interest or OID, which is addressed in the preceding
paragraph) will not be subject to U.S. federal income tax, provided that in
the case of a Certificateholder that is an individual, such Certificateholder
is not present in the United States for 183 days or more during the taxable
year in which such retirement or disposition occurs. Certain exceptions may be
applicable, and an individual non-U.S. Certificateholder should consult a tax
adviser.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of a Certificate to a registered owner who
is not an "exempt recipient" and who fails to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the manner required. Generally, individuals are not exempt recipients whereas
corporations and certain other entities are exempt recipients. Payments made
in respect of a U.S. Certificateholder must be reported to the IRS, unless the
U.S. Certificateholder is an exempt recipient or otherwise establishes an
exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) investor certificates to non-U.S. Certificateholders,
temporary Treasury regulations provide that backup withholding and information
reporting will not apply to payments with respect to which either requisite
certification has been received or an exemption has otherwise been established
(provided that neither the Certificate Trustee nor a paying agent has actual
knowledge that the holder is a U.S. Person or that the conditions of any other
exemption are not in fact satisfied). Payments of the proceeds of the sale of
a Certificate to or through a foreign office of a broker that is a U.S.
Person, a controlled foreign corporation for United States federal income tax
purposes or a foreign person 50 percent or more of whose gross income is
effectively connected with the conduct of a trade or
73
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business within the United States for a specified three-year period are
currently subject to certain information reporting requirements, unless the
payee is an exempt recipient or such broker has evidence in its records that
the payee is not a U.S. Person and no actual knowledge that such evidence is
false and certain other conditions are met. Temporary Treasury regulations
indicate that such payments are not currently subject to backup withholding.
Under current Treasury regulations, payments of the proceeds of a sale to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the payee certifies under penalties of
perjury as to his or her status as a non-U.S. Person and certain other
qualifications (and no agent of the broker who is responsible for receiving or
reviewing such statement has actual knowledge that it is incorrect) and
provides his or her name and address or the payee otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Certificateholder would be allowed as a refund or a credit against such
Certificateholder's U.S. federal income tax, provided that the required
information is furnished to the IRS.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Certificates will
be exempt from California personal income tax, but not exempt from the
California franchise tax applicable to banks and corporations. Gain or loss,
if any, resulting from an exchange or redemption of Certificates will be
recognized in the year of the exchange or redemption. Present California law
taxes both long-term and short-term capital gains at the rates applicable to
ordinary income. Interest on indebtedness incurred or continued by a
Certificateholder in connection with the purchase of Certificates will not be
deductible for California personal income tax purposes.
OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Certificates under any state or local tax law other than that of the State of
California. Each investor should consult its own tax adviser regarding state
and local tax consequences.
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain
collective investment funds or insurance company general or separate accounts
in which such plans, accounts or arrangements are invested, that are subject
to the fiduciary responsibility and prohibited transaction provisions of ERISA
and/or Section 4975 of the Code (collectively, "Plans"), and on persons who
are fiduciaries with respect to Plans, in connection with the investment of
assets that are treated as "plan assets" of any Plan for purposes of applying
Title I of ERISA and Section 4975 of the Code ("Plan Assets"). ERISA imposes
on Plan fiduciaries certain general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Generally, any person who has discretionary authority or control respecting
the management or disposition of Plan Assets, and any person who provides
investment advice with respect to Plan Assets for a fee or other
consideration, is a fiduciary with respect to such Plan Assets.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to
a Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject
to penalties imposed under ERISA and/or excise taxes imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transactions generally are set forth in Section
406 of ERISA and Section 4975 of the Code.
74
<PAGE>
Any fiduciary or other Plan investor considering whether to purchase the
Certificates of any Class or Series on behalf or with Plan Assets of any Plan
should consult with its legal advisors and refer to the related Prospectus
Supplement for guidance regarding the ERISA Considerations applicable to the
Certificates offered thereby.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, except as provided in the applicable Prospectus Supplement,
assets of such plans may be invested in the Certificates of any Class or
Series without regard to the ERISA considerations described herein, subject to
the provisions of other applicable federal and state law. However, any such
plan that is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
USE OF PROCEEDS
The Trust will use the net proceeds received from each sale of a Series of
Certificates to purchase the related Note or Notes from the Note Issuer. The
Note Issuer will use such proceeds to purchase the Transition Property from
the Seller and to pay issuance costs related to the Notes. The Seller will use
such proceeds to repay outstanding debt and reduce the amount of outstanding
equity.
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through underwriters named
in the related Prospectus Supplement (the "Underwriters") by a negotiated firm
commitment underwriting and public reoffering by the Underwriters or such
other underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Note Issuer and the Trust intend that Certificates will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Certificates may be made through a combination of such
methods.
The distribution of Certificates may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, Underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession
to certain other dealers. Underwriters, dealers and agents that participate in
the distribution of the Certificates of a Series may be deemed to be
underwriters and any discounts or commissions received by them from the Trust
and any profit on the resale of the Certificates by them may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from the Trust will be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Seller, the Note Issuer
and the Trust, Underwriters and agents who participate in the distribution of
the Certificates may be entitled to indemnification by the Seller and the Note
Issuer against certain liabilities, including liabilities under the Securities
Act.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
75
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RATINGS
It is a condition of issuance of each Class of Certificates that at the time
of issuance such Class receive the rating indicated in the related Prospectus
Supplement, which will be in one of the four highest categories, from at least
one Rating Agency. Each Class of Notes will receive the same rating from the
applicable Rating Agencies as the corresponding Class of Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Certificates upon initial issuance will not be
lowered or withdrawn by a Rating Agency at any time thereafter. If a rating of
any Class of Certificates is revised or withdrawn, the liquidity of such Class
of Certificates may be adversely affected. In general, ratings address credit
risk and do not represent any assessment of the rate of FTA Collections.
LEGAL MATTERS
Certain legal matters relating to the Notes and certain federal income tax
consequences of the issuance of the Notes will be passed upon by Latham &
Watkins, Los Angeles, California, counsel to the Seller and the Note Issuer.
Certain legal matters relating to the Certificates and certain federal income
tax consequences of the issuance of the Certificates will be passed upon by
Brown & Wood LLP, San Francisco, California, counsel to the Trust. Certain
legal matters relating to the Certificates will be passed upon by Cravath,
Swaine & Moore, New York, New York, counsel to the Underwriters.
76
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Act...................................................................... 40
Actual FTA Payments...................................................... 48
Administrator............................................................ 18
Advice Letters........................................................... 13
Annual Accountant's Report............................................... 49
Base Calculation Model................................................... 34
Basic Documents.......................................................... 60
Billing Period........................................................... 18
Book-Entry Certificates.................................................. 20
Calculation Date......................................................... 35
Capital Subaccount....................................................... 17, 53
Cede..................................................................... 20
CEDEL.................................................................... 66
CEDEL Participants....................................................... 68
Certificate Account...................................................... 62
Certificate Business Day................................................. 63
Certificate Event of Default............................................. 16, 63
Certificate Trustee...................................................... 8
Certificateholders....................................................... 3
Certificates............................................................. 1, 9
Class.................................................................... 1, 9
Closing Date............................................................. 36
Code..................................................................... 21, 71
Collection Account....................................................... 52
Collections Curve........................................................ 48
Commission............................................................... 3
Cooperative.............................................................. 68
CPUC..................................................................... 11
Customers................................................................ 12
Default.................................................................. 64
Definitive Certificates.................................................. 69
Delaware Business Trust Act.............................................. 28
Delaware Trustee......................................................... 9
Depositaries............................................................. 67
Distribution Date........................................................ 14
DTC...................................................................... 3, 20
Edison................................................................... 1, 8
Eligible Institution..................................................... 53
Eligible Investments..................................................... 53
ERISA.................................................................... 21
ESPs..................................................................... 25
Estimated FTA Payments................................................... 48
Euroclear................................................................ 66
Euroclear Operator....................................................... 68
Euroclear Participants................................................... 68
Event of Default......................................................... 16, 57
Excess Remittance........................................................ 48
Exchange Act............................................................. 3
Expected Amortization Schedule........................................... 16
</TABLE>
77
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INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FDIC................................................................... 53
Fee Agreement.......................................................... 39
FERC................................................................... 26
Final Maturity Date.................................................... 52
Financing Order........................................................ 11
Financing Order Anniversary............................................ 35
FTA Charge............................................................. 12
FTA Collections........................................................ 13
FTA Payments........................................................... 13
General Subaccount..................................................... 17, 53
H.R. 1230.............................................................. 23
holder................................................................. 20
Indirect Participants.................................................. 20
Infrastructure Bank.................................................... 1, 8
Initial Transition Property............................................ 36
IRS.................................................................... 72
ISO.................................................................... 25
Issuance Advice Letter................................................. 12
Monthly Servicer's Certificate......................................... 49
Moody's................................................................ 28
non-U.S. Certificateholder............................................. 71
Note Collateral........................................................ 52
Note Event of Default.................................................. 16, 57
Note Indenture......................................................... 52
Note Interest Rate..................................................... 52
Note Issuer............................................................ 1, 8
Note Trustee........................................................... 11
Noteholder............................................................. 52
Notes.................................................................. 1, 7, 10
OID.................................................................... 71
Operating Expenses..................................................... 18
Overcollateralization Amount........................................... 54
Overcollateralization Subaccount....................................... 17, 53
Participants........................................................... 20
Parties in Interest.................................................... 74
Payment Date........................................................... 14
Plan Assets............................................................ 74
Plans.................................................................. 74
Proposition 218........................................................ 23
PU Code................................................................ 11
PX..................................................................... 25
Quarterly Administration Fee........................................... 57
Quarterly Interest..................................................... 57
Quarterly Overcollateralization Collection............................. 54
Quarterly Principal.................................................... 57
Quarterly Servicer's Certificate....................................... 60
Rate Freeze Period..................................................... 33
Rating Agency.......................................................... 20
Rating Agency Condition................................................ 52
Record Date............................................................ 14
</TABLE>
78
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INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Registration Statement................................................... 3
Remittance Date.......................................................... 48
Remittance Shortfall..................................................... 48
Required Capital Level................................................... 17, 54
Required Overcollateralization Level..................................... 54
Reserve Subaccount....................................................... 17, 53
Residential Customers.................................................... 12
Rules.................................................................... 68
S&P...................................................................... 28
Sale Agreement........................................................... 8
Scheduled Final Distribution Date........................................ 15
Scheduled Maturity Date.................................................. 52
Securities Act........................................................... 3
Seller................................................................... 1, 8
Series................................................................... 1, 9
Series Issuance Date..................................................... 52
Servicer................................................................. 1, 8
Servicer Business Day.................................................... 44
Servicer Defaults........................................................ 50
Servicing Agreement...................................................... 8
Servicing Fee............................................................ 19
Small Commercial Customers............................................... 12
Special Counsel.......................................................... 22
Special Distribution Date................................................ 62
Special Payments......................................................... 62
State Pledge............................................................. 61
Statute.................................................................. 7
Subsequent Transfer Date................................................. 36
Subsequent Transition Property........................................... 36
Swap Agreement........................................................... 7
Termination Date......................................................... 15
Terms and Conditions..................................................... 69
Territory................................................................ 12
Transition Costs......................................................... 7, 11
Transition Property...................................................... 13, 34
True-Up Mechanism Advice Letter.......................................... 13
True-Up Mechanism Calculation Model...................................... 35
Trust.................................................................... 1, 8
Trust Agreement.......................................................... 8
U.S. Certificateholder................................................... 71
U.S. Person.............................................................. 71
Underwriters............................................................. 75
Utilities................................................................ 7
Variance Trigger......................................................... 14
Withholding Agent........................................................ 73
</TABLE>
- --------
1. The "CPUC" is referred to as the "Commission" in the Financing Order.
2. The "Statute" is referred to as "AB 1890" in the Financing Order.
3. The "Note Issuer" is referred to as the "SPE" in the Financing Order.
4. The "Trust" is referred to either as the "Issuer" or the "SPT" in the
Financing Order.
5. The "Certificates" are referred to as the "Rate Reduction Bonds" in the
Financing Order.
79
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE SELLER, THE NOTE ISSUER, THE TRUST, THE INFRASTRUCTURE BANK,
THE UNDERWRITERS OR ANY DEALER, SALESPERSON OR OTHER PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Reports to Holders......................................................... S-3
Prospectus Supplement Summary.............................................. S-4
[Additional Risk Factors Relating to the Class Certificates]............ S-12
Description of the Certificates............................................ S-12
Summary of Certain Provisions of the Series Supplement..................... S-15
Summary of Certain Provisions of the Swap Agreement........................ S-15
The Swap Counterparty...................................................... S-15
Description of the Notes................................................... S-15
Description of the Transition Property..................................... S-18
Certain Distribution and Weighted Average Life Considerations.............. S-19
The Seller and Servicer.................................................... S-20
Servicing.................................................................. S-20
Certain Federal Income Tax Consequences.................................... S-21
State Taxation............................................................. S-24
ERISA Considerations....................................................... S-25
Underwriting............................................................... S-27
Ratings.................................................................... S-27
Legal Matters.............................................................. S-28
Index of Principal Definitions............................................. S-29
Financial Statements....................................................... F-1
<CAPTION>
PROSPECTUS
<S> <C>
Available Information...................................................... 3
Reports to Holders......................................................... 3
Incorporation of Certain Documents by Reference............................ 4
Prospectus Supplement...................................................... 4
Table of Contents.......................................................... 5
Prospectus Summary......................................................... 7
Risk Factors............................................................... 22
Energy Deregulation and New California Market Structure.................... 32
Description of the Transition Property..................................... 32
Certain Distribution and Weighted Average Life Considerations.............. 38
The Trust.................................................................. 39
The Infrastructure Bank.................................................... 40
The Note Issuer............................................................ 41
The Seller and Servicer.................................................... 42
Servicing.................................................................. 47
Description of the Notes................................................... 52
Description of the Certificates............................................ 61
Certain Federal Income Tax Consequences.................................... 71
State Taxation............................................................. 74
ERISA Considerations....................................................... 74
Use of Proceeds............................................................ 75
Plan of Distribution....................................................... 75
Ratings.................................................................... 76
Legal Matters.............................................................. 76
Index of Principal Definitions............................................. 77
</TABLE>
UNTIL (90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT), ALL
DEALERS EFFECTING TRANSACTIONS IN THE RELATED SERIES OF CERTIFICATES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS AND A PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CALIFORNIA
INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE
TRUST SCE-1
$ (APPROXIMATE)
RATE REDUCTION CERTIFICATES
SERIES 199 -
----------------
PROSPECTUS SUPPLEMENT
----------------
[NAME OF UNDERWRITER(S)]
, 199
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder
other than underwriting discounts and commissions.
<TABLE>
<S> <C>
Registration Statement Fee....................................... $303.03
Printing and Engraving Expenses.................................. *
Trustees' Fees and Expenses...................................... *
Legal Fees and Expenses.......................................... *
Blue Sky Fees and Expenses....................................... *
Accountants' Fees and Expenses................................... *
Rating Agency Fees............................................... *
Miscellaneous Fees and Expenses.................................. *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 18-108 of the Delaware Limited Liability Company Act provides that
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement, a limited liability company may and has
the power to indemnify and hold harmless any member or other person from and
against any and all claims and demands whatsoever. Section 17 of the Limited
Liability Company Agreement of the Registrant provides that, to the full
extent permitted by applicable law, the Registrant shall indemnify any member
or officer of the Registrant for any loss, damage or claim incurred by such
member or officer by reason of any act or omission performed or omitted in
good faith on behalf of the Registrant in a manner reasonably believed to be
within the scope of the authority conferred on such member or officer by the
Limited Liability Company Agreement, except that the Registrant shall not
indemnify any such member or officer for any loss, act or omission incurred by
such member or officer by reason of willful misconduct with respect to such
acts or omissions.
Section 317 of the California Corporation Law (the "California Law")
provides that a corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any proceeding or
action by reason of the fact that he or she is or was a director, officer,
employee or other agent of such corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation or other enterprise. Section 317 also grants authority to
a corporation to include in its articles of incorporation indemnification
provisions in excess of that permitted in Section 317, subject to certain
limitations.
Article Eighth of the Articles of Incorporation of Southern California
Edison Company (the "Member") authorizes the Member to provide indemnification
of directors, officers, employees, and other agents through bylaw provisions,
agreements with agents, votes of shareholders or disinterested directors, or
otherwise, in excess of the indemnification otherwise permitted by Section 317
of the California Law, subject only to the applicable limits set forth in
Section 204 of the California Law. The Registrant believes that the officers
of the Registrant are serving at the request of the Member and are therefore
entitled to such indemnity from the Member.
Article VI of the Bylaws of the Member contains provisions implementing the
authority granted in Article Eighth of the Articles of Incorporation. The
Bylaws provide for the indemnification of any director or officer of the
Member, or any person acting at the request of the Member as a director,
officer, employee or agent of another corporation or other enterprise, for any
threatened, pending or completed action, suit or proceeding to the fullest
extent permissible under California Law and the Articles of Incorporation,
subject to the terms of any
II-1
<PAGE>
agreement between the Member and such a person; provided that, no such person
shall be indemnified: (i) except to the extent that the aggregate of losses to
be indemnified exceeds the amount of such losses for which the director or
officer is paid pursuant to any director's or officer's liability insurance
policy maintained by the Member; (ii) on account of any suit in which judgment
is rendered for an accounting of profits made from the purchase or sale of
securities of the Member pursuant to Section 16(b) of the Securities Exchange
Act of 1934; (iii) if a court of competent jurisdiction finally determines
that the indemnification is unlawful; (iv) for any acts or omissions involving
intentional misconduct or knowing and culpable violation of law; (v) for acts
or omissions that the director or officer believes to be contrary to the best
interests of the Member or its shareholders, or that involve the absence of
good faith; (vi) for any transaction from which the director or officer
derived an improper personal benefit; (vii) for acts or omissions that show a
reckless disregard for the director's or officer's duty to the Member or its
shareholders in circumstances in which the director or officer was aware, or
should have been aware, in the ordinary course of performing his or her
duties, of a risk of serious injury to the Member or its shareholders; (viii)
for acts or omissions that constitute an unexcused pattern of inattention that
amount to an abdication of the director's or officer's duties to the Member or
its shareholders; (ix) for costs, charges, expenses, liabilities and losses
arising under Section 310 or 316 of the California Law; or (x) as to
circumstances in which indemnity is expressly prohibited by Section 317. The
exclusions set forth in clauses (iv) through (ix) above shall apply only to
indemnification with regard to any action brought by or in the right of the
Member for breach of duty to the Member or its shareholders. The Bylaws also
provide that the Member shall indemnify any director or officer in connection
with (a) a proceeding (or part thereof) initiated by him or her only if such
proceeding (or part thereof) was authorized by the Board of Directors or (b) a
proceeding (or part thereof), other than a proceeding by or in the name of the
Member to procure a judgment in its favor, only if any settlement of such a
proceeding is approved in writing by the Member. Indemnification shall cover
all costs, charges, expenses, liabilities and losses, including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to
be paid in settlement, reasonably incurred or suffered by the director or
officer.
The Member has directors' and officers' liability insurance policies in
force insuring directors and officers of the Member and its subsidiaries. The
Member has also entered into written agreements with each of its directors
incorporating the indemnification provisions of the Bylaws.
II-2
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
+3.1 Certificate of Formation.
+3.2 Limited Liability Company Agreement.
*4.1 Form of Note Indenture.
*4.2 Form of Trust Agreement.
*4.3 Form of Note.
*4.4 Form of Rate Reduction Certificate.
*5.1 Opinion of Latham & Watkins with respect to legality of the Notes.
*5.2 Opinion of Brown & Wood LLP with respect to legality of the Rate
Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to federal tax matters.
*10.1 Form of Transition Property Purchase and Sale Agreement.
*10.2 Form of Transition Property Servicing Agreement.
*10.3 Form of Note Purchase Agreement.
*10.4 Form of Fee and Indemnity Agreement.
*23.1 Consent of Latham & Watkins (included in its opinion filed as Exhibit
5.1).
*23.2 Consents of Brown & Wood LLP (included in its opinions filed as Exhibits
5.2 and 8.1).
*24.1 Power of Attorney.
99.1 Application for Financing Order.
99.2 Financing Order.
*99.3 Form of Issuance Advice Letter.
*99.4 Application to Infrastructure Bank.
*99.5 Order of Infrastructure Bank.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant on behalf of the California Infrastructure and
Economic Development Bank Special Purpose Trust SCE-1 (the "Trust") hereby
undertakes as follows:
(a)(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement; (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a twenty
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; (iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that (a)(1)(i) and (a)(1)(ii) will not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934), with respect to the Trust that
is incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15
above, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under Section 305(b)(2)
of the Act.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Rosemead, State of California, on
September 17, 1997.
SCE FUNDING LLC
as Registrant
By /s/ Theodore F. Craver, Jr.
___________________________________
Theodore F. Craver, Jr.
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED ON SEPTEMBER 17, 1997 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Theodore F. Craver, Jr. President (Principal Executive
___________________________________________ Officer)
Theodore F. Craver, Jr.
/s/ Mary C. Simpson Treasurer (Principal Financial
___________________________________________ and Accounting Officer)
Mary C. Simpson
Southern California Edison Company, Member
as Member
</TABLE>
By /s/ Theodore F. Craver, Jr.
___________________________________
Theodore F. Craver, Jr.
Vice President & Treasurer
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
+3.1 Certificate of Formation.
+3.2 Limited Liability Company Agreement.
*4.1 Form of Note Indenture.
*4.2 Form of Trust Agreement.
*4.3 Form of Note.
*4.4 Form of Rate Reduction Certificate.
*5.1 Opinion of Latham & Watkins with respect to legality of the Notes.
*5.2 Opinion of Brown & Wood LLP with respect to legality of the Rate
Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to federal tax matters.
*10.1 Form of Transition Property Purchase and Sale Agreement.
*10.2 Form of Transition Property Servicing Agreement.
*10.3 Form of Note Purchase Agreement.
*10.4 Form of Fee and Indemnity Agreement.
*23.1 Consent of Latham & Watkins (included in its opinion filed as Exhibit
5.1).
*23.2 Consents of Brown & Wood LLP (included in its opinions filed as
Exhibits 5.2 and 8.1).
*24.1 Power of Attorney.
99.1 Application for Financing Order.
99.2 Financing Order.
*99.3 Form of Issuance Advice Letter.
*99.4 Application to Infrastructure Bank.
*99.5 Order of Infrastructure Bank.
</TABLE>
- --------
*To be filed by amendment.
+Previously filed.
<PAGE>
EXHIBIT 99.1
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
In The Matter Of The Application Of The )
Southern California Edison Company )
(U 338-E) For: (1) Authority To Reduce )
Rates Effective January 1, 1998, )
(2) Authority To Sell Or Assign Transition )
Property To One Or More Financing )
Entities; (3) Authority To Service Rate )
Reduction Bonds On Behalf Of Financing ) Application No. 97-05-___
Entities; (4) Authority To Establish )
Charges Sufficient To Recover Fixed )
Transition Amounts; and (5) Such Further )
Authority Necessary For Edison To Carry )
Out The Transactions Described In This )
Application )
- --------------------------------------------
APPLICATION OF SOUTHERN CALIFORNIA EDISON COMPANY
-------------------------------------------------
(U-338-E) FOR FINANCING ORDER AUTHORIZING THE ISSUANCE OF
---------------------------------------------------------
RATE REDUCTION BONDS AND 10 PERCENT RATE REDUCTION
--------------------------------------------------
EFFECTIVE JANUARY 1, 1998
-------------------------
ANN P. COHN
KENNETH S. STEWART
BRUCE A. REED
Attorneys for
SOUTHERN CALIFORNIA EDISON COMPANY
2244 Walnut Grove Avenue
Post Office Box 800
Rosemead, California 91770
Telephone: (818) 302-4183
Facsimile: (818) 302-7740
Dated: May 6, 1997
<PAGE>
RATE REDUCTION BONDS AND
------------------------
10 PERCENT RATE REDUCTION
-------------------------
EXECUTIVE SUMMARY
-----------------
Assembly Bill 1890 ("AB 1890") provides for electric utilities to finance a
portion of their Transition Costs/1/ through the issuance of debt securities,
---
known as Rate Reduction Bonds. The issuance of Rate Reduction Bonds will enable
utilities to reduce rates for residential and small commercial customers by at
least 10 percent for the period from January 1, 1998 through March 31, 2002 (the
maximum "rate freeze period").
In this Application, Edison is requesting that the Commission approve the
issuance of an aggregate amount of up to $3.0 billion of Rate Reduction Bonds in
one or more series or classes. The Rate Reduction Bonds will finance a portion
of Edison's Transition Costs at an interest rate lower than Edison's authorized
return for such assets. By so reducing the carrying cost of the financed
Transition Costs and by spreading out the recovery of such costs over the term
of the Rate Reduction Bonds, the 10 percent rate reduction will be achieved.
The net effect of the transaction will be to accelerate a reduction in
electricity rates for Edison's residential and small commercial customers.
Residential and small commercial customers will remain responsible for
repayment of the bonds through separate, nonbypassable charges called Fixed
Transition Amount ("FTA") charges. These charges will be subject to adjustment
to ensure repayment of the Rate Reduction Bonds over their term. In addition to
providing a 10 percent rate reduction over the rate freeze period, the issuance
of Rate Reduction Bonds will result in net present value benefits to residential
and small commercial customers that are presently estimated to be approximately
$400 million. These benefits, which result from reduced carrying costs for the
financed Transition Costs and from spreading out tax and principal payments over
the term of Rate Reduction Bonds, may vary due to changed conditions.
Edison also is filing concurrently an application with the California
Infrastructure and Economic Development Bank ("Infrastructure Bank"), a State
agency to facilitate and to approve the issuance of Rate Reduction Bonds. AB
1890 contemplates that Rate Reduction Bonds will be issued by one of (i) the
Infrastructure Bank; (ii) a Special Purpose Trust ("SPT") that is authorized by
the Infrastructure Bank; or (iii) any other Financing Entity authorized by the
Infrastructure Bank. The issuer of the Rate Reduction Bonds likely will be an
SPT authorized by, and subject to the oversight of, the Infrastructure Bank.
- ------------------------------
/1/ Terms that are capitalized and not defined herein are defined in PU Code
- ---
(S) 840 or in the Government Code.
-1-
<PAGE>
Edison intends to use the net proceeds from the Rate Reduction Bond
financing to reduce Edison's capitalization. This reduction will occur for
debt, preferred stock, and common equity in amounts approximately proportionate
to Edison's current debt and equity percentages.
The testimony supporting this Application (1) describes the proposed
transaction in more detail; (2) identifies the ratepayer benefits that will
result from the transaction; (3) proposes the ratemaking treatment related to
the transaction; and (4) requests the necessary tariff and other authorizations
to implement the transaction and to provide a 10 percent rate reduction for
residential and small commercial customers beginning on January 1, 1998 and
continuing through the rate freeze period.
-2-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section TITLE PAGE
- ------- ----- ----
<S> <C> <C>
I. INTRODUCTION..................................................... 1
A. Background.................................................. 1
B. Rate Reduction Bonds And 10 Percent Rate Reduction.......... 2
II. DESCRIPTION OF TRANSACTION....................................... 5
A. The Issuer Of The Bonds..................................... 10
B. Characteristics Of The Bonds................................ 10
C. Bankruptcy Treatment........................................ 11
D. Servicing Of The Transition Property........................ 12
E. Credit Enhancement.......................................... 13
1. FTA Charges And True-Up Mechanism...................... 13
2. Overcollateralization Amount........................... 14
3. Other Forms Of Credit Enhancement...................... 15
III. USE OF PROCEEDS.................................................. 15
IV. REQUEST FOR PROCEDURAL SCHEDULE IN............................... 16
ACCORDANCE WITH RESOLUTION ALJ-173
V. EXEMPTION FROM COMPETITIVE BIDDING............................... 17
VI. FEES............................................................. 18
VII. STATUTORY AUTHORITY.............................................. 19
A. Statutory And Other Authority............................... 19
B. Legal Name And Correspondence............................... 19
C. Articles Of Incorporation................................... 19
D. Proposed Tariff Changes..................................... 20
E. Summary Of Earnings......................................... 20
F. Balance Sheet............................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Section TITLE PAGE
- ------- ----- ----
<S> <C> <C>
G. Plant....................................................... 20
H. Service Territory........................................... 21
I. Capital Stock And Proxy Statement........................... 22
J. Depreciation................................................ 22
K. Service Of Notice Of Application............................ 22
L. Description Of Appendices................................... 23
VIII. REQUESTED FINDINGS, AUTHORIZATIONS AND
APPROVALS....................................................... 23
</TABLE>
VERIFICATION
APPENDIX A - SUMMARY OF EARNINGS
APPENDIX B - BALANCE SHEET AND INCOME STATEMENT
APPENDIX C - LIST OF COUNTIES AND MUNICIPALITIES
-ii-
<PAGE>
I.
INTRODUCTION
------------
Southern California Edison Company ("Edison" or the "Company") hereby
applies to the California Public Utilities Commission (the "Commission") for a
Financing Order pursuant to Article 5.5 (commencing with Section 840) of the
California Public Utilities Code ("PU Code")./1/
A. BACKGROUND
----------
On September 23, 1996, Governor Wilson signed into law Assembly Bill 1890
("AB 1890") which provides a comprehensive framework for the restructuring of
the electric industry in California./2/ AB 1890 was built upon the foundation
established by the Commission in its policy decision on industry restructuring,
Decision No. 95-12-063 (December 20, 1995) as modified by Decision No. 96-01-009
(January 10, 1996). Among its many provisions, AB 1890 provides for (i) the
financing of a portion of utilities' Transition Costs which are associated with
uneconomic utility investments and contractual obligations; and (ii) using Rate
Reduction Bonds to provide the reduction in revenue requirement needed for a
rate reduction of at least 10 percent for residential and small commercial
customers. In order to allow the rate reduction to become effective January 1,
1998 and continue through March 31, 2002, i.e., the maximum "rate freeze
period," the Legislature, in AB 1890, required Edison and other electrical
corporations to submit by June 1, 1997 their respective applications for
Financing Orders from the Commission and
- -------------
/1/ The terms "Financing Entity," "Financing Order," "Fixed Transition
Amounts," "Rate Reduction Bonds," "Transition Costs", and "Transition
Property" shall have the respective meanings given them in PU Code Section
840.
/2/ Certain provisions of AB 1890 which are relevant to the proposed
transaction have been proposed to be revised in SB 477, which is currently
under review by the Legislature. As used herein, "AB 1890" refers to
Assembly Bill 1890 as amended by SB 477.
-1-
<PAGE>
approvals from the California Infrastructure and Economic Development Bank
("Infrastructure Bank") for the issuance of the Rate Reduction Bonds by the
Issuer./3/ (PU Code (S)(S) 330(w), 365, 841(a), 841(e).)
Subsequent to the enactment of AB 1890, Edison and the other major
investor-owned electric utilities in California have worked with the staffs of
the Commission and the Infrastructure Bank, and with other interested parties
such as investment bankers and credit rating agencies, to develop the structure
for the Rate Reduction Bond financings and the process for their approval by the
Commission and the Infrastructure Bank.
B. RATE REDUCTION BONDS AND 10 PERCENT RATE REDUCTION
--------------------------------------------------
This Application requests Commission approval of the Rate Reduction Bond
transaction and authority to implement a 10 percent rate reduction effective
---
January 1, 1998. As described below, the 10 percent rate reduction is
contingent on the timely and sufficient issuance of Rate Reduction Bonds. The
plain language and the clearly expressed legislative intent embodied in AB 1890
demonstrate that the Legislature intended that the 10 percent rate reduction
would be linked to and contingent upon the issuance of Rate Reduction
Bonds./4/
The Legislature stated its basic intent to link the rate reduction to the
issuance of the Rate Reduction Bonds in the prefacing language of AB 1890 as
follows:
- -------------
/3/ As defined in Section II.A, below, the Issuer is either (1) the
Infrastructure Bank, (2) one or more Special Purpose Trusts, as defined in
California Government Code 63010, that are authorized by and subject to the
oversight of the Bank, or (3) one or more other entities approved by the
Bank.
/4/ Both Edison and PG&E have filed petitions to modify Decision No. 96-12-077,
Opinion on Cost Recovery Plans, dated December 20, 1996 which states that
"AB 1890 allows the utilities the option of accomplishing the required rate
------
reduction by issuing rate reduction bonds, as described in (S)(S) 840-847."
(D. 96-12-077, p. 9, emphasis added.)
-2-
<PAGE>
(b) It is the intent of the Legislature...to provide for all of
the following:
***
(2) An immediate rate reduction of no less than 10 percent for
residential and small commercial ratepayers.
(3) The financing of the rate reduction through the issuance of
-----------------------------------------------------------
"rate reduction bonds" that create no new financial obligations
----------------------
or liabilities for the State of California. (1996 Cal. Stat. Ch.
854, Section 1(b)(2), 1(b)(3), emphasis added.)
This language, employed in sequential subdivisions 1(b)(2) and 1(b)(3), with
explicit reference to the "financing of the rate reduction" leaves no doubt that
the Legislature intended the rate reduction to be financed through the issuance
of Rate Reduction Bonds.
The Legislature's intent is also made clear by the final subdivision of
Section 1 which states:
(e) It is the intent of the Legislature that electrical
corporations shall, by June 1, 1997, or on the earliest possible
date, apply concurrently for financing orders from the Public
Utilities Commission and rate reduction bonds from the California
Infrastructure and Economic Development Bank in amounts
sufficient to achieve a rate reduction in the most expeditious
manner for residential and small commercial customers of not less
than 10 percent for 1998 and continuing through March 31, 2002.
(1996 Cal. Stat. Ch. 854, Section 1(e).)
The Legislature thus clearly intended to condition the rate reduction on the
timely and required applications by utilities for Financing Orders from the
Commission
-3-
<PAGE>
and the issuance of Rate Reduction Bonds in sufficient amount to
achieve the rate reduction.
The Legislature also provided express guidance to the Commission in
carrying out its intent, by finding and declaring that
It is the intent of the Legislature to require and enable
------------------
electrical corporations to monetize a portion of the competition
transition charge for residential and small commercial consumers
so that these customers will receive rate reductions of no less
---------------------------------------------------------------
than 10 percent for 1998 continuing through 2002. (PU Code (S)
---------------
330(w)) (emphasis added.)
PU Code (S) 365 provides that "[t]he actions of the commission . . . shall be
--------
consistent with the findings and declarations contained in Section 330."
- -----------------------------------------------------------------------
(emphasis added.) PU Code (S) 841(a) requires utilities to apply to the
Commission for Financing Orders before June 1, 1997 and PU Code (S) 841(e)
provides that the Commission "shall establish procedures for the expeditious
processing of applications for financing orders, including the approval or
disapproval thereof within 120 days of the electrical corporation's making
application therefor." By establishing these expeditious filing and processing
requirements, the Legislature intended to provide procedures to accomplish the
issuance of Rate Reduction Bonds so that the 10 percent rate reduction could be
implemented in 1998. Thus, PU Code (S)(S) 330(w), 365, 841(a), and 841(e) all
link the issuance of Rate Reduction Bonds to rate reductions for residential and
small commercial customers./5/
- -------------
/5/ The overall structure of AB 1890 imposes balanced, but significant risks on
utility shareholders. However, nothing in AB 1890 suggests the Legislature
intended to impose additional risk on utility shareholders for the 10
percent residential and small commercial customer rate reduction. If the
Commission were to order the 10 percent rate reduction before the issuance
of Rate Reduction Bonds, Edison would net approximately $30 million less
each month in revenues from residential and small commercial customers
until the bonds were issued -- a result that is unlawful and clearly not
intended by AB 1890.
-4-
<PAGE>
II.
DESCRIPTION OF TRANSACTION
--------------------------
In this Application, Edison is requesting approval for the issuance of Rate
Reduction Bonds in the aggregate principal amount of up to $3.0 billion in one
or more series or classes. The Rate Reduction Bonds will provide proceeds
sufficient to recover a portion of Edison's Transition Costs, the full amount of
the bond issuance expenses, ongoing costs (including trustee, servicer, and
Infrastructure Bank fees), and the estimated tax liabilities associated with the
transaction./6/
This Application is filed with the expectation that if timely approvals are
received from the Commission, the Infrastructure Bank, and other regulators, the
Issuer will begin to issue Rate Reduction Bonds in late 1997 and on January 1,
1998, a 10 percent rate reduction for residential and small commercial customers
should be implemented./7/ The total amount of Rate Reduction Bonds required to
be issued to finance the 10 percent rate reduction is a function of a number of
variables, including sales forecasts, the interest rate of the Rate Reduction
Bonds, and the expected principal repayment terms of such bonds, which can only
be determined at the time the bonds are issued. Thus, the total amount of
Transition Costs to be recovered through the Rate Reduction Bond transaction and
the amount of Rate Reduction Bonds to be issued can only be estimated at this
time.
- -------------
/6/ Transition Costs include the costs of using the bond proceeds to refinance
or retire utility debt and equity and any tax liabilities associated with
the transaction. (PU Code (S) 840(f).)
/7/ In February 1997, Edison submitted a request for ruling to the Internal
Revenue Service ("IRS") seeking confirmation that (1) the SPE Debt
Securities (as defined below) will be treated as debt for federal income
tax purposes; and (2) the FTA charges (as defined below) will be included
in Edison's gross income in the year in which the related electric service
is provided. Should a favorable IRS ruling not be obtained or if the IRS
does not rule, Edison would have to reassess the transaction, and if
possible, modify it to eliminate the risk of current taxation. If the
structure of the transaction changes beyond the bounds contemplated by this
Application, Edison would take the steps necessary to modify this request
at the Commission.
-5-
<PAGE>
Edison is requesting that the Commission issue a Financing Order
authorizing the securitization of up to $3.0 billion of Transition Costs and
related costs in one or more series or classes of Rate Reduction Bonds./8/
Based on current estimates, issuing Rate Reduction Bonds in an aggregate amount
of $2.6 billion will be sufficient to provide the revenue requirement reduction
savings necessary for the 10 percent rate reduction. Because the initial $2.6
billion bond sizing is based primarily on current sales forecasts and interest
rate assumptions for the bonds, and actual sales and interest rates will vary,
additional Rate Reduction Bonds (up to the requested aggregate principal amount
of $3.0 billion as authorized by the Commission's Financing Order) may need to
be issued during the rate freeze period to ensure sufficient revenue requirement
reductions are actually generated to support the 10 percent rate reduction.
Edison proposes to establish a Rate Reduction Bond Memorandum Account to ensure
the net benefits of this transaction flow through to residential and small
commercial customers. Thus, if the Rate Reduction Bonds issued actually produce
revenue requirement reductions in excess of those needed for a 10 percent rate
reduction, Edison will be credit an amount equal to the excess revenue collected
to residential and small commercial customers through the Rate Reduction Bond
Memorandum Account. As a result of the proposed structure for the transaction
and based on current market conditions, Edison estimates that approximately $400
million in net present value benefits will accrue to residential and small
commercial customers over the bond repayment periods and will be reflected in
reduced rates for such customers./9/
- -------------
/8/ At some future date, Edison may apply to the Commission to finance other
Transition Costs, such as QF contract buyouts. The Commission may authorize
the issuance of these additional bonds based on a finding of customer
benefits.
/9/ This result satisfies the appropriate standard of review for the
Commission, which is that the Commission shall approve financing
applications if the issuance of the Rate Reduction Bonds would reduce rates
that residential and small commercial customers would have paid if the
financing order were not adopted. (PU Code (S) 841(a).)
-6-
<PAGE>
Residential and small commercial customers in Edison's service territory
will remain responsible for repayment of the Rate Reduction Bonds through
separate, nonbypassable charges called Fixed Transition Amount ("FTA") charges.
In the exhibits supporting this Application, Edison sets forth preliminary
estimates of the FTA charges for residential and small commercial customers
based on current conditions. The Financing Order should authorize Edison to
establish by means of one or more Advice Letter filings (i.e., "Issuance Advice
Letters") the nonbypassable FTA charges for residential and small commercial
customers when the definitive terms for the Rate Reduction Bonds have been
established (i.e., upon pricing of the bonds).
The following sections provide a brief description of the transaction which
is described in detail in Exhibit SCE-1, "Rate Reduction Bonds and 10 Percent
Rate Reduction" and is depicted in Figure 1.
In Step 1 of this process, Edison will form one or more Special Purpose
Entities (each, an "SPE") that will be separately organized legal entities
wholly owned by Edison./10/ Edison will transfer to the SPE the Transition
Property which consists of: (i) the FTA charges, as adjusted from time to time
in accordance with the provisions of the Financing Order and Section 841(c) of
the PU Code; (ii) the right to be paid the amount that is determined in the
Financing Order,/11/ and the right to all revenues, collections, claims,
payments, money, or proceeds of or arising
- -------------
/10/ Edison will also contribute equity to the SPE in an amount equal to
approximately 0.5 percent of the total principal amount of the Rate
Reduction Bonds.
/11/ This amount is the amount that Edison or its transferee is lawfully
entitled to receive pursuant to the provisions of Article 5.5 of the PU
Code.
-7-
<PAGE>
Figure 1
Rate Reduction Bonds
Transaction Structure
[CHART APPEARS HERE]
-8-
<PAGE>
from the FTA charges or constituting Fixed Transition Amounts that are the
subject of the Financing Order; and (iii) all rights to obtain adjustments to
the FTA charges pursuant to the provisions of the Financing Order and Section
841(c) of the PU Code. As provided in Sections (S)(S) 840(g), 841(f) and 843(c)
of the PU Code, Transition Property constitutes a current property right,
existing for all purposes, notwithstanding the fact that the value of the
property right may depend on customers using electricity, or Edison performing
certain services, in the future.
In Step 2, the SPE will issue secured debt (the "SPE Debt Securities") to
the Issuer. The SPE Debt Securities will be secured by the Transition Property,
the equity of the SPE and all rights of the SPE in and to the transaction
documents (e.g., the purchase agreement by which the SPE acquires the Transition
Property, and the servicing agreement, by which Edison acts as servicer for the
Rate Reduction Bonds).
In Step 3, the Issuer will issue Rate Reduction Bonds to investors either
directly or at the direction of the SPE. The Rate Reduction Bonds may be
secured by a statutory lien on the Transition Property to the extent provided by
the Public Utilities Code. In addition, if the Rate Reduction Bonds are issued
in the form of debt as opposed to beneficial interests, the Rate Reduction Bonds
will be secured by a security interest in the SPE Debt Securities and the
security therefor, including the Transition Property. The terms of the Rate
Reduction Bonds will substantially "mirror" the terms of the SPE Debt Securities
or the Rate Reduction Bonds will be pass-through certificates representing
interests in the SPE Debt Securities. The Issuer will transfer the net proceeds
from the Rate Reduction Bonds to the SPE, as consideration for the SPE Debt
Securities. The SPE will then transfer such proceeds to Edison as consideration
for the Transition Property.
-9-
<PAGE>
A. THE ISSUER OF THE BONDS
-----------------------
AB 1890 contemplates that Rate Reduction Bonds will be issued by one of the
following (the "Issuer"): (1) the Infrastructure Bank, (2) one or more Special
Purpose Trusts, as defined in California Government Code ("Govt. Code") (S)
63010, that are authorized by and subject to the oversight of the Infrastructure
Bank, (each, an "SPT"), or (3) one or more other entities approved by the
Infrastructure Bank. The Issuer will likely be one or more SPTs.
The Rate Reduction Bonds will not be obligations of Edison nor will they be
secured by a pledge of the general credit, full faith or taxing power of the
State of California or any agency or subdivision of the State, other than the
Issuer. (See PU Code (S) 841(d).) Pursuant to PU Code (S) 841(c), however,
---
there will be a pledge of the State of California not to alter certain rights
relating to the financing as described in such section. The source of payment
will be amounts collected from residential and small commercial customers
pursuant to a specific tariffed component of rates that will be owned by the
SPE, i.e., the FTA charges as described in this Application.
B. CHARACTERISTICS OF THE BONDS
----------------------------
The Rate Reduction Bonds may be in the form of revenue bonds, notes,
certificates of beneficial interest, or other evidences of interest or
indebtedness. (PU Code (S) 840(e).) The Infrastructure Bank and State
Treasurer will determine whether the Rate Reduction Bonds will also be subject
to call provisions. It is currently anticipated that the Rate Reduction Bonds
will be either notes substantially mirroring the terms of the SPE Debt
Securities or pass-through certificates evidencing interests in the SPE Debt
Securities, will be issued in one or more series or classes, and will have an
expected final maturity not to exceed ten years. The aggregate principal
repayment pattern is expected to result in
-10-
<PAGE>
approximately equal portions of principal being retired each year. However, due
to such factors as the seasonality of sales, principal repayments resulting from
FTA charge collections will vary during portions of the year. The form of,
interest rate, term of and other characteristics of the Rate Reduction Bonds
will be determined at the time of issuance based on then-current market
conditions.
C. BANKRUPTCY TREATMENT
--------------------
To obtain the desired rating for the Rate Reduction Bonds, investors must
be isolated from the risk of an Edison bankruptcy. As stated above, Edison will
transfer all of its right, title and interest in the Transition Property to the
SPE. The first element of the bankruptcy analysis focuses on the transfer as
constituting a "true sale" for commercial law purposes. As such, if Edison were
to become the subject of a bankruptcy proceeding, the Transition Property would
not be part of Edison's bankruptcy estate and therefore would not be subject to
the claims of Edison's creditors. Although Edison will collect the FTA charges
as servicer for the Rate Reduction Bonds, legal purposes the funds will not
become part of Edison's revenues or assets.
The second element of the bankruptcy analysis focuses on the separate legal
status of Edison and the SPE. The transaction will be structured so that in the
event of a bankruptcy of Edison the assets and liabilities of the SPE would not
be "substantively consolidated" with those of Edison./12/
These two elements of the structure are intended to facilitate obtaining a
higher credit rating on the Rate Reduction Bonds than on the existing first
mortgage debt of Edison. The credit rating agencies will expect to receive a
- -------------
/12/ When entities are "substantively consolidated" in a bankruptcy proceeding,
their assets and liabilities are pooled, thereby eliminating intercompany
claims. Claims of third party creditors are generally treated as claims
against the common pool of assets created by consolidation.
-11-
<PAGE>
satisfactory opinion of counsel confirming these elements at the time the Rate
Reduction Bonds are issued.
D. SERVICING OF THE TRANSITION PROPERTY
------------------------------------
Through the transfer of the Transition Property to the SPE, the SPE will
obtain the right and the obligation to collect FTA charges. On behalf of the
SPE, Edison will act initially as the servicer for the Rate Reduction Bonds and
will be responsible for calculating, billing, collecting, and accounting for the
FTA charges from residential and small commercial customers. Therefore, Edison
will carry out billing and collection activities both as servicer with respect
to the FTA charges and as principal with respect to its own charges to be paid
by such customers. In consideration for its servicing responsibilities, Edison
or any successor servicer will receive a periodic servicing fee which will be
recovered through the FTA charges./13/ To support the bankruptcy analysis, the
servicing agreement must be on arm's length terms and provide for a servicing
fee consistent with those in comparable transactions. Such servicing fee may be
calculated on the basis of a percentage of the principal amount (initial or
outstanding), a fixed dollar amount per eligible customer, or a percentage of
aggregate FTA charge collections. However, for ratemaking purposes, Edison
proposes a ratemaking mechanism to provide a credit to residential and small
commercial customers equal in value to any amounts it receives as compensation
for being the servicer which exceed its incremental out-of-pocket servicing
costs.
- -------------
/13/ Initially Edison will act as servicer, although successor servicers or
subservicers may perform these functions. It is anticipated that under
certain circumstances to be set forth in the Servicing Agreement, Edison
may be removed or may resign as servicer. A condition to any such
resignation will be a confirmation that such resignation will not result
in a down-grad or withdrawal of the ratings of the Rate Reduction Bonds.
-12-
<PAGE>
E. CREDIT ENHANCEMENT
------------------
1. FTA CHARGES AND TRUE-UP MECHANISM
---------------------------------
The nonbypassable FTA charges are to be levied upon all residential
and small commercial customers based on consumption of electricity. There
will be separate FTA charges for the residential (Domestic rate group) and
small commercial (GS-1 rate group) customers. Edison requests that the
Commission authorize it to establish the initial FTA charges by Issuance
Advice Letters which Edison would file upon final determination of all
terms of the Rate Reduction Bonds (i.e., when each series or class of Rate
Reduction Bonds is priced) and which would be effective within five
business days of filing. The FTA charges should be established at a level
(or at different levels during specified periods over the life of the Rate
Reduction Bonds) intended to provide for the full recovery of payments of
interest and principal on the Rate Reduction Bonds, in accordance with the
amortization schedule determined at the time of offering, plus
overcollateralization as well as related financing costs and fees ("Rate
Reduction Bond Debt Service"), based upon assumptions including sales
forecasts, charge-offs, and lags between FTA charge billing and collection
by the SPE. The level of FTA charges may differ for specified periods
during the term of the bonds due to several factors, including the
principal repayment terms of the bonds or changes in the weighted average
interest cost of the bonds as the relative principal amount outstanding for
different series or classes changes.
In order to minimize the impact of variability in sales and
collections of the FTA charges on the repayment of principal and interest
on the Rate Reduction Bonds, Edison proposes to adjust FTA charges by an
FTA charge true-up mechanism in accordance with AB 1890 at least annually
to keep
-13-
<PAGE>
actual principal amortization in line with the expected schedule. By means
of the proposed FTA charge true-up mechanism, on at least an annual basis,
Edison, as servicer (or any successor servicer) on behalf of the SPE, will
file revised FTA charges. Edison requests that such FTA charge revisions be
made effective within 15 days of requests for such revisions, which will be
made by Advice Letter filings. Also, Edison requests Commission
authorization to implement quarterly FTA charge revisions by Advice Letter
filings if the actual principal balance of the Rate Reduction Bonds differs
from a projected balance by more than a specified amount which is to be
determined by the Infrastructure Bank after consultation with the rating
agencies.
2. OVERCOLLATERALIZATION AMOUNT
----------------------------
The purpose of the overcollateralization amount is to provide security
to investors and to enhance the credit rating of the Rate Reduction Bonds
by providing an additional financed amount to cover shortfalls in FTA
charge collections between the FTA charge true-up prior to the expected
maturity and the time when the bonds are scheduled to be repaid. As
provided in PU Code (S) 841(c), the True-up Mechanism continues until the
Rate Reduction Bonds are paid in full. After the FTA charge true-up prior
to expected maturity, any principal and interest shortfalls due to
variability in sales and collections from that point until the legal
maturity of the Rate Reduction Bonds are intended to be addressed through
this overcollateralization amount. This amount will be established by the
Issuer (with input from the credit rating agencies) prior to the time of
bond pricing, will be a function of several variables but is primarily a
function of the True-up Mechanism for the FTA charges. It will equal the
amount by which Transition Costs and
-14-
<PAGE>
other costs recoverable through FTA charges exceed the initial principal
amount of the Rate Reduction Bonds./14/
Any portion of the overcollateralization amount collected in excess of
that amount necessary to retire fully the principal of the Rate Reduction
Bonds, as well as any remaining amounts collected with respect to the FTA
charges that are not needed to retire the Rate Reduction Bonds or otherwise
pay expenses, will be retained by the SPE. However, for ratemaking
purposes, Edison proposes a ratemaking mechanism to provide a credit to
residential and small commercial customers equal to the amount retained by
the SPE.
3. OTHER FORMS OF CREDIT ENHANCEMENT
---------------------------------
Other forms of credit enhancement customary for securitization
transactions also might be used, such as a debt service reserve fund, bank
letter of credit, or surety bond or similar insurance policy. If
determined to be cost-effective, these forms of credit enhancement will be
implemented at the time of bond pricing.
III.
USE OF PROCEEDS
---------------
The proceeds from the Rate Reduction Bond financing will be used to reduce
Edison's capitalization and to reimburse Edison for the costs of the
transaction. The reduction in capitalization will occur for debt, preferred
stock, and common equity in amounts approximately proportionate to the Company's
current debt and equity percentages. Transaction costs to be reimbursed include
underwriters fees,
- -------------
/14/ Added security will be provided by an affiliate demand note in an amount
equal to the cash equity of the SPE.
-15-
<PAGE>
legal and accounting fees, rating agency fees and others as described in Chapter
IV of Exhibit SCE-1.
IV.
REQUEST FOR PROCEDURAL SCHEDULE IN ACCORDANCE WITH RESOLUTION ALJ-173
---------------------------------------------------------------------
In accordance with PU Code (S) 841(e), the Commission is to establish
procedures for the expeditious processing of applications for Financing Orders,
including a decision on such applications within 120 days of the filing. Edison
requests that the Commission consider this Application ex parte, without
hearings because prompt action is mandated by AB 1890 in order to allow
sufficient time for the Commission to issue its Financing Order and for Edison
to complete the issuance of Rate Reduction Bonds in order to implement the 10
percent rate reduction on January 1, 1998.
Edison's exhibits and prepared testimony in support of this Application
accompany this filing. This Application is supported by the following
documents:
A. "Rate Reduction Bonds and 10 Percent Rate Reduction", identified as
Exhibit SCE-1;
B. "Proposed Ratemaking And Tariff Changes," identified as Exhibit SCE-2;
and
C. "Qualifications of Witnesses," identified as Exhibit SCE-3.
Each exhibit is sponsored by expert witnesses familiar with the content of
the applicable portion of the exhibit who will describe those aspects of
Edison's application that are within the expertise of the witness. The prepared
testimony of Edison's witnesses demonstrates that the Commission should grant
the relief
-16-
<PAGE>
requested in this Application. The following schedule complies with Resolution
ALJ-173, which established special procedural rules to be followed for
applications for financing orders.
PROPOSED SCHEDULE FOR RATE REDUCTION BOND
APPLICATION AND 10 PERCENT RATE REDUCTION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EVENT DATE
- ------------------------------------------------------------------------------------------------
<S> <C>
Application Filed May 6, 1997
- ------------------------------------------------------------------------------------------------
Response or Protest To Applications May 20
- ------------------------------------------------------------------------------------------------
Pre-hearing Conference May 27
- ------------------------------------------------------------------------------------------------
Hearings, if needed May 28 - June 3
- ------------------------------------------------------------------------------------------------
Opening Briefs June 13
- ------------------------------------------------------------------------------------------------
Reply Briefs June 25
- ------------------------------------------------------------------------------------------------
Assigned Commissioner or ALJ Proposed Decision August 4
- ------------------------------------------------------------------------------------------------
Comments on PD August 25
- ------------------------------------------------------------------------------------------------
Reply Comments on PD September 2
- ------------------------------------------------------------------------------------------------
Commission Financing Order September 3
- ------------------------------------------------------------------------------------------------
Rate Reduction Bonds Issued/FTA Charges October - December 1997
Implemented
- ------------------------------------------------------------------------------------------------
</TABLE>
V.
EXEMPTION FROM COMPETITIVE BIDDING
----------------------------------
The Commission ordinarily requires securities of public utilities to be
sold through competitive bidding except where it is demonstrated that the nature
of the securities or the marketing process makes it unreasonable or
impracticable to apply such competitive bidding requirement.
Edison requests an exemption from the Commission's competitive bidding rule
with respect to the issuance of the Rate Reduction Bonds and the SPE Debt
-17-
<PAGE>
Securities./15/ As discussed above, the Rate Reduction Bonds will not be
issued and sold by Edison, but rather will be issued by the Infrastructure Bank,
or an SPT or other financing entity authorized by the Infrastructure Bank. The
issuance and sale of the Rate Reduction Bonds will, therefore, be subject to the
procedures and requirements applied by the California State Treasurer's office
("State Treasurer"). Accordingly, the State Treasurer already has appointed
Salomon Brothers Inc. a lead underwriter for the issuance of the Rate Reduction
Bonds on Edison's behalf. Furthermore, the State Treasurer currently is in the
process of appointing a co-lead underwriter and co-managers for the issuance of
the Rate Reduction Bonds.
VI.
FEES
----
PU Code (S) 1904 prescribes fees to be paid for a certificate issued by the
Commission authorizing a public utility to issue bonds, notes or other evidences
of indebtedness. Because the Rate Reduction Bonds will be issued by the
Infrastructure Bank, an SPT, or other financing entity as described above,
rather than by a public utility, PU Code (S) 1904 is inapplicable and no fees
are required. In addition, since the SPE Debt Securities will substantially
"mirror" the terms of the Rate Reduction Bonds, PU Code (S) 1904 should be
inapplicable to the SPE Debt Securities. This conclusion is consistent with the
intent of AB 1890 to reduce customer rates, since any fees paid to the
Commission as part of the Rate Reduction Bond financing would be recovered from
residential and small commercial customers as part of the FTA charges in
accordance with PU Code (S) 840(g). It is also consistent with the Commission's
practice not to charge fees for bonds which are used to refinance existing
utility debt.
- -------------
/15/ Since the SPE Debt Securities will substantially "mirror" the terms of the
Rate Reduction Bonds, the SPE Debt Securities should not be subject to the
competitive bidding rules.
-18-
<PAGE>
VII.
STATUTORY AUTHORITY
-------------------
A. STATUTORY AND OTHER AUTHORITY
-----------------------------
This Application is made pursuant to Sections 454, 454.5, 491, 701, 702,
728, 729, and 840-847 of the Public Utilities Code of the State of California,
the Commission's Rules of Practice and Procedure, and prior decisions, orders,
and resolutions of this Commission.
B. LEGAL NAME AND CORRESPONDENCE
-----------------------------
Applicant, Southern California Edison Company, is an electric public
utility organized and existing under the laws of the State of California. The
location of Edison's principal place of business is 2244 Walnut Grove Avenue,
Post Office Box 800, Rosemead, California 91770.
The name, title, and address of the person to whom correspondence or
communications in regard to this Application are to be addressed is:
Bruce A. Reed
Senior Attorney
Southern California Edison Company
Post Office Box 800
Rosemead, CA 91770
Telephone: (818) 302-4183
C. ARTICLES OF INCORPORATION
-------------------------
A copy of Edison's Restated Articles of Incorporation as amended, and as
presently in effect, certified by the Secretary of the State, has previously
been filed with the Commission in connection with Application No. 93-06-022, and
is incorporated herein by reference pursuant to Rule 16(a) of the Commission's
Rules of Practice and Procedure.
-19-
<PAGE>
D. PROPOSED TARIFF CHANGES
-----------------------
Each of Edison's proposed changes to its tariffs is contained in Chapter IV
of Exhibit SCE-2.
E. SUMMARY OF EARNINGS
-------------------
A summary of earnings reflecting Edison's operations within the
Commission's jurisdiction, authorized by the Commission in Decision No. 96-01-
011, the final decision in Edison's Test Year 1995 General Rate Case
Application, is contained in Appendix A.
F. BALANCE SHEET
-------------
Appendix B to this Application contains copies of Edison's latest
available balance sheet, as of March 31, 1997, and the income statement for the
period ending the same date, the most recent period available. Shown in the
balance sheet are the accumulated provisions for depreciation and the related
property shown at cost. The balance sheet shows, among other things, the amount
and classes of Edison's stock, debentures, bonds (by series) and notes issued
and outstanding as of March 31, 1997.
G. PLANT
-----
Edison is engaged in the business of generating, transmitting, and
distributing electric energy in portions of central and southern California. In
addition to its properties in California, it owns, in some cases jointly with
others, facilities in Nevada, Arizona, and New Mexico, its share of which
produces power and energy for the use of its customers in California. In
conducting such business, Edison operates an interconnected and integrated
electric utility system.
-20-
<PAGE>
Edison owns and operates 11 fossil-fueled steam electric generating plants,
2 combustion turbine plants, 2 combined cycle plants, 1 diesel electric
generating plant, and 36 hydroelectric plants. Edison also operates the San
Onofre Nuclear Generating Station Units 2 and 3, in which it owns 75.05%
interest. All of these generating plants are located in central and southern
California.
Edison operates two coal-fired electric generating units in Clark County,
Nevada (Mohave Project), in which it owns a 56% undivided interest.
In addition, Edison has a 48% interest in Units 4 and 5 of a coal-fired
steam electric generating plant in New Mexico (Four Corners Project) and a 15.8%
interest in Palo Verde Units 1, 2, and 3, located west of Phoenix, Arizona. All
are operated by another utility.
Edison also owns distribution facilities located in California and
transmission and related communications facilities which are located in
California, Nevada, Arizona, and New Mexico.
The original cost of Edison's property and equipment, together with the
applicable depreciation reserve, are contained in Appendix A of Edison's
Application No. 93-12-025, which Edison incorporates herein by reference.
H. SERVICE TERRITORY
-----------------
Edison's service territory is located in 15 counties in central and
southern California, including Fresno, Imperial, Inyo, Kern, Kings, Los Angeles,
Madera, Mono, Orange, Riverside, San Bernardino, Santa Barbara, Tulare,
Tuolumne, and Ventura Counties, and includes about 180 incorporated communities
as well as outlying rural territories. Edison also supplies electricity to
other electric utilities under special contracts for distribution and other use
by them.
-21-
<PAGE>
I. CAPITAL STOCK AND PROXY STATEMENT
---------------------------------
Certain classes and series of Edison capital stock are listed on a
"National Securities Exchange," as defined in the Securities Exchange Act of
1934 (15 U.S.C. 78 (a) et seq.). A copy of the joint proxy statement of Edison
-- ---
and Edison's parent company, Edison International, as sent to its shareholders
was forwarded to the Commission on March 31, 1997, pursuant to General Order No.
65-A of the Commission and is, by this reference, made a part hereof.
J. DEPRECIATION
------------
Pursuant to Commission Decision No. 59926, dated April 12, 1960, Edison
uses accelerated depreciation for income tax purposes and "flows through"
reductions in income tax to ratepayers within the Commission's jurisdiction for
property placed in service prior to 1981. Pursuant to Decision No. 93848 in
OII-24, Edison uses the Accelerated Cost Recovery System ("ACRS") for federal
income tax purposes and "normalizes" reductions in income tax to ratepayers for
property placed in service after 1980 in compliance with the Economic Recovery
Tax Act of 1981. Pursuant to Decision No. 86-01-061 in OII No. 86-11-019, Phase
II, Edison uses the Modified Accelerated Cost Recovery System ("MACRS") for
federal income tax purposes and, also in compliance with the Tax Reform Act of
1986, continues to "normalize" reductions in income tax to ratepayers for
property placed in service after 1986.
K. SERVICE OF NOTICE OF APPLICATION
--------------------------------
This Application requests a change in rates. A list of the cities and
counties affected by the rate changes resulting from this Application is
attached as Appendix C. The State of California is also a customer of Edison
whose rates may be affected by the proposed revisions.
-22-
<PAGE>
As provided in PU Code (S) 454 (a), notice of filing of this Application
will be included with the regular bills mailed to all customers affected by the
proposed changes. Edison will serve a notice of filing this Application on all
parties to the Restructuring proceeding, i.e., OII 94-04-032/OIR 94-04-031, the
Competition Transition Charge proceeding (A. 96-08-001), and, in accordance with
Resolution ALJ-173, to interested parties who have made requests to be served.
L. DESCRIPTION OF APPENDICES
-------------------------
Applicant's showing in support of this Application includes the following
Appendices, which are attached hereto and, by this reference, incorporated
herein:
Appendix A contains a summary of earnings reflecting Edison's
operations within the Commission's jurisdiction.
Appendix B contains copies of Edison's latest available balance sheet,
as of March 31, 1997, and the income statement for the twelve-month
period ending the same date. Shown on the balance sheet are the
accumulated provisions for depreciation on the related property shown
at cost.
Appendix C contains a list of the counties and municipalities served
by Edison in which some or all citizens will or may be affected by the
tariff modifications and rate level changes proposed herein. The State
of California is also a customer of Edison and may be similarly
affected.
VIII.
REQUESTED FINDINGS, AUTHORIZATIONS AND APPROVALS
------------------------------------------------
AB 1890 is comprised of a complex set of interdependent provisions that
together authorize, permit and in some instances mandate certain actions by
Edison, the Commission and the Infrastructure Bank, among others, in order to
implement and maintain the Legislature's intended balance among industry
deregulation, rate reduction and Transition Cost recovery. In order that the
Fixed
-23-
<PAGE>
Transition Amounts, FTA charges, and related Transition Property be established,
the Rate Reduction Bonds be issued, and the residential and small commercial
rate reduction be implemented as intended, AB 1890 contemplates that certain
findings, authorizations, and approvals be included in the Financing Order.
Transactional constraints, such as legal considerations and rating agency
concerns, give rise to the need for additional findings, approvals and
authorizations in the Financing Order.
Therefore, in addition to the duties, obligations, rights and remedies
provided for by AB 1890 and other applicable laws, and in addition to seeking
general authority to enter into and perform the transactions described in this
application, Edison respectfully requests that the Commission in the Financing
Order specifically make the following findings, approvals and
authorizations:/16/
A. GENERAL AUTHORIZATION
1. Find that Edison may recover a portion of its Transition Costs and the
costs of providing, recovering, financing and refinancing Transition Costs
in an aggregate principal amount of up to $3.0 billion from proceeds of SPE
Debt Securities and Rate Reduction Bonds, which shall include all costs of
issuance approved by the Infrastructure Bank, and the owner of the
Transition Property may recover principal, interest, and related costs
associated with the SPE Debt Securities and the Rate Reduction Bonds
through Fixed Transition Amounts, as described in this Application;
2. Find, as required by AB 1890, that the designation of the Fixed Transition
Amounts and the issuance of up to $3.0 billion of SPE Debt Securities and
Rate Reduction Bonds in connection with such Fixed Transition Amounts
- -------------
/16/ Edison intends to later provide a more complete form of Financing Order.
-24-
<PAGE>
will reduce rates that residential and small commercial customers of Edison
would have paid if the Financing Order were not adopted;
3. Find that the amount of SPE Debt Securities and Rate Reduction Bonds to be
issued shall be determined using the sizing methodology described in this
Application based on market conditions at the time the Rate Reduction Bonds
are priced, that the principal on the SPE Debt Securities and the Rate
Reduction Bonds shall be repaid in substantially equal annual amounts, that
the final expected maturity of the SPE Debt Securities and the Rate
Reduction Bonds shall be no later than ten years from the date of issuance
with a final legal maturity to be determined by the Infrastructure Bank,
and that the Infrastructure Bank shall determine the overcollateralization
amount required;
B. THE FIXED TRANSITION AMOUNTS AND FTA CHARGES
4. Determine that the methodology to calculate the FTA charges associated with
Rate Reduction Bond issuance shall be as described in this Application, and
that these FTA charges shall be filed with the Commission in Advice Letters
(the "Issuance Advice Letters"); and find that FTA charges may be included
as a separate line item on customers' bills;
5. Find that each Issuance Advice Letter associated with the Financing Order
shall be effective five business days after filing, upon which it shall be
deemed a part of this Financing Order for purposes of AB 1890, and that the
FTA charges established thereby constitute Fixed Transition Amounts;
6. Require that, to the extent feasible, if residential or small commercial
customers fail to pay their utility bills in full, any shortfall in
revenues received shall be allocated between FTA charges and all other
components of
-25-
<PAGE>
the customers' bills based on the ratio of the amount of the bills relating
to the FTA charges and the amount relating to all other components of the
bills;
C. THE FTA CHARGES TRUE-UP MECHANISM
7. Establish that the procedures for the expeditious approval by the
Commission of periodic adjustments (the "True-up Mechanisms") to the FTA
charges (as may be necessary to ensure timely recovery of all Transition
Costs that are the subject of the Financing Order, and the costs of capital
associated with the provision, recovery, financing, or refinancing thereof,
including the costs of issuing, servicing and retiring the SPE Debt
Securities and Rate Reduction Bonds contemplated by the Financing Order)
shall be as described in this Application, and find that such True-up
Mechanisms shall continue until the SPE Debt Securities and the Rate
Reduction Bonds are paid in full;
8. Determine that the methodology to calculate routine FTA charge adjustments
shall be as described in this Application, and that such adjustments shall
be filed with the Commission in routine True-up Mechanism Advice Letters;
determine that such routine True-up Mechanism Advice Letters shall be filed
with the Commission annually at least 15 days before the end of each
calendar year and the resulting adjustments to the FTA charges shall be
implemented at the beginning of the next calendar year; and determine that
additionally such routine True-up Mechanism Advice Letters may be filed at
least 15 days before the end of any calendar quarter and the resulting
adjustments to the FTA charges shall be implemented at the beginning of the
next calendar quarter;
9. Find that a non-routine True-up Mechanism Advice Letter may be filed at
least 90 days before the end of any calendar quarter and the resulting
-26-
<PAGE>
adjustments to the FTA charges shall be implemented at the beginning of the
next calendar quarter;
10. Find that a True-up Mechanism Advice Letter shall be filed at least 15 days
before each anniversary of the issuance of the Financing Order, and that
the Commission shall determine on the Financing Order issuance anniversary,
as required by AB 1890, whether adjustments to the FTA charges are
required, with the resulting adjustments to the FTA charges, if necessary,
to be implemented within 90 days of the Financing Order issuance
anniversary;
D. TRANSITION PROPERTY
11. Find that upon the effective date of each Issuance Advice Letter associated
with the Financing Order, all of the Transition Property identified in such
Advice Letter constitutes a current property right and shall thereafter
continuously exist as property for all purposes;
12. Find that the Transition Property identified in an Issuance Advice Letter
associated with the Financing Order shall include, without limitation, (1)
the right, title and interest in and to the FTA charges set forth in such
Advice Letter, as adjusted from time to time, (2) the right to be paid the
total amounts set forth in such Advice Letter, (3) the right, title and
interest in and to all revenues, collections, claims, payments, money, or
proceeds of or arising from such FTA charges, and (4) all rights to obtain
adjustments to such FTA charges under the True-up Mechanisms;
13. Find that the holders of the Transition Property are entitled to recover
Fixed Transition Amounts in the aggregate amount equal to the principal
amount of the SPE Debt Securities and the Rate Reduction Bonds, all
interest thereon, the overcollateralization amount and all related fees,
costs and
-27-
<PAGE>
expenses in respect of the SPE Debt Securities and Rate Reduction Bonds
until they have been paid in full;
E. STEPS IN THE RATE REDUCTION BOND TRANSACTION
1. Transfer of Transition Property to the SPE
14. Approve the sale by Edison of the Transition Property identified in an
Issuance Advice Letter to one or more SPEs, as identified in such Advice
Letter;
15. Find that, upon the sale by Edison of the Transition Property to one or
more SPEs, (1) such SPE(s) shall have all of the rights originally held by
Edison with respect to such Transition Property, including, without
limitation, the right to exercise any and all rights and remedies to
collect any amounts payable by any customer in respect of such Transition
Property, notwithstanding any objection or direction to the contrary by
Edison and (2) any payment by any customer to such SPE shall discharge such
customer's obligations in respect of such Transition Property to the extent
of such payment, notwithstanding any objection or direction to the contrary
by Edison;
16. Find that, upon the sale by Edison of the Transition Property to one or
more SPEs, Edison shall not be entitled to recover the FTA charges
associated with such Transition Property other than for the benefit of the
holders of the SPE Debt Securities and the Rate Reduction Bonds in
accordance with Edison's duties as servicer;
17. Find that the SPE(s) identified in an Issuance Advice Letter, if so
approved by the Infrastructure Bank, constitute Financing Entities;
-28-
<PAGE>
2. TRANSFER OF SPE DEBT SECURITIES TO THE ISSUER
18. Approve the issuance by the SPE(s), identified in an Issuance Advice Letter
and approved by the Infrastructure Bank, of SPE Debt Securities to one or
more Issuers, as identified in such Advice Letter, on terms to be approved
by the Infrastructure Bank; provided, however, that the aggregate amount of
SPE Debt Securities related to all such Edison Advice Letters associated
with the Financing Order shall not exceed $3.0 billion;
19. Approve the pledging by the SPE(s), identified in an Issuance Advice
Letter, as security for the SPE Debt Securities, of such SPE's right, title
and interest in and to the Transition Property, and of such SPE's other
assets;
3. ISSUANCE OF THE RATE REDUCTION BONDS
20. Approve the issuance by the Issuer(s), identified in an Issuance Advice
Letter and approved by the Infrastructure Bank, of Rate Reduction Bonds, on
terms to be approved by the Infrastructure Bank; provided, however, that
the aggregate amount of Rate Reduction Bonds related to all such Edison
Advice Letters associated with the Financing Order shall not exceed $3.0
billion;
21. Approve, to the extent stated in an Issuance Advice Letter, the pledging by
the Issuer(s), as security for the Rate Reduction Bonds, of such Issuer's
right, title and interest in and to the SPE Debt Securities and all
security therefor;
22. Find that any default under the documents relating to the SPE Debt
Securities or the Rate Reduction Bonds shall entitle the holders of the SPE
Debt Securities or Rate Reduction Bonds or the trustees or representatives
for such holders to exercise any and all rights or remedies such holders or
such trustees or representatives therefor may have pursuant to any
statutory lien on the Transition Property;
-29-
<PAGE>
F. Rate Reduction Bond Servicing
23. Authorize Edison to contract with one or more SPEs and/or Issuers to
collect amounts in respect of the FTA charges for the benefit and account
of such SPEs and/or Issuers, and to account for and remit these amounts to
or for the account of such SPEs and/or Issuers;
24. Provide that, in the event of default by Edison in payment to or for the
benefit of the SPE of the FTA charges, the Commission, upon the application
by (1) the holders of the SPE Debt Securities or the Rate Reduction Bonds
and the trustees or representatives therefor as beneficiaries of any
statutory lien permitted by the Public Utilities Code, (2) the SPE or its
assignees, (3) the Issuer, or (4) pledgees or transferees, including
transferees under Public Utilities Code Section 844, of the Transition
Property, shall order the sequestration and payment to or for the benefit
of the SPE or such other party of revenues arising with respect to the
Transition Property;
25. Find that the Commission shall not approve or require any third party
servicer(s) to replace Edison in any of its servicing functions in whole or
in part without determining that approving or requiring such third party
servicer(s) to replace Edison will not cause the then current rating of the
Rate Reduction Bonds to be withdrawn or downgraded;
26. Find that regardless of who is responsible for billing, residential and
small commercial customers shall continue to be responsible for FTA
charges;
27. Find that if a third party meters and bills for the FTA charges, Edison
must have access to information on kilowatt-hour billing and usage by
customers to provide for proper reporting to the SPE and to perform its
obligations as servicer;
-30-
<PAGE>
28. Find that in the case of a third party default, billing responsibilities
must be promptly transferred to another party to minimize losses;
29. Find that the failure of customers to pay FTA charges shall allow shut-off
by Edison on behalf of the SPE of the customers failing to pay FTA charges
in accordance with Commission-approved shut-off policies;
G. RATE REDUCTION AUTHORIZATION
30. Conditioned on the timely and sufficient issuance of Rate Reduction Bonds,
authorize, as required by AB 1890, Edison to provide the 10 percent rate
reduction via a bill credit to eligible customers effective January 1,
1998;
31. Find that for purposes of eligibility to receive the rate reduction and
responsibility to pay for FTA charges, Edison's residential and small
commercial customers are those served on rate schedules in the Domestic and
GS-1 rate groups;
H. RATEMAKING MECHANISM AUTHORIZATIONS
32. Authorize Edison to establish by Advice Letter filing(s), the Rate
Reduction Bond Memorandum Account, Schedule RRB, and modifications to
Edison's Preliminary Statement and Transition Cost Balancing Account as
described in this Application;
33. Adopt the provisions described in this Application to ensure that the FTA
charges are non-bypassable, and authorize the rate collection methods
relating thereto;
I. ADDITIONAL AUTHORIZATIONS AND APPROVALS
-31-
<PAGE>
34. Provide that this Financing Order shall become effective in accordance with
its terms only when Edison files with the Commission its written consent to
all terms and conditions of the Order; and
35. Provide such additional authorizations and approvals as may be necessary
for Edison to carry out the transactions described in this Application.
Dated at Rosemead, California, this 6th day of May, 1997.
SOUTHERN CALIFORNIA EDISON COMPANY
By: /s/ Theodore F. Craver, Jr.
----------------------------------
THEODORE F. CRAVER, JR.
Vice President and Treasurer
ANN P. COHN
KENNETH S. STEWART
BRUCE A. REED
/s/ Bruce A. Reed
- ------------------------
By: Bruce A. Reed
Attorneys for
SOUTHERN CALIFORNIA EDISON COMPANY
2244 Walnut Grove Avenue
Post Office Box 800
Rosemead, California 91770
Telephone: (818) 302-4183
Facsimile: (818) 302-7740
Dated: May 6, 1997
-32-
<PAGE>
VERIFICATION
------------
I, Theodore F. Craver, Jr., am Vice President and Treasurer of Southern
California Edison Company, the Applicant herein, and am authorized to make this
verification on its behalf. I am informed and believe that the matters stated
in the foregoing document are true.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 6th day of May, 1997, at Rosemead, California.
/s/ Theodore F. Craver, Jr.
-----------------------------------
THEODORE F. CRAVER, JR.
Vice President and Treasurer
<PAGE>
APPENDIX A - SUMMARY OF EARNINGS
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
1997 AUTHORIZED
SUMMARY OF EARNINGS
CPUC JURISDICTION
(Thousands of 1997 Dollars)
<TABLE>
<CAPTION>
1997
DESCRIPTION Authorized(1)(2)
----------- ----------------
(1)
<S> <C>
OPERATING REVENUES
Total Operating Revenues 3,775,170
OPERATING EXPENSES
Steam 213,534
Nuclear 11,333
Hydro 25,092
Other 18,496
----------
Production - Total 268,455
Transmission 78,274
Distribution 179,801
Customer Accounts 136,284
Uncollectibles 12,943
CS&I - DSM Programs 69,293
CS&I - O&M 10,482
CS&I - Economic Development 3,246
RD&D - RD&D Programs 29,644
RD&D - O&M 497
A&G (Except RD&D, P&B) 160,912
Health Care 99,530
Non-health Care 73,204
PBOPs 54,400
Franchise Requirements 30,548
Software Savings Adjustment (6,130)
Off-System Sales Adder (843)
----------
Subtotal 1,200,539
Revenue Credits (132,169)
Depreciation (Exc. Nucl. Decom.) 1,040,757
Nuclear Decommissioning Exp. 99,259
Taxes Other Than Income 139,428
Taxes Based on Income 479,516
----------
Total Operating Expenses 2,827,330
NET OPERATING REVENUE 947,840
RATE BASE 10,597,010
RATE OF RETURN 8.94%
</TABLE>
(1) Reflects the 1995 GRC Authorized amounts adjusted for the CPUC-Authorized
SONGS 2&3 and Palo Verde Settlement Agreements, and the 1997 adopted cost of
capital.
(2) This authorized summary of earnings was allocated between generation and
non-generation to obtain the non-generation rate PBR starting point
(D.96-09-092).
<PAGE>
APPENDIX B - BALANCE SHEET AND INCOME STATEMENT
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
----------------------------------
BALANCE SHEET
MARCH 31, 1997
A S S E T S
(Thousands of Dollars)
<TABLE>
<S> <C>
UTILITY PLANT:
Utility plant, at original cost $20,537,877
Less - Accumulated depreciation and
decommissioning (9,687,121)
-----------
10,850,756
Construction work in progress 525,265
Nuclear fuel, at amortized cost 185,411
-----------
11,561,432
-----------
OTHER PROPERTY AND INVESTMENTS:
Nonutility property, at cost - less
accumulated depreciation 70,175
Nuclear decommissioning trusts, at cost 1,499,836
Other investments 115,470
-----------
1,685,481
-----------
CURRENT ASSETS:
Cash and equivalents 223,283
Receivables, including unbilled revenues,
less reserves of $24,525
for uncollectible accounts 832,123
Fuel inventory 58,626
Materials and supplies, at average cost 153,458
Accumulated deferred income taxes - net 167,699
Prepayments and other current assets 59,794
-----------
1,494,983
-----------
DEFERRED CHARGES:
Unamortized debt issuance and
reacquisition expense 339,654
Rate phase-in plan 40,013
Income tax-related deferred charges 1,691,963
Other deferred charges 434,269
-----------
2,505,899
-----------
$17,247,795
===========
</TABLE>
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
----------------------------------
BALANCE SHEET
MARCH 31, 1997
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)
<TABLE>
<S> <C>
CAPITALIZATION:
Common stock $ 2,168,054
Additional paid-in capital 218,399
Retained Earnings 2,603,439
-----------
Common shareholder's equity 4,989,892
Preferred stock without mandatory
redemption requirements 283,755
Preferred stock with mandatory redemption requirements 275,000
Long-term debt 4,660,831
-----------
10,209,478
-----------
OTHER LONG-TERM LIABILITIES:
Accumulated provisions for pensions, insurance and other 452,048
-----------
CURRENT LIABILITIES:
Long-term debt due within one year 426,470
Short-term debt 134,826
Accounts payable 327,191
Accrued taxes 560,766
Accrued interest 104,677
Dividends payable 106,102
Regulatory balancing accounts - net 106,505
Deferred unbilled revenue and other 787,819
-----------
2,554,356
-----------
DEFERRED CREDITS:
Accumulated deferred income taxes - net 3,097,468
Accumulated deferred investment tax credits 342,042
Customer advances and other deferred credits 592,403
-----------
4,031,913
-----------
$17,247,795
===========
</TABLE>
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
----------------------------------
STATEMENT OF INCOME
3 MONTHS ENDED MARCH 31, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVENUE:
Sales $1,642,274
Other 53,162
----------
Total operating revenue 1,695,436
----------
OPERATING EXPENSES:
Fuel 144,616
Purchased power 628,674
Provisions for regulatory adjustment clauses - net (88,173)
Other operating expenses 240,954
Maintenance 95,878
Depreciation and decommissioning 305,583
Income taxes 95,297
Property and other taxes 38,875
----------
Total operating expenses 1,461,704
----------
OPERATING INCOME 233,732
----------
OTHER INCOME AND DEDUCTIONS:
Provision for rate phase-in plan (11,309)
Allowance for equity funds used during construction 2,003
Interest and dividend income 6,856
Other - net 4,649
----------
Total other income and deductions - net 2,199
----------
INCOME BEFORE INTEREST EXPENSE 235,931
----------
INTEREST EXPENSE:
Interest on long-term debt and amortization 91,189
Other interest expense 27,491
Allowance for borrowed funds used during construction (2,412)
Capitalized interest (1,320)
----------
Total interest expense - net 114,948
----------
NET INCOME 120,983
DIVIDENDS ON CUMULATIVE PREFERRED STOCK 8,599
----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 112,384
==========
</TABLE>
<PAGE>
APPENDIX C - LIST OF COUNTIES AND MUNICIPALITIES
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
----------------------------------
Citizens or some of the citizens of the following counties and municipal
corporations will or may be affected by the changes in rates proposed herein.
<TABLE>
<CAPTION>
Counties
--------
<S> <C> <C> <C>
Fresno Kings Orange Santa Barbara
Imperial Los Angeles Riverside Tulare
Inyo Madera San Bernardino Ventura
Kern Mono
<CAPTION>
Municipal Corporations
----------------------
Adelanto Diamond Bar Lomita Rosemead
Agoura Hills Downey Long Beach San Bernardino
Alhambra Duarte Los Alamitos San Buenaventura
Anaheim El Monte Los Angeles San Dimas
Apple Valley El Segundo Lynwood San Fernando
Arcadia Exeter Mammoth Lakes San Gabriel
Artesia Farmersville Manhattan Beach San Jacinto
Avalon Fillmore Maywood San Marino
Azusa Fontana McFarland Santa Ana
Baldwin Park Fountain Valley Mission Viejo Santa Barbara
Banning Fullerton Monrovia Santa Clarita
Barstow Gardena Montclair Santa Fe Springs
Beaumont Garden Grove Montebello Santa Monica
Bell Glendale Monterey Park Santa Paula
Bellflower Glendora Moorpark Seal Beach
Bell Gardens Grand Terrace Moreno Valley Sierra Madre
Beverly Hills Hanford Murrieta Signal Hill
Bishop Hawaiian Gardens Newport Beach Simi Valley
Blythe Hawthorne Norco South El Monte
Bradbury Hemet Norwalk South Gate
Brea Hermosa Beach Ojai South Pasadena
Buena Park Hesperia Ontario Springs
Burbank Hidden Hills Orange Stanton
Calabasas Highland Oxnard Tehachapi
California City Huntington Beach Palmdale Temple City
Calimesa Huntington Park Palm Desert Temecula
Camarillo Indian Wells Palm Springs Thousand Oaks
Canyon Lake Industry Palos Verdes Estates Torrance
Carpinteria Inglewood Paramount Tulare
Carson Irvine Pasadena Tustin
Cathedral City Irwindale Perris Twenty-Nine Palms
Cerritos La Canada-Flintridge Pico Rivera Upland
Chino Laguna Beach Placentia Ventura
Chino Hills Laguna Niguel Pomona Vernon
Claremont La Habra Porterville Victorville
Colton La Habra Heights Port Hueneme Villa Park
Commerce Lake Elsinore Rancho Cucamonga Visalia
Compton Lakewood Rancho Mirage Walnut
Corona La Mirada Rancho Palos Verdes West Covina
Costa Mesa Lancaster Redlands West Hollywood
Covina La Palma Redondo Beach Westlake
Cudahy La Puente Rialto Westminster
Culver City La Verne Ridgecrest Whittier
Cypress Lawndale Riverside Woodlake
Delano Lindsay Rolling Hills Yorba Linda
Desert Hot Springs Loma Linda Rolling Hills Estates Yucaipa
</TABLE>
<PAGE>
Application No: 97-05-
-------
Exhibit No: SCE-1
-------
Witness: Various
-------
[Logo of Southern California Edison]
An EDISON INTERNATIONAL Company
(U 338-E)
RATE REDUCTION BONDS AND 10 PERCENT
RATE REDUCTION
Before the
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Rosemead, California
May 6, 1997
<PAGE>
SCE-1
RATE REDUCTION BONDS AND 10% RATE REDUCTION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE WITNESS
<C> <S> <C> <C>
I. LEGISLATIVE AUTHORITY FOR THE 10 PERCENT
RATE REDUCTION AND ISSUANCE OF
RATE REDUCTION BONDS..................................... I-1 M. Simpson
A. Background Of Electric Industry Restructuring
And AB 1890......................................... I-1
B. General Statutory And Procedural Authorizations
Related To The Rate Reduction Bond Transaction...... I-3
C. Rate Reduction Bonds And 10 Percent Rate
Reduction........................................... I-5
II. ROLES OF VARIOUS ENTITIES IN RATE REDUCTION BOND
TRANSACTION............................................. II-1
A. Role Of California Infrastructure And Economic
Development Bank................................... II-1
B. Roles Of Other Entities............................ II-2
III. ASSET-BACKED SECURITIES MARKET......................... III-1
A. Overview Of Asset-Backed Securities............... III-1
1. Differences Between Asset-Backed Securities
And Corporate Bonds.......................... III-2
2. Pricing For Asset-Backed Securities.......... III-2
B. Size And Growth Of Asset-Backed Securities
Market............................................ III-3
IV. SECURITIZATION OF TRANSITION COSTS, AMOUNT
TO BE FINANCED, AND EDISON'S PROPOSED RATE
REDUCTION BOND TRANSACTION.............................. IV-1
A. Asset Securitization............................... IV-1
1. Creation Of The Transition Property........... IV-2
</TABLE>
-i-
<PAGE>
SCE-1
RATE REDUCTION BONDS AND 10% RATE REDUCTION
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
SECTION PAGE WITNESS
<C> <S> <C> <C>
2. Bankruptcy Treatment........................... IV-3
3. Securing The Revenue Stream From
Collections Risk............................... IV-4
a) Billing Policies To Support Bond
Rating.................................... IV-8
4. Credit Enhancement............................ IV-11
a) Purpose Of True-Up Mechanism........... IV-9
b) Purpose Of Overcollateralization
Amount................................... IV-9
B. The Amount Of Rate Reduction Bonds Needed,
Expenses Of Issuance, And Use Of Proceeds.......... IV-10
1. Amount Of Rate Reduction Bonds To Be
Issued........................................ IV-10
2. Expenses For Issuance Of Rate Reduction
Bonds......................................... IV-10 G. Tabata
3. Use Of Proceeds From Rate Reduction Bonds..... IV-13 M. Simpson
C. Terms Of The Rate Reduction Bond Transaction....... IV-13
1. Accounting And Tax Features Of The
Transaction................................... IV-16
a) Accounting Features Of The Transfer...... IV-16 L. Geiger
b) Tax Considerations....................... IV-16 D. Klun
2. Proposed Overcollateralization Amount......... IV-18 M. Simpson
3. Bond Trustee Fees And Other Ongoing Costs..... IV-18 G. Tabata
4. Fixed Transition Amount Charge
Calculation................................... IV-20 C. Jacobs
</TABLE>
-ii-
<PAGE>
SCE-1
RATE REDUCTION BONDS AND 10% RATE REDUCTION
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
SECTION PAGE WITNESS
<C> <S> <C> <C>
a) Initial FTA Charge Calculation
Process............................................ IV-20
b) Forecast FTA Charges............................... IV-21
5. Servicing Obligations................................... IV-22 G. Tabata
6. Schedule For Financings................................. IV-25
V. RATE REDUCTION BOND SIZING AND ECONOMIC
BENEFITS........................................................ V-1 C. Jacobs
A. Sizing The Rate Reduction Bonds............................ V-1
B. Summary Of Economic Benefits Of The Rate
Reduction Bond Transaction................................. V-3
C. Determining The Amount Financed And Need For
Additional Financing....................................... V-4
D. Impact Of Debt Retirement.................................. V-5
E. Cashflow Considerations.................................... V-6
</TABLE>
Appendix SCE-1-A: Rate Reduction Bond Sizing Model
Appendix SCE-1-B: FTA Charge Calculation Equations
Appendix SCE-1-C: Interest Earnings On FTA Charge Collections
-iii-
<PAGE>
I.
LEGISLATIVE AUTHORITY FOR THE 10 PERCENT RATE REDUCTION AND
-----------------------------------------------------------
ISSUANCE OF RATE REDUCTION BONDS
--------------------------------
The purpose of this chapter is to
. Provide a general background to electric industry restructuring as it
relates to recovery of Transition Costs and the use of a nonbypassable
charge on consumption of electricity as the basis for the issuance of Rate
Reduction Bonds;
. Describe the statutory authorizations related to the Rate Reduction Bond
transaction; and
. Highlight the linkage between the 10 percent rate reduction for residential
and small commercial customers and the issuance of Rate Reduction Bonds.
A. BACKGROUND OF ELECTRIC INDUSTRY RESTRUCTURING AND AB 1890
---------------------------------------------------------
To understand the Rate Reduction Bond transaction, it is helpful to
consider in broad outline the events which have resulted in the filing of this
Application. In Decision No. 95-12-063 (December 20, 1995) as modified by
Decision No. 96-01-009, the Commission prescribed a new generation market
structure that "embraces competition in the provision of electric services,
offers retail customers choice and flexibility in energy services, and reforms
the manner in which we regulate utility monopoly services." (D. 95-12-063, p.
25.) The transformation of the electric generation industry to a competitive
market will ultimately result in the rates charged for energy being based on the
competitive market price for energy rather than regulated prices.
The Commission found that electric rates paid by customers in California
were high and that these costs resulted in part from generation-related costs
such as long-term power purchase contracts with Qualifying Facilities ("QFs") or
nuclear power plant costs that had previously been reviewed and found reasonable
by the Commission. (Id. at p. 110.) However, the Commission also recognized
that the transformation to the competitive market would result in some
generation-related facilities having values
I-1
<PAGE>
substantially below their present book value and contracts to purchase
electricity at rates above the market price for power. The Commission and the
Legislature, through the enactment of Assembly Bill 1890 ("AB 1890"), have
provided the opportunity to recover the net above-market costs of generation-
related assets and obligations by allowing utilities to continue to include such
costs in their rates for a prescribed recovery period.
AB 1890 was passed unanimously by both houses of the California Legislature
in August 1996 and was signed into law by Governor Wilson on September 23, 1996.
AB 1890 implements and enhances the Commission's electric industry restructuring
program. A number of the Public Utilities ("PU") Code Sections added by AB 1890
direct the Commission to establish effective mechanisms to ensure recovery of
Transition Costs from existing and future customers of electricity, subject to
the limited exemptions provided therein. (See, e.g., PU Code (S)(S) 367, 369.)
PU Code (S) 367 generally allows electric utilities to continue to recover the
net uneconomic portion of their generation-related assets and obligations (i.e.,
Transition Costs) by separating this component of existing rates as a
Competition Transition Charge ("CTC") and by continuing to collect these costs
as a nonbypassable charge from customers over a Transition Cost recovery period.
PU Code (S) 368 required electric utilities to submit to the Commission a
plan for continued recovery of Transition Costs in the competitive marketplace.
Edison submitted its cost recovery plan on October 15, 1996, which was adopted
with some modifications in Decision No. 96-12-077. As stated in Edison's cost
recovery plan, under AB 1890 electricity rates for residential and small
commercial customers are frozen until January 1, 1998, and then, contingent on
Rate Reduction Bond financing, reduced by 10 percent and then frozen again for a
"rate freeze period" extending through the earlier of March 31, 2002 or the date
the Transition Costs have been collected in full./1/ Rates for all
---
- --------------------
/1/ The period from January 1, 1998 through the earlier of March 31, 2002 or
the date on which Transition Costs are fully recovered will be referred to as
the "rate freeze period" throughout this testimony.
I-2
<PAGE>
other customers remain at June 10, 1996 levels throughout the rate freeze
period. Freezing rtes stabilizes collected revenues (subject to sales
variations), and declining cost create revenues beyond those required to provide
service, that can be applied to offset Transition Costs. (D. 96-12-077, p. 6.)
AB 1890 provides electric utilities a reasonable opportunity to collect
Transition Costs and allows the recovery of a portion of the Transition Costs by
the issuance of Rate Reduction Bonds which are backed by a nonbypassable charge
based on the consumption of electricity.
B. GENERAL STATUTORY AND PROCEDURAL AUTHORIZATIONS RELATED TO THE RATE
-------------------------------------------------------------------
REDUCTION BOND TRANSACTION
--------------------------
In this Application, Edison is applying for a Financing Order from the
Commission finding that Edison may recover a portion of its Transition Costs
from the proceeds of Rate Reduction Bonds and for authorization for a 10 percent
rate reduction for residential and small commercial customers effective January
1, 1998. The 10 percent rate reduction is to be accomplished by
. "monetizing" or securitizing a portion of Edison's Transition Costs
through the sale of Transition Property to one or more Special Purpose
Entities ("SPEs") (as described in Chapters IV.A and IV.C below) and the
issuance of Rate Reduction Bonds with a term to maturity extending
beyond March 31, 2002, i.e., beyond the rate freeze period;
. requiring that debt service and related costs on the Rate Reduction
Bonds be paid from rates paid by residential and small commercial
customers subject to June 10, 1996 total rate levels (reduced by 10
percent) during the rate freeze period;
. allowing the SPE to collect the portion of Transition Costs secured by
the Rate Reduction Bonds along with interest and related costs from
residential
I-3
<PAGE>
and small commercial customers by means of nonbypassable charges based
on electricity usage (the "FTA charges");
. after the end of the rate freeze period, allowing the SPE to continue to
collect the FTA charges from residential and small commercial customers
in amounts sufficient to pay the debt service and related costs for the
Rate Reduction Bonds in addition to allowing Edison to recover through
rates its costs of providing service; and
. requiring future adjustments to the FTA charges imposed on residential
and small commercial customers to ensure the collection of revenues
sufficient to pay the debt service and related costs on Rate Reduction
Bonds in accordance with the Financing Order.
AB 1890 provides the statutory basis for issuing Rate Reduction Bonds that
will result in a revenue requirement reduction sufficient to enable a 10 percent
rate reduction for residential and small commercial customers during the rate
freeze period. It requires utilities to apply for Financing Orders from the
Commission by June 1, 1997. In order to facilitate the securitization of the
Transition Costs, AB 1890 makes irrevocable the Commission's Financing Orders
with respect to the Transition Property that provides the basis for the issuance
of the Rate Reduction Bonds. (PU Code (S)(S) 841(c); 842(d).) AB 1890 also
provides that the state shall neither limit nor alter the Commission's Financing
Orders until the Rate Reduction Bond obligations are fully discharged. (PU Code
(S) 841(c).) Moreover, AB 1890 also requires the Commission to establish
procedures for the expeditious processing of applications for Financing Orders,
including the approval or disapproval of such applications within 120 days of
the filing thereof. (PU Code (S) 841(e).)
By separate application to the California Infrastructure and Economic
Development Bank ("Infrastructure Bank"), Edison will make the necessary
requests to provide for the issuance of the Rate Reduction Bonds by one of the
following (the "Issuer"): (1) the Infrastructure Bank, (2) one or more Special
Purpose Trusts, as defined in California
I-4
<PAGE>
Government Code ("Govt. Code") (S) 63010, that are authorized by and subject to
the oversight of the Infrastructure Bank, (each, an "SPT") or (3) one or more
other entities approved by the Infrastructure Bank. The Issuer will likely be
one or more SPTs.
C. RATE REDUCTION BONDS AND 10 PERCENT RATE REDUCTION
--------------------------------------------------
For residential and small commercial customers, timely and sufficient
issuance of Rate Reduction Bonds will allow a 10 percent reduction on January 1,
1998 from the rate levels shown on Edison's electric rate schedules as of June
10, 1996./2/ As described in Edison's cost recovery plan and in Edison's
--
Application, the Legislature made this rate reduction contingent upon issuance
of Financing Orders and Rate Reduction Bonds. AB 1890 provides for the issuance
of Rate Reduction Bonds to achieve a rate reduction of at least 10 percent for
residential and small commercial customers during the rate freeze period./3/
--
- ----------------------
/2/ Rates will be reduced by means of a 10 percent bill credit from the
- --
consumer's total bill as described in Exhibit SCE-2.
/3/ (See e.g. AB 1890 (S)1(e)); PU Code (S)(S) 330(w), 841(a).) Both Edison
- -- --------
and PG&E have filed petitions to modify D. 96-12-077, the Commission's Opinion
On Cost Recovery Plans, with respect to a single reference in that decision to
the optional use of Rate Reduction Bonds to effectuate the 10 percent rate
reduction.
I-5
<PAGE>
II.
ROLES OF VARIOUS ENTITIES IN RATE REDUCTION BOND TRANSACTION
------------------------------------------------------------
The purpose of this chapter is to provide a brief description of the role
of the Infrastructure Bank and other entities in the Rate Reduction Bond
transaction.
A. ROLE OF CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT
----------------------------------------------------------
INFRASTRUCTURE BANK
-------------------
Edison will file concurrently with this application a separate application
with the Infrastructure Bank to authorize the issuance of the Rate Reduction
Bonds. The Infrastructure Bank will give its final approval once the Commission
issues a Financing Order and the terms of the Rate Reduction Bonds have been
finalized. As discussed in more detail in Chapter IV.A below, it is anticipated
that an SPT approved by the Infrastructure Bank will be the Issuer of the Rate
Reduction Bonds. If an SPT is the Issuer of the Rate Reduction Bonds, then by
law the California State Treasurer's office ("State Treasurer") will act as
agent for sale of the bonds. Accordingly, the Infrastructure Bank and/or the
State Treasurer will approve the amount, pricing, timing and other terms of the
Rate Reduction Bonds. Edison is not asking the Commission to specifically
approve such matters, but rather, as Edison has done with its own Commission-
approved financings, is seeking to maintain the flexibility to determine such
matters in light of then-current market conditions. As described In Chapter
IV.C.4.a, below, as each series or class of Rate Reduction Bonds is priced,
Edison proposes to file on behalf of the applicable SPE, Issuance Advice Letters
to establish the initial levels of FTA charges, and those filings will reflect
the amount, pricing and other terms of the Rate Reduction Bonds after they are
approved by the Infrastructure Bank.
In addition to approving an SPT or other entity as the Issuer of the Rate
Reduction Bonds, and the amount, pricing, timing and other terms of the Rate
Reduction Bonds, the Infrastructure Bank and/or the State Treasurer will
participate in the transaction as follows:
II-1
<PAGE>
. Selection and/or approval of other participants to the transaction,
including bond counsel, bond trustee, bond underwriters (including
managing and co-managing underwriters) and their legal counsel, and
bond rating agencies;
. Review and approval of transaction documentation, including such
principal documents as a Servicing Agreement with Edison, Transition
Property Purchase Agreement, Rate Reduction Bond Trust Indenture, Trust
Agreement, Certificate Agreement, Bond Purchase Agreement, SPE Debt
Securities Purchase or Loan Agreement, SEC Registration Statement or
other disclosure document, Security Agreement, and other governmental
filings;
. Participation in various aspects of the issuance of the Rate Reduction
Bonds, including approval of the marketing plan for the bonds prepared
by the managing underwriter(s), participation in meetings or phone
calls with ratings agencies and potential investors, and conduct of its
own "due diligence," to the extent it considers necessary or
appropriate; and
. Preparation and review of reports to the Legislature or other
governmental bodies concerning the transaction, to the extent
considered necessary or appropriate.
B. ROLES OF OTHER ENTITIES
-----------------------
Other entities, including the Commission, also will play important roles
in the transaction. In the Joint Comments of the utilities regarding the ALJ's
ruling on the Rate Reduction Bond workshop, filed March 14, 1997, the utilities
described the recommended roles of the Commission, the Infrastructure Bank,
State Treasurer as Agent for Sale, the utilities, and underwriters in the
transaction. Consistent with AB 1890, the Commission's role covers customer
benefits and ratemaking impacts, while the Infrastructure Bank is expected to
address the mechanics of the transaction, including such considerations as the
amount, pricing, timing and other terms of Rate Reduction Bonds.
II-2
<PAGE>
III.
ASSET-BACKED SECURITIES MARKET
------------------------------
The purpose of this chapter is to
. Provide background information on the asset-backed securities market so the
Commission will better understand the context in which Rate Reduction Bonds
will be evaluated by financial markets and rating agencies;
. Provide an overview of the market for asset-backed securities ("ABS") in
terms of historical evolution, asset composition and size; and
. Describe how the Rate Reduction Bonds will be structured, rated, and
priced, relative to other ABS.
A. OVERVIEW OF ASSET-BACKED SECURITIES
-----------------------------------
The ABS market originated with mortgage-backed securities, which are backed
by the cash flows generated from the interest and principal payments in a pool
of residential mortgages. The ABS market developed out of the recognition that
this technique could be successfully applied to other types of financial and
non-financial assets with predictable cash flow streams, including automobile
loans, credit card receivables, boat loans, student loans, home equity loans,
trade receivables, equipment leases and many other asset classes. The credit
quality of these securities depends on the historical and projected analysis of
the cash flow characteristics of the underlying assets. Diversification of
underlying assets (e.g., many mortgagors, many credit card borrowers) enhances
the credit quality of the securities. The first public market ABS transaction
was completed in 1986.
The structure of an ABS depends critically on the underlying assets. In
general, the original owner of the underlying assets sells the assets directly
or indirectly to a special purpose entity and that entity directly or indirectly
issues securities for which the primary source of payment of principal and
interest is the cash flow generated by the underlying assets.
III-1
<PAGE>
For Rate Reduction Bonds, the asset is Transition Property which consists
of the FTA charges, as adjusted from time to time in accordance with the
provisions of the Financing Order and PU Code (S) 841(c). Specifically, the
Transition Property includes: (i) the right to be paid the amount that is
determined in the Financing Order to be the amount that Edison or its transferee
is lawfully entitled to receive pursuant to the provisions of Article 5.5 of the
PU Code and the proceeds thereof, and the right to all revenues, collections,
claims, payments, money, or proceeds of or arising from the FTA charges or
constituting Fixed Transition Amounts that are the subject of the Financing
Order; and (ii) all rights to obtain adjustments to the FTA charges pursuant to
the provisions of the Financing Order and PU Code (S) 841(c).
1. DIFFERENCES BETWEEN ASSET-BACKED SECURITIES AND CORPORATE BONDS
---------------------------------------------------------------
ABS are fundamentally different in structure and credit profile from
traditional corporate bonds. Most corporate bonds have "bullet" maturities,
meaning all the principal is paid in a single payment on a date-certain
maturity. In contrast, ABS maturities are often subject to some uncertainty
with respect to the exact timing of the principal repayment. For example, if
the underlying auto loans of an auto loan-backed security are prepaid at a
faster rate than expected, the repayment of principal to investors will be
accelerated. Conversely, if many of the underlying loans are delinquent,
investors may receive their principal later than originally expected. As
discussed in Chapter IV.A, the credit analysis of ABS securities is also
fundamentally different, focusing on the assets themselves and on structural
considerations, including those which isolate the assets from the credit risk of
the corporate enterprise, rather than the operating performance of an overall
corporate enterprise.
2. PRICING FOR ASSET-BACKED SECURITIES
-----------------------------------
Similar to most fixed-rate debt securities, fixed-rate ABS are priced
relative to a comparable term U.S. Treasury security. ABS usually tend to trade
relative to an expected average life, i.e., the expected average principal
repayment date. For example, a
III-2
<PAGE>
generic AAA-rated auto loan ABS with a two-year average life is valued by
investors at about 40 basis points over the benchmark two-year U.S. Treasury
yield. ABS do not typically trade at spreads over U.S. Treasury securities as
narrow as comparably-rated corporate bonds. For example, a hypothetical two-year
AAA-rated bond issued by an industrial company would probably trade at about 20
basis points over the benchmark U.S. Treasury yield. The spread premium required
for auto loan ABS reflects several factors including the uncertainty of the
exact timing of investors' return of principal, unlike the one-time payment or
"bullet" structure that corporate bonds offer.
B. SIZE AND GROWTH OF ASSET-BACKED SECURITIES MARKET
-------------------------------------------------
The ABS market has grown to approximately $347 billion since the first
public market offering was completed in 1986. The first public securitization
of credit card receivables took place in 1987 and this asset class now dominates
the ABS market, constituting over 46 percent of total outstanding ABS. Auto
loans and home equity loans each contribute about 14-19 percent of the market.
A third tier of asset classes includes manufactured housing, student loans and
equipment leases.
The pace of annual issuance in the ABS market has risen from $42 billion in
1990 to $148 billion in 1996. As the structure of securities and the type of
assets eligible for financing in the ABS market continue to evolve and expand,
this growth may continue. For example, floating-rate ABS has grown from about
10 percent of total issuance in 1990 to over 51 percent in 1996. The annual
issuance volume of asset-backed securities now rivals that of the corporate bond
market. For example, in 1996, asset-backed issuances approached that of
investment-grade corporate bonds ($148 billion vs. $185 billion), while in 1993,
ABS were only 31 percent of total corporate bond issuances.
III-3
<PAGE>
IV.
SECURITIZATION OF TRANSITION COSTS, AMOUNT TO BE FINANCED, AND
--------------------------------------------------------------
EDISON'S PROPOSED RATE REDUCTION BOND TRANSACTION
-------------------------------------------------
The purpose of this chapter is to
. Provide an overview of asset securitization, including methods of credit
enhancement such as the true-up mechanism and overcollateralization amount
as proposed to be applied to the Rate Reduction Bonds;
. Describe the proposed amount of the Rate Reduction Bonds, including the
estimated expenses of issuance of the Rate Reduction Bonds, the use of the
proceeds, and the estimated costs associated with using the proceeds; and
. Describe Edison's proposal for issuance of Rate Reduction Bonds; the
financing structure and relationship of the entities and transactions
involved, and Edison's proposed timetable for issuance of the Rate
Reduction Bonds.
A. ASSET SECURITIZATION
--------------------
Asset securitization means (1) taking certain legal and credit enhancement
measures to segregate an identifiable asset from the general property of the
seller, or original owner of the asset, to decrease the risk to the investors
that the asset and its related revenue stream will become uncollectible, and (2)
using the asset and its related revenue stream to secure a debt issuance which
is used to fund the acquisition of the asset. In other words, the revenue
stream associated with the asset is separated from the credit risks of the
originator and may be made more creditworthy. As a result, the securitized debt
supported by that revenue stream may have less risk, and therefore investors are
willing to accept a lower return, i.e., interest rate, than for a debt security
issued by the originator. The Rate Reduction Bonds issued on behalf of Edison
are expected to receive a higher credit rating from credit rating agencies than
Edison receives for its existing first mortgage debt.
IV-1
<PAGE>
The methods of creating this higher degree of creditworthiness for the
securitized asset and its related revenue stream generally fall into two
categories. First, steps are taken to isolate the asset and its revenue stream
from the credit risks of the original owner of the asset, including the risk of
insolvency of the original owner. When this separation of risk is successfully
achieved, investors look primarily to the asset's revenue stream for payment of
interest and principal on the securitized debt, rather than relying on the
credit of the original owner of the asset.
Second, assurance must be provided that the revenue stream itself will be
secure. The credit rating will depend on the predictability and stability of
the revenue stream, and the rating agencies' analysis will focus on the
stability of cash flows despite financial stress or changes in circumstances.
If necessary, the transaction may include credit enhancement mechanisms, such as
true-ups, an overcollateralization amount, reserve fund or bond insurance, in
order to achieve the desired credit rating. The aim of all of these mechanisms
is to give investors greater comfort that a creditworthy revenue stream will
exist to pay the interest and principal on the securitized debt, so that they
will be willing to purchase that debt at a lower interest rate than would
otherwise apply to the debt of the original owner of the asset.
The following sections discuss how this asset securitization and increased
creditworthiness will be achieved for the Rate Reduction Bond transaction.
1. CREATION OF THE TRANSITION PROPERTY
-----------------------------------
As mentioned above, securitizations require the identification and
isolation of an asset and its related revenue stream. In this case, the asset
and its related revenue stream is Edison's Transition Property. AB 1890
contemplates that the Commission will issue a Financing Order which will, among
other things (1) specify the amount of Transition Costs and related costs that
can be recovered through the FTA charges, (2) approve the methodology for
periodic true-ups of the FTA charges, (3) identify the Transition Property as
consisting of, among other things, all rights to the FTA charges,
IV-2
<PAGE>
and (4) declare the Financing Order irrevocable. (PU Code (S) 841(c).) The
Transition Property is created upon the effective date of the Issuance Advice
Letter filing which establishes the FTA charges. Moreover, under AB 1890, the
State has also agreed not to limit or alter the recoverability of the Transition
Property until the Rate Reduction Bonds are discharged. (Id.) Consistent with AB
1890, the Transition Property constitutes a current property right and will
continuously exist as property for all purposes until the Rate Reduction Bonds
are discharged. (PU Code (S)(S) 840(g), 841(f).) Thus, investors will be assured
that the FTA charge revenue stream to repay the bonds will not be altered at a
future date by the Commission or the State.
2. BANKRUPTCY TREATMENT
--------------------
One element of the transaction that is critical to obtaining the
desired credit rating is an assessment of risks in the event of an Edison
bankruptcy. To isolate investors from this potential risk, Edison intends to
form one or more SPEs that will be separately organized legal entities wholly
owned by Edison. Each SPE will own Transition Property and issue secured debt
(the "SPE Debt Securities") to the Issuer, and will be restricted from engaging
in any other business activity unrelated to the Rate Reduction Bond transaction.
Edison will transfer to the SPE all of its right, title and interest
in and to the Transition Property. The first element of the bankruptcy analysis
focuses on the transfer as constituting a "true sale" for commercial law
purposes. As such, if Edison were to become the subject of a bankruptcy
proceeding, the Transition Property would not be part of Edison's bankruptcy
estate and therefore would not be subject to the claims of Edison's creditors.
Although Edison is the seller of the Transition Property and will act as
servicer for the SPE and the Issuer by collecting the FTA charges, the SPE will
hold legal title to the collections received in connection with the FTA charges
and the funds will not be part of Edison's revenues or assets. AB 1890
expressly provides that certain transfers of Transition Property approved in a
Financing Order and intended by the parties to
IV-3
<PAGE>
constitute an absolute transfer or true sale shall be so treated for all
purposes, subject to certain limited exceptions. (See PU Code (S) 844.) As
contemplated by AB 1890, the Rate Reduction Bonds will be non-recourse to any of
Edison's assets, other than the Transition Property sold to the SPE. (PU Code
(S) 842(a).) In order to facilitate a true sale, Edison envisions that it will
give sufficient notice to third parties that the Transition Property is owned by
the applicable SPE and is not available to creditors of Edison. This notice
could be provided to an appropriate service list when the FTA charges are
established by Advice Letter filings. The notice might also involve inclusion of
the FTA charge as a separate line item on customers' bills. Edison is exploring
the technical feasibility of including a separate charge on its bills, and if
required for the bankruptcy opinion and if feasible, will include the FTA charge
as a line item on customers' bills.
The second element of the bankruptcy analysis focuses on the separate
legal status of Edison and the SPE. The transaction will be structured so that
in the event of a bankruptcy of Edison, the assets and liabilities of the SPE
would not be "substantively consolidated" with those of Edison.
As a result of the foregoing structural elements, the Rate Reduction
Bonds should be able to receive a credit rating superior to Edison's credit
rating. In order to issue their ratings, credit rating agencies will expect to
receive a satisfactory opinion of counsel confirming the foregoing structural
elements at the time the Rate Reduction Bonds are issued.
3. SECURING THE REVENUE STREAM FROM COLLECTIONS RISK
-------------------------------------------------
In assessing the risks of an ABS transaction, rating agencies will
review historical collection experience, requesting detailed information on
billing, collections, delinquencies, and write-offs attributable to residential
and small commercial customers in Edison's service territory. Because these
data have been collected for use in general rate case proceedings, the
information is readily available and understood. The collections ability of
utilities historically has been viewed as strong by the rating
IV-4
<PAGE>
agencies,/4/ due to the small percentage of ultimate write-offs and the ability
--
to enforce bill payment through service disconnection.
Although Edison's historical collections experience can be expected to
lend support for a strong rating for the Rate Reduction Bonds, the changes
resulting from industry restructuring are likely to be viewed with concern by
the rating agencies and investors. The possibility that the cash flows due
investors may be billed for and collected by other energy service providers
("ESPs") will create uncertainty as to the quality of the payment stream.
Rating agency analysts, no longer able to rely only on historical collections
data, will look for support to the Commission's policies and procedures for ESP
billing and collection of the FTA charges.
These policies and procedures will be addressed in other Commission
proceedings that may not be concluded before issuance of the Rate Reduction
Bonds. The absence of Commission guidelines will be viewed as an additional
risk factor by rating agencies, and could negatively affect the rating for the
Rate Reduction Bonds or the costs of credit enhancements. Thus, Edison requests
that the Commission provide broad policy guidance on a limited set of collection
issues to reassure the rating agencies.
a) Billing Policies To Support Bond Rating
---------------------------------------
The following key policies are important to assure the Rate Reduction
Bonds receive the highest possible bond rating:
. REGARDLESS OF WHO IS RESPONSIBLE FOR BILLING, RESIDENTIAL AND SMALL
COMMERCIAL CUSTOMERS WILL CONTINUE TO BE RESPONSIBLE FOR FTA
CHARGES IN ACCORDANCE WITH AB 1890.
AB 1890 authorizes the creation of Transition Property based on the
FTA charge levied on residential and small commercial customers. As described
in the previous section, the ability to sell this property for legal purposes
and obtain a
- -------------------------
/4/ Fitch, for example, characterizes utilities' collection experience as
- --
"exceptionally good." See "Guidelines for Rating Debt Backed by Regulatory
Assets" Fitch Research Global Power Electric Special Report, September 30, 1996.
IV-5
<PAGE>
bankruptcy opinion based on this sale is critical in obtaining the highest
possible bond rating and providing the lowest costs to customers. In order for a
true sale to take place, the nature of the property must be clear and in
conformity with the legislation, which states that residential and small
commercial customers "shall continue to pay fixed transition amounts after
December 31, 2001, until the bonds are paid in full ... ." (PU Code (S) 841(a)).
To support the bankruptcy opinion, the existence of other billing
agents cannot eliminate the clear and continuing obligation of these customer
classes to pay FTA charges. An ESP or other party may take on the obligation of
billing for FTA charges, and, in collecting FTA charges, may incur its own
obligation to pay such collections to the utility. However, a customer's
ultimate obligation to pay FTA charges cannot be transferred to the ESP without
clouding the nature of the Transition Property and violating the intent of AB
1890.
. IF AN ESP METERS AND BILLS FOR THE FTA CHARGES, THE UTILITY MUST
HAVE ACCESS TO INFORMATION ON KILOWATT-HOUR BILLING AND USAGE BY
CUSTOMERS TO PROVIDE PROPER REPORTING AND TO DISCHARGE ITS FUNCTION
AS SERVICER.
The rating agencies will require assurances that appropriate amounts
of FTA charges are indeed being billed and recovered by ESPs. In ABS
transactions, they typically assess the quality of a company's billing and
collections procedures, including systems and technology, collections
accounting, and actions against delinquent accounts. They also require regular
reporting from the servicer on collections. They will want to be assured that
collections quality is being maintained, as they closely monitor the bond
repayment after issuance of the bonds. In addition, they will want assurances
that Edison has sufficient information to perform other servicing roles,
including applications for adjustments to the FTA charge. As described below,
they will also desire remedies in instances where collections quality declines.
IV-6
<PAGE>
. APPROPRIATE SHUT-OFF POLICIES MUST BE MAINTAINED TO MINIMIZE
INVESTOR'S CREDIT RISK IN THE CASE OF NON-PAYMENT OF FTA CHARGES BY
INDIVIDUAL CUSTOMERS.
Shut off policies are viewed by the rating agencies as an important
tool for limiting losses from uncollectibles. As such, current policies must be
maintained to allow shut off of customers by the utility in the case of non-
payment of FTA charges.
. APPROPRIATE STANDARDS, PROCEDURES AND/OR CREDIT POLICIES MUST BE IN
PLACE TO ASSURE NO INCREASE IN INVESTOR RISK AS A RESULT OF ESP
COLLECTION OF FTA CHARGES.
. COMMISSION GUIDELINES SHOULD BE AT LEAST AS PROTECTIVE TO
INVESTORS AS EXISTING RATING AGENCY STANDARDS GOVERNING CREDIT
RISK.
. APPROPRIATE STANDARDS FOR BILLING AND SERVICING PROCEDURES
SHOULD BE SET IN PLACE CONSISTENT WITH THOSE IN SIMILAR ABS
TRANSACTIONS
Rating agencies and bond investors will see an additional layer of
risk if ESPs collect and hold FTA charges prior to remittance to the utility.
In order to minimize risk in the event of an ESP default, they will want to see
appropriate credit policies set in place to minimize this risk. For example, the
rating agencies may allow monthly remittances of the FTA charges by an ESP if
the company is rated Single-A or better. However, if a company is not rated, or
rated below investment grade, the rating agencies may require remittances within
24 or 48 hours, deposits, letters of credit, or other assurances to protect
investors.
In addition, Commission approved standards may be necessary to assure
ESPs act diligently in their role as billers and collectors. The choice of
appropriate methods to secure FTA charge collections against any risk resulting
from ESPs as billing agents is likely to be highly controversial and cannot be
decided in this proceeding. However, Commission reassurances in the Financing
Order that these methods will be determined and set in place will provide some
comfort to the rating agencies.
IV-7
<PAGE>
. IN THE CASE OF ESP DEFAULT, BILLING RESPONSIBILITIES MUST BE
PROMPTLY TRANSFERRED TO ANOTHER PARTY TO MINIMIZE LOSSES.
In the event that ESP defaults on its payments of FTA charge
collections, the rating agencies will desire prompt action to assure FTA charges
paid by customers continue to be passed on to investors. Although the actual
procedures in the event of ESP default may also be highly contested, there
should be less disagreement on the need for a way to assure prompt transfer of
accounts to another billing agent.
The broad policies outlined above are only a subset of those likely to
be addressed in the Commission's Direct Access, Unbundling, and Ratesetting
proceedings. Edison does not desire to preempt a full discussion by its request
in this proceeding. However, these issues clearly are important for achieving
the highest possible bond rating and the minimum ratepayer cost for the Rate
Reduction Bonds. As a result, we request that the Commission indicate its
intent to establish appropriate ESP billing procedures and credit policies by
approving the general guidelines described above.
4. CREDIT ENHANCEMENT
------------------
Credit enhancements are mechanisms that provide investors with added
assurance that they will recover their investment and a return thereon, i.e.,
interest. Credit enhancement mechanisms fall into two basic categories: (1)
those provided by the original owner of the asset by the transaction structure,
generally by enhancing the amount or nature of the revenue stream, and (2) those
provided by third parties. Examples of credit enhancement provided by the
original owner include reserve accounts, overcollateralization amounts, and
true-up mechanisms. Examples of credit enhancement provided by third parties
include bond insurance and letters of credit. The proposed Rate Reduction Bond
transaction will use a true-up mechanism authorized by AB 1890 and
overcollateralization amounts or other means of credit enhancement.
IV-8
<PAGE>
a) Purpose Of True-Up Mechanism
----------------------------
AB 1890 requires the Commission to approve adjustments to the FTA
charges as may be necessary to ensure timely recovery of principal and interest
on the Rate Reduction Bonds. These periodic true-ups will provide greater
assurance that the collection of aggregate FTA charges will be sufficient to
satisfy the obligations to the bondholders for the entire term of the bonds,
except for the time between the last true-up and the final maturity of the
bonds. The credit analysis of the Rate Reduction Bonds will be affected
favorably by the true-up mechanism for adjusting the FTA charges. Although the
true-up mechanism does not completely eliminate the need for other forms of
credit enhancement, it should significantly minimize the amount and cost of
other credit enhancements.
b) Purpose Of Overcollateralization Amount
---------------------------------------
Overcollateralization exists when security holders have purchased or
are secured by an asset and its related revenue stream with a value in excess of
the investment made by security holders, thereby assuring the likelihood of
repayment of the investment and a return thereon. For the Rate Reduction Bonds,
with the addition of a true-up mechanism, the overcollateralization amount is
intended to address shortfalls in collections after the legal maturity of the
Rate Reduction Bonds (i.e., any collection shortfalls throughout the transaction
will be recovered via the true-up mechanism until the legal maturity, after
which the FTA charge will no longer be collected). Because the FTA charges will
be calculated to recover not only the Rate Reduction Bond principal balance
outstanding but also the overcollateralization amount, collections could be
lower than expected and still be sufficient to fully amortize the Rate Reduction
Bonds. As described in Exhibit SCE-2, a ratemaking mechanism will be
established to ensure that any excess overcollateralization remaining after the
payment of the Rate Reduction Bonds will be credited to residential and small
commercial customers.
IV-9
<PAGE>
B. THE AMOUNT OF RATE REDUCTION BONDS NEEDED, EXPENSES OF ISSUANCE, AND
--------------------------------------------------------------------
USE OF PROCEEDS
---------------
1. AMOUNT OF RATE REDUCTION BONDS TO BE ISSUED
-------------------------------------------
The total amount of Transition Costs required to be financed and Rate
Reduction Bonds required to be issued to provide the revenue requirement
reduction sufficient for a 10 percent rate reduction over the rate freeze period
is a function of a number of variables, including actual sales to eligible
customers, and the principal repayment schedule, interest rate, and term of the
bonds. Thus, the total amount of Transition Costs to be financed and the amount
of Rate Reduction Bonds to be issued can only be estimated at this time. A
description of the model used to size the Rate Reduction Bonds is provided in
Chapter V and in Appendix SCE-1-A. Based on that model and current forecasts,
Edison estimates that $2.6 billion of Rate Reduction Bonds would be sufficient
to provide the 10 percent rate reduction over the rate freeze period. However,
to cover sale forecast errors, Edison is requesting approval in the Commission's
Financing Order of the issuance of Rate Reduction Bonds in the aggregate
principal amount of up to $3.0 billion.
2. EXPENSES FOR ISSUANCE OF RATE REDUCTION BONDS
---------------------------------------------
As defined in PU Code (S)(S) 840(d) and (g), Transition Property and
related FTA charges may be used to recover the "costs of providing, recovering,
financing, or refinancing the transition costs, including the costs of issuing,
servicing, and retiring rate reduction bonds." Based on the currently estimated
initial offering of $2.6 billion of Rate Reduction Bonds, Edison estimates the
issuance expenses to be approximately $21.5 million. Such costs include
underwriters fees and expenses, legal fees and disbursements for outside finance
counsel, bond counsel and underwriters' counsel, accounting fees, rating agency
fees, SEC registration fees, Infrastructure Bank fees, printing expenses, bond
trustee fees, SPE fees, and other miscellaneous expenses. These costs can only
be estimated at this time because the actual expenses will not be known
IV-10
<PAGE>
until after the Financing Order has been issued by the Commission and the Rate
Reduction Bonds have been priced and issued. These expenses will be paid from
the proceeds of the bond offering or, to the extent payment prior thereto is
required, will be paid by Edison, as seller and initial servicer, and reimbursed
through the proceeds of the bond offering. Other ongoing expenses, including
bond trustee and servicing fees, will be recovered through the FTA charges and
are discussed in Chapters IV.C.3 and IV.C.5, below.
The underwriters provide a number of services including advising on
the structure of the transaction, reviewing documentation, communicating with
the rating agencies, and marketing, pricing, underwriting and ultimate sale of
the bonds. Underwriters fees are generally calculated as a percentage of the
principal amount of the bonds sold. Typical underwriting fees on negotiated
fixed-income transactions with a final maturity of 10 years are 5/8% on the
principal amount of the bonds, or $6.25 per $1,000 (i.e., $16.24 million for a
$2.6 billion issuance). Underwriters' out-of-pocket expenses may also be
reimbursed. These fees will be negotiated between the State Treasurer and the
underwriters.
Legal fees and disbursements include expenses for company counsel,/5/
--
underwriters counsel, and bond counsel. Company counsel advises on the
transaction structure including bankruptcy, regulatory and tax matters, issues
the bankruptcy opinions and tax opinion if necessary, and drafts most other
documents related to the financing, including, among other tasks, SEC
registration statements and servicer agreements. Underwriters counsel also
advises on the transaction structure, reviews all transaction documents, and
performs a due diligence review of the transaction with an emphasis on
protecting the interests of the underwriters as initial purchasers of the
- ---------------------
/5/ Company counsel, as used herein, refers to legal specialists hired by
- --
Edison to provide expert legal advice on tax, bankruptcy, financing and other
issues and are not employees of Edison's law department.
IV-11
<PAGE>
bonds. Bond counsel advises the State with respect to investor and issuer
concerns and reviews and drafts the transaction documents. Fees for company
counsel, underwriters counsel, and bond counsel are estimated to be $2.0
million, $500,000, and $125,000, respectively.
Accounting fees are for Edison's independent auditor, Arthur Andersen
& Co., and include the costs of researching and determining the appropriate
accounting characterization for this transaction. Arthur Andersen's fees are
estimated to be $300,000.
Rating agency fees are the charges associated with reviewing the
transaction and setting and publishing a rating for the Rate Reduction Bonds and
may include expenses of outside legal counsel if retained by the rating agency.
These fees typically are in large degree fixed, based on the principal amount of
bonds issued. Rating agency fees are estimated to be $500,000.
SEC Registration fees are a standard cost of issuing publicly traded
debt, and are calculated as a percentage (1/33%) of the principal amount of
bonds issued. This calculates to approximately $790,000.
Estimates of other expenses not specifically described above are:
<TABLE>
<S> <C>
Infrastructure Bank $200,000
Printing $100,000
Trustee and Trustee Counsel $ 50,000
SPE Set-Up Fees, SPE Counsel, Other $ 25,000
</TABLE>
If, as expected, the Rate Reduction Bonds are issued by an SPT
authorized by the Infrastructure Bank, then most of these fees will be subject
to negotiation and/or approval by the Infrastructure Bank or State Treasurer,
not by Edison. In particular, the Infrastructure Bank or State Treasurer will
approve and/or appoint underwriters (and co-managers), underwriters counsel,
bond counsel, rating agencies, bond trustee, and bond trustee's counsel.
IV-12
<PAGE>
Other fees such as accounting and printing will be negotiated and/or
authorized by Edison, and also will be included in the costs recovered through
FTA charges. In addition, as discussed in this Application, Edison has
requested an exemption from fees required under PU Code (S) 1904. If that
exemption is not granted by the Commission, the estimated fees paid to the
Commission would be approximately $1.4 million.
3. USE OF PROCEEDS FROM RATE REDUCTION BONDS
-----------------------------------------
Edison intends to use the net proceeds after costs to reduce Edison's
capitalization and also to reimburse Edison for any transaction costs incurred
through the issuance of the Rate Reduction Bonds. The reduction in
capitalization will occur for debt, preferred stock, and common equity in
amounts that are approximately proportionate to Edison's current debt and equity
percentages.
C. TERMS OF THE RATE REDUCTION BOND TRANSACTION
--------------------------------------------
Figure IV-1 provides a schematic of the structure of the Rate Reduction
Bond transaction as is currently being proposed. This structure is subject to
change as a result of the final outcomes of several regulatory reviews and
proceedings.
In Step 1 of this process, Edison will form one or more SPEs that will be
separately organized legal entities. Edison will transfer to the SPE the
Transition Property in exchange for the net proceeds from the issuance of SPE
Debt Securities. Edison will also contribute equity to the SPE in an amount
equal to approximately 0.5 percent of the total principal amount of the Rate
Reduction Bonds. This equity is necessary to provide an adequate capital basis
for the SPE. The SPE is expected to loan an amount equal to the equity
contribution to an affiliate of Edison in return for a demand note from the
affiliate. This note, along with the Transition Property, will be pledged as
security for the SPE Debt Securities, thereby providing an additional amount of
security beyond that which is included in the Transition Property.
IV-13
<PAGE>
FIGURE IV-1
Rate Reduction Bonds
Transaction Structure
[CHART APPEARS HERE]
In Step 2, the SPE will issue the SPE Debt Securities to the Issuer.
The SPE Debt Securities will be secured by the Transition Property, the equity
of the SPE and all rights of the SPE in and to the transaction documents.
In Step 3, the Issuer will issue Rate Reduction Bonds to investors
either directly or at the direction of the SPE. The Rate Reduction Bonds may be
secured by a statutory lien on the Transition Property to the extent provided by
the Public Utilities Code. In addition if the Rate Reduction Bonds are issued
in the form of debt as opposed to beneficial interests, the Rate Reduction Bonds
will be secured by a security interest in the SPE Debt Securities, including the
Transition Property. The terms of the Rate Reduction Bonds will substantially
"mirror" the terms of the SPE Debt Securities, or the Rate Reduction Bonds will
be pass-through certificates representing interests in the SPE Debt Securities.
Issuer will transfer the net proceeds from the Rate Reduction Bonds to the SPE,
as consideration for the SPE Debt Securities, which will then transfer them to
Edison as consideration for the Transition Property.
IV-14
<PAGE>
While this is Edison's proposed transaction structure, each element is
subject to change due to circumstances outside Edison's direct control,
including resolution of Edison's IRS ruling request discussed below in Chapter
IV.C.1(b) and the passage of SB 477. The final transaction structure and terms
of the Rate Reduction Bonds will be determined in collaboration with the
Infrastructure Bank at the time the Rate Reduction Bonds are marketed and after
input from the rating agencies and the underwriters. Edison also expects,
subject to market conditions, that the Rate Reduction Bonds will be issued in
one or more series or classes beginning in late 1997, each of which may be in a
different form and have different terms or call features. Accordingly, Edison
is requesting Commission approval of the issuance of up to $3.0 billion of Rate
Reduction Bonds with the form and terms of each series or class of the Rate
Reduction Bonds to be determined at the time of offering. As explained more
fully in Exhibit SCE-2, Edison will notify the Commission by Advice Letter
filing when pricing and other terms are established for the offering of each
series or class of Rate Reduction Bonds. This filing will report the specific
costs of, and the amounts financed by the Rate Reduction Bonds, and the initial
FTA charges implemented at that time.
It is anticipated that the Rate Reduction Bonds will have expected
maturities not exceeding 10 years, depending on market conditions. Legal
maturities are expected to be approximately one to three years beyond the
expected maturities. This additional period of time beyond the expected
maturities is necessary to allow for continued collection of the FTA charges
should the Rate Reduction Bonds not be repaid by the expected maturity.
Interest and principal is expected to be payable quarterly, although other
frequencies such as monthly may be considered if it is determined to be
economically advantageous at the time of issue of the Rate Reduction Bonds.
Interest rates on the Rate Reduction Bonds will be fixed or floating as
determined by the Infrastructure Bank or State Treasurer at the time of issuance
to provide the lowest all-in-cost of bonds. Any
IV-15
<PAGE>
floating rate debt exposure will be mitigated with swaps or other interest rate
risk management instruments as approved by the Bank or State Treasurer.
1. ACCOUNTING AND TAX FEATURES OF THE TRANSACTION
----------------------------------------------
a) Accounting Features Of The Transfer
-----------------------------------
On November 15, 1996, PG&E, SDG&E and Edison submitted a letter to the
Securities and Exchange Commission ("SEC") regarding the accounting treatment
for the proposed Rate Reduction Bond transaction. By this letter, the utilities
sought confirmation that the transaction would be treated for financial
reporting purposes as a sale of regulatory assets. On February 5, 1997, the SEC
denied the utilities' request. As a result, the amount financed will be
recorded as debt of the SPE for financial reporting purposes. Edison, the SPE,
the Infrastructure Bank and the holders of the Rate Reduction Bonds will
expressly agree pursuant to the terms of the applicable documents to treat the
SPE Debt Securities as debt of the SPE secured by the Transition Property and
the equity of the SPE for all purposes. Because the SPE is consolidated with
Edison for financial reporting purposes, the amounts financed will also appear
as debt in Edison's consolidated financial statements. The debt will be
amortized as principal is paid, and interest expense will be accrued monthly.
Edison's financial statements will also include footnote disclosure (1) that the
repayment of the Rate Reduction Bonds is based on the Transition Property, which
has been sold by Edison to the SPE, (2) that the holders of the Rate Reduction
Bonds do not have recourse to any assets or revenues of Edison and (3) that the
creditors of Edison do not have recourse to any assets or revenues of the SPE,
including, without limitation, the Transition Property.
b) Tax Considerations
------------------
AB 1890 provides for recovery of taxes associated with Transition
Costs. (PU Code (S)(S) 367(d), 840(f).) The possibility that the Internal
Revenue Service ("IRS") would assess income taxes when Edison receives the
initial proceeds from the Rate Reduction Bonds, rather than when FTA charge
revenues are collected, is a risk
IV-16
<PAGE>
associated with financing the Transition Costs. In addition to having tax
consequences, this would also affect the economics of issuing the Rate Reduction
Bonds as the benefits of the transaction depend in large part on spreading out
the tax payments over the life of the bonds.
As a result, in February 1997, PG&E, SDG&E, and Edison submitted
ruling requests to the IRS seeking confirmation that (1) the SPE Debt Securities
will be treated as debt of the utility for federal income tax purposes, and (2)
the FTA charges will be included in Edison's gross income in the year in which
the related electrical service is provided to residential and small commercial
customers and not at the time of debt issuance. An IRS ruling is expected by
mid-1997.
If the creation of an SPE and receipt of bond proceeds yields current
income taxation of those proceeds, the benefits of the financing transaction
would be substantially reduced. Should the IRS choose not to provide a ruling,
or rule adversely, Edison would have to reassess the transaction and, if
possible, modify it to eliminate the risk of current taxation. If the structure
of the transaction changes beyond the bounds contemplated in this Application,
Edison will take appropriate steps to modify its request with the Commission.
After a ruling is obtained from the IRS, a similar letter ruling will be sought
from the California Franchise Tax Board.
Edison expects that the interest paid to holders of Rate Reduction
Bonds will not be exempt from federal income taxes or from taxes imposed in any
state other than the State of California. If the Rate Reduction Bonds are
issued by the Infrastructure Bank or an SPT, income from the bonds may be exempt
from personal income taxation by the State of California. If they are issued by
another entity authorized by the Infrastructure Bank, the Rate Reduction Bonds
will most likely not be exempt from income tax. Edison has been advised by its
financial advisors that, because the segment of the bond market that would
benefit from California tax exemption is small in relation to the total
aggregate principal amount of the Rate Reduction Bonds, the exemption would
IV-17
<PAGE>
have little or no impact on the overall pricing of the bonds. However, it may be
possible that one or more series or classes of the Rate Reduction Bonds of
smaller size than the total aggregate principal amount be sold primarily to
California individual investors and such series or class could benefit from
California tax exemption.
2. PROPOSED OVERCOLLATERALIZATION AMOUNT
-------------------------------------
As discussed in Chapter IV.A.4.b, above, the FTA charges, the tariff
collection mechanism paid by residential and small commercial customers,/6/
--
will be calculated to yield expected collections in excess of those needed to
repay fully principal and interest. This is done in order to protect against
the risk of insufficient collections due to sales or collections variability.
The amount of such overcollateralization will be determined by the Issuer (with
input from the rating agencies) at the time of bond pricing to achieve the
desired rating./7/ In addition, Edison's contribution of equity to the SPE
--
will provide an additional overcollateralization amount. Any portion of the
overcollateralization amount collected in excess of that amount necessary to
retire fully the principal of the Rate Reduction Bonds, as well as any remaining
amounts collected with respect to the FTA charges that are not needed to retire
the Rate Reduction Bonds or otherwise pay expenses, will be retained by the SPE.
However, for ratemaking purposes, as described in Exhibit SCE-2. Edison
proposes to provide a credit to residential and small commercial customers equal
to the amount retained by the SPE.
3. BOND TRUSTEE FEES AND OTHER ONGOING COSTS
-----------------------------------------
As defined in PU Code (S) 840(g), Transition Property and related FTA
charges may be used to recover the "costs of providing, recovering, financing,
or refinancing the transition costs, including the costs of issuing, servicing,
and retiring rate reduction bonds." In addition to expenses for the issuance of
Rate Reduction Bonds, as described in
- -----------------------
/6/ See Exhibit SCE-2, Section III, for the details regarding the
- ---
implementation through tariffs of the FTA charges.
/7/ Added security will be provided by a demand note equal to the cash
- --
equity of the SPE.
IV-18
<PAGE>
Chapter IV.B.2 above, and servicing fees, described in Chapter IV.C.5 below, it
is anticipated that other costs will be incurred throughout the life of the Rate
Reduction Bonds. Such expenses, estimated to total approximately $90,000
annually, will include fees for bond trustee, bond trustee's counsel, SPE, SPE
manager, Infrastructure Bank, and rating agencies.
The bond trustee will be responsible for:
. investing the FTA charge collections received from the SPE/Servicer
in high quality, short-term debt instruments
. maintaining a record of bondholders
. calculating and remitting interest and principal payments to the
Rate Reduction Bond investors
. reporting as required by the Commission, Infrastructure Bank or any
other regulatory body
SPE expenses will include the costs associated with operating the
entity, including labor for the SPE employee(s), rent, utilities, furniture and
equipment, and other miscellaneous costs.
SPE manager fees will include any costs associated with its role as
the independent manager of the SPE. These costs may be similar to those of the
SPE (described above) if the SPE manager is another special purpose subsidiary
of the utility. Alternatively, an independent third party such as a trust
company also may act as SPE manager.
The Infrastructure Bank's operating costs will include labor, bond
counsel and financial advisor fees, and other incidental expenses. The rating
agencies will assess ongoing fees associated with the monitoring of each bond
offering. These ongoing expenses can only be estimated at this time because the
actual expenses will not be known either until agreements are negotiated and/or
the actual costs are incurred after the issuance of the Rate Reduction Bonds.
IV-19
<PAGE>
4. FIXED TRANSITION AMOUNT CHARGE CALCULATION
------------------------------------------
The FTA charges will be levied on residential and small commercial
customers in the form of nonbypassable, usage-based charges./8/ Edison's
--
tariffs will identify the FTA charges as a component of residential and small
commercial customers' overall rates, i.e., those customers taking service under
rate schedules in the Domestic and General Service ("GS-1") rate groups./9/
--
As described below, the FTA charges for each series or class of Rate
Reduction Bonds will be established at a level (or different levels during
specified periods over the life of the Rate Reduction Bonds) intended to provide
for the full recovery of payments of interest and principal on the Rate
Reduction Bonds, in accordance with the amortization schedule for the Rate
Reduction Bonds determined at the time of offering, plus overcollateralization
as well as related financing costs and fees ("Rate Reduction Bond Debt
Service"), based upon assumptions including sales forecasts, charge-offs, and
lags between FTA charge billing and collection.
FTA charge collections received during a quarterly period by the
Issuer will be paid to investors after payment of servicing fees and other
ongoing expenses. The amounts paid to investors will first be allocated to
interest on the Rate Reduction Bonds (to the extent accrued) and the remainder
will be allocated to reduce the outstanding principal.
a) Initial FTA Charge Calculation Process
--------------------------------------
When the pricing terms for the Rate Reduction Bonds are finalized, a
principal amortization schedule will be established. The FTA charges will be
calculated in a manner intended to provide for the full recovery of the Rate
Reduction Bond Debt
- ----------------------
/8/ There will be a separately calculated FTA charge for residential and
- --
small commercial customers as described in Section IV.C.4.a and each FTA charge
will be comprised of separate FTA charge rate components for each series or
class of bonds.
/9/ See Exhibit SCE-2, Chapter II, for more information regarding
- ---
eligibility requirements.
IV-20
<PAGE>
Service. The total scheduled FTA charge collections for any quarter will include
collections for bills sent in prior quarters and for bills sent in the current
quarter, in each case, as a result of the expected timing of collections from
the applicable customer rate groups.
Because the scheduled collections come from two customer rate groups,
a different FTA charge is required for each to maintain an appropriate
allocation of Transition Costs. Separate FTA charges for Domestic and GS-1 rate
groups are needed because a 10 percent rate reduction differs on an average
cents per kWh basis for Domestic and GS-1 rate group customers. Separate
charges are needed to avoid cross-subsidies between residential and small
commercial customers once the rate freeze period ends.
The Rate Reduction Bond Debt Service will be allocated to each rate
group proportional to the total revenues calculated by multiplying the rates in
effect as of June 10, 1996 by the forecast billing determinants for each rate
group. This method results in an allocation of the FTA charges in proportion to
the benefits received by each rate group in the form of the 10 percent rate
reduction. The specific formulas used to calculate the FTA charges can be found
in Appendix SCE-1-B.
Edison requests Commission approval of the method for designing the
initial FTA charges and for subsequent FTA charge true-ups as described in
Exhibit SCE 2, Chapter III.C. Edison proposes to file the initial FTA charges
for each series or class of Rate Reduction Bonds by Advice Letter on the day of
bond pricing to be effective within five business days of bond pricing in
compliance with the Commission's Financing Order.
b) Forecast FTA Charges
--------------------
Table IV-1, below, illustrates the forecast decline in the FTA charges
for the Domestic and GS-1 customer rate groups based upon current assumptions.
IV-21
<PAGE>
TABLE IV-1
FORECAST FTA CHARGES
--------------------
<TABLE>
<CAPTION>
YEAR DOMESTIC GS-1
(cents/kWh) (cents/kwh)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 $0.019 $0.021
2 $0.017 $0.018
3 $0.016 $0.017
4 $0.016 $0.017
5 $0.015 $0.016
6 $0.014 $0.015
7 $0.013 $0.014
8 $0.012 $0.013
9 $0.011 $0.012
10 $0.010 $0.011
</TABLE>
5. SERVICING OBLIGATIONS
---------------------
Edison requests Commission authority to contract with the SPE as
servicer for the Rate Reduction Bonds. In accordance with PU Code (S) 842(c),
Edison will act initially as servicer and, in this capacity, the SPE will
contract with Edison to bill customers and make collections. As servicer,
Edison will also initiate and participate in periodic true-up adjustments of the
FTA charges by the Commission in a manner intended to provide for the full
recovery of the remaining Rate Reduction Bond Debt Service, based upon revised
assumptions including sales forecasts, charge-offs, and lags between FTA charge
billing and collection. (See PU Code (S) 841(e).)
Edison's servicing role has important implications for the tax
treatment of the Rate Reduction Bonds. As discussed in Chapter 4.C.1.b above,
PG&E, SDG&E and Edison submitted ruling requests with the IRS regarding the
federal income tax consequences of the proposed Rate Reduction Bond transaction.
Edison's ruling request relies upon a transaction structure in which the utility
retains its role as primary servicer for the Rate Reduction Bonds. Important
facts underlying that request include (1) the fact that the utility as servicer
will be the entity which remits the FTA charge collections to the SPE as
described below; and (2) the utility as servicer will be allowed to commingle
any FTA charges it collects with its other funds until it remits those FTA
charge
IV-22
<PAGE>
collections to the SPE. Therefore, any decision to alter the transaction and the
utility's role as servicer would require a revision to the IRS ruling request
and a probable delay in the issuance of the IRS ruling. Accodingly, no other
party can be primary servicer as long as Edison is able to perform the function
without placing Edison's tax position at risk. Furthermore, any modification to
this servicing structure may also affect the tax treatment of the transaction by
the California Franchise Tax Board.
Pursuant to an agreement between Edison and the SPE, Edison will
collect the FTA charges and deposit the collections into accounts set up by the
SPE on a monthly basis./10/ The FTA charge collection activities will be
---
subject to the Commission's regulations regarding collections, customer
relationships and other consumer-related matters. Within that framework, Edison
will follow instructions and perform these activities as if it were a third-
party contractor.
As is typical in securitization transactions, and required to support
the bankruptcy analysis, Edison or any successor servicer will be paid an arm's
length fee for the administrative costs of servicing the FTA charge revenue
stream, including applying for and implementing required true-ups. Pursuant to
the servicing agreement, Edison or a successor servicer will be bound to act in
good faith with respect to such required true-ups, and must file for any true-
ups required by the servicing agreement. Based on an examination of servicing
fees for comparable ABS transactions and a projection of the expenses a third
party servicer would incur, Edison proposes a servicing fee of 1.5 to 2.0
percent of the initial principal amount of bonds issued./11/ However, because
---
most of the servicing-related costs that would be incurred by a third party are
already reflected in
- ---------------------------
/10/ Actual deposit intervals will be established in conjunction with the
- ---
requirements of bond rating agencies.
/11/ Servicing fees for this type of transaction typically are on the order
- ---
of one to two percent of the balance of assets securitized. On certain issues,
the declining asset balance results in a declining servicing fee. However, in
most such cases, prepayment activity (e.g., on mortgage-backed securities)
reduces the number of accounts to be serviced. In the case of the Rate
Reduction Bonds, however, the number of accounts is not assumed to decline and
therefore a declining servicing fee structure is not appropriate.
IV-23
<PAGE>
Edison's base rates, such as the cost of billing customers and making necessary
regulatory filings, Edison proposes for ratemaking purposes that it will provide
a credit to residential and small commercial customers for all but its
incremental, out-of-pocket costs of servicing. One example of such an
incremental expense could be any required audits related to Edison's role as
servicer for the bonds. A second example is company counsel expenses. Company
counsel will advise Edison on any ongoing aspects of the Rate Reduction Bonds
including (but not limited to) periodic Advice Letter filings on behalf of the
applicable SPE in respect of adjustments to the FTA charges, and Edison's role
and responsibilities as servicer for the Rate Reduction Bonds. Accounting and
company counsel fees are estimated to be $50,000 annually.
In accordance with AB 1890, any successor to Edison pursuant to any
bankruptcy, reorganization or other insolvency proceeding, or pursuant to any
merger, sale or transfer, by operation of law, or otherwise (PU Code (S) 845) is
required to perform Edison's obligations with respect to the Rate Reduction
Bonds, including collecting and remitting to the SPE or, as directed by the SPE,
to the trustee for the holders of the Rate Reduction Bonds, the amounts in
respect of the Transition Property. (PU Code (S)(S) 842(c), 845.) If the
servicer chosen as Edison's successor were an unaffiliated third party servicer,
such servicer would retain the servicing fee in its entirety./12/ The
---
servicer will also be liable to the SPE for any actions brought against the SPE
arising out of its performance of its servicing function (unless due to the
SPE's negligence), as well as for any damages suffered as a result of failure to
perform its duties as servicer.
- ------------------------
/12/ It is important to recognize that this fee would only be paid to an
- ---
unaffiliated third party servicer in the event that Edison is unable to perform
as servicer due to bankruptcy or some other event. Customers would be
disadvantaged if any unaffiliated party could retain the servicing fee in total
solely due to its role in billing or collecting the FTA charges. If an ESP
provides billing and collection services for Edison, the ESP will not become a
servicer for the FTA charge and will not be eligible for any portion of the
servicing fee.
IV-24
<PAGE>
6. SCHEDULE FOR FINANCINGS
-----------------------
The initial issuance of Rate Reduction Bonds is expected in the fourth
quarter of 1997. The exact date of issuance will depend on market conditions
and other factors such as receipt of various regulatory approvals./13/ If as
---
a result of sales growth, the initial financing is insufficient to provide
enough savings for a 10 percent rate reduction during the rate freeze period,
Edison will issue additional series or classes of Rate Reduction Bonds. If a
total of more than $3.0 billion of Rate Reduction Bonds is needed to provide
sufficient savings for the 10 percent rate reduction, Edison will file an
application for an additional Financing Order. (See PU Code (S) 841.)
- ------------------------
/13/ If unusual market conditions develop in the fourth quarter of 1997, the
- ---
Issuer may choose to delay issuance of some or all of the Rate Reduction Bonds
until first quarter 1998.
IV-25
<PAGE>
V.
RATE REDUCTION BOND SIZING AND ECONOMIC BENEFITS
------------------------------------------------
A. SIZING THE RATE REDUCTION BONDS
-------------------------------
The purpose of this Chapter is to present the revenue requirement
calculation used to determine the size of the Rate Reduction Bond issuance. In
summary, the size of the Rate Reduction Bond issuance is determined by solving
for an amount of Transition Costs that must be financed ("Financed Transition
Costs") with the Rate Reduction Bonds in order to achieve a 10 percent rate
reduction for residential and small commercial customers. The amount of Financed
Transition Costs must provide revenue requirement reduction during the rate
freeze period sufficient to offset both the 10 percent rate reduction and the
rate freeze period debt service on the Rate Reduction Bonds.
By financing Transition Costs, Edison avoids having to recover those
Transition Costs (depreciation and associated taxes) and the return on those
Transition Costs through the CTC. At the same time, however, by financing
Transition Costs with the Rate Reduction Bonds, there is a new revenue
requirement that must be collected from customers to cover the Rate Reduction
Bond Debt Service. The net revenue requirement reduction calculated by the model
is the difference between the avoided Transition Cost revenue requirement and
the Rate Reduction Bond revenue requirement (i.e., the Rate Reduction Bond Debt
Service less any credits/14/).
---
A revenue requirement summary demonstrating how a revenue requirement
reduction sufficient to support a 10 percent rate reduction can be achieved is
shown in Table V-1, below. The detailed analysis supporting the information
shown in Table V-1 is contained in Appendix SCE-1-A. This analysis shows that a
Rate
- -----------------------
/14/ Examples of credits include the financed tax credit which is described
- ---
in Appendix SCE-1-A and the servicing fee credit.
V-1
<PAGE>
Reduction Bond financing in the amount of $2.6 billion with the bonds having an
expected maturity of 10 years and a coupon rate of 7.5 percent would provide a
revenue requirement reduction sufficient for a 10 percent rate reduction for
residential and small commercial customers during the rate freeze period.
TABLE V-1
---------
SUMMARY OF BOND SIZING MODEL
----------------------------
(IN MILLIONS)
-------------
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Line ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Avoided Revenue Requirement 739 703 668 632 156 0 0 0 0 0
2 Principal Payment and Ongoing Costs (305) (305) (305) (305) (305) (305) (305) (305) (305) (305)
3 Interest Payment (187) (168) (148) (129) (110) (90) (71) (51) (32) (12)
4 Financed Tax Component Credit and Servicing 143 133 123 112 118 109 95 81 67 52
Fee Credit ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
5 Revenue Requirement Difference 390 363 337 311 (141) (286) (281) (276) (270) (265)
6 Franchise Fees and Uncollectibles 4 4 4 3 (2) (3) (3) (3) (3) (3)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7 Total Revenue Requirement Difference 394 367 341 314 (143) (289) (284) (279) (273) (268)
</TABLE>
Line 1 shows the revenue requirement reduction in each year over the period
from 1998 through the first quarter of 2002, the assumed rate freeze period in
this example. The avoided revenue requirement represents the Financed
Transition Costs revenue requirement. Lines 2 and 3 show the estimated annual
principal payments and ongoing costs and interest payments to holders of Rate
Reduction Bonds over the 10-year term. Line 4 represents the carrying cost
savings resulting from the tax component included in the total amount of
Financed Transition Cost and the servicing fee credit. As described in Appendix
SCE-1-A, this savings is analogous to the deferred tax ratebase credit that
ratepayers currently receive.
V-2
<PAGE>
Line 5 shows the net annual change in revenue requirement as the sum of
lines 1, 2, 3, and 4. Line 6 shows the impact on franchise fees and
uncollectibles. Line 7 is the sum of lines 5 and 6 and shows the total annual
revenue requirement difference over the term of the bonds. During the rate
freeze period, this amounts to $351 million on average which is forecast to be
the annual reduction in revenue requirement for a 10 percent rate reduction for
residential and small commercial customers. Actual reductions in revenue
requirement and costs will be reflected in the Rate Reduction Bond Memorandum
Account and any recorded net credits will be reflected in rates as described in
Chapter I.B.2 of Exhibit SCE-2.
B. SUMMARY OF ECONOMIC BENEFITS OF THE RATE REDUCTION BOND TRANSACTION
-------------------------------------------------------------------
The proposed issuance of up to $3.0 billion of Rate Reduction Bonds
provides reductions in revenue requirement expected to be sufficient to support
a 10 percent rate reduction for residential and small commercial customer groups
during the rate freeze period. Based on current estimates, this transaction
also is expected to result in net present value ("NPV") savings of $400 million
over the entire term of the Rate Reduction Bonds. The actual NPV savings will
depend on the principal repayment schedule, interest rate, term and other
considerations. Those factors will generally be established at the time the
Rate Reduction Bonds are issued. The benefits are the result of several factors
including (1) the reduced cost of capital resulting from refinancing the
stranded cost, (2) the ability to defer tax payments, thereby reducing the
present value cost, and (3) the opportunity value of money.
Edison's capitalization consists of approximately 50 percent debt and 50
percent equity. The equity is a more expensive source of financing because the
returns earned by investors are not tax deductible. Hence, in determining the
V-3
<PAGE>
revenue requirements the equity return must be grossed up for taxes./15/ By
---
replacing the current debt and equity capital structure with the all-debt
structure of the Rate Reduction Bonds, a cost savings results.
The tax savings are realized by recognizing income that would have been
collected during the rate freeze period over the term of the Rate Reduction
Bonds which is anticipated to be 10 years. This savings is possible because the
bonds are treated as debt of the utility for tax purposes. Therefore, the
proceeds from the issuance of the bonds are not taxable when received. Instead,
Edison recognizes the income and pays the tax as the FTA charges are collected.
In this way, the net present value of the tax payments is reduced.
Finally, there is an additional benefit from the opportunity value of
receiving money today rather than in the future. The Rate Reduction Bonds allow
customers to take advantage of the lower electric rates immediately rather than
requiring them to wait until the end of the rate freeze period. Customers
benefit by having increased cash available to them. Customers can buy more now
than in the future after inflation has eroded their purchasing power.
Alternatively, a customer may choose to invest the money now and earn a return
on it. Because the Rate Reduction Bonds have a relatively low interest rate
compared to other forms of consumer debt, ratepayers benefit by the low cost
financing provided by the Rate Reduction Bonds.
C. DETERMINING THE AMOUNT FINANCED AND NEED FOR ADDITIONAL FINANCING
-----------------------------------------------------------------
In order to provide the necessary revenue requirement reduction for a 10
percent rate reduction for residential and small commercial customer groups
- ----------------------------
/15/ Normally, equity also is more expensive because of the greater risk born
- ---
by investors. However, in determining the rate of return on Transition Costs,
the Commission fixed Edison's equity return at 90 percent of the embedded cost
of debt.
V-4
<PAGE>
beginning January 1, 1998, up to $3.0 billion of Rate Reduction Bonds may be
issued. The expected amount will be determined close to the time the Rate
Reduction Bonds are issued. However, even at the time of initial Rate Reduction
Bond issuance, Edison will be unable to precisely match the amount financed to
the reductions in revenue requirement necessary to produce a 10 percent rate
reduction over the rate freeze period. This is because the actual amount of
reductions in revenue requirement needed will vary depending on actual sales to
eligible customers. For example, if actual sales to residential customers
exceed our forecast, it would result in the need for additional financings to
create reductions in revenue requirement sufficient to support the 10 percent
rate reduction associated with these additional sales.
If Edison subsequently determines that the amount financed was inadequate
to provide the required reduction in revenue requirement for the 10 percent rate
reduction during the rate freeze period (e.g., if sales increase above our
forecast), additional Rate Reduction Bonds will need to be issued. If the
amount financed provides reductions in revenue requirement greater than required
for a 10 percent rate reduction, the additional reductions in revenue
requirement will be returned to residential and small commercial customers
through the Rate Reduction Bond Memorandum Account discussed in Chapter I of
Exhibit SCE-2.
D. IMPACT OF DEBT RETIREMENT
-------------------------
As a result of issuing the Rate Reduction Bonds, a portion of Transition
Costs which would have been collected over the four-year Transition Cost
recovery period will be received at the time the bonds are issued. This timing
difference may result in increased costs from debt redemptions prior to maturity
or reduced costs from avoiding the issuance of additional new debt. However,
these changes in costs cannot be readily separated from the other factors
affecting Edison's debt requirements, including construction needs, cash flows
from the transmission and
V-5
<PAGE>
distribution operations, and recovery of generation costs through accelerated
amortization of its nuclear plants and the expected sale of its gas-fired
generating plants.
Because the Rate Reduction Bonds change only the timing of the recovery of
the funds, the effects should be reflected in rates for all customers rather
than only residential and small commercial customers. Edison will include any
changes in interest rates due to debt calls and retirements in the calculation
of its embedded cost of debt for all customer groups during the next cost of
capital proceeding. If additional costs are incurred to retire debt or
preferred stock due to Transition Cost recovery, those costs will be considered
in the review of the Transition Cost Balancing Account in Edison's annual
Revenue Adjustment Proceeding ("RAP")./16/ In this Application, Edison is not
---
requesting to include such costs in the amount financed.
E. CASHFLOW CONSIDERATIONS
-----------------------
Pending remittances to the Issuer (which are expected to be made
monthly),/17/ the FTA charges collected from customers will not be segregated
- ------------
from Edison's other collections, and Edison, as servicer, will remit the after-
tax interest earnings on these amounts through the Rate Reduction Bond
Memorandum Account to residential and small commercial customers. The proposed
method for determining the interest earnings is explained in Appendix SCE-1-C.
In addition, the Issuer will receive funds from Edison, as servicer, each
month to be applied to principal and interest but the Issuer is expected to
distribute those funds to investors quarterly./18/ While holding these funds,
---
the Issuer will
- ---------------------------
/16/ This approach was authorized in Decision No. 96-12-088, December 20,
- ---
1996.
/17/ Actual deposit intervals will be established in conjunction with the
- ---
requirements of bond rating agencies.
/18/ Payments to investors may be made monthly.
- ---
V-6
<PAGE>
invest the funds in high quality short-term instruments. The after-tax interest
earnings will be flowed back to the SPE quarterly. For ratemaking purposes, an
amount equal to the after-tax interest earnings will be returned to ratepayers
through an entry in the Rate Reduction Bond Memorandum Account.
V-7
<PAGE>
APPENDIX SCE-1-A
Rate Reduction Bond Sizing Model
<PAGE>
APPENDIX SCE-1-A
Rate Reduction Bond Sizing Model
A. BACKGROUND
----------
This appendix sets forth an analysis of how a reduction in revenue
requirement in an amount sufficient to support a 10 percent rate reduction can
be achieved. This analysis shows the revenue requirement that residential and
small commercial customers would have paid absent the Rate Reduction Bonds
("avoided revenue requirement") and the revenue requirement that they are
expected to pay with the Rate Reduction Bonds. This bond sizing model shows
that a Rate Reduction Bond financing in the amount of $2.6 billion with the
bonds having an expected maturity of 10 years and a coupon of 7.5 percent would
provide the revenue requirement reduction sufficient for a 10 percent rate
reduction for residential and small commercial customers.
B. USE OF GENERIC TRANSITION COST ASSET
------------------------------------
As described in detail in Chapters I-IV of Exhibit SCE-1, the Rate
Reduction Bonds are designed to monetize a portion of Edison's Transition Costs
through the creation and sale of Transition Property. The Transition Property
sold is not linked to a specific asset or set of assets such as utility
generating plant. Rather, the Transition Property is tied to the revenue stream
created by the FTA charge. As a result, the creation of the Transition Property
could be based on any portion of the Transition Costs, for example, uneconomic
plant, QF payments, regulatory assets, etc.
The fact that the Rate Reduction Bonds are not linked directly to specific
Transition Costs provides Edison with flexibility in accounting for the
transaction, and enables it to provide the maximum benefits to customers
A-1
<PAGE>
for each dollar financed. Rather than focus on each asset type, the time frame
for its collection, its tax effects, and its associated rate of return, the
analysis should focus on the transaction and its benefits for residential and
small commercial customers.
The transaction will allow Edison to replace, or refinance, presently
outstanding debt and equity supporting uneconomic assets with the Rate Reduction
Bonds. The effect of this refinancing is to reduce the cost of capital below
the authorized rate of return on uneconomic assets. For each dollar financed,
customers will pay the interest rate on the Rate Reduction Bonds, currently
estimated to be 7.5 percent instead of Edison's pre-tax return on uneconomic
assets of 9.86 percent (7.35 percent weighted cost).
The best way to assure that residential and small commercial customers will
receive all of the benefits of this reduced cost of capital is to base the Rate
Reduction Bond sizing and the ratemaking on a generic Transition Cost. As
described in more detail below, Edison will provide residential and small
commercial customers a credit for the reduced cost of capital associated with
the bonds. In addition, rather than adjusting specific asset classes for the
financing, the total amount of Transition Costs will be reduced by the Financed
Transition Cost (and the return on Financed Transition Costs). In this way,
ratepayers will only pay the Transition Costs owed, and receive maximum credit
for the reduced financing costs.
Using a generic Transition Cost asset helps assure that there will be no
cost shifting between customer groups. If a particular asset were to be
associated with the Rate Reduction Bonds and removed from the Transition
A-2
<PAGE>
Cost account, either large or small customers could be treated unfairly,
depending on the asset chosen./1/
To ensure that the Rate Reduction Bonds do not result in cost shifting
between customer groups, the Transition Cost Balancing Account will be modified,
as explained in more detail in Exhibit SCE-2, to exclude the impacts of the Rate
Reduction Bonds and the 10 percent rate reduction. Thus, linkage between the
financing and specific assets is not necessary for determining when the rate
freeze ends.
The use of a generic Transition Cost simplifies the tax analysis as well.
The Financed Transition Cost amount represents a revenue requirement for the
recovery of stranded cost plus associated income taxes. Since a significant
portion of the stranded cost relates to assets where tax benefits have
previously been flowed through to ratepayers, the recovery of the stranded asset
requires a gross up of the income tax component in determining the total
stranded cost revenue requirement. Once this total stranded cost revenue
requirement is approved by the Commission, then a portion of the total amount
can be financed as a generic Transition Cost component of the total without
identifying the specific assets relating to the financed portion.
The rate reduction during the rate freeze period will reduce the revenue
collected by Edison and a proportionate reduction in taxes will be flowed
through to customers as a part of the 10 percent rate reduction. Similarly,
because the FTA charges to customers will be taxable revenue to Edison over the
bond repayment period, the principal amount of the FTA includes a gross up
component for the payment of the associated taxes. All
- ------------
/1/ Factors which could affect the allocation of Transition Costs include
whether an asset earns a return and what tax impacts it may have.
A-3
<PAGE>
tax impacts associated with specific assets will be flowed through the
Transition Cost accounts already described in detail in Edison's CTC
Application.
C. BOND SIZING MODEL DETAILS
-------------------------
A detailed explanation of the Rate Reduction Bond sizing model is provided
here with a printout of that model immediately following this narrative. Page 1
summarizes the assumptions and input values used in the model. Line 3 shows the
revenue requirement reduction necessary to provide a 10 percent rate reduction
during the rate freeze period. Line 4 is the sum of the values in line 3. Line
7 shows the revenue reduction from line 3 on a quarterly basis. Line 8 is the
sum of the values in line 7. Line 12 shows the assumed rate freeze period over
which Transition Costs will be amortized. The actual amortization of Transition
Costs may be more rapid depending on the CTC revenues available for Transition
Cost recovery. As described in Exhibit SCE-2, the actual revenue requirement
reduction created by the Rate Reduction Bond transaction will be compared to the
savings provided to customers in the form of the 10 percent rate reduction. For
purposes of that calculation, it will be assumed that the Financed Transition
Costs would have been amortized in proportion to the actual amortization of
unfinanced Transition Costs. Line 15 shows the pre-tax rate of return on
stranded assets. This return is calculated as follows:
A-4
<PAGE>
<TABLE>
<CAPTION>
Component Cost Weight Weighted Tax Pre-tax
Cost Multiplier Weighted Cost
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term Debt 7.78% 47% 3.66% 1.0 3.66%
Preferred Stock 6.69% 5% 0.33% 1.6825 0.56%
Common Equity 6.99% 48% 3.36% 1.6825 5.65%
----- -----
WEIGHTED AVERAGE 7.35% 9.86%
</TABLE>
Line 17 shows the gross-up factor for franchise fees and uncollectibles.
Line 21 shows the expected maturity of the bonds. Line 25 shows the expected
coupon rate of the Rate Reduction Bonds. Lines 27 and 29 show the estimate of
the refundable ongoing cost (servicing fee) and the nonrefundable ongoing costs,
respectively. Line 31 shows the pre-tax authorized return on nongeneration
assets. Line 35 is the issuance costs. Line 39 shows the two components of the
principal amount of Financed Transition Costs, (i.e., the direct stranded asset
amount and the associated taxes). Line 41 shows the total Financed Transition
Costs.
Page two shows the avoided revenue requirement for the amount of Transition
Costs identified in the input page. Line 4 shows the end of year Transition
Cost balance. Line 5 shows the book depreciation. Line 6 shows the average
year Transition Cost balance. Line 7 shows the pre-tax return on Transition
Costs based on the average year balance. Line 13 shows the annual taxes due.
Lines 18 through 20 show the annual revenue requirements on a quarterly basis.
Line 21 is the sum of lines 18 through 20. Line 22 reflects the franchise fees
and uncollectibles due. Line 23 shows the total revenue requirement that
residential and small commercial
A-5
<PAGE>
customers would pay absent the Rate Reduction Bonds, i.e., the avoided revenue
requirement.
Page three shows the revenue requirement for the Rate Reduction Bonds.
Lines 4 and 5 show the principal and interest payments on the Rate Reduction
Bonds./2/ Lines 6 and 7 show the refundable and nonrefundable ongoing costs.
Line 12 shows the refund of the refundable ongoing costs. Line 16, labeled
financed tax component balance, shows the tax component included in the total
amount of Financed Transition Costs, and line 17 shows the amortization of the
financed tax component. The financed tax component is amortized in proportion to
the amortization of the principal. Lines 18 and 19 show the average year
financed tax component balance and the rate of return to be applied when
calculating the financed tax component credit. This credit will be given only to
residential and small commercial customers and is analogous to the deferred tax
ratebase credit currently given to all customers. During the rate freeze period,
the applicable rate of return is the return on uneconomic assets. After the rate
freeze period, the applicable rate of return is the then-authorized
nongeneration return. Line 20 shows the annual financed tax component credit.
Line 21 shows the financed tax component credit on a quarterly basis. Line 32
shows the total revenue requirement that residential and small commercial
customers are expected to pay with the Rate Reduction Bonds. Note that because
level principal amortization was chosen, the debt service on the Rate Reduction
Bonds as well as the total revenue requirement declines over time.
- ------------
/2/ The estimates shown here do not reflect certain assumptions which will be
used to determine the FTA charge such as seasonal usage patterns and lags
between FTA charge billing and collection. These assumptions are described
in Appendix SCE-1-B.
A-6
<PAGE>
Page 6 shows the revenue requirement reduction achieved by the Rate
Reduction Bond financing. Line 4 shows the avoided revenue requirement and line
5 shows the revenue requirement that residential and small commercial customers
are expected to pay with the Rate Reduction Bonds. The difference between the
two, line 6, is the revenue requirement reduction created by the financing.
Line 7 shows the difference between the estimated quarterly revenue requirement
reduction created through the financing and the estimated savings passed on to
residential and small commercial customers through the 10 percent rate
reduction. This amount will be tracked in the Rate Reduction Bond Memorandum
Account, as described in Exhibit SCE-2, Chapter I.B.2. Line 12 is the sum of
the values in line 6. Based on the assumptions, the forecast revenue
requirement reduction during the rate freeze period is $351 million annually
on average which is the forecast amount necessary for a 10 percent rate
reduction for residential and small commercial customers. Line 16 shows that
$2.6 billion of Rate Reduction Bonds will be issued which is the sum of the
Financed Transition Costs and the issuance expenses. Line 20 shows that the net
present value savings over the entire term of the Rate Reduction Bonds resulting
from the proposed financing is estimated to be $400 million. This sizing model
will be used at the time of issuance to determine the amount of Rate Reduction
Bonds needed to support the 10 percent rate reduction.
A-7
<PAGE>
RATE REDUCTION BONDS - SIZING CALCULATIONS
INPUT PAGE
($ in millions)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1 Target revenue reduction, 1/1/1998 - 3/31/2002: 1998 1999 2000 2001 2002
2 ----------------------------------------------- ---- ---- ---- ---- ----
3 Revenue reduction for 10% rate reduction $ 351 $ 351 $ 351 $ 351 $ 90
4 Total revenue reduction $ 1,494
5
6 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99
---------------------------------------------------------------
7 Quarterly revenue reduction $ 88 $ 88 $ 88 $ 88 $ 88
8 Total revenue reduction $ 1,494
9
10 Transition Costs amortization without debt financing:
-----------------------------------------------------
11
12 Amortization period 4 years 1 quarter(s)
13 Number of amortization periods 17 quarters
14
15 Pre-tax return on Transition Costs 9.86%
16
17 Franchise fees & uncollectibles 1.1217%
18
19 Transition Costs amortization with debt financing:
-------------------------------------------------
20
21 Amortization period 10 years 0 quarters
22 Number of amortization periods 40 quarters
23
24 Annual Quarterly
------- ----------
25 Interest (percent of outstanding principal) 7.50% 1.88%
26
27 Refundable ongoing costs (percent of original principal) 1.75% 0.44%
28
29 Nonrefundable ongoing costs $ .14 $ .04
30
31 Annual authorized pre-tax rate of return 13.55%
34
35 Bond issuance expenses $21.5
36
37 Transition Costs Financed:
------------------------- Direct Associated Tax
38 Transition cost Component
------------------------------------------
39 Transition Cost financed 1,530 --- 1,044
40 ------------------------------------------
41 Total principal amount of Transition Cost financed 2,575
<CAPTION>
1 Target revenue reduction, 1/1/1998 - 3/31/2002:
2 -----------------------------------------------
3 Revenue reduction for 10% rate reduction
4 Total revenue reduction
5
6 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00
---------------------------------------------------------------
7 Quarterly revenue reduction $ 88 $ 88 $ 88 $ 88 $ 88
8 Total revenue reduction
9
10 Transition Costs amortization without debt financing:
-----------------------------------------------------
11
12 Amortization period
13 Number of amortization periods
14
15 Pre-tax return on Transition Costs
16
17 Franchise fees & uncollectibles
18
19 Transition Costs amortization with debt financing:
-------------------------------------------------
20
21 Amortization period
22 Number of amortization periods
23
24
25 Interest (percent of outstanding principal)
26
27 Refundable ongoing costs (percent of original principal)
28
29 Nonrefundable ongoing costs
30
31 Annual authorized pre-tax rate of return
34
35 Bond issuance expenses
36
37 Transition Costs Financed:
-------------------------
38
39 Transition Cost financed
40
41 Total principal amount of Transition Cost financed
<CAPTION>
1 Target revenue reduction, 1/1/1998 - 3/31/2002:
2 -----------------------------------------------
3 Revenue reduction for 10% rate reduction
4 Total revenue reduction
5
6 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01
---------------------------------------------------------------
7 Quarterly revenue reduction $ 88 $ 88 $ 88 $ 88 $ 88
8 Total revenue reduction
9
10 Transition Costs amortization without debt financing:
-----------------------------------------------------
11
12 Amortization period
13 Number of amortization periods
14
15 Pre-tax return on Transition Costs
16
17 Franchise fees & uncollectibles
18
19 Transition Costs amortization with debt financing:
-------------------------------------------------
20
21 Amortization period
22 Number of amortization periods
23
24
25 Interest (percent of outstanding principal)
26
27 Refundable ongoing costs (percent of original principal)
28
29 Nonrefundable ongoing costs
30
31 Annual authorized pre-tax rate of return
34
35 Bond issuance expenses
36
37 Transition Costs Financed:
-------------------------
38
39 Transition Cost financed
40
41 Total principal amount of Transition Cost financed
<CAPTION>
1 Target revenue reduction, 1/1/1998 - 3/31/2002:
2 -----------------------------------------------
3 Revenue reduction for 10% rate reduction
4 Total revenue reduction
5
6 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00
---------------------------------------------------------------
7 Quarterly revenue reduction $ 88 $ 88 $ 88 $ 88 $ 88
8 Total revenue reduction
9
10 Transition Costs amortization without debt financing:
-----------------------------------------------------
11
12 Amortization period
13 Number of amortization periods
14
15 Pre-tax return on Transition Costs
16
17 Franchise fees & uncollectibles
18
19 Transition Costs amortization with debt financing:
-------------------------------------------------
20
21 Amortization period
22 Number of amortization periods
23
24
25 Interest (percent of outstanding principal)
26
27 Refundable ongoing costs (percent of original principal)
28
29 Nonrefundable ongoing costs
30
31 Annual authorized pre-tax rate of return
34
35 Bond issuance expenses
36
37 Transition Costs Financed:
-------------------------
38
39 Transition Cost financed
40
41 Total principal amount of Transition Cost financed
<CAPTION>
1 Target revenue reduction, 1/1/1998 - 3/31/2002:
2 -----------------------------------------------
3 Revenue reduction for 10% rate reduction
4 Total revenue reduction
5
6 12/31/01 3/31/02
----------------------
7 Quarterly revenue reduction $ 88 $ 90
8 Total revenue reduction
9
10 Transition Costs amortization without debt financing:
-----------------------------------------------------
11
12 Amortization period
13 Number of amortization periods
14
15 Pre-tax return on Transition Costs
16
17 Franchise fees & uncollectibles
18
19 Transition Costs amortization with debt financing:
-------------------------------------------------
20
21 Amortization period
22 Number of amortization periods
23
24
25 Interest (percent of outstanding principal)
26
27 Refundable ongoing costs (percent of original principal)
28
29 Nonrefundable ongoing costs
30
31 Annual authorized pre-tax rate of return
34
35 Bond issuance expenses
36
37 Transition Costs Financed:
-------------------------
38
39 Transition Cost financed
40
41 Total principal amount of Transition Cost financed
</TABLE>
A-8
<PAGE>
RATE REDUCTION BONDS - SIZING CALCULATIONS
17-QUARTER ASSET-AMORTIZATION CASE
($ in millions)
Assumptions: 17-quarter asset amortization
- ----------- 9.86% pre-tax carrying cost
<TABLE>
<CAPTION>
1 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 Transition Cost Balances
------------------------
3
4 EOY Transition Cost Asset Balance 1,530 -- -- -- 1,170 --
5 Annual Transition Cost Asset
Depreciation -- -- -- 360 --
6 Average Transition Cost Asset Balance -- -- -- 1,350 --
7 Annual Pre-tax Return on Average
Balance -- -- -- 133 --
8
9
10 Taxes
-----
11
12 EOY Tax Balance 1,044 -- -- -- 799 --
13 Annual Tax Amortization -- -- -- 246 --
14
15
16 Quarterly Revenue Requirement,
------------------------------
17-quarter Amortization
-----------------------
17
18 Transition Cost Asset Depreciation
(ln 5 / 4) 90 90 90 90 90
19 Pre-tax Return on Average Transition
Cost Balance (ln 7 / 4) 33 33 33 33 24
20 Tax Component (ln 13 / 4) 61 61 61 61 61
-----------------------------------------------------
21 Subtotal (ln 18 + ln 19 + ln 20) 185 185 185 185 176
22 Franchise Fees & Uncollectibles 2 2 2 2 2
-----------------------------------------------------
23 Total Revenue Requirement, 1/1/1998-
3/31/2002 187 187 187 187 178
=====================================================
<CAPTION>
1 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00 9/30/00
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 Transition Cost Balances
------------------------
3
4 EOY Transition Cost Asset Balance -- -- 810 -- -- --
5 Annual Transition Cost Asset
Depreciation -- -- 360 -- -- --
6 Average Transition Cost Asset Balance -- -- 990 -- -- --
7 Annual Pre-tax Return on Average
Balance -- -- 98 -- -- --
8
9
10 Taxes
-----
11
12 EOY Tax Balance -- -- 553 -- -- --
13 Annual Tax Amortization -- -- 246 -- -- --
14
15
16 Quarterly Revenue Requirement,
------------------------------
17-quarter Amortization
-----------------------
17
18 Transition Cost Asset Depreciation
(ln 5 / 4) 90 90 90 90 90 90
19 Pre-tax Return on Average Transition
Cost Balance (ln 7 / 4) 24 24 24 16 16 16
20 Tax Component (ln 13 / 4) 61 61 61 61 61 61
-----------------------------------------------------
21 Subtotal (ln 18 + ln 19 + ln 20) 176 176 176 167 167 167
22 Franchise Fees & Uncollectibles 2 2 2 2 2 2
-----------------------------------------------------
23 Total Revenue Requirement, 1/1/1998-
3/31/2002 178 178 178 169 169 169
=====================================================
<CAPTION>
1 12/31/00 3/31/01 6/30/01 9/30/01 12/31/01 3/31/02
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 Transition Cost Balances
------------------------
3
4 EOY Transition Cost Asset Balance 450 -- -- -- 90 --
5 Annual Transition Cost Asset
Depreciation 360 -- -- -- 360 90
6 Average Transition Cost Asset Balance 630 -- -- -- 270 45
7 Annual Pre-tax Return on Average
Balance 62 -- -- -- 27 4
8
9
10 Taxes
-----
11
12 EOY Tax Balance 307 -- -- -- 61 (0)
13 Annual Tax Amortization 246 -- -- -- 246 61
14
15
16 Quarterly Revenue Requirement,
------------------------------
17-quarter Amortization
-----------------------
17
18 Transition Cost Asset Depreciation
(ln 5 / 4) 90 90 90 90 90 90
19 Pre-tax Return on Average Transition
Cost Balance (ln 7 / 4) 16 7 7 7 7 4
20 Tax Component (ln 13 / 4) 61 61 61 61 61 61
-----------------------------------------------------
21 Subtotal (ln 18 + ln 19 + ln 20) 167 158 158 158 158 156
22 Franchise Fees & Uncollectibles 2 2 2 2 2 2
-----------------------------------------------------
23 Total Revenue Requirement, 1/1/1998-
3/31/2002 169 160 160 160 160 158
=====================================================
</TABLE>
A-9
<PAGE>
RATE REDUCTION BONDS--SIZING CALCULATIONS
BOND ISSUANCE CASE
($ in millions)
<TABLE>
<CAPTION>
Assumptions: 10-year amortization 7.5% pre-tax carrying cost $2596 MM principal issued
-----------
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
---------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
1
2 Debt Service
------------
3
4 Principal Payment 65 65 65 65
5 Interest Payment 49 47 46 45
6 Refundable Ongoing Costs Credit 11 11 11 11
7 Nonrefundable Ongoing Costs 0 0 0 0
-------------------------------------------
8 Quarterly Total Debt Service 125 124 123 121
===========================================
9
10 Refundable Ongoing Costs Credit
-------------------------------
11
12 Quarterly Refundable Ongoing Costs Credit (11) (11) (11) (11)
13
14 Financed Tax Component Carrying Cost Credit
-------------------------------------------
15
16 EOQ Balance of Financed Tax Component 1,044 1,018 992 966 940
17 Financed Tax Component Amortization (reduce per ln 4) 26 26 26 26
18 Average Balance of Financed Tax Component - - - 992
19 Rate of Return Applied to Financed Tax Component - - - 9.86%
20 Annual Carrying Cost Credit on Financed Tax Component - - - (98)
21 Quarterly Carrying Cost Credit on Financed Tax Component (24) (24) (24) (24)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
------------------------------------------------------
24
25 Principal Payment (ln 4) 65 65 65 65
26 Interest Payment (ln 5) 49 47 46 45
27 Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11
28 Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11)
29 Carrying Cost Credit on Financed Tax Component (ln 15) (24) (24) (24) (24)
-------------------------------------------
30 Subtotal (sum of ln 19 through ln 23) 89 88 87 86
31 Franchise Fees & Uncollectibles 1 1 1 1
-------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 90 89 88 86
===========================================
<CAPTION>
3/31/99 6/30/99 9/30/99 12/31/99
-------------------------------------------
<C> <S> <C> <C> <C> <C>
1
2 Debt Service
------------
3
4 Principal Payment 65 65 65 65
5 Interest Payment 44 43 41 40
6 Refundable Ongoing Costs Credit 11 11 11 11
7 Nonrefundable Ongoing Costs 0 0 0 0
-------------------------------------------
8 Quarterly Total Debt Service 120 119 118 116
===========================================
9
10 Refundable Ongoing Costs Credit
-------------------------------
11
12 Quarterly Refundable Ongoing Costs Credit (11) (11) (11) (11)
13
14 Financed Tax Component Carrying Cost Credit
-------------------------------------------
15
16 EOQ Balance of Financed Tax Component 914 888 862 835
17 Financed Tax Component Amortization (reduce per ln 4) 26 26 26 26
18 Average Balance of Financed Tax Component - - - 888
19 Rate of Return Applied to Financed Tax Component - - - 9.86%
20 Annual Carrying Cost Credit on Financed Tax Component - - - (88)
21 Quarterly Carrying Cost Credit on Financed Tax Component (22) (22) (22) (22)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
------------------------------------------------------
24
25 Principal Payment (ln 4) 65 65 65 65
26 Interest Payment (ln 5) 44 43 41 40
27 Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11
28 Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11)
29 Carrying Cost Credit on Financed Tax Component (ln 15) (22) (22) (22) (22)
-------------------------------------------
30 Subtotal (sum of ln 19 through ln 23) 87 86 84 83
31 Franchise Fees & Uncollectibles 1 1 1 1
-------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 88 87 85 84
===========================================
<CAPTION>
3/31/00 6/30/00 9/30/00 12/31/00
-------------------------------------------
<C> <S> <C> <C> <C> <C>
1
2 Debt Service
------------
3
4 Principal Payment 65 65 65 65
5 Interest Payment 39 38 37 35
6 Refundable Ongoing Costs Credit 11 11 11 11
7 Nonrefundable Ongoing Costs 0 0 0 0
-------------------------------------------
8 Quarterly Total Debt Service 115 114 113 112
===========================================
9
10 Refundable Ongoing Costs Credit
-------------------------------
11
12 Quarterly Refundable Ongoing Costs Credit (11) (11) (11) (11)
13
14 Financed Tax Component Carrying Cost Credit
-------------------------------------------
15
16 EOQ Balance of Financed Tax Component 809 783 757 731
17 Financed Tax Component Amortization (reduce per ln 4) 26 26 26 26
18 Average Balance of Financed Tax Component - - - 783
19 Rate of Return Applied to Financed Tax Component - - - 9.86%
20 Annual Carrying Cost Credit on Financed Tax Component - - - (77)
21 Quarterly Carrying Cost Credit on Financed Tax Component (19) (19) (19) (19)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
-----------------------------------------------------
24
25 Principal Payment (ln 4) 65 65 65 65
26 Interest Payment (ln 5) 39 38 37 35
27 Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11
28 Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11)
29 Carrying Cost Credit on Financed Tax Component (ln 15) (19) (19) (19) (19)
-------------------------------------------
30 Subtotal (sum of ln 19 through ln 23) 85 83 82 81
31 Franchise Fees & Uncollectibles 1 1 1 1
-------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 86 84 83 82
===========================================
<CAPTION>
3/31/01 6/30/01 9/30/01 12/31/01
-------------------------------------------
<C> <S> <C> <C> <C> <C>
1
2 Debt Service
------------
3
4 Principal Payment 65 65 65 65
5 Interest Payment 34 33 32 30
6 Refundable Ongoing Costs Credit 11 11 11 11
7 Nonrefundable Ongoing Costs 0 0 0 0
-------------------------------------------
8 Quarterly Total Debt Service 110 109 108 107
===========================================
9
10 Refundable Ongoing Costs Credit
-------------------------------
11
12 Quarterly Refundable Ongoing Costs Credit (11) (11) (11) (11)
13
14 Financed Tax Component Carrying Cost Credit
-------------------------------------------
15
16 EOQ Balance of Financed Tax Component 705 679 652 626
17 Financed Tax Component Amortization (reduce per ln 4) 26 26 26 26
18 Average Balance of Financed Tax Component - - - 679
19 Rate of Return Applied to Financed Tax Component - - - 9.86%
20 Annual Carrying Cost Credit on Financed Tax Component - - - (67)
21 Quarterly Carrying Cost Credit on Financed Tax Component (17) (17) (17) (17)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
------------------------------------------------------
24
25 Principal Payment (ln 4) 65 65 65 65
26 Interest Payment (ln 5) 34 33 32 30
27 Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11
28 Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11)
29 Carrying Cost Credit on Financed Tax Component (ln 15) (17) (17) (17) (17)
-------------------------------------------
30 Subtotal (sum of ln 19 through ln 23) 82 81 80 79
31 Franchise Fees & Uncollectibles 1 1 1 1
-------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 83 82 81 80
===========================================
</TABLE>
<PAGE>
RATE REDUCTION BONDS -- SIZING CALCULATIONS
BOND ISSUANCE CASE
($ in millions)
Assumptions: 10-year amortization 7.5% pre-tax carrying c
- -----------
<TABLE>
<CAPTION>
3/31/02 6/30/02 9/30/02 12/31/02 3/31/03 6/30/03
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Debt Service
- ------------
Principal Payment 65 65 65 65 65 65
Interest Payment 29 28 27 26 24 23
Refundable Ongoing Costs Credit 11 11 11 11 11 11
Nonrefundable Ongoing Costs 0 0 0 0 0 0
----------------------------------------------------------------------
Quarterly Total Debt Service 106 104 103 102 101 99
======================================================================
Refundable Ongoing Costs Credit
- -------------------------------
Quarterly Refundable Ongoing Costs Credit (11) (11) (11) (11) (11) (11)
Financed Tax Component Carrying Cost Credit
- -------------------------------------------
EOQ Balance of Financed Tax Component 600 574 548 522 496 470
Financed Tax Component Amortization (reduce per ln 4) 26 26 26 26 26 26
Average Balance of Financed Tax Component 613 - - 561 - -
Rate of Return Applied to Financed Tax Component 9.86% - - 13.55% - -
Annual Carrying Cost Credit on Financed Tax Component (15) - - (57) - -
Quarterly Carrying Cost Credit on Financed Tax Component (15) (19) (19) (19) (16) (16)
Quarterly Revenue Requirement on Rate Reduction Bonds
- -----------------------------------------------------
Principal Payment (ln 4) 65 65 65 65 65 65
Interest Payment (ln 5) 29 28 27 26 24 23
Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11 11 11
Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11) (11) (11)
Carrying Cost Credit on Financed Tax Component (ln 15) (15) (19) (19) (19) (16) (16)
----------------------------------------------------------------------
Subtotal (sum of ln 19 through ln 23) 79 74 73 71 73 72
Franchise Fees & Uncollectibles 1 1 1 1 1 1
----------------------------------------------------------------------
Total Revenue Requirement, 12/31/98-12/31/07 80 75 74 72 74 73
======================================================================
</TABLE>
<TABLE>
<CAPTION>
9/30/03 12/31/03 3/31/04 6/30/04 9/30/04 12/31/04
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Debt Service
- ------------
Principal Payment 65 65 65 65 65 65
Interest Payment 22 21 19 18 17 16
Refundable Ongoing Costs Credit 11 11 11 11 11 11
Nonrefundable Ongoing Costs 0 0 0 0 0 0
----------------------------------------------------------------------
Quarterly Total Debt Service 98 97 96 95 93 92
======================================================================
Refundable Ongoing Costs Credit
- -------------------------------
Quarterly Refundable Ongoing Costs Credit (11) (11) (11) (11) (11) (11)
Financed Tax Component Carrying Cost Credit
- -------------------------------------------
EOQ Balance of Financed Tax Component 444 417 391 365 339 313
Financed Tax Component Amortization (reduce per ln 4) 26 26 26 26 26 26
Average Balance of Financed Tax Component - 470 - - - 365
Rate of Return Applied to Financed Tax Component - 13.55% - - - 13.55%
Annual Carrying Cost Credit on Financed Tax Component - (64) - - - (49)
Quarterly Carrying Cost Credit on Financed Tax Component (16) (16) (12) (12) (12) (12)
Quarterly Revenue Requirement on Rate Reduction Bonds
- -----------------------------------------------------
Principal Payment (ln 4) 65 65 65 65 65 65
Interest Payment (ln 5) 22 21 19 18 17 16
Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11 11 11
Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11) (11) (11)
Carrying Cost Credit on Financed Tax Component (ln 15) (16) (16) (12) (12) (12) (12)
----------------------------------------------------------------------
Subtotal (sum of ln 19 through ln 23) 71 70 72 71 70 68
Franchise Fees & Uncollectibles 1 1 1 1 1 1
----------------------------------------------------------------------
Total Revenue Requirement, 12/31/98-12/31/07 72 71 73 72 70 69
======================================================================
</TABLE>
<TABLE>
<CAPTION>
3/31/05 6/30/05 9/30/05 12/31/05 3/31/06
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt Service
- ------------
Principal Payment 65 65 65 65 65
Interest Payment 15 13 12 11 10
Refundable Ongoing Costs Credit 11 11 11 11 11
Nonrefundable Ongoing Costs 0 0 0 0 0
----------------------------------------------------------
Quarterly Total Debt Service 91 90 88 87 86
==========================================================
Refundable Ongoing Costs Credit
- -------------------------------
Quarterly Refundable Ongoing Costs Credit (11) (11) (11) (11) (11)
Financed Tax Component Carrying Cost Credit
- -------------------------------------------
EOQ Balance of Financed Tax Component 287 261 235 209 183
Financed Tax Component Amortization (reduce per ln 4) 26 26 26 26 26
Average Balance of Financed Tax Component - - - 261 -
Rate of Return Applied to Financed Tax Component - - - 13.55% -
Annual Carrying Cost Credit on Financed Tax Component - - - (35) -
Quarterly Carrying Cost Credit on Financed Tax Component (9) (9) (9) (9) (5)
Quarterly Revenue Requirement on Rate Reduction Bonds
- -----------------------------------------------------
Principal Payment (ln 4) 65 65 65 65 65
Interest Payment (ln 5) 15 13 12 11 10
Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11 11
Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11) (11)
Carrying Cost Credit on Financed Tax Component (ln 15) (9) (9) (9) (9) (5)
----------------------------------------------------------
Subtotal (sum of ln 19 through ln 23) 71 69 68 67 69
Franchise Fees & Uncollectibles 1 1 1 1 1
----------------------------------------------------------
Total Revenue Requirement, 12/31/98-12/31/07 72 70 69 68 70
==========================================================
</TABLE>
A-11
<PAGE>
RATE REDUCTION BONDS -- SIZING CALCULATIONS
BOND ISSUANCE CASE
($ in millions)
Assumptions: 10-year amortization 7.5% pre-tax carrying c
- ------------
<TABLE>
<CAPTION>
1 6/30/06 9/30/06 12/31/06 3/31/07 6/30/07 9/30/07 12/31/07
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2 Debt Service
------------
3
4 Principal Payment 65 65 65 65 65 65 65
5 Interest Payment 9 7 6 5 4 2 1
6 Refundable Ongoing Costs Credit 11 11 11 11 11 11 11
7 Nonrefundable Ongoing Costs 0 0 0 0 0 0 0
------------------------------------------------------------------------------
8 Quarterly Total Debt Service 85 84 82 81 80 79 78
==============================================================================
9
10 Refundable Ongoing Costs Credit
-------------------------------
11
12 Quarterly Refundable Ongoing Costs
Credit (11) (11) (11) (11) (11) (11) (11)
13
14 Financed Tax Component Carrying
-------------------------------
Cost Credit
-----------
15
16 EOQ Balance of Financed Tax Component 156 130 104 78 52 26 (0)
17 Financed Tax Component Amortization
(reduce per ln 4) 26 26 26 26 26 26 26
18 Average Balance of Financed Tax
Component - - 156 - - - 52
19 Rate of Return Applied to Financed Tax
Component - - 13.55% - - - 13.55%
20 Annual Carrying Cost Credit on
Financed Tax Component - - (21) - - - (7)
21 Quarterly Carrying Cost Credit on
Financed Tax Component (5) (5) (5) (2) (2) (2) (2)
22
23 Quarterly Revenue Requirement on Rate
-------------------------------------
Reduction Bonds
---------------
24
25 Principal Payment (ln 4) 65 65 65 65 65 65 65
26 Interest Payment (ln 5) 9 7 6 5 4 2 1
27 Total Ongoing Costs (ln 6 + ln 7) 11 11 11 11 11 11 11
28 Refundable Ongoing Costs Credit (ln 12) (11) (11) (11) (11) (11) (11) (11)
29 Carrying Cost Credit on Financed Tax
Component (ln 15) (5) (5) (5) (2) (2) (2) (2)
----------------------------------------------------------------------------
30 Subtotal (sum of ln 19 through ln 23) 68 67 66 68 67 66 64
31 Franchise Fees & Uncollectibles 1 1 1 1 1 1 1
----------------------------------------------------------------------------
32 Total Revenue Requirement, 12/31/98 -
12/31/07 69 68 66 69 68 66 65
============================================================================
</TABLE>
A-12
<PAGE>
RATE REDUCTION BONDS - SIZING CALCULATIONS
REVENUE REQUIREMENT DIFFERENCES
($ in millions)
<TABLE>
<CAPTION>
1 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
-----------------------------
3
4 Revenue Requirement,
17-quarter Transition Costs Amortization 187 187 187 187 178 178
5 Revenue Requirement, Rate Reduction Bonds (90) (89) (88) (86) (88) (87)
---------------------------------------------------------------
6 Subtotal Calculated Difference 97 98 99 100 90 91
7 Rate Reduction Bond Memo Account (9) (10) (11) (13) (2) (3)
---------------------------------------------------------------
8 Difference 88 88 88 88 88 88
===============================================================
9
10 Sizing Calculations:
--------------------
11
12 Total Calculated Difference, 1,494
1/1/1998 - 1/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued 2,575
15 Bond Issuance Expense 22
------
16 Face Value of Bonds Issued 2,596
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference, 401
1/1/1998 - 12/31/2007 (ln 8)
21 Annual Discount Rate 10.0%
22 Quarterly Discount Rate 2.5%
</TABLE>
<TABLE>
<CAPTION>
1 9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
-----------------------------
3
4 Revenue Requirement,
17-quarter Transition Costs Amortization 178 178 169 169 169 169 160 160
5 Revenue Requirement, Rate Reduction Bonds (85) (84) (86) (84) (83) (82) (83) (82)
----------------------------------------------------------------------------------
6 Subtotal Calculated Difference 92 94 83 85 86 87 77 78
7 Rate Reduction Bond Memo Account (5) (6) 4 3 2 1 11 10
----------------------------------------------------------------------------------
8 Difference 88 88 88 88 88 88 88 88
==================================================================================
9
10 Sizing Calculations:
--------------------
11
12 Total Calculated Difference,
1/1/1998 - 1/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference,
1/1/1998 - 12/31/2001 (ln 6)
21 Annual Discount Rate
22 Quarterly Discount Rate
</TABLE>
A-13
<PAGE>
RATE REDUCTION BONDS - SIZING CALCULATIONS
REVENUE REQUIREMENT DIFFERENCES
($ in millions)
<TABLE>
<CAPTION>
1 9/30/01 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02 3/31/03
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
-----------------------------
3
4 Revenue Requirement,
17-quarter Transition Costs Amortization 160 160 158 - - - -
5 Revenue Requirement, Rate Reduction Bonds (81) (80) (80) (75) (74) (72) (74)
-----------------------------------------------------------------------------
6 Subtotal Calculated Difference 79 80 78 (75) (74) (72) (74)
7 Rate Reduction Bond Memo Account 9 7 12 - - - -
-----------------------------------------------------------------------------
8 Difference 88 88 90 (75) (74) (72) (74)
=============================================================================
9
10 Sizing Calculation:
------------------
11
12 Total Calculated Difference,
1/1/1998 - 1/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
-----------------------------
19
20 NPV of Quarterly Difference,
1/1/1998 - 12/31/2007 (ln 8)
21 Annual Discount Rate: 10.0%
22 Quarterly Discount Rate 2.5%
</TABLE>
<TABLE>
<CAPTION>
1 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04 9/30/04 12/31/04 3/31/05
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
-----------------------------
3
4 Revenue Requirement,
17-quarter Transition Costs Amortization - - - - - - - -
5 Revenue Requirement, Rate Reduction Bonds (73) (72) (71) (73) (72) (70) (69) (72)
----------------------------------------------------------------------------------
6 Subtotal Calculated Difference (73) (72) (71) (73) (72) (70) (69) (72)
7 Rate Reduction Bond Memo Account - - - - - - - -
----------------------------------------------------------------------------------
8 Difference (73) (72) (71) (73) (72) (70) (69) (72)
==================================================================================
9
10 Sizing Calculation:
------------------
11
12 Total Calculated Difference,
1/1/1998 - 1/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
-----------------------------
19
20 NPV of Quarterly Difference,
1/1/1998 - 12/31/2007 (ln 8)
21 Annual Discount Rate:
22 Quarterly Discount Rate
</TABLE>
A-14
<PAGE>
RATE REDUCTION BONDS - SIZING CALCULATIONS
REVENUE REQUIREMENT DIFFERENCES
($ in millions)
<TABLE>
<CAPTION>
1 6/30/05 9/30/05 12/31/05 3/31/06 6/30/06 9/30/06 12/31/06
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
-----------------------------
3
4 Revenue Requirement,
17-quarter Transition Costs Amortization - - - - - - -
5 Revenue Requirement, Rate Reduction Bonds (70) (69) (68) (70) (69) (68) (66)
-----------------------------------------------------------------------------
6 Subtotal Calculated Difference (70) (69) (68) (70) (69) (68) (66)
7 Rate Reduction Bond Memo Account - - - - - - -
-----------------------------------------------------------------------------
8 Difference (70) (69) (68) (70) (69) (68) (66)
=============================================================================
9
10 Sizing Calculation:
------------------
11
12 Total Calculated Difference,
1/1/1998 - 1/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
-----------------------------
19
20 NPV of Quarterly Difference,
1/1/1998 - 12/31/2007 (ln 8)
21 Annual Discount Rate: 10.0%
22 Quarterly Discount Rate 2.5%
</TABLE>
<TABLE>
<CAPTION>
1 3/31/07 6/30/07 9/30/07 12/31/07
------------------------------------------
<S> <C> <C> <C> <C>
2 Revenue Requirement Difference
-----------------------------
3
4 Revenue Requirement,
17-quarter Transition Costs Amortization - - - -
5 Revenue Requirement, Rate Reduction Bonds (69) (68) (66) (65)
------------------------------------------
6 Subtotal Calculated Difference (69) (68) (66) (65)
7 Rate Reduction Bond Memo Account - - - -
------------------------------------------
8 Difference (69) (68) (66) (65)
==========================================
9
10 Sizing Calculation:
------------------
11
12 Total Calculated Difference,
1/1/1998 - 1/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
-----------------------------
19
20 NPV of Quarterly Difference,
1/1/1998 - 12/31/2001 (ln 6)
21 Annual Discount Rate:
22 Quarterly Discount Rate
</TABLE>
A-15
<PAGE>
APPENDIX SCE-1-B
FTA CHARGE CALCULATION EQUATIONS
<PAGE>
APPENDIX SCE-1-B
FTA CHARGE CALCULATION
A. BACKGROUND
This appendix describes the method used to calculate the FTA charges. The
FTA charge for each series or class of Rate Reduction Bonds will be established
at a level (or at different levels during specified periods over the life of the
Rate Reduction Bonds) intended to provide for the full recovery of payments of
interest and principal on the Rate Reduction Bonds, in accordance with the
amortization schedule for the Rate Reduction Bonds determined at the time of
offering, plus overcollateralization as well as related financing costs and fees
("Rate Reduction Bond Debt Service"), based upon assumptions including sales
forecasts, charge-offs, and lags between FTA charge billing and collection. This
model will be used to calculate the initial FTA charges and will also be used to
calculate revised FTA charges./1/
B. EXPLANATION OF CALCULATION AND INPUTS
The Rate Reduction Bond balance and any overcollateralization will be
amortized in equal annual installments over the expected life of the bonds,
anticipated to be 10 years. This amortization schedule will result in declining
interest payments over the life of the bonds which will provide greater rate
stability than other amortization options. While we know the annual principal
amortization, the quarterly principal payments will not be equal. This is
because the FTA charge is usage based and usage is generally higher in the
summer months. Therefore, more FTA will be collected and
- --------------------
/1/ It is possible that the model will need to be changed at times during the
term of the Rate Reduction Bonds. As described in Exhibit SCE-2, Edison
requests that the Commission's Financing Order authorize Edison to make FTA
charge true-up filings which require changes to the model by Advice Letter
filings which would make new FTA charges effective within 90 days of such
filings.
B-1
<PAGE>
more principal will be reduced during those months. The amount of interest paid
each year will depend in part on the timing differences caused by seasonal
changes in projected consumption.
The total scheduled FTA charge collections for any quarter equals the
interest and the scheduled principal amortization including
overcollateralization due to investors for that quarter plus the servicer fee
and other ongoing costs. The total scheduled FTA charge collections for any
quarter will include collections for bills sent in prior quarters and for bills
sent in the current quarter, in each case, as a result of the expected timing of
collections from the applicable rate groups.
The following equations are used to develop a formula which can be used to
solve for the FTA charge using a forecast of kWh sales, uncollectibles and the
timing of collections. Because the Rate Reduction Bonds may be issued in
several series or classes and each series or class may have different
characteristics, a separate FTA charge will be calculated for each series or
class. These formulas are used to develop a separate FTA charge for one series
or class of bonds./2/
C. FORMULAS
The variables used are defined as follows:
EB = Ending Balance
P = Principal Payment
TSC = Total Scheduled Collections
I = Interest Payment
r = Coupon Rate
K = kWh Sales
P1 = Percent of revenue received during month billed
- ------------------
/2/ To convert these equations in order to solve for the total FTA charge
rather than the FTA charge for a single series or class of bonds, replace
"r" with the weighted average interest rate for each period.
B-2
<PAGE>
P2 = Percent of revenue received the second month after it is billed
P3 = Percent of revenue received the third month after it is billed
P4 = Percent of revenue received the fourth month after it is billed
P5 = Percent of revenue received in the fifth month (remaining revenue
less the percent written off)
T = FTA Charge
W = Revenue Weighting Factor
F = Quarterly Ongoing Fees (including servicing fee)
DS = Rate Reduction Bond Debt Service
The subscripts used are defined as follows:
n = any quarter
y = any year
m# = month
R = residential
G = GS-1
The ending balance for any quarter is:
EB\\n=\\EB\\n-1\\ - P\\n\\ (1)
The scheduled principal amortization in any quarter is:
P\\n\\ = TSC\\n\\ - I\\n\\ - F\\n\\ (2)
The scheduled interest due in any quarter is:
I\\n\\ = EB\\n-1\\ * r (3)
-
4
Using equation 3 in equation 2 yields:
P\\n\\ = TSC\\n\\ - F\\n\\ - (EB\\n-1\\ * r) (4)
-
4
Using equation 4 in equation 1 yields:
EB\\n\\ = EB\\n-1\\ - TSC\\n\\ + F\\n\\ + (EB\\n-1\\ * r/4) (5)
B-3
<PAGE>
Rearranging equation 5 yields:
EB\\n\\ = EB\\n-1\\ (1 + r ) - TSC\\n\\ + F\\n\\ (6)
-
4
Using equation 6 we can write the expression for the ending balance in the
fourth quarter.
EB\\4\\ = EB\\3\\ (1 + r/4) - TSC\\4\\ + F\\4\\ (7)
Now using equation 6, substitute the expression for EB\\3\\ into Equation 7.
EB\\4\\ = [EB\\2\\ (1 + r/4) - TSC\\3\\ + F\\3\\] (1 + r/4) -
TSC\\4\\ + F\\4\\ (8)
Do the same substitutions for EB\\2\\ and EB\\1\\ to get:
EB\\4\\ = [[[ EB\\o\\ (1 + r/4) - TSC\\1\\ + F\\1\\] (1 + r/4) -
TSC\\2\\ + F\\2\\] (1 + r/4) - TSC\\3\\ + F\\3\\] (1 + r/4) -
TSC\\4\\ + F\\4\\ (9)
Rearranging the terms of equation 9 gives:
EB\\4\\ = EB\\o\\ (1 + r/4)/4/ - (TSC\\1\\ - F\\1\\)
(1 + r/4)/3/ - (TSC\\2\\ - F\\2\\) (1 + r/4)/2/
- - (TSC\\3\\ - F\\3\\) (1 + r/4) - (TSC\\4\\ - F\\4\\) (10)
Equation 10 gives us an expression for the ending balance, as a function of
the beginning balance, coupon rate and total scheduled collections.
The total scheduled collections for any quarter are a function of the
amount of FTA charges billed each month and the payment lag. The billings in a
given month are kWh sales for that month multiplied by the FTA charge. As
described in Appendix SCE-1-C of this exhibit, the payments in respect of bills
sent in a given month are received by Edison over a period of five months.
Therefore, the collections in any given quarter will reflect
B-4
<PAGE>
collections from bills sent in the four months prior to the start of the
quarter. The variables P1 through P5 describe the percentage of a month's billed
revenue received over each month of a five month period.
The total scheduled collections for any quarter are:
TSC\\n\\ = K\\m-3\\ * T\\y\\ '* (P5) +
K\\m-2\\ * T\\y\\ '* (P4+P5) +
K\\m-1\\ * T\\y\\ '* (P3+P4+P5) +
K\\mo\\ * T\\y\\ '* (P2+P3+P4) +
K\\m1\\ * T\\y\\ * (P1+P2+P3) +
K\\m2\\ * T\\y\\ * (P1+P2) +
K\\m3\\ * T\\y\\ * (P1) (11)
Where: T\\y\\' is T\\y-1\\ for billings from the previous year
and T\\y\\ for billings from the current year
Substitute the expression for total scheduled collections in equation 11
into equation 10.
EB\\4\\ = EB\\o\\ (1 + r/4)/4/
- -[K\\m-3\\ * T\\y-1\\* (P5) + K\\m-2\\ * T\\y-1\\ * (P4+P5) + First Quarter
K\\m-1\\ * T\\y-1\\ * (P3+P4+P5) + Collections
K\\mo\\ * T\\y-1\\ * (P2+P3+P4) + K\\m1\\ * T\\y\\* (P1+P2+P3) +
K\\m2\\ * T\\y\\ * (P1+P2) + K\\m3\\ * T\\y\\ * (P1) - F\\1\\ ] * (1 + r/4)/3/
- -[K\\m0\\ * T\\y-1\\ * (P5) + K\\m1\\ * T\\y\\ * (P4+P5) + Second Quarter
K\\m2\\ * T\\y\\ * (P3+P4+P5) + Collections
K\\m3\\ * T\\y\\ * (P2+P3+P4) + K\\m4\\ * T\\y\\ * (P1+P2+P3) +
K\\m5\\ * T\\y\\ * (P1+P2) + K\\m6\\ * T\\y\\ * (P1) - F\\2\\] * (1 + r/4)/2/
B-5
<PAGE>
- -[K\\m3\\ * T\\y\\ * (P5) + K\\m4\\ * T\\y\\ * (P4+P5) + Third Quarter
K\\m5\\ * T\\y\\ * (P3+P4+P5) + Collections
K\\m6\\ * T\\y\\ * (P2+P3+P4) + K\\m7\\ * T\\y\\ * (P1+P2+P3) +
K\\m8\\ * T\\y\\ * (P1+P2) + K\\m9\\ * T\\y\\ * (P1) - F\\3\\] * (1 + r/4)
- -[K\\m6\\ * T\\y\\ * (P5) + K\\m7\\ * T\\y\\ * (P4+P5) + Fourth Quarter
K\\m8\\ * T\\y\\ * (P3+P4+P5) + Collections
K\\m9\\ * T\\y\\ * (P2+P3+P4) + K\\m10\\ * T\\y\\ * (P1+P2+P3) +
K\\m11\\ * T\\y\\ ** (P1+P2) + K\\m12\\ * T\\y\\ * (P1) - F\\4\\] (12)
Now we have an expression for the ending balance as a function of the FTA
charge and other forecast quantities.
As explained in Exhibit SCE-1, Section IV.C.4.a, because the scheduled
collections come from two customer classes, a different FTA charge is required
for each to maintain an appropriate allocation of Transition Costs. The Rate
Reduction Bond Debt Service will be allocated to each rate group using weighting
factors. The weighting factors are proportional to the total revenues
calculated by multiplying the rates in effect as of June 10, 1996 by the
forecast billing determinants for each rate group. This allocation method
results in an allocation of the FTA charges in proportion to the benefits
received by each rate group in the form of the 10 percent rate reduction.
The Rate Reduction Bond Debt Service is weighted among rate groups
according to weighting factors as described above.
The expression for total billed revenue is:
DS = DS * W\\R\\ + DS * W\\G\\ (13)
The Rate Reduction Bond Debt Service can also be expressed as the FTA
charge for each rate group (where T\\R\\ = FTA charge for residential and
B-6
<PAGE>
T\\G\\ = FTA charge for GS-1 customers) multiplied by annual sales for each
rate group.
DS = T\\R\\ * K\\R\\ + T\\G\\ * K\\G\\ (14)
The Rate Reduction Bond Debt Service for each rate group is:
DS\\R\\ = T\\R\\ * K\\R\\ = DS *W\\R\\ (15)
DS\\G\\ = T\\G\\ * K\\G\\ = DS * W\\G\\ (16)
Using equations 15 and 16, we can write an expression for Rate Reduction
Bond Debt Service as a function of the two FTA charges, annual sales and
weighting factors.
DS = T\\R\\ * K\\R\\ = T\\G\\ * K\\G\\ (17)
--------------- ---------------
W\\R\\ W\\G\\
Equation 17 can be rearranged to express the GS-1 FTA charge as a function
of the residential FTA charge.
T\\G\\ = T\\R\\ * K\\R\\ * W\\G\\ (18)
--------------- ------
W\\R\\ K\\G\\
Now we must convert equation 12 into a two rate group formula using the FTA
charge relationship in equation 18.
EB\\4\\ = EB\\o\\ (1 + r/4)/4/ First Quarter
- -[K\\m-3R\\ * T\\R(y-1)\\ * (P5) + K\\m-2R\\ * T\\R(y-1)\\ Collections-
* (P4 + P5) + K\\m-1R\\ * T\\R(y-1)\\ * (P3+P4+P5) + Residential
K\\moR\\ * T\\R(y-1)\\ * (P2+P3+P4) + K\\m1R\\ * T\\R\\ * (P1+P2+P3) +
K\\m2R\\ * T\\R\\ * (P1+P2) + K\\m3R\\ * T\\R\\ * (P1) - F\\1\\] * (1 + r/4)/3/
B-7
<PAGE>
- -[K\\m0R\\ * T\\R(y-1)\\ * (P5) + K\\m1R\\ * T\\R\\ * Second Quarter
(P4+P5) + K\\m2R\\ * T\\R\\ * (P3+P4+P5) + Collections-
K\\m3R\\ * T\\R\\ * (P2+P3+P4) + K\\m4R\\ * T\\R\\ * Residential
(P1+P2+P3) + K\\m5R\\ * T\\R\\ * (P1+P2) +
K\\m6R\\ * T\\R\\ * (P1) - F\\2\\] * (1 + r/4)/2/
- -[K\\m3R\\ * T\\R\\ * (P5) + K\\m4R\\ * T\\R\\ * (P4+P5) Third Quarter
+ K\\m5\\ * T\\R * (P3+P4+P5) + Collections-
K\\m6R\\ * T\\R\\ * (P2+P3+P4) + K\\m7R\\ * Residential
T\\R\\ * (P1+P2+P3) +
K\\m8R\\ * T\\R\\ * (P1+P2)
+ K\\m9R\\ * T\\R\\ * (P1) - F\\3\\] * (1 + r/4)
- -[K\\m6R\\ * T\\R\\ * (P5) + K\\m7R\\ * T\\R\\ * (P4+P5) Fourth Quarter
+ K\\m8R\\ * T\\R\\ * (P3+P4+P5) + Collections-
K\\m9R\\ * T\\R\\ * (P2+P3+P4) Residential
+ K\\m10R\\ * T\\R\\ * (P1+P2+P3) +
K\\m11R\\ * T\\R\\ * (P1+P2) + K\\m12R\\ * T\\R\\ * (P1) - F\\4\\]
- -[K\\m-3G\\ * T\\R(y-1)\\ * K\\R\\ * W\\G\\ * (P5)+ First Quarter
----------------------------- Collections-
W\\R\\ * K\\G\\ GS-1
K\\m-2G\\ * T\\R(y-1)\\ * K\\R\\ * W\\G\\ * (P4+P5) +
-----------------------------
W\\R\\ * K\\G\\
K\\m-1G\\ * T\\R(y-1)\\ * K\\R\\ * W\\G\\ * (P3+P4+P5) +
-----------------------------
W\\R\\ * K\\G\\
K\\moG\\ * T\\R(y-1)\\ * K\\R\\ * W\\G\\ * (P2+P3+P4) +
------------------------------
W\\R\\ * K\\G\\
K\\m1G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2+P3) +
-------------------------
W\\R\\ * K\\G\\
K\\m2G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2) +
------------------------
W\\R\\ * K\\G\\
K\\m3G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1) - F\\1\\] * (1 + r/4)/3/
-------------------------
W\\R\\ * K\\G\\
- -[K\\m0G\\ * T\\R(y-1)\\ * K\\R\\ * W\\G\\ * (P5) + Second Quarter
----------------------------- Collections-
W\\R\\ * K\\G\\ GS-1
K\\m1G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P4+P5) +
------------------------
W\\R\\ * K\\G\\
K\\m2G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P3+P4+P5) +
-------------------------
W\\R\\ * K\\G\\
K\\m3G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P2+P3+P4) +
------------------------
W\\R\\ * K\\G\\
K\\m4G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2+P3) +
------------------------
W\\R\\ * K\\G\\
K\\m5G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2) +
------------------------
W\\R\\ * K\\G\\
K\\m6G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1) - F\\2\\] * (1 + r/4)/2/
------------------------
W\\R\\ * K\\G\\
B-8
<PAGE>
- -[K\\m3G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P5) + Third Quarter
------------------------ Collections-
W\\R\\ * K\\G\\ GS-1
K\\m4G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P4+P5) +
------------------------
W\\R\\ * K\\G\\
K\\m5G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P3+P4+P5) +
-------------------------
W\\R\\ * K\\G\\
K\\m6G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P2+P3+P4) +
------------------------
W\\R\\ * K\\G\\
K\\m7G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2+P3) +
-------------------------
W\\R\\ * K\\G\\
K\\m8G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2) +
------------------------
W\\R\\ * K\\G\\
K\\m9G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1) - F\\3\\] * (1 + r/4)
-------------------------
W\\R\\ * K\\G\\
- -[K\\m6G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P5) + Fourth Quarter
------------------------- Collections-
W\\R\\ * K\\G\\ GS-1
K\\m7G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P4+P5) +
------------------------
W\\R\\ * K\\G\\
K\\m8G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P3+P4+P5) +
------------------------
W\\R\\ * K\\G\\
K\\m9G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P2+P3+P4) +
------------------------
W\\R\\ * K\\G\\
K\\m10G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2+P3) +
------------------------
W\\R\\ * K\\G\\
K\\m11G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1+P2) +
-------------------------
W\\R\\ * K\\G\\
K\\m12G\\ * T\\R\\ * K\\R\\ * W\\G\\ * (P1) - F\\4\\] (19)
-------------------------
W\\R\\ * K\\G\\
The next step is to solve equation 19 for T\\R\\, the residential FTA
charge. The last step is to substitute the value for T\\R\\ into equation 17 and
solve for T\\G\\, the GS-1 FTA charge.
The formulas listed above describe the FTA charge calculation assuming
principal and interest payments are made to Rate Reduction Bond investors
quarterly. If the principal and interest payments to investors are made
monthly, the formula will be revised. The method and logic used in deriving the
formula will be the same. However, the equations which reference the quarterly
interest and principal payments will be revised to
B-9
<PAGE>
reflect monthly payments. Similarly, the equations that reference quarterly
scheduled collections will instead reference the monthly scheduled collections.
Also, the fees which were payable quarterly would likely be payable monthly,
although the total annual fee amount would remain the same. The resulting
monthly formula is quite lengthy and complex unlike the quarterly formula which
is simple and straightforward.
B-10
<PAGE>
Appendix SCE-1-C
Interest Earning On FTA Charge Collections
<PAGE>
APPENDIX SCE-1-C
METHOD OF CALCULATING CASHFLOW BENEFITS
FROM FTA COLLECTIONS HELD BY EDISON
A. INTRODUCTION
------------
As described in Exhibit SCE-1, pending remittances to the Issuer (which are
expected to be made monthly),/1/ the FTA charges collected from customers will
not be segregated from Edison's other collections. Edison, as servicer, will
remit the after-tax interest earnings on these amounts through the Rate
Reduction Bond Memorandum Account to residential and small commercial customers.
The proposed method for determining the after-tax interest earnings is explained
in this Appendix.
The amount of interest earnings is a function of the current interest rate,
the amount of FTA charges billed, and the length of time that Edison holds and
invests the FTA charge collections. The time that Edison is able to invest the
FTA charge collections will depend on when customers pay their bills. Although
the majority of payments are received within 30 days of bill presentation, some
payments are received over the following three months. Any payment not received
within 120 days after the account is closed will be written off consistent with
current policy. Currently Edison's computer billing system is not capable of
tracking the daily receipts of FTA charge collections from individual
customers./2/ Therefore, the amount of FTA charge collections must be estimated
using the amount of FTA
- ---------------
/1/ Actual deposit intervals will be established in conjunction with the
requirements of bond rating agencies.
/2/ In the future, Edison's computer billing system may become capable of
tracking collections of FTA charges from individual customers as those
collections are received. If this occurs, we will use the FTA charge
collection information from the computer billing system rather than
estimating the amount of FTA charge collections as described in this
appendix.
C-1
<PAGE>
charges billed in a given month and the existing information on customers'
payment patterns.
B. DOMESTIC AND GS-1 PAYMENT PATTERNS ANALYSIS
-------------------------------------------
Edison has performed a payment patterns analysis for both the Domestic and
GS-1 rate classes to determine when collections are typically received from
customers. Our two-year historical average of billed revenue received by day 30
and by day 60 for the two rate groups is shown in Table 1. As Table 1 shows, on
average, 80 percent of all payments are received by day 30 and 95 percent are
received by day 60.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Table 1
- ------------------------------------------------------------------
Percent of Billed Revenue Received by:
- ------------------------------------------------------------------
<S> <C> <C> <C>
Customer Day 30 Day 60 Day 120
Group
- ------------------------------------------------------------------
Domestic 78.55% 95.59% 99.50%
- ------------------------------------------------------------------
GS-1 83.03% 95.57% 99.66%
- ------------------------------------------------------------------
</TABLE>
The data in Table 1 show the revenue received by day 30 and day 60. In
order to estimate the revenue received each day before Day 30 and between Day 30
and Day 60, two analyses were performed. For a typical month, specifically July
1996, the time lags between bill presentation and receipt of payments were
tracked. From this data and the data in Table 1, a payment pattern curve was
determined.
Limited data exists for the payment patterns beyond Day 60. The historical
write off percentages for the Domestic and GS-1 rate groups are quite small,
0.50 percent and 0.34 percent, respectively. Since Edison writes off
receivables 120 days after the account closes, the payment patterns between Day
60 and Day 120 are
C-2
<PAGE>
estimated by assuming a straight line payment pattern from 95.59 percent at day
60 to 99.50 percent at day 120 for Domestic customers. For GS-1 customers the
straight line is assumed from 95.57 percent at day 60 to 99.66 percent at day
120.
The final payment patterns analysis is shown in Table 2. This table shows
the percent of revenue received by day from the day after the bill is sent out
to the day when any uncollected amounts are written off for Domestic and GS-1
rate groups. The fourth column of the table shows the weighted average of the
two rate groups.
C. DETERMINING AGGREGATE COLLECTIONS
---------------------------------
The study described above shows the average time lag from when a given
day's bills are presented to the time Edison receives payment. Assuming that
this payment pattern is the same for bills sent on each day of the month and
that the billed amounts for a given month are spread evenly over each day of the
month, the daily payments received as a percent of the monthly amount billed can
be determined for each day's billing. The payments received for each day can be
summed to determine the cumulative payments received on each day from day 1
through day 150. Day 150 is the day when the bills sent on the last day of the
month are written off. The amount of FTA charge collections that Edison has
received on any given day can be determined by multiplying the FTA charges
billed in any given month by the percentage of payments received.
The amount of FTA charge collections received by Edison can then be
multiplied by the applicable interest rate to yield the cashflow benefits.
Because Edison will invest the FTA charge collections for less than a month, the
applicable interest rate is the one-month commercial paper rate.
Table 3 shows the daily FTA collections and the monthly remittances to the
Issuer (assumed here to occur on day 30, 60, 90, 120 and 150) and the after-tax
C-3
<PAGE>
interest earnings (assuming an annual interest rate of 5 percent). Each of the
numbers shown in Table 3 is a percent of the total billed amount for the given
month. Column One shows the calendar days. The first bill of the month is sent
out on day 0 and the last bill of the month is sent out on day 29, assuming a 30
day month. The table continues until day 150 at which time the last payment (in
respect of bills sent on day 29) is either received or written off. Column Two
shows the cumulative FTA collections for each day. Column Three shows the
incremental FTA charges collected on each day. The fourth column shows the
collection account. The amount in column four represents the FTA charge
collections that Edison is holding at any point in time. The fifth column,
labeled Collection Account with Interest, shows the funds available to be
invested by Edison. The amount in column five represents the sum of all FTA
collections and accrued interest less any amounts of FTA charges previously
remitted to the Issuer and any amounts of interest earnings previously remitted.
Columns Six and Seven of the table show the FTA charges remitted to the Issuer
and the interest earnings remitted to ratepayers by an entry in the Rate
Reduction Bond Memorandum Account, respectively.
1. ILLUSTRATIVE EXAMPLE
--------------------
Here is an example of how the specific calculation of interest
earnings would work using the tables provided above and an estimate of
interest rates of 5 percent. An average month's FTA charge billings are
assumed to be $34 million. From Table 3, the interest earned in the first
month would be .035 percent of the month's billings or $11,900. The
interest earnings from the payments received in the second month would be
.069 percent of the month's billings or $23,500. A similar calculation
would be applied to the remaining three months during which Edison would
receive collections in respect of the
C-4
<PAGE>
$34 million billed. The interest earnings on the remaining months would be
.016 percent of the month's billings or $5,400.
2. UPDATING THE PAYMENT PATTERN STUDY
----------------------------------
Certain events may result in a significant change in customers'
payment pattern (e.g. the introduction of third parties billing for
Edison's charges.) If such an event occurs, the estimated payment pattern
will be updated and will be used to determine cashflow benefits as well as
be reflected in any future true-up to the FTA charges.
C-5
<PAGE>
<TABLE>
<CAPTION>
Table 2
Percent of Billed Revenue Received
Domestic and GS-1 Customers
Calendar Domestic GS-1 Weighted Avg
Days
<S> <C> <C> <C>
1 0.20% 0.22% 0.20%
2 0.64% 0.52% 0.63%
3 2.17% 1.20% 2.01%
4 4.93% 2.07% 4.47%
5 10.91% 3.38% 9.71%
6 15.20% 6.44% 13.81%
7 20.23% 10.91% 18.75%
8 24.47% 14.42% 22.87%
9 26.05% 17.24% 24.64%
10 28.04% 20.68% 26.87%
11 32.37% 23.71% 30.99%
12 36.82% 27.33% 35.31%
13 39.68% 32.14% 38.48%
14 44.69% 37.85% 43.61%
15 49.23% 42.09% 48.10%
16 52.13% 45.56% 51.09%
17 53.40% 49.71% 52.81%
18 55.39% 53.38% 55.07%
19 59.07% 57.54% 58.83%
20 62.06% 62.29% 62.10%
21 65.89% 67.28% 66.11%
22 68.82% 70.03% 69.02%
23 70.03% 71.86% 70.32%
24 70.74% 73.94% 71.25%
25 72.72% 75.44% 73.16%
26 74.35% 77.04% 74.77%
27 75.51% 78.98% 76.06%
28 77.05% 80.99% 77.68%
29 77.92% 82.16% 78.59%
30 78.55% 83.03% 79.26%
31 78.95% 83.86% 79.73%
32 80.03% 84.50% 80.74%
33 80.51% 85.08% 81.24%
34 81.38% 85.93% 82.10%
35 82.96% 86.93% 83.59%
36 83.98% 87.68% 84.57%
37 84.51% 88.34% 85.12%
38 84.71% 88.93% 85.38%
39 85.29% 89.50% 85.96%
40 86.08% 90.07% 86.72%
41 86.65% 90.67% 87.29%
42 87.12% 91.33% 87.79%
43 87.74% 91.83% 88.40%
44 88.47% 92.11% 89.05%
45 88.76% 92.37% 89.33%
46 89.31% 92.63% 89.84%
47 89.91% 92.86% 90.38%
48 90.62% 93.15% 91.02%
49 91.48% 93.52% 91.80%
50 92.56% 93.78% 92.76%
51 92.91% 94.00% 93.09%
52 93.07% 94.17% 93.24%
53 93.25% 94.34% 93.42%
54 93.64% 94.53% 93.78%
55 94.32% 94.75% 94.39%
56 94.81% 95.01% 94.84%
57 95.27% 95.20% 95.26%
58 95.43% 95.33% 95.41%
59 95.43% 95.43% 95.43%
60 95.59% 95.57% 95.59%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table 2
Percent of Billed Revenue Received
Domestic and GS-1 Customers
Calendar Domestic GS-1 Weighted Avg
Days
<S> <C> <C> <C>
1 0.20% 0.22% 0.20%
2 0.64% 0.52% 0.63%
3 2.17% 1.20% 2.01%
4 4.93% 2.07% 4.47%
5 10.91% 3.38% 9.71%
6 15.20% 6.44% 13.81%
7 20.23% 10.91% 18.75%
8 24.47% 14.42% 22.87%
9 26.05% 17.24% 24.64%
10 28.04% 20.68% 26.87%
11 32.37% 23.71% 30.99%
12 36.82% 27.33% 35.31%
13 39.68% 32.14% 38.48%
14 44.69% 37.85% 43.61%
15 49.23% 42.09% 48.10%
16 52.13% 45.56% 51.09%
17 53.40% 49.71% 52.81%
18 55.39% 53.38% 55.07%
19 59.07% 57.54% 58.83%
20 62.06% 62.29% 62.10%
21 65.89% 67.28% 66.11%
22 68.82% 70.03% 69.02%
23 70.03% 71.86% 70.32%
24 70.74% 73.94% 71.25%
25 72.72% 75.44% 73.16%
26 74.35% 77.04% 74.77%
27 75.51% 78.98% 76.06%
28 77.05% 80.99% 77.68%
29 77.92% 82.16% 78.59%
30 78.55% 83.03% 79.26%
31 78.95% 83.86% 79.73%
32 80.03% 84.50% 80.74%
33 80.51% 85.08% 81.24%
34 81.38% 85.93% 82.10%
35 82.96% 86.93% 83.59%
36 83.98% 87.68% 84.57%
37 84.51% 88.34% 85.12%
38 84.71% 88.93% 85.38%
39 85.29% 89.50% 85.96%
40 86.08% 90.07% 86.72%
41 86.65% 90.67% 87.29%
42 87.12% 91.33% 87.79%
43 87.74% 91.83% 88.40%
44 88.47% 92.11% 89.05%
45 88.76% 92.37% 89.33%
46 89.31% 92.63% 89.84%
47 89.91% 92.86% 90.38%
48 90.62% 93.15% 91.02%
49 91.48% 93.52% 91.80%
50 92.56% 93.78% 92.76%
51 92.91% 94.00% 93.09%
52 93.07% 94.17% 93.24%
53 93.25% 94.34% 93.42%
54 93.64% 94.53% 93.78%
55 94.32% 94.75% 94.39%
56 94.81% 95.01% 94.84%
57 95.27% 95.20% 95.26%
58 95.43% 95.33% 95.41%
59 95.43% 95.43% 95.43%
60 95.59% 95.57% 95.59%
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7
Cumulative Daily FTA Collections Remit
Calendar FTA Charge Charge Collections Account Remit FTA Interest
Days Collections Collections Account w/interest/1/ Collections Earnings
<S> <C> <C> <C> <C> <C> <C>
1 0.007 0.007 0.007 0.007 0.000 0.000
2 0.028 0.021 0.028 0.028 0.000 0.000
3 0.095 0.067 0.095 0.095 0.000 0.000
4 0.244 0.149 0.244 0.244 0.000 0.000
5 0.567 0.324 0.567 0.567 0.000 0.000
6 1.028 0.460 1.028 1.028 0.000 0.000
7 1.653 0.625 1.653 1.653 0.000 0.000
8 2.415 0.762 2.415 2.415 0.000 0.000
9 3.236 0.821 3.236 3.237 0.000 0.000
10 4.132 0.896 4.132 4.133 0.000 0.000
11 5.165 1.033 5.165 5.166 0.000 0.000
12 6.342 1.177 6.342 6.343 0.000 0.000
13 7.625 1.283 7.625 7.627 0.000 0.000
14 9.078 1.454 9.078 9.081 0.000 0.000
15 10.681 1.603 10.681 10.685 0.000 0.000
16 12.384 1.703 12.384 12.389 0.000 0.000
17 14.145 1.760 14.145 14.150 0.000 0.000
18 15.981 1.836 15.981 15.987 0.000 0.000
19 17.941 1.961 17.941 17.949 0.000 0.000
20 20.011 2.070 20.011 20.021 0.000 0.000
21 22.215 2.204 22.215 22.226 0.000 0.000
22 24.516 2.301 24.516 24.528 0.000 0.000
23 26.860 2.344 26.860 26.874 0.000 0.000
24 29.234 2.375 29.234 29.251 0.000 0.000
25 31.673 2.439 31.673 31.692 0.000 0.000
26 34.165 2.492 34.165 34.187 0.000 0.000
27 36.701 2.535 36.701 36.726 0.000 0.000
28 39.290 2.589 39.290 39.318 0.000 0.000
29 41.910 2.620 41.910 41.941 0.000 0.000
30 44.552 2.642 44.552 44.587 44.552 0.035
31 47.203 2.651 2.651 2.651 0.000 0.000
32 49.873 2.671 5.321 5.322 0.000 0.000
33 52.514 2.641 7.962 7.963 0.000 0.000
34 55.102 2.588 10.550 10.551 0.000 0.000
35 57.565 2.463 13.013 13.015 0.000 0.000
36 59.923 2.359 15.371 15.374 0.000 0.000
37 62.136 2.212 17.584 17.588 0.000 0.000
38 64.219 2.084 19.668 19.674 0.000 0.000
39 66.263 2.044 21.711 21.719 0.000 0.000
40 68.258 1.995 23.706 23.715 0.000 0.000
41 70.135 1.877 25.583 25.594 0.000 0.000
42 71.884 1.750 27.332 27.346 0.000 0.000
43 73.548 1.664 28.996 29.012 0.000 0.000
44 75.063 1.515 30.511 30.529 0.000 0.000
45 76.437 1.374 31.885 31.906 0.000 0.000
46 77.729 1.292 33.177 33.200 0.000 0.000
47 78.981 1.252 34.429 34.455 0.000 0.000
48 80.180 1.198 35.628 35.657 0.000 0.000
49 81.279 1.099 36.727 36.759 0.000 0.000
50 82.301 1.022 37.749 37.784 0.000 0.000
51 83.200 0.899 38.648 38.686 0.000 0.000
52 84.008 0.808 39.456 39.497 0.000 0.000
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7
Cumulative Daily FTA Collections Remit
Calendar FTA Charge Charge Collections Account Remit FTA Interest
Days Collections Collections Account w/interest/1/ Collections Earnings
<S> <C> <C> <C> <C> <C> <C>
53 84.778 0.770 40.226 40.270 0.000 0.000
54 85.529 0.751 40.977 41.025 0.000 0.000
55 86.237 0.708 41.685 41.736 0.000 0.000
56 86.906 0.669 42.354 42.408 0.000 0.000
57 87.546 0.640 42.994 43.052 0.000 0.000
58 88.137 0.591 43.585 43.646 0.000 0.000
59 88.698 0.561 44.146 44.211 0.000 0.000
60 89.242 0.544 44.690 44.759 44.690 0.069
61 89.773 0.531 0.531 0.531 0.000 0.000
62 90.272 0.499 1.030 1.030 0.000 0.000
63 90.757 0.485 1.515 1.515 0.000 0.000
64 91.215 0.458 1.973 1.973 0.000 0.000
65 91.625 0.411 2.384 2.384 0.000 0.000
66 92.006 0.380 2.764 2.764 0.000 0.000
67 92.370 0.364 3.128 3.129 0.000 0.000
68 92.727 0.357 3.485 3.487 0.000 0.000
69 93.068 0.341 3.826 3.827 0.000 0.000
70 93.385 0.318 4.144 4.145 0.000 0.000
71 93.686 0.301 4.444 4.446 0.000 0.000
72 93.972 0.286 4.730 4.733 0.000 0.000
73 94.240 0.268 4.998 5.001 0.000 0.000
74 94.489 0.248 5.247 5.250 0.000 0.000
75 94.730 0.241 5.488 5.492 0.000 0.000
76 94.956 0.227 5.715 5.719 0.000 0.000
77 95.167 0.211 5.925 5.930 0.000 0.000
78 95.359 0.191 6.117 6.122 0.000 0.000
79 95.526 0.168 6.284 6.290 0.000 0.000
80 95.664 0.138 6.422 6.428 0.000 0.000
81 95.793 0.129 6.552 6.558 0.000 0.000
82 95.920 0.126 6.678 6.685 0.000 0.000
83 96.042 0.122 6.800 6.808 0.000 0.000
84 96.155 0.113 6.913 6.921 0.000 0.000
85 96.249 0.094 7.007 7.016 0.000 0.000
86 96.331 0.082 7.089 7.098 0.000 0.000
87 96.401 0.070 7.159 7.169 0.000 0.000
88 96.468 0.067 7.226 7.237 0.000 0.000
89 96.537 0.069 7.295 7.306 0.000 0.000
90 96.602 0.066 7.360 7.372 7.360 0.012
91 96.668 0.066 0.066 0.066 0.000 0.000
92 96.734 0.066 0.131 0.131 0.000 0.000
93 96.799 0.066 0.197 0.197 0.000 0.000
94 96.865 0.066 0.263 0.263 0.000 0.000
95 96.931 0.066 0.328 0.328 0.000 0.000
96 96.996 0.066 0.394 0.394 0.000 0.000
97 97.062 0.066 0.460 0.460 0.000 0.000
98 97.128 0.066 0.526 0.526 0.000 0.000
99 97.194 0.066 0.591 0.591 0.000 0.000
100 97.259 0.066 0.657 0.657 0.000 0.000
101 97.325 0.066 0.723 0.723 0.000 0.000
102 97.391 0.066 0.788 0.789 0.000 0.000
103 97.456 0.066 0.854 0.854 0.000 0.000
104 97.522 0.066 0.920 0.920 0.000 0.000
105 97.588 0.066 0.985 0.986 0.000 0.000
106 97.653 0.066 1.051 1.052 0.000 0.000
</TABLE>
C-9
c
<PAGE>
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7
Cumulative Daily FTA Collections Remit
Calendar FTA Charge Charge Collections Account Remit FTA Interest
Days Collections Collections Account w/interest/1/ Collections Earnings
<S> <C> <C> <C> <C> <C> <C>
107 97.719 0.066 1.117 1.117 0.000 0.000
108 97.785 0.066 1.182 1.183 0.000 0.000
109 97.850 0.066 1.248 1.249 0.000 0.000
110 97.916 0.066 1.314 1.315 0.000 0.000
111 97.982 0.066 1.379 1.381 0.000 0.000
112 98.047 0.066 1.445 1.446 0.000 0.000
113 98.113 0.066 1.511 1.512 0.000 0.000
114 98.179 0.066 1.577 1.578 0.000 0.000
115 98.245 0.066 1.642 1.644 0.000 0.000
116 98.310 0.066 1.708 1.710 0.000 0.000
117 98.376 0.066 1.774 1.776 0.000 0.000
118 98.442 0.066 1.839 1.841 0.000 0.000
119 98.507 0.066 1.905 1.907 0.000 0.000
120 98.573 0.066 1.971 1.973 1.971 0.002
121 98.636 0.063 0.063 0.063 0.000 0.000
122 98.698 0.061 0.125 0.125 0.000 0.000
123 98.757 0.059 0.184 0.184 0.000 0.000
124 98.814 0.057 0.241 0.241 0.000 0.000
125 98.869 0.055 0.296 0.296 0.000 0.000
126 98.921 0.053 0.348 0.348 0.000 0.000
127 98.971 0.050 0.399 0.399 0.000 0.000
128 99.020 0.048 0.447 0.447 0.000 0.000
129 99.066 0.046 0.493 0.493 0.000 0.000
130 99.109 0.044 0.536 0.537 0.000 0.000
131 99.151 0.042 0.578 0.578 0.000 0.000
132 99.190 0.039 0.617 0.618 0.000 0.000
133 99.228 0.037 0.655 0.655 0.000 0.000
134 99.263 0.035 0.690 0.690 0.000 0.000
135 99.296 0.033 0.723 0.723 0.000 0.000
136 99.326 0.031 0.753 0.754 0.000 0.000
137 99.355 0.028 0.782 0.782 0.000 0.000
138 99.381 0.026 0.808 0.809 0.000 0.000
139 99.405 0.024 0.832 0.833 0.000 0.000
140 99.427 0.022 0.854 0.855 0.000 0.000
141 99.447 0.020 0.874 0.875 0.000 0.000
142 99.464 0.018 0.891 0.892 0.000 0.000
143 99.479 0.015 0.907 0.908 0.000 0.000
144 99.493 0.013 0.920 0.921 0.000 0.000
145 99.504 0.011 0.931 0.932 0.000 0.000
146 99.512 0.009 0.939 0.941 0.000 0.000
147 99.519 0.007 0.946 0.947 0.000 0.000
148 99.523 0.004 0.950 0.952 0.000 0.000
149 99.525 0.002 0.952 0.954 0.000 0.000
150 99.525 0.000 0.952 0.954 0.952 0.002
</TABLE>
/1/ An interest rate of 5 percent was assumed.
<PAGE>
Application No: 97-05-
-----------
Exhibit No: SCE-2
-----------
Witness: Various
-----------
[SOUTHERN CALIFONIA EDISON LOGO]
An EDISON INTERNATIONAL Company
(U-338-E)
PROPOSED RATEMAKING AND TARIFF CHANGES
Before the
PUBLIC UTILITES COMMISSION OF THE STATE OF CALIFORNIA
Rosemead, California
May 6, 1997
<PAGE>
SCE-2
PROPOSED RATEMAKING AND TARIFF CHANGES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE WITNESS
------- ---- -------
<S> <C> <C>
I. RATEMAKING PROPOSAL............................................. I-1 J. Yee
A. Introduction............................................... I-1
B. Proposed Ratemaking Mechanisms To Prevent Cost
Shifting And To Provide Net Benefits To
Residential And Small Commercial Customers................. I-1
1. Transition Cost Balancing Account..................... I-2
2. Rate Reduction Bond Memorandum Account................ I-3
C. Transition Cost Recovery Considerations.................... I-5 C. Jacobs
D. Financial Reporting Considerations......................... I-7 L. Geiger
II. 10 PERCENT RATE REDUCTION....................................... II-1 J. Dalessi
A. Introduction............................................... II-1
B. Rate Schedules Eligible For The 10 Percent................. II-2
Rate Reduction
C. Description Of Bill Credit To Implement 10 Percent......... II-2
Rate Reduction
III. IMPLEMENTATION OF THE FIXED TRANSITION
AMOUNT CHARGE TARIFF............................................III-1
A. Introduction...............................................III-1
B. FTA Charges And Total Rate Levels..........................III-1
C. Implementing The 10 Percent Bill Credit And
The FTA Charges............................................III-2
D. Adjustment Mechanism For FTA Charges.......................III-4
E. Provisions For Collection Of FTA Charges From
Eligible Customers Who Change Rate Schedules...............III-6
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE WITNESS
------- ---- -------
<S> <C> <C>
F. Provisions For Collection Of FTA Charges From
Eligible Customers Who Bypass................................III-7
IV. PROPOSED TARIFF CHANGES........................................... IV-1 J. Yee
A. Proposed Tariff for Rate Reduction Bond
Memorandum Account........................................... IV-1
B. Proposed Modification To TCBA Tariff......................... IV-3
C. Proposed Schedule RRB........................................ IV-5 J. Dalessi
D. Proposed Changes To Preliminary Statement.................... IV-7
</TABLE>
ii
<PAGE>
I.
RATEMAKING PROPOSAL
-------------------
A. INTRODUCTION
------------
As discussed in Chapter V of Exhibit SCE-1, the amount of Rate Reduction
Bonds issued is sized to produce the forecast of revenue requirement reductions
necessary for the 10 percent rate reduction during the maximum rate freeze
period from January 1, 1998 through March 31, 2002. The proposed transaction,
using current assumptions, results in benefits and costs over the term of the
Rate Reduction Bonds. In order to accumulate and pass through the revenue
requirement impacts of the transaction to residential and small commercial
consumers, and to avoid any cost shifting, certain additional ratemaking
mechanisms need to be implemented. Section B of this chapter discusses: (1) the
impact of the Rate Reduction Bonds on the Transition Cost Balancing Account
("TCBA"), (2) the need to modify the TCBA to prevent cost shifting between
customer classes as a result of the Rate Reduction Bond transaction and 10
percent rate reduction, and (3) the establishment of a Rate Reduction Bond
Memorandum Account to track costs and revenue requirement reductions over the
term of the Rate Reduction Bonds to ensure that residential and small commercial
customers receive the net benefits associated with the Rate Reduction Bonds.
Sections C and D of this chapter discusses transition cost recovery and
financial accounting considerations.
B. PROPOSED RATEMAKING MECHANISMS TO PREVENT COST SHIFTING AND TO PROVIDE NET
--------------------------------------------------------------------------
BENEFITS TO RESIDENTIAL AND SMALL COMMERCIAL CUSTOMERS
------------------------------------------------------
As described in Chapter V of Exhibit SCE-1, Edison estimated the benefits
of the Rate Reduction Bond transaction by comparing the applicable Transition
Cost revenue requirement with and without the issuance of Rate Reduction Bonds.
On
I-1
<PAGE>
a forecast basis, that analysis estimates the size of the bond issuance required
to provide the 10 percent rate reduction.
Edison proposes to establish a Rate Reduction Bond Memorandum Account to
track the benefits and costs of the transaction. Also, to protect against cost
shifting between small and large customer classes that could occur as a result
of the Rate Reduction Bond transaction and the 10 percent rate reduction, Edison
requests that the Commission authorize modifications to the TCBA proposed by
Edison in Application. No. 96-08-071 which will operate in conjunction with
Edison's proposed Rate Reduction Bond Memorandum Account as described below.
1. TRANSITION COST BALANCING ACCOUNT
---------------------------------
In the Transition Cost Application No. 96-08-071, Edison proposed a
Transition Cost Balancing Account as a ratemaking mechanism to compare
transition costs with CTC revenues. In order to prevent cost shifting between
customer classes, Edison proposes to impute the CTC revenue during the rate
freeze period that otherwise would have been billed absent the 10 percent rate
reduction and the rate reduction bonds. To do this, Edison would impute a
revenue amount equal to the CTC revenue reduction due to the FTA charge and the
10 percent rate reduction for residential and small commercial customers. With
this adjustment, the balance in the TCBA may reach zero at some time during the
rate freeze period and indicate that Transition Costs that must be recovered by
the end of year 2001 could have been recovered absent the impact of the 10
percent rate reduction and Rate Reduction Bonds. By doing this, customers are
assured that the rate freeze ends at the same time as it otherwise would have,
regardless of the 10 percent rate reduction and the issuance of the Rate
Reduction Bonds./1/ Thus,
- -----------------------------
/1/ The Rate Freeze Period may be extended for certain customer categories to
recover CTC exemptions mandated by AB 1890 as described in Edison's
Transition Cost Appl. No. 96-08-071. The firewall mandated by PU Code
Section 330 (V)(2) ensures that the two customer categories
(residential/small commercial and all others) pay only for their CTC
exemptions. CTC collection
(Continued)
I-2
<PAGE>
large customers' responsibility for paying CTC is unaffected by the 10 percent
rate reduction and the Rate Reduction Bonds. All customers will still be
required to pay for those Transition Costs eligible for recovery after December
31, 2001 pursuant to certain provisions of Assembly Bill 1890 ("AB 1890").
2. RATE REDUCTION BOND MEMORANDUM ACCOUNT
--------------------------------------
Edison proposes to establish a Rate Reduction Bond Memorandum Account
effective at the time the Fixed Transition Amount ("FTA") charges are first
implemented for the two eligible rate groups (described below in Chapter II.B),
or on January 1, 1998, whichever is earlier. The Rate Reduction Bond Memorandum
Account will track the reduced CTC revenues as a result of the 10 percent rate
reduction and the costs and reductions in revenue requirements associated with
the Rate Reduction Bond transaction for residential and small commercial
customers. This memorandum account will ensure that residential and small
commercial customers receive the net benefits resulting from the Rate Reduction
Bond transaction. Each month during the rate freeze period, Edison will compare
the net revenue requirement reductions produced from the Rate Reduction Bonds
with the 10 percent rate reduction given to residential and small commercial
customers. The difference will be tracked in the Rate Reduction Bond Memorandum
Account and will accrue interest at the three-month commercial paper rate
similar to other Edison memorandum accounts authorized by the Commission.
If Edison concludes during the rate freeze period that the revenue
requirement reduction resulting from the Rate Reduction Bond financing is
inadequate to support the 10 percent rate reduction over the rate freeze period,
- -------------------
Continued from the previous page
and the rate freeze period would only continue for that customer category
to recover the CTC exemptions for that customer category. Once the
exemptions are recovered, the rate freeze period would end for that
customer category.
I-3
<PAGE>
Edison may issue additional bonds up to the aggregate amount authorized in the
Commission's Financing Order. If the revenue requirement reduction produced
from the Rate Reduction Bond financing exceeds the amount needed for the 10
percent rate reduction, residential and small commercial customers will receive
the excess amounts reflected in the Rate Reduction Bond Memorandum Account after
the rate freeze period ends through an adjustment to rates implemented in
Edison's annual Revenue Adjustment Proceeding ("RAP"), as authorized by Decision
No. 96-12-088, or other successor ratemaking proceeding authorized by the
Commission.
Edison proposes to retain this memorandum account during the entire
repayment period for the Rate Reduction Bonds in order to track the net benefits
owed to residential and small commercial customers. In doing so, the
residential and small commercial customers will receive the net savings, plus
accrued interest, produced by the Rate Reduction Bond financing. The savings
include the financed tax credit described in Appendix SCE-1-A, the after-tax
investment earnings discussed in Chapter V.E of Exhibit SCE-1 and Appendix SCE-
1-C, a credit equal to the overcollateralization amount, and any FTA charge not
needed to retire the Rate Reduction Bonds as described in Chapter IV.C of
Exhibit SCE-1. Moreover, Edison proposes to use the Rate Reduction Bond
Memorandum Account to record a credit amount equal to the servicing fees it
receives, less any incremental out-of-pocket costs associated with its
activities as servicer as discussed in Chapter IV.C.5 of Exhibit SCE-1, and any
franchise fee amounts resulting from adjustments to the revenue requirements
produced by the bond sizing model as discussed in Chapter IV.C.4. After the
rate freeze period ends, Edison proposes that any annual credit or debit amounts
recorded in this account be consolidated with other pending rate changes
considered in the annual RAP, or successor ratemaking proceeding authorized by
the Commission.
I-4
<PAGE>
C. TRANSITION COST RECOVERY CONSIDERATIONS
----------------------------------------
The Rate Reduction Bond Memorandum Account described in Chapter I.B.2 of
this exhibit ensures that any savings created through the issuance of the Rate
Reduction Bonds are passed on to residential and small commercial customers and
therefore, cannot be used by Edison for additional Transition Cost collection.
Furthermore, as the hypothetical example below illustrates, the Transition Cost
amounts to be financed have the same risk of recovery as the unfinanced
Transition Costs due to the rate freeze. As a result, the issuance of the Rate
Reduction Bonds and the 10 percent rate reduction do not allow Edison to collect
any more or less of its Transition Costs than it would have collected if it had
not issued the Rate Reduction Bonds and if it had not provided the rate
reduction. In other words, the Rate Reduction Bonds are Transition Cost
recovery neutral.
If Edison had not proposed the Rate Reduction Bond Memorandum Account,
there would be a possibility of improving Transition Cost recovery through the
issuance of the Rate Reduction Bonds. For example, assume the financing
produces reductions in revenue requirements of $350 million a year during the
rate freeze period. Using the forecast of sales, the $350 million per year
reductions in revenue requirement translates to a 10 percent rate reduction
during the rate freeze period. If, however, sales over the rate freeze period
are two percent below the amount used to size the Rate Reduction Bonds for the
10 percent rate reduction, then the total revenue passed through to residential
and small commercial customers by the 10 percent rate reduction would be less
than $350 million a year. In this example, it would be only $343 million a
year. Without the Rate Reduction Bond Memorandum Account, the additional $7
million could have been used to recover Transition Costs. However, the Rate
Reduction Bond Memorandum Account prevents this from happening and ensures that
the $7 million is credited to
I-5
<PAGE>
residential and small commercial customers. Thus, in this example, residential
and small commercial customers would have realized a 10.2 percent rate
reduction.
The fact that Edison will receive the proceeds of the Rate Reduction Bonds
does not remove the risk of recovery of that amount. This can be shown by an
example comparing the recovery risk without the Rate Reduction Bond transaction
to the recovery risk with the Rate Reduction Bond transaction. Assume that
based on its forecasts of total revenues, Edison expected that $9 billion would
be available for the recovery of Transition Costs (i.e., no Transition Costs are
financed), and based on its forecasts, Edison expected to recover exactly that
amount. If, however, during the rate freeze period, the Power Exchange ("PX")
price actually exceeds the forecast resulting in $8 billion of additional costs,
then Edison would only collect $1 billion of Transition Costs. Now, instead
assume that $3 billion of the total $9 billion Transition Costs are financed
through the issuance of Rate Reduction Bonds. The revenues available for
Transition Cost recovery are reduced by the 10 percent rate reduction and the
FTA charges. With the same forecast of total revenues, $6 billion would be
available for the recovery of Transition Costs. If, as assumed above, during
the rate freeze period, the PX price actually exceeds the forecast, resulting in
$8 billion of additional costs, then Edison not only loses the $6 billion of
unfinanced cost that it cannot recover, since it must continue to pass through
the FTA charges to investors, it loses an additional $2 billion. After the $2
billion loss is subtracted from the financed Transition Costs of $3 billion,
Edison will have collected $1 billion of Transition Costs. This is exactly the
same result that would have been achieved absent the Rate Reduction Bond
Transaction. The amount financed by Rate Reduction Bonds does not affect the
amount of Transition Cost recovery - it is the variability in PX price, sales
and non-CTC revenue requirements which will affect the amount of Transition Cost
recovery.
I-6
<PAGE>
As these hypothetical examples demonstrate, the issuance of the Rate
Reduction Bonds and the 10 percent rate reduction do not improve the certainty
or amount of Transition Cost recovery.
D. FINANCIAL REPORTING CONSIDERATIONS
----------------------------------
Under Edison's current proposal in the CTC filing, the cash and ratemaking
recovery of certain Transition Costs is projected to occur during the 4-year
transition period. Consistent with the ratemaking proposed in this chapter,
Edison plans to defer for financial reporting purposes amortization of the
portion of Transition costs that relates to the securitization of the Transition
Property. These deferred costs will be amortized to expense over the 10-year
period of the Rate Reduction Bonds, and will result in a matching for financial
reporting purposes of the effects of the securitization transaction. The
deferral will have no effect on the ratepayers.
I-7
<PAGE>
II.
10 PERCENT RATE REDUCTION
-------------------------
A. INTRODUCTION
------------
Edison presented its proposals regarding customer eligibility for the 10
percent rate reduction and for reflecting the rate reduction and the FTA charges
in rates in Exhibit SCE-1 to Application No. 96-12-019, Edison's Ratesetting
Application. This chapter presents Edison's proposals for implementing the rate
reduction in greater detail.
Contingent on the timely and sufficient issuance of Rate Reduction Bonds,
Edison proposes to implement the 10 percent rate reduction for all residential
and small commercial customers required by AB 1890, by providing a 10 percent
credit on those customers' bills calculated using rates in effect on June 10,
1996. As described in Chapter III, Edison proposes to establish nonbypassable
FTA charges for residential and small commercial customers to recover the Fixed
Transition Amounts associated with the issuance of Rate Reduction Bonds. The
FTA charges will not change the total rate paid by residential and small
commercial customers during the rate freeze period because the FTA charge
collections will be exactly offset by the reductions in the residually
determined CTC revenues. In effect, the FTA charges reallocate a portion of
revenues that would otherwise be collected through the CTC.
Edison proposes to implement the 10 percent bill credit on January 1, 1998
contingent upon the timely and sufficient issuance of Rate Reduction Bonds. The
10 percent bill credit will remain in effect for the duration of the rate freeze
period as established by PU Code (S) 368(a), and the FTA charges will remain in
effect until the Rate Reduction Bond obligations are discharged which is
expected to occur in approximately 10 years. As described in Chapter III,
Edison proposes to adjust the FTA charges at least annually (and as often as
quarterly based on a trigger
II-1
<PAGE>
mechanism) to reflect updated sales forecasts, charge-off experience, or other
variables that affect collections.
B. RATE SCHEDULES ELIGIBLE FOR THE 10 PERCENT RATE REDUCTION
---------------------------------------------------------
For purposes of the rate reduction as well as the fire wall provisions of
AB 1890, Edison's residential and small commercial customers are those served on
rate schedules in the Domestic and General Service ("GS-1") rate groups./2/
---
PU Code Chapter 331(h) defines "small commercial customer" as a customer that
has a maximum peak demand of less than 20 kW. This definition corresponds to
all customers served on rate schedules in Edison's GS-1 rate group. As defined
in Edison's tariffs, these rate schedules are open to general service customers
with maximum demands less than or equal to 20 kW./3/ While some customers with
---
peak demands of less than 20 kW are served on agricultural and pumping, street
lighting, and traffic control rate schedules, these customers are not considered
to be part of the small commercial customer class. Other portions of AB 1890
make clear the intended distinction between commercial and agricultural
customers by referring separately to residential, commercial, agricultural, and
industrial customers./4/
---
C. DESCRIPTION OF BILL CREDIT TO IMPLEMENT 10 PERCENT RATE REDUCTION
-----------------------------------------------------------------
Edison proposes to implement the 10 percent rate reduction by providing a
credit on the bills of residential and small commercial customers. To ensure
that each residential and small commercial customer is provided with a 10
percent rate reduction, the total bill will be calculated at rate levels in
effect on June 10, 1996
- -----------------------
/2/ These include all customers on Schedules D, D-APS, D-CARE, DE, DM, DMS-
- ---
1, DMS-2, DMS-3, DS, TOU-D-1, TOU-D-2, TOU-EV-1, TOU-EV-2, GS-1, TOU-GS-1,
TOU-EV-3, and GS-1 customers taking service on GS-APS.
/3/ Edison's tariffs define general service as service to any lighting or
- ---
power installation except those eligible for service on single-family and
multifamily domestic, street lighting, outdoor area lighting, traffic
control, resale, or standby schedules.
/4/ See PU Code (S)(S) 334, 337, and 338.
- ---
II-2
<PAGE>
and then reduced by a 10 percent bill credit. As proposed in Edison's December
6, 1996 Ratesetting Application (A.96-12-019), direct access customers will be
charged the same rates as bundled service customers, except they will not pay
for Edison's costs of procuring electricity from the PX. For these direct access
customers, the discount will be applied to the total bill before subtracting the
PX energy charge, so that they receive the same 10 percent rate reduction they
would have received if they had remained as bundled service customers. The bill
credit will be reflected as a reduction in residual CTC collected from
residential and small commercial customers. Revenues collected for PX energy,
transmission, distribution, public benefit programs, and nuclear decommissioning
costs will not be affected by the bill credit.
Edison's bill credit proposal complies with AB 1890 because every
residential and small commercial customer will receive a 10 percent rate
reduction relative to June 10, 1996 rate levels. It is simple to administer
because it does not require redesigning residential and small commercial rates,
and it is competitively neutral as it provides identical rate reductions to
direct access and bundled service customers.
II-3
<PAGE>
III.
IMPLEMENTATION OF THE FIXED TRANSITION AMOUNT CHARGE TARIFF
-----------------------------------------------------------
A. INTRODUCTION
------------
The purpose of this chapter is to describe implementation of the
nonbypassable FTA charge, and the mechanism that will be used to periodically
adjust the FTA charges.
B. FTA CHARGES AND TOTAL RATE LEVELS
---------------------------------
The FTA charges will not change the total rate levels required to be paid
by residential and small commercial customers during the rate freeze period.
They will be added to the charges for PX energy, transmission, distribution,
public benefit programs, and nuclear decommissioning costs before these charges
are subtracted from total rate levels to determine the CTC applicable to
residential and small commercial customers. Figure III-1 shows how the residual
CTC, after January 1, 1998 will be decreased by an amount equal to the FTA
charge so that total rates, which reflect the 10 percent rate reduction, are not
impacted by this additional charge during the rate freeze period.
III-1
<PAGE>
FIGURE III-1
Illustrative Rate Components
for Residential Customers
Before and After Rate Reduction Bonds
[FIGURE III-1 GRAPHIC APPEARS HERE]
After the rate freeze period has concluded, the FTA charges will be added
to other applicable rate components to determine the total rate levels.
C. IMPLEMENTING THE 10 PERCENT BILL CREDIT AND THE FTA CHARGES
-----------------------------------------------------------
In Decision No. 96-12-077, the Opinion on Cost Recovery Plans, the
Commission determined that the 10 percent rate reduction required by Chapter
368(a) of the PU Code for residential and small commercial customers will remain
in effect through March 31, 2002, if the rate freeze is not terminated
earlier./5/ Contingent upon the Financing Order requested in this Application
and the timely issuance of Rate Reduction Bonds in amounts sufficient to provide
for the 10 percent rate reduction for residential and small commercial
customers, Edison proposes to implement the 10 percent rate reduction beginning
on January 1, 1998.
Since the Rate Reduction Bonds will likely be issued prior to January
1,
- --------------------------
/5/ D.96-12-077, p. 9.
- ---
III-2
<PAGE>
1998 and the 10 percent rate reduction is expected to begin January 1, 1998,
revenue requirement savings will be created by the Rate Reduction Bonds from the
date the bonds are issued to the date the rate reduction begins. However, if
market conditions are such that some or all of the Rate Reduction Bonds are
issued in the first quarter of 1998, the cost of the rate reduction will be
accrued from January 1, 1998 to the time the bonds are issued. These savings or
costs will flow back to residential and small commercial customers through the
Rate Reduction Bond Memorandum Account as discussed in Chapter I.B.3. Moreover,
as part of its obligations as servicer, Edison will need to begin collecting FTA
charges from residential and small commercial customers when each series or
class of the bonds are issued. Thus, Edison proposes to implement FTA charges
as a component of rates prior to January 1, 1998 by Advice Letter filing(s) for
each series or class of bonds to be effective within five business days of
filing./6/ Concurrent with this change, the Energy Cost Adjustment Clause
---
Billing Factor will be reduced by an amount equal to the FTA charge so that
total rates remain frozen./7/
---
In accordance with Decision No. 96-12-077, the 10 percent bill credit will
continue until the earlier of March 31, 2002, or the end of the rate freeze
period. The FTA charges will remain in place beyond the rate freeze period,
until the Rate Reduction Bond obligations are discharged. PU Code (S) 841(a)
provides that residential and small commercial customers "shall continue to pay
Fixed Transition Amounts after December 31, 2001, until the bonds are paid in
full by the financing entity." Edison proposes to adjust the level of the FTA
charges at least annually as discussed below.
- -------------------------
/6/ The filing date is expected to be the date on which the bonds are priced.
- ---
/7/ After January 1, 1998, upon the issuance of each series or class of Rate
- ---
Reduction Bonds, residual CTC for residential and small commercial
customers will be decreased by an amount equal to the total FTA charge.
III-3
<PAGE>
D. ADJUSTMENT MECHANISM FOR FTA CHARGES
------------------------------------
PU Code Chapter 840(c) states that the Financing Order "shall include,
without limitation, a procedure to require the expeditious approval by the
Commission of periodic adjustments to Fixed Transition Amounts included therein
to ensure recovery of all Transition Costs and the costs of capital associated
with the proposed provision, recovery, financing, or refinancing thereof,
including the costs of issuing, servicing, and retiring the Rate Reduction Bonds
contemplated by the Financing Order." Due to differences between forecast and
actual kWh sales to residential and small commercial customers and forecast and
actual uncollectibles, and the timing of the collections, the revenues collected
through the FTA charges will differ from the Fixed Transition Amounts targeted
for collection. Thus, the actual amortization will differ from the targeted
amortization.
Edison is requesting authority from the Commission pursuant to PU Code (S)
841(c) to adjust FTA charges at least annually and as often as quarterly in
order to minimize the difference between scheduled and actual FTA charge
collections./8/ The ability to adjust FTA charges is an important consideration
---
of the rating agencies to ensure that there will be a sufficiently stable cash
flow returned to holders of the Rate Reduction Bonds.
To ensure timely repayment of the Rate Reduction Bonds, Edison proposes to
adjust the FTA charges at least annually as required by PU Code (S) 841(e) and
as often as quarterly with a trigger mechanism based on a specified variance
from scheduled amortization. The actual criteria for the true-up trigger are to
be determined by the Infrastructure Bank based on input from rating agencies,
and will be described in the servicing agreement, but would at a minimum require
an
- ---------------------------
/8/ Due to the mandated 10 percent rate reduction and rate level freeze,
- ---
Edison will not be able to change its overall rates from June 10, 1996
levels during the rate freeze period.
III-4
<PAGE>
annual adjustment to track the expected decline in FTA charges over time as
interest charges decrease with declining amounts of principal outstanding.
The new FTA charges will be determined using the formulas described in
Appendix SCE 1-B based on updated forecasts of kWh sales, uncollectibles and the
timing of collections if necessary. The calculation will reflect the debt
service revenue requirement, and to the extent there are previous over- or
under-collections, the revised FTA charges will be established to return the
outstanding balance of the Rate Reduction Bonds to the originally projected
balance. For administrative ease, Edison proposes to link the true-up dates to
each calendar quarter. Because this process must be undertaken in good faith by
Edison as servicer, and involves the use of a model that the Commission will
have examined, the Commission should authorize Edison to make such adjustments
by Advice Letter filings to be made no later than 15 days before the end of each
calendar quarter if required by the trigger mechanism or at least annually if
not required by the trigger mechanism. The revised FTA charges provided by
these Advice Letter filings would then be effective on the first day of the
following calendar quarter. These filings would be considered routine True-up
Mechanism Advice Letter filings.
It is possible that the model will need to be changed at times during the
term of the Rate Reduction Bonds. Therefore, Edison requests that the
Commission's Financing Order authorize Edison to make FTA charge true-up filings
which require changes to the model by Advice Letter filings which would make new
FTA charges effective within 90 days of such filings. These filings would be
considered non-routine True-up Mechanism Advice Letter filings.
Finally, PU Code (S) 841(e) requires "the Commission to determine whether
the adjustments are required on each anniversary of the issuance of the
Financing Order, and at the additional intervals as may be provided for in the
Financing Order, and for the adjustments, if required, to be approved within 90
days of each
III-5
<PAGE>
anniversary of the issuance of the Financing Order, or of each additional
interval provided for in the Financing Order." Thus, Edison proposes to make a
FTA charge adjustment Advice Letter filing at least 15 days before the
anniversary of the issuance of the Financing Order so that the Commission shall
make a determination whether adjustments to the FTA charges are needed, and if
necessary, implement such FTA charge adjustments within 90 days of the issuance
anniversary.
E. PROVISIONS FOR COLLECTION OF FTA CHARGES FROM ELIGIBLE CUSTOMERS WHO CHANGE
---------------------------------------------------------------------------
RATE SCHEDULES
--------------
During the term of the Rate Reduction Bonds, customers may switch to and
from any applicable rate schedule within the Domestic and GS-1 rate groups in
accordance with existing tariff provisions. However, to ensure credit risks are
minimized, it is necessary to take measures to prevent customers from taking
advantage of the 10 percent rate reduction but avoiding the repayment period for
the bonds by switching to a schedule outside the Domestic or GS-1 rate groups.
For example, a customer might take service on a GS-1 rate schedule during the
rate freeze period and then switch to an agricultural and pumping rate schedule
(not eligible for the rate reduction) to avoid the FTA charge once the rate
freeze period has ended. To address this concern, Edison proposes to not allow
customers who were served on a rate schedule subject to the rate reduction to
voluntarily switch to service on any rate schedule not subject to the FTA charge
until the repayment obligations for the Rate Reduction Bonds have been
discharged.
Customers who no longer meet the applicability for service criteria on a
rate schedule that qualifies for the 10 percent discount will no longer receive
the 10 percent bill credit nor will they be required to pay the FTA
charge./9/ This
---
- -------------------
/9/ In cases where customers aggregate their load through master-metering or
- ---
other means, the FTA charge and bill credits would continue to apply to the
individual customers.
III-6
<PAGE>
provision would apply, for example, when a GS-1 customer grows beyond 20 kW and
migrates to a rate schedule with a higher demand eligibility criterion such as
Schedule GS-2. Edison does not expect this provision to encourage such migration
because it is unlikely that customers would add load to grow beyond 20 kW solely
for the purpose of avoiding the FTA charges. This provision is consistent with
the treatment of the nonbypassable CTC for customers who change rate schedules.
Residential customers cannot migrate to a schedule that will not require a FTA
charge.
F. PROVISIONS FOR COLLECTION OF FTA CHARGES FROM ELIGIBLE CUSTOMERS WHO BYPASS
---------------------------------------------------------------------------
AB 1890 provides for the recovery of Fixed Transition Amounts through
nonbypassable charges. (PU Code Chapter 840(d).) Customers subject to the FTA
charge who subsequently (1) discontinue or reduce purchases of electricity
supply and delivery services from the utility; (2) purchase or consume
electricity supplied and delivered by sources other than the utility to replace
such utility purchases; and (3) remain physically located at the same location
or are located within the utility's service territory ("departing load") should
continue to be responsible for paying the FTA charge. In assessing the FTA
charge for departing load, Edison proposes to apply similar nonbypassability
provisions as applicable to CTC for departing load./10/ Edison's proposal for
---
collecting CTC from customers with departing load is described in SCE-2 of
Application No. 96-08-071, Edison's Transition Cost Application.
Consistent with that proposal, each customer's FTA charge payment will be
based on that customer's consumption of electricity. Electricity consumption
will include both the electricity delivered to customers via utility
transmission and
- ----------------
/10/ The CTC exemptions specified in AB 1890 for certain irrigation districts
- --- and for load served by onsite generation after June 30, 2000 will not
apply to the FTA charges.
III-7
<PAGE>
distribution facilities and electricity provided off-system, e.g., by on-site
generation, cogeneration, or "over-the-fence" generation. Where Edison is no
longer able to meter or obtain the customer's electricity consumption, the FTA
charge will be based on the customer's historical usage.
III-8
<PAGE>
IV.
PROPOSED TARIFF CHANGES
-----------------------
The purpose of this chapter is to provide Edison's proposed tariffs which
are needed to enable the issuance of the Rate Reduction Bonds and the 10 percent
rate reduction.
A. PROPOSED TARIFF FOR RATE REDUCTION BOND MEMORANDUM ACCOUNT
----------------------------------------------------------
The following tariff language would be inserted into Edison's current
tariffs as part of Section N of Edison's Preliminary Statement.
28. Rate Reduction Bond Memorandum Account (RRB Memorandum Account)
The Company shall maintain a RRB Memorandum Account to record the
difference between the Rate Reduction Bond Savings Amount and the Ten
Percent Rate Reduction Amount provided to residential and small commercial
customers in accordance with Assembly Bill 1890 ("AB 1890"). This RRB
Memorandum Account will also be used to record other credit amounts for
financed tax credits, overcollateralization not needed to discharge the
Rate Reduction Bonds, servicing fees, and interest earned on cash flow
timing differences, less incremental costs associated with servicing
activities, and any other related costs.
a. Definitions
1. Rate Reduction Bonds:
Rate Reduction Bonds shall be authorized by
the Commission in its Financing Order to allow for the ten percent rate
reduction in accordance with AB 1890.
2. Rate Reduction Bond Savings Amount:
The Rate Reduction Bond Savings Amount shall include items such as the
avoided revenue requirement of the transition cost financed tax credit,
overcollateralization not needed to discharge the Rate Reduction Bonds,
IV-1
<PAGE>
servicing fees, interest earnings on FTA charges held prior to
remittance to bondholders, less the principal and interest payments and
other related fees (including FF&Us) associated with the repayment of
the Rate Reduction Bonds and other related costs.
3. Ten Percent Rate Reduction Amount:
The Ten Percent Rate Reduction Amount shall be the difference between
the residential and small commercial customer revenues actually billed
and the residential and small commercial customer revenues that would
have been billed absent the rate reduction in accordance with AB 1890.
Entries shall be made to the Rate Reduction Bond Memorandum Account at the end
of each month and shall be the result of the following calculation:
(a) The Ten Percent Rate Reduction Amount identified in a.3.
(b) Less: The Rate Reduction Bond Savings Amount identified in a.2.
If the resulting amount is positive, a debit entry shall be recorded in the RRB
Memorandum Account. If the resulting amount is a negative amount, a credit entry
shall be recorded in the Rate Reduction Bond Memorandum Account.
The Company shall maintain the Rate Reduction Bond Memorandum Account until the
Rate Reduction Bond obligations are discharged. At that time, if a credit
balance exists in the RRB Memorandum Account, the Company shall propose a credit
adjustment to return the additional savings to residential and small commercial
customers. To the extent a credit or debit balance exists in
IV-2
<PAGE>
the RRB Memorandum Account at the end of any year following the rate freeze
period until the Rate Reduction Bond obligations are discharged, Edison
shall request inclusion of that amount in rates for residential and small
commercial customers along with other revenue changes in the annual RAP, or
successor proceeding authorized by the Commission.
Interest shall accrue monthly by applying the Interest Rate to the average
of the beginning and ending month balance in the RRB Memorandum Account.
B. PROPOSED MODIFICATION TO TCBA TARIFF
------------------------------------
Rate Reduction Bond Entry to CTC Revenue Subaccounts
----------------------------------------------------
The following entries shall be inserted on pages 12 and 104 of Edison's Proposed
Transition Cost Balancing Account Tariff (Preliminary Statement) Language
submitted on November 22, 1996 in Application No. 96-08-071. The purpose of
these entries is to recognize the revenue associated with the Rate Reduction
Bonds in the CTC Revenue subaccounts. The CTC Tariff language will be submitted
on June 16, 1997 as ordered in the final Commission Decision No.______.
6.c.(5). A monthly credit entry equal to the Ten Percent Rate Reduction Amount
as defined in Part N, Section 28 of this Preliminary Statement (Rate Reduction
Bond Memorandum Account), plus a monthly credit entry equal to the monthly
revenue received from residential and small commercial customers from the Fixed
Transition Amount charge as defined in Schedule RRB shall be recorded in the
Rate Reduction Bond Revenue Subaccount.
IV-3
<PAGE>
9.c. Rate Reduction Bond Revenue Subaccount
A monthly credit entry equal to the Ten Percent Rate Reduction Amount as defined
in Part N, Section 28 of this Preliminary Statement (Rate Reduction Bond
Memorandum Account), plus a monthly credit entry equal to the monthly revenue
received from residential and small commercial customers from the Fixed
Transition Amount charge as defined in Schedule RRB shall be recorded in the
Rate Reduction Bond Revenue Subaccount.
IV-4
<PAGE>
C. Proposed Schedule RRB
---------------------
Edison's proposed Schedule RRB is as follows:
- --------------------------------------------------------------------------------
SCHEDULE RRB
------------
RATE REDUCTION BONDS
--------------------
BILL CREDIT AND FTA CHARGE
--------------------------
APPLICABILITY
- -------------
Applicable to Domestic service customers served under Schedules D, D-APS, D-
CARE, DE, DM, DMS-1, DMS-2, DMS-3, DS, TOU-D-1, TOU-D-2, TOU-EV-1, and TOU-EV-2;
to General Service customers with demands of 20 kW or less served under
Schedules GS-1 and TOU-GS-1 (including such customers additionally served under
Schedule GS-APS) and TOU-EV-3.
TERRITORY
- ---------
Within the entire territory served.
RATES
- -----
BILL CREDIT:
All charges and provisions of the applicable rate schedule will be applied
except that, pursuant to Public Utilities Code Section 368(a), effective January
1, 1998 (contingent upon issuance of Rate Reduction Bonds), the customer will
receive a 10% Bill Credit applied to the total bill. For Direct Access
customers, the credit will be applied to the total bill before subtracting the
Power Exchange Energy Charge. The Bill Credit expires on the earlier of March
31, 2002 or the date the rate freeze is terminated.
FIXED TRANSITION AMOUNT CHARGE (FTA):
The FTA charge is a nonbypassable per kWh charge, set forth in Part I, Rate
Schedule Summary of the Preliminary Statement for the appropriate Domestic and
General Service customers.
Customers with Departing Load will continue to be responsible for paying the FTA
charge.
The FTA charge will not change the total rate paid by eligible Domestic and
General Service customers during the rate freeze period because reductions in
the residually determined generation rate will exactly offset the FTA charge.
The FTA charge will be adjusted, by Advice Letter, at least annually and as
often as quarterly and shall be effective within 15 days of filing pursuant to
Decision _________.
Pursuant to Public Utilities Code Section 841 (a), the FTA charge will remain in
effect until the Rate Reduction Bond obligations are discharged.
- --------------------------------------------------------------------------------
IV-5
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL CONDITIONS
- ------------------
1. Removal From Schedule: Once service is provided under this schedule,
customers cannot elect to change to a rate schedule for which Schedule RRB is
not applicable until the Rate Reduction Bond obligations are discharged.
However, customers served under this schedule who subsequently no longer meet
the eligibility criteria of their regular rate schedule shall be transferred
to another rate schedule in accordance with such eligibility criteria and may
not continue to be served under Schedule RRB. Such customers will no longer
be responsible for paying the FTA charge (e.g., a Schedule GS-1 customer
whose monthly maximum demand consistently exceeds 20 kW is required to
transfer to Schedule GS-2).
- --------------------------------------------------------------------------------
IV-6
<PAGE>
D. PROPOSED CHANGES TO PRELIMINARY STATEMENT
-----------------------------------------
Edison also proposes to list the FTA charge in its Rate Schedule Summary of
rates, Part I of its Preliminary Statement. Thus, Edison proposes the addition
of the FTA charge as a separately identified rate component of applicable rate
schedules as follows:
IV-7
<PAGE>
<TABLE>
<CAPTION>
Rate Schedule Trans/1/ Distrbtn/2/ Gen/3,4/ MAMBF/5/ NDC/6/ PBPC/7/ CARES/8/ PUCRF/9/ FTAC/10/ Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
- -----------
D
Energy Charge - $/kWh
Baseline (June-Oct) 0.00449 0.00898 0.10211 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.12009
(Oct-June) 0.00449 0.05258 0.05851 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.12009
Nonbaseline (June-Oct) 0.00449 0.00898 0.12359 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.14157
(Oct-June) 0.00449 0.05258 0.07999 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.14157
Basic Charge - $/day
Single- 0.00000 0.03300 0.00000 0.03300
Family
Residence
Multi-Family 0.00000 0.02500 0.00000 0.02500
Residence
Minimum Charge - $/day
Single- 0.00000 0.06600 0.00000 0.06600
Family
Residence
Multi-Family 0.00000 0.04900 0.00000 0.04900
Residence
D-APS
Air Conditioning Cycling
Credit - $/ton/summer season day
50% Cycling (0.00) (0.00) (0.05) (0.05)
67% Cycling (0.00) (0.00) (0.10) (0.10)
100% (0.00) (0.00) (0.18) (0.18)
Cycling
D-
CARE
Energy Charge - $/kWh
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Baseline (June-Oct) 0.00449 0.00898 0.10211 (0.00031) 0.00144 0.00247 (0.01788) 0.00012 0.00000 0.10142
(Oct-June) 0.00449 0.05258 0.05851 (0.00031) 0.00144 0.00247 (0.01788) 0.00012 0.00000 0.10142
Nonbaseline (June-Oct) 0.00449 0.00898 0.12359 (0.00031) 0.00144 0.00247 (0.02110) 0.00012 0.00000 0.11968
(Oct-June) 0.00449 0.05258 0.07999 (0.00031) 0.00144 0.00247 (0.02110) 0.00012 0.00000 0.11968
</TABLE>
/1/Trans = Transmission
/2/Distrbtn = Distribution
/3/Gen =
Generation
/4/Competitive Transition Charge (CTC) = Total generation charge minus
Power Exchange (PX) Energy Charge.
/5/MAMBF = Miscellaneous Adjustment
Mechanism Billing Factor
/6/NDC = Nuclear
Decommissioning Charge
/7/PBPC = Public Benefits
Program Charge
/8/CARES = The California Alternate Rates for Energy Surcharge is described
in Preliminary Statement, Part O.
/9/PUCRF = The PUC Reimbursement Fee is
described in Schedule RF-E.
/10/FTAC - The Fixed Transition Amount Charge is
described in Schedule RRB.
<TABLE>
<CAPTION>
Rate Schedule Trans Distrbtn Gen MAMBF NDC PBPC CARES PUCRF FTAC Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DS
Summer 0.02000 0.01000 0.04000 0.07000
Season
Premium -
$/kWh/day
Winter (0.02000) (0.01000) (0.04000) (0.07000)
Season
Discount-
$/kWH/day
California Alternate Rates For
Energy 0.00 0.00 100.00 100.00*
Discount - %
TOU-
D-1
Energy Charge - $/kWh
</TABLE>
IV-9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summer 0.00449 0.03650 0.44033 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.48583
Season -
On-Peak
Off-Peak 0.00449 0.03650 0.05817 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.10367
Winter 0.00449 0.03650 0.09453 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.14003
Season -
On-Peak
Off-Peak 0.00449 0.03650 0.04478 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.09028
Basic Charge - $/day
Single- 0.00000 0.03300 0.00000 0.03300
Family
Residence
Multi-Family 0.00000 0.02500 0.00000 0.02500
Residence
TOU Meter 0.00000 0.08000 0.00000 0.08000
Charge -
$/day
Baseline (0.00000) (0.00000) (0.02148) (0.02148)
Credit -
$/kWh
Minimum Charge - $/day
Single 0.00000 0.06600 0.00000 0.06600
Family
Residence
Multi-Family 0.00000 0.04900 0.00000 0.04900
Residence
California Alternate Rates for
Energy 0.00 0.00 100.00 100.00*
Discount - %
*The "total" shown above represents 100% of the discount percentage as set forth in the specific rate schedule.
- ------------------------------------------------------------------------------------------------------------------------
Rate Schedule Trans Distrbtn Gen MAMBF NDC PBPC CARES PUCRF FTAC Total
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TOU-
D-2
Energy Charge - $/kWh
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summer 0.00449 0.03650 0.34977 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.39527
Season-
On-Peak
Off-Peak 0.00449 0.03650 0.03898 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.08448
Winter 0.00449 0.03650 0.06803 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.11353
Season-
On-Peak
Off-Peak 0.00449 0.03650 0.02776 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.07326
Customer 0.00000 0.12000 0.14000 0.26000
Charge-
$/day
TOU Meter 0.00000 0.08000 0.00000 0.08000
Charge-
$/day
<CAPTION>
California Alternate Rates for
Energy 0.00 0.00 100.00 100.00*
Discount-%
</TABLE>
TOU-EV-1
Energy Charge - $/kWh
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summer 0.01883 0.07794 0.22404 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.32532
Season-
On-Peak
Off-Peak 0.00123 0.02706 0.00811 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.04091
Winter 0.00186 0.02889 0.12205 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.15731
Season-
On-Peak
Off-Peak 0.00045 0.02483 0.01452 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.04431
Basic 0.00000 0.02500 0.00000 0.02500
Charge-
$/day
</TABLE>
IV-11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
TOU Meter 0.00000 0.08000 0.00000 0.08000
Charge-
$/day
Minimum 0.00000 0.04900 0.00000 0.04900
Charge-
$/day
</TABLE>
TOU-EV-2
Energy Charge - $/kWh
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summer 0.01883 0.07794 0.16462 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.26590
Season-
On-Peak
Off-Peak 0.00123 0.02706 0.00811 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.04091
Winter 0.00186 0.02889 0.11339 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.14865
Season-
On-Peak
Off-Peak 0.00045 0.02483 0.01452 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.04431
Customer 0.00000 0.12000 0.14000 0.26000
Charge-
$/day
TOU Meter 0.00000 0.08000 0.00000 0.08000
Charge-
$/day
</TABLE>
*The "total" shown above represents 100% of the discount percentage as set forth
in the specific rate schedule.
<TABLE>
<CAPTION>
Rate Schedule Trans Distrbtn Gen MAMBF NDC PBPC CARES PUCRF FTAC Total
- ------------- ------- -------- ------- -------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GS-1
Energy Charge- 0.00376 0.02985 0.07948 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.11780
$/kWh
Customer 0.00000 0.28000 0.20000 0.48000
Charge-
$/day
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Phase 0.000 0.079 0.000 0.079
Service -
$/day
Excess Transformer
Capacity - 0.00 0.03 0.00 0.03
$/kVA/day
Voltage Discount, Energy - %
From 2 kV to 0.00 78.00 22.00 100.00*
50 kV
Above 50 kV 0.00 78.00 22.00 100.00*
California Alternate Rates for
Energy 0.00 0.00 100.00 100.00*
Discount - %
</TABLE>
*The "total" shown above represents 100% of the discount percentage as set forth
in the specific rate schedule.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Rate Schedule Trans Distrbtn Gen MAMBF NDC PBPC CARES PUCRF FTAC Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOU-EV-3
Energy Charge - $/kWh
Summer Season
On-Peak 0.01751 0.06865 0.28518 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.37585
Off-Peak 0.00105 0.02219 0.01316 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.04091
Winter Season
On-Peak 0.00146 0.02337 0.07295 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.10229
Off-Peak 0.00038 0.02031 0.01911 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.04431
Customer 0.00000 0.28000 0.20000 0.48000
Charge -
$/day
TOU Meter 0.00000 0.08000 0.00000 0.08000
Charge -
$/day
</TABLE>
IV-13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Three Phase 0.000 0.079 0.000 0.079
Service -
$/day
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Rate Schedule Trans Distrbtn Gen MAMBF NDC PBPC CARES PUCRF FTAC Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOU-GS-1
Energy Charge - $/kWh
Summer On-Peak 0.00376 0.02985 0.49508 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.53320
Season
Mid-peak 0.00376 0.02985 0.05016 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.08828
Off-Peak 0.00376 0.02985 0.01731 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.05543
Winter On-Peak N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Season
Mid-peak 0.00376 0.02985 0.04319 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.08131
Off-Peak 0.00376 0.02985 0.01667 (0.00031) 0.00144 0.00247 0.00079 0.00012 0.00000 0.05479
Customer 0.00000 0.28000 0.20000 0.48000
Charge -
$/day
TOU Meter 0.00000 0.08000 0.00000 0.08000
Charge -
$/day
Three-Phase 0.000 0.079 0.000 0.079
Service -
$/day
Excess Transformer
Capacity - 0.00 0.03 0.00 0.03
$/kVA/day
Voltage Discount, Energy - %
From 2 kV to 0.00 78.00 22.00 100.00*
50 kV
Above 50 kV 0.00 78.00 22.00 100.00*
</TABLE>
IV-14
<PAGE>
California Alternate Rates for
Energy 0.00 0.00 100.00 100.00*
Discount - %
* The "total" shown above represents 100% of the discount percentage as set
forth in the specific rate schedule.
IV-15
<PAGE>
Application No: 97-05-
-------------
Exhibit No: SCE-3
-------------
Witness: Various
-------------
[LOGO OF SOUTHERN CALIFORNIA EDISON]
An EDITON INTERNATIONAL Company
(U 338-E)
QUALIFICATIONS OF WITNESSES
Before the
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Rosemead,
California
May 6, 1997
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
QUALIFICATIONS AND PREPARED TESTIMONY
OF JOHN P. DALESSI
Q. Please state your name and business address for the record.
A. My name is John P. Dalessi, and my business address is 2244 Walnut Grove
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California
Edison Company.
A. I am a Supervisor in the Pricing Division of the Regulatory Policy and
Affairs Department. My responsibilities include pricing research and rate
related analyses.
Q. Briefly describe your educational and professional background.
A. I received a Bachelor of Arts Degree in Economics from California State
University, Long Beach in 1989 and a Master of Arts Degree in Economics
from University of California at Santa Barbara in 1990. I began working as
a Tariff Analyst for Southern California Edison in December of 1991. In
May of 1994 I was promoted to the position of Regulatory Specialist
responsible for marginal cost of service studies, calculation of marginal
cost revenue responsibility, and design of street and area lighting rates.
I attained my present position in May of 1995. I have previously testified
before the California Public Utilities Commission.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to sponsor Chapter II,
"10 Percent Rate Reduction," Chapter III, "Implementation Of The Fixed
Transition Amount Charge Tariff," and Sections C and D of Chapter IV,
"Proposed Tariff Changes," of Exhibit SCE-2, Proposed Ratemaking And Tariff
------------------------------
Changes.
--------
1
<PAGE>
Q. Was this material prepared by you or under your supervision?
A. Yes, it was.
Q. Insofar as this material is factual in nature, do you believe it to be
correct?
A. Yes, I do.
Q. Insofar as this material is in the nature of opinion or judgment, does it
represent your best judgment?
A. Yes, it does.
Q. Does this conclude your qualifications and prepared testimony?
A. Yes, it does.
2
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
QUALIFICATIONS AND PREPARED TESTIMONY
OF LYLE G. GEIGER
Q. Please state your name and business address for the record.
A. My name is Lyle G. Geiger, and my business address is 2244 Walnut Grove
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California
Edison Company.
A. I am manager of Internal Controls and Financial Compliance. My group is
responsible for ensuring that Edison's financial accounting and disclosure
practices are in conformity with the standards and regulations set forth by
the Financial Accounting Standards Board, Security and Exchange Commission,
Federal Energy Regulatory Commission, and California Public Utilities
Commission. We also participate in the Accounting Standard development
process within these organizations. In addition, we are responsible for
reinforcing a strong internal control framework throughout Edison.
Q. Briefly describe your educational and professional background.
A. I received my Bachelor of Science degree in Business Administration, with
an emphasis in Accounting, from the University of Nebraska in 1969. I hold
CPA certificates from the states of Nebraska and California. Prior to
joining Edison in 1976, I worked in public accounting for seven years,
including three years with the CPA firm of Haskins & Sells (now Deloitte &
Touche). During my first two years with Edison, I worked in Audits,
primarily as a Supervising Financial Auditor. I was then promoted to
Financial Accounting Manager in 1979. In May 1989, I assumed my current
position.
3
<PAGE>
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to sponsor Section C.1.a.
of Chapter IV, "Securitization Of Transition Costs, Amount To Be Financed,
And Edison's Proposed Rate Reduction Bond Transaction," of Exhibit SCE-1,
Rate Reduction Bonds and 10% Rate Reduction, and Section D of Chapter I
-------------------------------------------
"Ratemaking Proposal" of Exhibit SCE-2 Proposed Ratemaking and Tariff
------------------------------
Changes.
--------
Q. Was this material prepared by you or under your supervision?
A. Yes, it was.
Q. Insofar as this material is factual in nature, do you believe it to be
correct?
A. Yes, I do.
Q. Insofar as this material is in the nature of opinion or judgment, does it
represent your best judgment?
A. Yes, it does.
Q. Does this conclude your qualifications and prepared testimony?
A. Yes, it does.
4
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
QUALIFICATIONS AND PREPARED TESTIMONY
OF CYNTHIA S. JACOBS
Q. Please state your name and business address for the record.
A. My name is Cynthia S. Jacobs, and my business address is 2244 Walnut Grove
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California
Edison Company.
A. I am a Project Manager in the Corporate Financial Planning and Analysis
division of the Treasurer's Department. I am currently assigned full time
to the Rate Reduction Bond financing project.
Q. Briefly describe your educational and professional background.
A. I received a Bachelor of Science in Engineering from the University of
Illinois at Champaign-Urbana (1985). I received a Master's degree in
Business Administration from the University of California at Los Angeles
(1992). I have been employed by Southern California Edison since 1993.
Since joining Edison, I have held various positions in the Treasurer's
Department. Before joining Edison, I was employed by TRW as a Quality
Assurance Manager. Prior to that, I was employed by General Motors as an
Application Engineer.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to sponsor Section C.4 of
Chapter IV "Securitization Of Transition Costs, Amount To Be Financed, And
Edison's Proposed Rate Reduction Bond Transaction," "Chapter V "Rate
Reduction Bond Sizing and Economic Benefits," Appendix SCE-1-A, SCE-1-B,
and SCE-1-C, of Exhibit SCE-1, Rate Reduction Bonds and 10% Rate
---------------------------------
Reduction, and Section C of Chapter I, "Ratemaking Proposal," in Exhibit
---------
SCE-2, Proposed Ratemaking And Tariff Changes.
--------------------------------------
5
<PAGE>
Q. Was this material prepared by you or under your supervision?
A. Yes, it was.
Q. Insofar as this material is factual in nature, do you believe it to be
correct?
A. Yes, I do.
Q. Insofar as this material is in the nature of opinion or judgment, does it
represent your best judgment?
A. Yes, it does.
Q. Does this conclude your qualifications and prepared testimony?
A. Yes, it does.
6
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
QUALIFICATIONS AND PREPARED TESTIMONY
OF DEBORAH J. KLUN
Q. Please state your name and business address for the record.
A. My name is Deborah J. Klun, and my business address is 2244 Walnut Grove
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California
Edison Company.
A. I am employed in the Tax Department as Manager of Taxes and am responsible
for the tax research and analysis group. That group is responsible for
tax, research and planning, IRS audits, accounting for income taxes,
budgeting of taxes and tax issues involved in rate proceedings.
Q. Briefly describe your educational and professional background.
A. I received a Bachelor of Science in Commerce, with a Major in Accountancy
(1975) and a Master of Science in Taxation (1979) from DePaul University in
Chicago. I also received a Juris Doctor (1982) from Northwestern
University in Chicago. I passed the CPA exam in 1975 (Illinois) and the
bar exam in Hawaii in 1982.
I have been with Edison since 1988, holding various positions in the tax
department. Prior to working at Edison, I was employed by a large
multinational corporation as Director of Federal Tax. I have also
practiced law and have been employed by a big six accounting firm in both
the audit and tax departments.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to sponsor Section C.1.b.
of Chapter IV, "Securitization Of Transition Costs, Amount To Be Financed,
7
<PAGE>
And Edison's Proposed Rate Reduction Bond Transaction," of Exhibit SCE-1,
Rate Reduction Bonds and 10% Rate Reduction.
--------------------------------------------
Q. Was this material prepared by you or under your supervision?
A. Yes, it was.
Q. Insofar as this material is factual in nature, do you believe it to be
correct?
A. Yes, I do.
Q. Insofar as this material is in the nature of opinion or judgment, does it
represent your best judgment?
A. Yes, it does.
Q. Does this conclude your qualifications and prepared testimony?
A. Yes, it does.
8
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
QUALIFICATIONS AND PREPARED TESTIMONY
OF MARY C. SIMPSON
Q. Please state your name and business address for the record.
A. My name is Mary C. Simpson, and my business address is 2244 Walnut Grove
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California
Edison Company.
A. As Director of Corporate Finance and Investments in the Treasurer's
Department, I am responsible for the Company's long-term financings, cash
management, and pension and decommissioning fund investments. I am also
responsible for the Company's annual cost of capital filings, productivity
measurement and other economic analyses.
Q. Briefly describe your educational and professional background.
A. I received my Bachelor of Science degree in Economics from Southern
Methodist University in 1973. I continued my education in Economics at
Claremont Graduate School, earning a Master's degree in 1976 and a Ph.D. in
1984.
While in graduate school, I held lecturer positions at both Pomona
College (1977) and Claremont McKenna College (1978-1979). In 1979, I
joined Southern California Edison as an Assistant Economist in the
Treasurer's Department. I held various positions within that department
and was promoted to Manager of Regulatory Finance and Economics in 1991. I
attained my present position in January 1996. I have previously testified
before the California Public Utilities Commission.
9
<PAGE>
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to sponsor Chapter I,
"Legislative Authority For The 10 Percent Rate Reduction And Issuance Of
Rate Reduction Bonds," Chapter II, "Roles Of Various Entities In Rate
Reduction Bond Transaction," Chapter III, "Asset-Backed Securities Market,"
Chapter IV, "Securitization Of Transition Costs, Amount To Be Financed, And
Edison's Proposed Rate Reduction Bond Transaction," with the exception of
Sections B.2, C.1.a, b, C.3, C.4.a, b, C.5, and C.6, of Exhibit SCE-1, Rate
----
Reduction Bonds and 10% Rate Reduction.
---------------------------------------
Q. Was this material prepared by you or under your supervision?
A. Yes, it was.
Q. Insofar as this material is factual in nature, do you believe it to be
correct?
A. Yes, I do.
Q. Insofar as this material is in the nature of opinion or judgment, does it
represent your best judgment?
A. Yes, it does.
Q. Does this conclude your qualifications and prepared testimony?
A. Yes, it does.
10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
QUALIFICATIONS AND PREPARED TESTIMONY
OF GEORGE T. TABATA
Q. Please state your name and business address for the record.
A. My name is George T. Tabata, and my business address is 2244 Walnut Grove
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California
Edison Company.
A. I am a Project Manager in the Corporate Financial Planning and Analysis
division of the Treasurer's Department. I am currently assigned to the
Rate Reduction Bond financing project.
Q. Briefly describe your educational and professional background.
A. I received a Bachelor of Science degree in Business Administration, with
emphases in both finance and accounting, from the University of California
at Berkeley in 1979. I received a Masters degree in Business
Administration, also with an emphasis in finance, from the California State
University at Los Angeles in 1989. I have over 17 years of experience at
Southern California Edison Company, working in various capacities including
Corporate Financial Planning and Analysis, Long-Term Finance, Cash
Management, Pensions and Investor Relations.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to sponsor Sections B.2
and C.3 and C.5 of Chapter IV, "Securitization Of Transition Costs, Amount
To Be Financed, And Edison's Proposed Rate Reduction Bond Transaction," of
Exhibit SCE-1, Rate Reduction Bonds And 10% Rate Reduction.
--------------------------------------------
Q. Was this material prepared by you or under your supervision?
A. Yes, it was.
11
<PAGE>
Q. Insofar as this material is factual in nature, do you believe it to be
correct?
A. Yes, I do.
Q. Insofar as this material is in the nature of opinion or judgment, does it
represent your best judgment?
A. Yes, it does.
Q. Does this conclude your qualifications and prepared testimony?
A. Yes, it does.
12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
QUALIFICATIONS AND PREPARED TESTIMONY
OF JAMES W. YEE
Q. Please state your name and business address for the record.
A. My name is James W. Yee, and my business address is 2244 Walnut Grove
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California
Edison Company.
A. Presently, I hold the position of Senior Regulatory & Financial Analyst in
the Regulatory Policy and Affairs Department of Edison. I am responsible
for the regulatory analysis and support in various regulatory proceedings
related to electric industry restructure.
Q. Briefly describe your educational and professional background.
A. I graduated from Penn State University in University Park, Pennsylvania, in
1971, with a Bachelor of Science Degree in Business Administration with a
major in accounting.
After graduation, I was employed by Transmix Corporation as an Accounting
Supervisor. In 1977, I joined Grefco Inc. as a staff accountant where my
duties included all phases of general accounting, budgeting, and special
projects. In 1978, I joined Southern California Edison Company, and have
held various positions in the Controller's, Energy Supply and Marketing,
and Regulatory Policy and Affairs organizations within the Company. I have
previously testified before the California Public Utilities Commission.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony in this proceeding is to sponsor Sections A and
B of Chapter I, "Ratemaking Proposal," and Sections A and B of Chapter IV,
13
<PAGE>
"Proposed Tariff Changes," of Exhibit SCE-2, Proposed Ratemaking and Tariff
------------------------------
Changes.
--------
Q. Was this material prepared by you or under your supervision?
A. Yes, it was.
Q. Insofar as this material is factual in nature, do you believe it to be
correct?
A. Yes, I do.
Q. Insofar as this material is in the nature of opinion or judgment, does it
represent your best judgment?
A. Yes, it does.
Q. Does this conclude your qualifications and prepared testimony?
A. Yes, it does.
14
<PAGE>
Decision 97-09-056 September 3, 1997
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
In the Matter of the Application of the
Southern California Edison Company (U 338-E)
For: (1) Authority to Reduce Rates Effective
January 1, 1998; (2) Authority to Sell or
Assign Transition Property to One or More
Financing Entities; (3) Authority to Service Application 97-05-018
Rate Reduction Bonds on Behalf of Financing
Entities; (4) Authority to Establish Charges (Filed May 6, 1997)
Sufficient to Recover Fixed Transition Amounts;
and (5) Such Further Authority Necessary for
Edison to Carry out the Transactions Described
in this Application.
- ------------------------------------------------
FINANCING ORDER
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C>
FINANCING ORDER
Summary of Financing Order........................................................ 1
Statutory Overview................................................................ 1
Rate Reduction Bond Transaction................................................... 3
Proposed Structure of the Transaction........................................... 3
Timing of Transaction and Amount of Financed Transition Costs................... 4
Amount of Financed Transition Costs............................................. 4
Issuance Costs.................................................................. 6
Ongoing Transaction Costs....................................................... 6
FTA Charges..................................................................... 7
FTA Charge True-Up Mechanism.................................................... 9
Routine FTA Charge True-Up Mechanism.......................................... 10
Nonroutine FTA Charge True-Up Mechanism....................................... 11
Determination of Need for FTA Charge Adjustment on Anniversary of Financing
Order......................................................................... 11
Transition Property............................................................. 12
Sale of Transition Property to the SPE.......................................... 13
Issuance and Transfer of SPE Debt Securities, and Issuance of RRBs.............. 13
Rate Reduction Authorization...................................................... 14
Eligibility..................................................................... 14
Prevention of FTA Charge Bypass................................................. 15
Ratepayer Benefits................................................................ 16
Related Issues.................................................................... 17
Tax Considerations.............................................................. 17
Financial Accounting............................................................ 18
Credit Rating Agency Considerations............................................. 19
True-Sale Opinion............................................................. 19
Allocation of Collection Shortfalls............................................. 19
Credit Enhancement.............................................................. 20
Sequestration................................................................... 21
Servicing....................................................................... 21
Ratemaking...................................................................... 22
Transition Cost Balancing Account............................................. 22
Rate Reduction Bond Memorandum Account........................................ 23
Finding of Fact................................................................... 25
Conclusions of Law................................................................ 26
ORDER............................................................................... 31
</TABLE>
Appendix A Pro forma Issuance Advice Letter,
FTA Charge True-Up Mechanism Advice Letters
-i-
<PAGE>
SUMMARY OF FINANCING ORDER
Under Assembly Bill 1890 (AB 1890), electric corporations can request to
finance a portion of their transition costs through the issuance of securities
known as rate reduction bonds (RRBs). The revenue requirement reduction produced
by the RRBs will provide residential and small commercial electric customers
with a 10% rate reduction through the rate-freeze period established by Public
Utilities (PU) Code Section 368(a).
The Commission finds that the issuance of RRBs, coupled with a 10% rate
reduction for residential and small commercial (a small commercial customer is
defined by PU Code Section 331(h) as one whose maximum peak demand is less than
20 kilowatts) beginning on January 1, 1998, and continuing through the
rate-freeze period, will lower rates residential and small commercial customers
would have paid if this financing order were not adopted. Therefore, subject to
conformation in an issuance advice letter that the structure and pricing terms
for the RRBs result in net present value benefits, the Commission authorizes
Southern California Edison Company's (Edison's) participation in the
transaction described in its application. Upon issuance of RRBs, the Commission
requires Edison to provide a 10% rate reduction (from June 10, 1996 rates) to
residential and small commercial customers on January 1, 1998, to remain in
effect for the remainder of the rate-freeze period. In the event that Edison
concludes that RRBs cannot be issued in time to commence the rate reduction on
January 1, 1998, we expect Edison to so advise the Commission, and submit a
revised application for approval of a cost recovery plan that accomplishes the
rate reduction by January 1, 1998. This financing order will become effective
only after Edison files with the Commission its written consent to all terms and
conditions of this financing order.
STATUTORY OVERVIEW
On September 23, 1996, Governor Wilson signed into law a comprehensive
electric industry restructuring bill, AB 1890. Among other things, AB 1890 added
Article 5.5 to the PU Code (PU Code SS 840-847) to authorize electrical
corporations to recover certain transition costs (Financed Transition Costs)
through the issuance of a new type
-1-
<PAGE>
of asset-backed security (ABS), known as RRBs(1). Edison was required to apply
to the Commission for a financing order no later than June 1, 1997. (PU Code
(S)841(a).)
If the Commission approves an application for a financing order, AB 1890
requires residential and small commercial customers to repay the principal
interest and related costs of the RRBs through separate, nonbypassable charges
called fixed transition amounts (FTA) charges. FTA charges are generally defined
in AB 1890 as the nonbypassable rates authorized by the Commission in a
financing order to recover the costs of providing, recovering, financing or
refinancing transition costs, including the costs of issuing, servicing and
retiring RRBs. Residential and small commercial customers will pay the FTA
charges as a usage-based, cents-per-kilowatt-hour component of their monthly
bills.
AB 1890 designates the right to be paid the nonbypassable FTA charge
revenues that will be collected from residential and small commercial customers
as an irrevocable property right This property right is defined in AB 1890 as
transition property. Upon the issuance of RRBs, the right to recover FTA charges
is irrevocable, and cannot be rescinded by either the Commission or the State of
California.
AB 1890 also requires the establishment of a true-up mechanism to
periodically adjust the FTA charges to ensure that they remain sufficient to
recover, in a timely manner, the scheduled RRB principal, including an
overcollateralization amount, interest and ongoing costs (hereinafter, FTA
charge True-Up Mechanism).
AB 1890 provides for the RRBs to be issued by the California Infrastructure
and Economic Development Bank (Infrastructure Bank), one or more special-purpose
trusts (SPT) that are authorized by and subject to the oversight of the
Infrastructure Bank, or another financing entity (Issuer) approved by the
Infrastructure Bank. Edison has
- --------------
(1) AB 1890 generally defines transition costs as the costs and categories of
costs for generation-related assets and obligations, consisting of generation
facilities, generation-related regulatory assets, nuclear settlements, and power
purchase agreements that may become uneconomic as a result of a competitive
generation market. Transition costs also include the cost of refinancing or
retiring of debt or equity capital of an electrical corporation, and associated
federal and state tax liabilities. (PU Code (S)840(f).)
-2-
<PAGE>
submitted applications to the Infrastructure Bank for approval of the Issuer,
and for approval of the terms and conditions of the RRB transaction.
RATE REDUCTION BOND TRANSACTION
PROPOSED STRUCTURE OF THE TRANSACTION
Edison has provided a general description of the transaction structure
in its application and prepared testimony. This proposed structure is subject
to modification, depending upon marketing of the RRBs and negotiations with the
nationally recognized credit rating agencies, which will be asked to rate the
RRBs. The final structure will be determined by the Infrastructure Bank and the
Issuer at the time the RRBs are marketed and after input from the rating
agencies and the underwriters.(2)
As described in Edison's application, the principal asset to be used
to support the RRBs is transition property. Edison will form a Special Purpose
Entity (SPE), a bankruptcy-remote business entity, wholly-owned by Edison, and
will contribute equity (approximately 1/2% of the total RRB principal amount) to
it. Edison will transfer the transition property to the SPE.
The SPE will issue debt securities (SPE Debt Securities). The debt
securities will either be RRBs, or will be pledged for and will substantially
mirror the terms and conditions of the RRBs issued by another financing entity.
(3) The transition property, the equity of the SPE, and the rights of the SPE
will be pledged as collateral to secure the SPE Debt Securities.
The Issuer will issue RRBs to investors in the form of notes or
certificates representing beneficial ownership interests in the SPE Debt
Securities. The RRBs may be secured by a statutory lien on the transition
property to the extent provided by the PU Code. It is anticipated that the RRBs
will be issued in a few large transactions, and that
- ---------------
(2) The Commission has traditionally allowed utilities flexibility as to the
structure of debt issued. While this decision does not authorize the issuance of
debt of Edison, the Commission's decision in this application is consistent with
that precedent.
(3) The SPE Debt Securities may bear a fixed rate of interest and the RRBs may
bear a floating rate of interest, with the difference covered by a swap
contract.
-3-
<PAGE>
each issuance may have several classes. The longest term bonds will have
expected repayment terms of approximately ten years, with legal maturities up to
three years beyond the expected repayment term. If the RRBs are issued by a
financing entity other than the SPE, the proceeds from the issuance will be
transferred from the Issuer to the SPE, which will then transfer such proceeds
to Edison in consideration for the transfer of the transition property. If the
RRBs are issued directly by the SPE, the SPE will then transfer such proceeds to
Edison in consideration for the transfer of the transition property.
TIMING OF TRANSACTION AND AMOUNT OF FINANCED TRANSITION COSTS
In order to commence the rate reduction on January 1, 1998, Edison
must also receive necessary approvals from the Infrastructure Bank. Assuming the
other contingencies described in Edison's application have been resolved, and
market conditions are such that the transaction provides a sufficient revenue
requirement reduction to support a 10% rate reduction during the rate-freeze
period and to result in net present value benefits, the SPE Debt Securities and
RRBs will be issued in the fourth quarter of 1997. If Edison concludes that RRBs
cannot be issued in time to commence the rate reduction on January 1, 1998, we
expect Edison to so advise the Commission by letter to the Executive Director,
indicating how Edison proposes to proceed (including, if appropriate, a revised
application for approval of a cost recovery plan).
AMOUNT OF FINANCED TRANSITION COSTS
To authorize recovery of transition costs through the proposed
financing, we note that the transition costs referred to in PU Code (S)841(a)
are defined in PU Code (S)840(f). The uneconomic costs described in PU Code
(S)367 include transition costs. Edison's application does not include the
costs of refinancing or retiring of debt or equity referred to in the last
sentence of PU Code (S)840(f). Requests, if any, for recovery of such
uneconomic costs pursuant to PU Code Section 367 will be made in another
proceeding.
The estimate of total uneconomic costs pursuant to PU Code Section 367
is sufficiently large to warrant issuance of the RRBs in the requested amounts.
Edison
-4-
<PAGE>
estimates transition costs to be as much as four times greater than the
aggregate principal amount of the proposed issuance of RRBs. Most of those
uneconomic costs (including qualifying facility capacity prices and nuclear sunk
costs) are neither in dispute in proceedings pursuant to PU Code Section 367,
nor sensitive to market prices. Thus, the Commission concludes that transition
costs in sufficient amounts currently exist. Any concern regarding the
sufficiency of available transition costs is mitigated by the fact that if such
estimates are in error, the rate-freeze period will end early and residential
and small commercial customers will receive credit for any excess savings
produced by the financing through the ratemaking mechanisms set forth in
Edison's application and discussed in this financing order.
Edison is authorized to recover a portion of its transition costs from
the proceeds of SPE Debt Securities and RRBs in an aggregate principal amount of
up to $3.0 billion, as necessary to provide the 10% rate reduction to
residential and small commercial customers. In determining the appropriate size
of initial issuances, Edison shall use the bond sizing model presented in its
prepared testimony as appendix SCE-1-A to Exhibit SCE-1 in this proceeding as
applied to the structure and terms of RRBs actually issued and described in one
or more issuance advice letters. Issuance advice letters shall become effective
five business days after filing. The form of issuance advice letter in Appendix
A to this financing order shall be used.
In addition, as is described below, higher than currently forecasted
sales to residential and small commercial customers during the rate-freeze
period could lead to the need to issue RRBs in addition to those reflected in
the initial issuance. Such additional issuances are authorized, up to the
aggregate total amount of $3.0 billion (to the extent not included in the
initial issuance of RRBs) and shall be initiated during the rate-freeze period
based on Edison's assessment of whether the revenue requirement reduction
resulting from the RRB transaction (as measured by the Rate Reduction Bond
Memorandum Account) is adequate to support the 10% rate reduction over the
rate-freeze period. These issuances, if needed, shall be implemented and
reflected in FTA charges by future issuance advice letter filings. Conversely,
if the revenue requirement reduction produced by the RRB transaction exceeds the
amount needed for the 10% rate
-5-
<PAGE>
reduction, residential and small commercial customers will receive the excess
amounts reflected in the Rate Reduction Bond Memorandum Account, plus interest
as discussed below, after the rate-freeze period ends, through an adjustment to
rates.
ISSUANCE COSTS
In accordance with PU Code (S)840(d), "the costs of providing,
recovering, financing, or refinancing the transition costs through a plan
approved by the commission in the financing order, including the costs of
issuing, servicing, and retiring rate reduction bonds" are recoverable through
the FTA charges. Thus, Edison proposes to finance such costs by the issuance of
RRBs. Edison estimates the issuance costs associated with the transaction to be
approximately $21.5 million, based on an issuance of $2.6 billion aggregate
principal amount of RRBs, or less than one percent of the RRB issuance amount.
These costs include underwriters fees and expenses, legal fees, rating agency
fees, Securities and Exchange Commission (SEC) registration fees, accounting
fees, trustees fees, Infrastructure Bank fees, printing fees and miscellaneous
costs.(4) These costs will be recovered by Edison in the RRB transaction and
will be paid out of the proceeds of the issuance of the RRBs, or to the extent
prior payment is required, will be paid by Edison, as seller and servicer under
the transaction documents for the RRBs, and reimbursed through the proceeds of
the RRBs. We shall limit the aggregate costs of issuance to $21.5 million for
the first $2.6 aggregate principal amount of RRBs and 1% for the next $400
million aggregate principal amount of RRBs. Any costs that are approved by the
Infrastructure Bank or STO shall be paid prior to costs that are not subject to
approval by the Infrastructure Bank or STO.
ONGOING TRANSACTION COSTS
The primary ongoing transaction cost will be the servicing fee paid to
Edison or a substitute servicer for servicing the RRBs. In order to support the
SPE's
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(4)The Infrastructure Bank or State Treasurer's Office (STO) will approve bond
counsel fees, underwriter fees, underwriter counsel fees, bond trustee fees,
Infrastructure Bank fees, rating
Footnote continued on next page
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legal status separate and apart from Edison, the servicing fee paid to Edison
must be market-based. The servicing fee will be a part of the servicing
agreement and will be included in the determination of the FTA charges.
The full amount of the market-based servicing fee will be included in
the FTA charges. However, as long as Edison is servicer, Edison proposed a
ratemaking mechanism which will provide a credit, after the rate-freeze period,
to residential and small commercial ratepayers in Edison's Rate Reduction Bond
Memorandum Account equal in value to any amounts it receives as compensation,
excepting only amounts needed to cover incremental, out-of-pocket costs and
expenses incurred by Edison to service the RRBs. These types of expenses would
include required audits related to Edison's role as servicer, and legal and
accounting fees related to the servicing obligation. Thus, the only net
ratemaking impact will be such incremental expenses. To the extent these
expenses occur, and are included in the adjusted FTA charges, they may be
reviewed in a subsequent Edison Revenue Allocation Proceeding or successor
ratemaking proceeding.
It is anticipated that there will be a small amount of additional,
ongoing costs associated with the RRB transaction, such as trustees fees and
other administrative costs. These costs will also be recovered through the FTA
charges.
FTA CHARGES
To facilitate the transaction, the Commission will ensure that
residential and small commercial customer rates necessary to repay the RRBs,
i.e., FTA charges, are implemented when the RRBs are issued and that expeditious
procedures are adopted to establish and to adjust FTA charges. Therefore, five
business days in advance of issuance of the RRBs, Edison is authorized to file
an issuance advice letter with the Commission. There may be more than one RRB
issuance, and a separate issuance advice letter will be necessary for each. The
issuance advice letter will describe the actual
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agency fees, SEC registration fees, printing fees, and other expenses related to
the sale of the RRBs to which the Infrastructure Bank or STO is a party.
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structure of the RRB transaction it covers, as approved by the Infrastructure
Bank, the total principal amount and the pricing of RRBs being issued under its
terms. It will also describe the FTA charges associated with the RRB issuance to
be reflected in Edison's tariffs, which will be calculated using the methodology
and formulas proposed in Edison's application as adopted in this financing order
based on market conditions at the time the RRBs are priced. To confirm that the
actual terms of the RRBs are forecast to result in lower rates for residential
and small commercial customers than without the RRBs at the time the RRBs are
issued, the Commission will require Edison to provide a net present value
calculation of such benefits, using the methodology contained in Edison's
prepared testimony as Appendix SCE-A to Exhibit SCE-1, applied to the actual
structure and terms of the RRBs in the issuance advice letters. So long as the
terms and structure result in positive net present value benefits, Edison is
authorized to undertake the RRB transaction.
The FTA charges for residential and small commercial customers,
calculated using the methodology contained in Edison's prepared testimony, shall
become effective five business days after the issuance advice letter is filed.
This procedure is reasonable because the bond sizing model and the FTA charge
calculations have been examined and found reasonable in this proceeding and
because Edison will use the pro forma issuance advice letter contained in
Appendix A to this financing order. The transition property relating to the FTA
charges will then constitute a current property right, as required for the
issuance of the RRBs, and will continuously exist thereafter for all purposes.
Edison (or a substitute servicer) will remit FTA charges collected
during the prior month to a trustee (the Trustee) appointed under an indenture
or pooling and servicing agreement in connection with the related transition
property. The Trustee will deposit these remittances to a collection account.
Once each quarter, the Trustee will release money from the collection account to
pay servicing compensation and the other SPE and Trustee expenses, as well as
accrued interest and principal in respect of the SPE Debt Securities and the
RRBs.
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FTA charges will be set at a level intended to recover scheduled interest
and principal on the RRBs, in accordance with the amortization schedule for the
RRBs determined at the time of issuance, plus an overcollateralization amount as
well as related financing costs and fees, including servicing fees, based on
assumptions including sales forecasts, charge-offs, and lags between FTA charge
billing and collection. If SPE Debt Securities and RRBs are redeemed prior to
the scheduled maturity dates in connection with a sale of transition property by
the Trustee upon an event of default, or in connection with the exercise of an
optional "clean-up" call, FTA charges will be set as if the SPE Debt Securities
and RRBs remained outstanding to their scheduled maturity. The FTA charges shall
remain in effect until the owner of the transition property, or its assignee,
has received FTA charges sufficient to cover the overcollateralization amount,
and to pay the principal amount, plus interest and other ongoing costs.
During the rate-freeze period, FTA charges will not increase residential
and small commercial customers' rates. This will be accomplished by reducing
residual competition transition charges (CTCs) by an amount equal to the FTA
charges so that total rates, which reflect the 10% rate reduction, are not
impacted by this additional charge during the rate-freeze period. Other
customers' rates are subject to the June 10, 1996 total rate level freeze during
the rate-freeze period. After the rate-freeze period, the FTA charges will be
added to residential and small commercial customers' rates until the RRBs are
retired, as is contemplated by AB 1890.
FTA CHARGE TRUE-UP MECHANISM
Although this financing order and the designated FTA charges are
irrevocable, the Commission must approve adjustments to the FTA charges as
necessary to ensure timely recovery of all transition costs that are the subject
of this financing order, as well as the costs of capital associated with the
provision, recovery, financing, or refinancing of transition costs, including
costs of issuing, servicing, credit enhancing (including through
overcollateralization as a cost of financing), and retiring the RRBs. (PU Code
(S)841(c).) As is provided for in AB 1890, the Commission must
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establish a procedure for the expeditious approval of periodic adjustments to
the FTA charges. (PU Code (S) 841(e).)
Edison proposes to adjust FTA charges by an FTA charge True-Up
Mechanism at least annually to keep actual principal amortization in line with
the expected schedule which is established at the time of offering. The
calculation will reflect the debt service revenue requirement. To the extent
there are any previous under- or over-payments to the Trustee, the revised FTA
charges will be established to return the outstanding balance of the RRBs to the
originally projected balance within 12 months of the adjustment.
Edison's proposed FTA charge adjustment mechanisms are consistent with
AB 1890 and are reasonable. The forms of advice letters for both the annual and
the quarterly routine FTA charge True-Up Mechanisms are included in Appendix A
to this financing order.
ROUTINE FTA CHARGE TRUE-UP MECHANISM
As servicer, Edison shall file routine True-Up Mechanism advice
letters annually, at least 15 days before the end of the calendar year, with the
option of filing quarterly routine True-Up Mechanism advice letters, if needed.
Edison may file a routine FTA charge True-Up Mechanism advice letter at least
15 days before the end of any calendar quarter (including calendar year end),
with the resulting changes to the FTA charges to be effective on the first day
of the next calendar quarter. For these adjustments, the trued-up FTA charges
will be calculated using the methodology described in Edison's prepared
testimony, based on updated forecasts of kWh sales, uncollectibles, and the
timing of collections if necessary.
Edison proposes to adjust the FTA charges at least annually, and as
often as quarterly with a trigger mechanism based on a specified variance
between the actual principal balance (based on the amounts actually received by
the Trustee) and the projected principal balance. The actual criteria for the
quarterly true-up trigger are to be established in the servicing agreement,
based on input from rating agencies. At a minimum, there will be a required
annual adjustment to track the expected decline in
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FTA charges over time as interest charges decrease with declining amounts of
principal outstanding.
NONROUTINE FTA CHARGE TRUE-UP MECHANISM
As Edison points out, it is not possible at this time to anticipate
all eventualities that might require an adjustment to the formulas used to
calculate FTA charges. Therefore, Edison may also request nonroutine changes to
the FTA charges, as is necessary to ensure the timely recovery of RRB principal,
including an overcollateralization amount, and interest. These nonroutine FTA
charge True-Up advice letters must be filed at least 90 days before the end of a
calendar quarter, with the resulting changes to be effective on the first day of
the next calendar quarter. In contrast to the issuance advice letters and the
routine true-up adjustment mechanism, these filings may require a Commission
resolution because such filings may involve changes to the basic FTA charge
calculation methodology contained in Edison's prepared testimony. The Energy
Division will advise Edison by the 45th day after Edison files a nonroutine FTA
charge True-Up Mechanism advice letter if there are any modifications to the
calculation methodology the Energy Division believes are necessary. If the
Energy Division and Edison cannot resolve any differences, then the Commission
will issue a resolution to decide any issues. However, the Commission will issue
such a resolution before the 90-day period has elapsed. In the absence of notice
by the Commission that the Energy Division believes modifications to the
calculation methodology are necessary, Edison will be authorized to implement
the FTA charge adjustments it has proposed in its nonroutine True-Up Mechanism
advice letter on the 90th day after the filing.
DETERMINATION OF NEED FOR FTA CHARGE ADJUSTMENT ON
ANNIVERSARY OF FINANCING ORDER
AB 1890 requires the Commission to determine, on each anniversary date
of the issuance of the financing order, whether the FTA charges need to be
adjusted. (PU Code (S)841(e).) Therefore, at least 15 days before each
anniversary date of the issuance of this financing order, Edison will file an
FTA charge True-up
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advice letter stating whether an adjustment to the FTA charges is necessary.
The Commission will make the appropriate finding on the anniversary date, with
any necessary changes to be approved within 90 days of the financing order
anniversary date. Due to administrative convenience, and the other adjustment
options authorized herein, it is expected that Edison will avail itself of
annual and quarterly routine and nonroutine FTA charge True-Up Mechanisms, if
possible, to place into effect all necessary adjustments to the FTA charges.
TRANSITION PROPERTY
Transition property is contemplated to be transferred to an SPE,
bankruptcy-remote from Edison, which then will issue SPE Debt Securities to the
Issuer. These structural elements are expected to enable the RRBs to receive a
credit rating superior to Edison's. The transition property used to secure the
RRBs will be a property right created by AB 1890. (PU Code (S) 841(f).) Thus,
the Commission finds that upon the effective date of each issuance advice letter
associated with this financing order, all of the transition property identified
in such advice letter constitutes a current property right and shall thereafter
continuously exist as property for all purposes. The transition property shall,
without limitation, include (1) the right, title and interest in and to the FTA
charges set forth in the issuance advice letter, as adjusted from time to time,
(2) the right to be paid the total amount set forth in the issuance advice
letter, (3) the right, title and interest in and to all revenues, collections,
claims, payments, money, or proceeds of or arising from the FTA charges, and (4)
the right, title and interest in and to all rights to obtain adjustments to the
FTA charges under the FTA charges True-Up Mechanism.
In addition, in accordance with AB 1890, the Commission finds that the
holders of the transition property are entitled to recover FTA charges in
amounts equal to the scheduled principal amounts for the SPE Debt Securities
(which will equal the scheduled principal payment amounts for the RRBs), all
interest thereon, the overcollateralization amount and all related fees, costs
and expenses.
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SALE OF TRANSITION PROPERTY TO THE SPE
The Commission approves the sale by Edison of the transition property
identified in issuance advice letters to one or more SPEs, and finds that upon
approval by the Infrastructure Bank, such SPEs constitute financing entities for
all purposes of AB 1890. Upon the sale of the transition property identified
in an issuance advice letter to the SPE, the SPE will have all of the rights
originally held by Edison with respect to the transition property, including,
without limitation, the right to exercise any and all rights and remedies to
collect any amounts payable by any customer in respect of the transition
property, notwithstanding any objection or direction to the contrary by Edison.
Any payment by any such customer to the SPE shall discharge the customer's
obligations in respect of the transition property to the extent of the payment,
notwithstanding any objection or direction to the contrary by Edison.
By means of this financing order, the Commission approves the sale of
transition property created by an issuance advice letter from Edison to the SPE
identified in the related issuance advice letter. The Commission also finds that
any such SPE is, to the extent so approved by the Infrastructure Bank, a
financing entity as defined by AB 1890.
ISSUANCE AND TRANSFER OF SPE DEBT SECURITIES, AND ISSUANCE OF RRBs
The Commission approves the issuance by any such SPE of SPE Debt
Securities, on terms approved by the Infrastructure Bank, with the terms to
mirror substantially the terms of the RRBs, to the Issuer identified in the
related issuance advice letter. The Commission also approves any such SPE's
pledging of its right, title and interest in and to the transition property as
security for its SPE Debt Securities.
The Commission approves the issuance by any such Issuer of RRBs, on terms
authorized by the Infrastructure Bank. The Commission also approves any such
Issuer's pledging of its right, title and interest in and to its SPE Debt
Securities, and all security therefor, as security for the Issuer's RRBs if the
RRBs are issued as debt securities.
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RATE REDUCTION AUTHORIZATION
Contingent upon timely and sufficient issuance of RRBs, the Commission
requires Edison to provide a 10% rate reduction from June 10, 1996 rate levels
to its residential and small commercial electric customers, consistent with our
decision (D.) 96-12-077 and Edison's cost recovery plan approved thereby.
Subject to these conditions, the rate reduction is to go into effect on January
1, 1998, and to remain in effect for the remainder of the rate-freeze period,
i.e., until Commission-authorized uneconomic costs pursuant to PU Code Section
367 have been fully recovered, but no later than March 31, 2002. (D.96-12-077,
pp.9,35.)
Edison's proposed method to provide the 10% reduction to eligible
customers, via a bill credit, results in the same bills for these customers as
would a reduction implemented via a reduction in each component of the
customers' rates. Therefore, it is consistent with AB 1890, which generally
refers to rate reductions. Edison proposes to use the bill credit for
administrative convenience.
Additionally, it is easier to provide the reduction to direct access
customers via a bill credit. The bill credit can be calculated under the
assumption that the customer is a full service customer, so that the same bill
reduction is received regardless of whether a customer is a direct access or
full service customer.
For these reasons we will authorize Edison to implement the 10% reduction
via a bill credit.
ELIGIBILITY
The rate reduction applies to residential and small commercial customers
as defined by AB 1890. For this purpose, Edison's eligible customers are those
served on rate schedules in Edison's Domestic and General Service (GS-1) rate
group. (5) Edison's proposal to address this issue, reflected in its proposed
Schedule RRB, and as modified
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(5) These include all customers on Schedules D, D-APS, D-CARE, DE, DM, DMS-1,
DMS-2, DMS-3, DS, TOU-D-1, TOU-D-2, TOU-EV-1, GS-1, TOU-GS-1, TOU-EV-3, and GS-1
customers taking service on GS-APS.
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below, is adopted. All other customers will neither receive the rate reduction
nor be responsible for FTA charges.
Subject to the bypass provisions discussed below, customers who no longer
meet the applicability for service criteria on a rate schedule that qualifies
for the 10% reduction will no longer receive the 10% bill credit, nor will they
be required to continue to pay the FTA charge. (6) This provision will apply,
for example, when a GS-1 customer's load grows beyond 20 kilowatts and the
customer migrates to a rate schedule with a higher demand eligibility criterion,
such as schedule GS-2. Edison does not expect that this provision will encourage
such migration, because it is unlikely that customers will add load to increase
beyond 20 kilowatts, solely for the purpose of avoiding the FTA charges. (7)
This provision is consistent with the treatment of nonbypassable competition
transition charges in other proceedings for customers who change rate schedules.
Residential customers cannot migrate to a schedule which does not require an FTA
charge.
PREVENTION OF FTA CHARGE BYPASS
To ensure credit risks are minimized, it is necessary to take measures to
prevent customers from taking advantage of the 10% rate reduction but avoiding
the repayment period afterwards by switching to a schedule outside the Domestic
or GS-1 rate groups. For example, a customer might take service on a GS-1 rate
schedule during the rate freeze period and then switch to an agricultural and
pumping rate schedule (not eligible for the rate reduction) to avoid the FTA
charge once the rate-freeze period has ended. To address this concern, Edison
proposes that customers who were served on a rate schedule in the GS-1 rate
group as of January 1, 1998 who voluntarily switch to service on any
agricultural and pumping, GS-2, or TOU-GS-2 rate schedule will
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(6) In cases in which a customers aggregate load through master-metering or
other means, the FTA charge and bill credits will continue to the individual
customers.
(7) Edison does not consider migration due to load growth to constitute
voluntary migration.
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continue to pay the applicable FTA charge for GS-1 customers until the RRBs have
been retired. Edison is authorized to file tariff modifications to achieve this
result. If a customer migrates from GS-1 to GS-2 due to load growth, which makes
the customer no longer eligible for GS-1, the customer should not be required to
continue to pay FTA charges.
Customers subject to the FTA charges who subsequently discontinue or
reduce purchases of electricity supply and delivery services from Edison or any
successor distribution utility, purchase or consume electricity supplied and
delivered by sources other than Edison or any successor distribution utility,
and remain physically located at the same location or are located within the
historical service territory of Edison or any successor distribution utility
(departing customers) will continue to be responsible for paying the FTA
charges. In assessing the FTA charges for departing customers, Edison proposes
to apply similar nonbypassability provisions as applicable to CTC for departing
load customers. (8) Edison's proposal for collecting CTC from departing
customers is described in Exhibit SCE-2 of Edison's Application (A.) 96-08-071.
Edison is authorized to include comparable tariff provisions to ensure the FTA
charges are nonbypassable.
RATEPAYER BENEFITS
Edison evaluated whether residential and small commercial customers can be
expected to benefit from the RRB transaction (Assuming a 10-year amortization
with level principal payment obligations, and financing $2.6 billion of
transition costs) and associated 10% rate reduction. Edison did so by comparing
the net present value of (1) the amount these rate payers could be expected to
Pay in rates with the RRBs and rate reduction in place to (2) the amount they
could be expected to pay without the RRBs and rate reduction. In our companion
decision today, D.97-09-054, we determined
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(8) The CTC exemptions specified in AB 1890 for certain irrigation districts and
for load served by onsite generation after June 30, 2000 will not apply to the
FTS charges.
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that the rates for purpose of the second clause of the previous sentence are the
rates in effect as of June 10, 1996.
On a net present value basis, using a discount rate of 10%, Edison expects
the RRB transaction and 10% rate reduction to result in net present value
benefits of approximately $400 million. Based on this evidence, the Commission
finds that the issuance of RRBs of ten-year expected final maturity and the
implementation of the associated 10% rate reduction during the rate-freeze
period will lower rates for residential and small commercial customers as is
contemplated by AB 1890. To confirm this finding prior to the issuance of RRBs,
issuance advice letters shall include a calculation in accordance with the bond
sizing model described in Edison's prepared testimony indicating that, based on
the actual structure and pricing terms (i.e., actual amortization pattern,
interest rate, amount of transition costs financed, and expected maturities for
the RRBs), the issuance of RRBs is expected to result in a net present value
benefit to residential and small commercial customers. If such a confirmation
cannot be made, then Edison should so advise the Commission and should not
proceed with the transaction.
RELATED ISSUES
As Edison describes in its testimony, there are several related issues
that have a potentially significant impact on the RRB transaction. The following
sections of this financing order discuss those issues.
TAX CONSIDERATIONS
The possibility that the Internal Revenue Service (IRS) would assess
income taxes when Edison receives the initial proceeds from the RRBs, rather
than when FTA charge revenues are collected, is a risk associated with financing
the transition costs. In addition to having tax consequences, the economics of
issuing the RRBs would be adversely affected if Edison's income tax payments
associated with the FTA charges were to be accelerated and become due when the
RRBs are issued rather than when FTA charges are billed.
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As a result, in February 1997, Edison submitted a ruling request to the
IRS seeking confirmation that (1) the SPE Debt Securities will be treated as
debt of the utility for federal income tax purposes, and (2) the FTA charges
will be included in Edison's gross income in the year in which the related
electrical service is provided to residential and small commercial customers
and not at the time of debt issuance.
If the receipt of RRB proceeds yields current income taxation of those
proceeds, the benefits of the financing transaction would be substantially
reduced. Should the IRS choose not to provide a ruling, or rule adversely,
Edison would have to reassess the transaction and, if possible, modify it to
reduce the risk of current taxation. If the structure of the transaction changes
beyond the bounds contemplated in its Application or this financing order,
Edison will take appropriate steps to modify its request with the Commission to
the extent permitted by PU Code Section 841(c). If the transaction as modified
does not produce net present value benefits through overall revenue requirement
reductions as indicated in issuance advice letters, then the Commission cannot
confirm that the transaction will lower rates for residential and small
commercial customers. The requirement that issuance advice letters include a net
present value benefit calculation addresses this concern.
It its brief, Edison has indicated that it may go forward with the RRB
transaction under this financing order in the absence of an IRS ruling. Edison
is put on notice that if it chooses to do so, its shareholders will bear the
consequences of any tax treatment, to the extent that it is more adverse than
the tax treatment assumed in the NPV benefits calculation it has presented in
its application.
FINANCIAL ACCOUNTING
The amount financed will be recorded as debt of the SPE for financial
reporting purposes. Edison, the SPE, the Infrastructure Bank and the holders of
the RRBs will expressly agree pursuant to the terms of the applicable documents
to treat the SPE Debt Securities as debt of the SPE secured by, among other
things, the transition property and the equity of the SPE for all purposes.
Because the SPE is consolidated with Edison for financial reporting purposes,
the amounts financed will appear as debt
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in Edison's consolidated financial statements. This is not expected to impact
Edison's utility credit ratings, as it is expected that the rating agencies
will determine that the RRBs, which are not supported by Edison's general
revenue stream, do not affect Edison's creditworthiness.
CREDIT RATING AGENCY CONSIDERATIONS
TRUE-SALE OPINION
Credit rating agencies will require an acceptable opinion of bankruptcy
counsel at the time the RRBs are issued for assurance that the transition
property will be bankruptcy-remote from Edison. To obtain such an opinion, the
transfer of the transition property from Edison to the SPE must constitute a
"true sale" (i.e., if Edison were to become the subject of a bankruptcy
proceeding, the transition property would not be part of Edison's bankruptcy
estate and therefore would not be subject to the claims of Edison's creditors).
AB 1890 expressly provides that certain transfers of transition property
approved in a financing order and intended by the parties to constitute an
absolute transfer or true sale shall be so treated for all purposes, subject to
certain limited exceptions. (See PU Code (S) 844.) As contemplated by AB 1890,
the RRBs will be non-recourse to any of Edison's assets, other than the SPE's
equity and the transition property sold to the SPE. (PU Code (S) 842(a).)
In furtherance of this true-sale analysis, Edison envisions that it will
give sufficient notice to third parties that the transition property is owned by
the applicable SPE and is not available to creditors of Edison by serving the
issuance advice letters on the parties to this proceeding as well as Edison's
standard advice letter service list. This decision authorizes Edison to include
FTA charges as a separate line item on customers' bills.
ALLOCATION OF COLLECTION SHORTFALLS
In order to preserve the bankruptcy-remote status of the transition
property once it is transferred to the SPE, Edison cannot have any claim on the
FTA charges, In particular, if Edison collects less than the full amount that is
billed to
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residential and small commercial customers, it cannot favor itself over the
owner of the transition property. It must allocate that shortfall appropriately
between FTA charges and other charges. Such shortfalls shall be allocated
between FTA charges and other Edison charges in the same proportion as the
amount of FTA charges billed bears to the aggregate amount of Edison charges
billed.
CREDIT ENHANCEMENT
Credit enhancements are mechanisms that provide investors with added
assurance that they will recover their investment. Examples of credit
enhancement provided by the original owner include reserve accounts,
overcollateralization amounts, and True-Up Mechanisms. Examples of credit
enhancement provided by third parties include bond insurance and letters of
credit. It is expected that the RRB transaction will use a True-Up Mechanism
authorized by AB 1890 (as described above) and overcollateralization amounts or
other means of credit enhancement.
The purpose of the overcollateralization amount is to provide security to
investors and to enhance the credit rating of the RRBs by providing an
additional financed amount to cover shortfalls in FTA charge collection payments
to the Trustee between the final expected FTA charge true-up and the expected
maturity of the RRBs. In other words, the FTA charges will be set to collect an
amount slightly in excess of the payments required to amortize the RRBs as
scheduled.
The overcollateralization amount needed to satisfy the credit rating
agencies will be established by the Issuer with input from the credit rating
agencies prior to the time of RRB pricing. The actual amount will be approved by
the Infrastructure Bank and STO. The amount will be a function of several
variables but is expected primarily to be a function of the FTA charge True-Up
Mechanism.
Customers bearing the FTA charges in their rates should receive credit
equal to the amount of any transition property overcollateralization not used to
repay the principal and interest on RRBs. As a result, overcollateralization
will not reduce customer benefits from the RRB transaction.
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The FTA charges will be set to collect any overcollateralization amount. As
with other components of the FTA charges, it will be trued-up to the extent
necessary using the True-Up Mechanism we adopt in this financing order. As is
set forth below, any overcollateralization amount collected in excess of the
amount needed to repay the principal, plus appropriate interest, of the RRBs
will benefit residential and small commercial customers.
SEQUESTRATION
Consistent with PU Code (S) 843(e), we will agree that, in the event of a
default by Edison in payment of the FTA charges to the SPE, we will, upon
application by the Trustee, order the sequestration and payment to the SPE, or
such other party as designated by the Trustee, of revenues arising with respect
to the transition property. This will provide additional certainty that the FTA
charges will benefit the owner of the transition property, and should serve to
enhance the credit quality of the RRBs.
SERVICING
To the extent that any interest in transition property is transferred by
Edison to an SPE, the Commission is required to authorize the utility to
contract with the financing entity to perform servicing functions on behalf of
the financing entity. (PU Code (S) 842(c).) Pursuant to a servicing agreement
with the SPE and/or Issuer, Edison will act as servicer of the transition
property. That is, Edison will be responsible for customer kilowatt-hour billing
and usage information, and for billing and collecting the FTA charges. On a
monthly or more frequent basis, Edison will remit estimated FTA charge
collections, on behalf of the SPE and/or Issuer, to the Trustee. The Trustee, in
turn, will make quarterly debt service payments to the RRB investors, as well as
pay other ongoing costs associated with the RRB transaction. Pursuant to this
decision, the Commission authorizes Edison to contract with the SPEs and/or
Issuers to collect amounts in respect of the FTA charges for the benefit and
account of such SPEs and/or Issuers, and to account for and remit these amounts
to or for the account of such SPEs and/or Issuers. The servicing agreement will
provide that Edison, as initial servicer,
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may not voluntarily resign its duties as servicer without obtaining the prior
approval of the Commission.
RATEMAKING
It is necessary to incorporate the RRB transaction into Edison's
ratemaking mechanisms to ensure that Edison's CTC ratemaking mechanism
accomplishes its intended purpose of determining when the rate freeze should
end, preventing any CTC cost shifting to large customers as a result of the 10%
rate reduction and the RRBs, and providing residential and small commercial
customers all of the benefits from the RRB transaction.
TRANSITION COST BALANCING ACCOUNT
Edison proposes a mechanism to adjust the Transition Cost Balancing
Account (TCBA) to ensure it is treated as if the RRBs were not issued. The
reason for this is to ensure the RRB transaction does not cause any cost
shifting. It will do so by ending the rate-freeze period at the same time it
would have ended in the absence of the rate reduction and RRB issuance. By
ending the rate freeze at the same time it would have ended if the RRB
transaction did not take place, large customers are assured that they will not
pay additional transition costs. The Rate Reduction Bond Memorandum Account,
discussed below, then ensures that small customers are also treated fairly under
the RRB transaction.
Edison proposes to reflect the RRB transaction in its CTC ratemaking
mechanism established in D.97-06-060 by imputing a revenue credit to the
ratemaking mechanism equal to the net CTC revenue reduction due to the FTA
charges and the 10% rate reduction for residential and small commercial
customers. With this adjustment, the balance in the CTC ratemaking mechanism may
reach zero at some time during the rate-freeze period and indicate that
transition costs that must be recovered before March 31, 2002, would have been
recovered absent the impact of the 10% rate reduction and absent the RRBs. By
doing this, customers are assured that the rate freeze ends at the same time it
otherwise would have, regardless of the 10% rate reduction and the issuance of
RRBs. The rate-freeze period ends when this approach,
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including these imputed revenues, show that transition costs have been fully
recovered (or on March 31, 2002, if that comes first). Thus, large customers'
responsibility for paying CTC is unaffected by the 10% rate reduction and the
RRBs. All customers will still be required to pay for those transition costs
eligible for recovery after December 31, 2001 pursuant to certain provisions
of AB 1890.
RATE REDUCTION BOND MEMORANDUM ACCOUNT
The Rate Reduction Bond Memorandum Account will be used by
Edison to make a determination if additional RRBs need to be issued (within the
aggregate total amount of $3.0 billion authorized by this financing order). As
the sizing model demonstrates, financing a given amount of transition costs with
RRBs means that residential and small commercial customers should receive a
specific amount of total savings because of the 10% rate decrease. If sales to
residential and small commercial customers during the rate-freeze period are
higher than was estimated in the sizing model used to determine the amount of
RRBs to be issued, then these customers' total savings from the rate reduction
(which is equal to the rate reduction times the total amount of sales to the
customers) will be higher than was estimated when the RRBs were sized.
Moreover, there are several ratemaking adjustments which
may need to be made to residential and small commercial customers' rates after
the end of the rate-freeze period due to the RRB transaction. These include
ensuring that these customers receive the full benefit of (1) the after-tax
interest earnings on the FTA charges before Edison, acting as servicer, forwards
them to the Trustee, (2) any increase in the value of Edison's ownership
interest in the SPE due to investment income earned by the SPE and any
overcollateralization amounts or other FTA charges that are released by the
Trustee to the SPE and not used to make payments on the RRBs, (3) the servicing
fees (less incremental expenses incurred by Edison as servicer) received by
Edison, (4) FTA charges (including overcollateralization amounts) not used by
the SPE to retire RRBs, (5) savings created by the transaction in excess of what
has been provided through the 10% rate reduction to which residential and small
commercial
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customers are entitled given the amount of transition costs financed through
RRBs, and (6) any carrying cost savings associated with the financed taxes.
Edison is to pass each of these back to residential and small commercial
customers.
Some of these adjustments relate to amounts held by the SPE. The
distinction between amounts owned by the SPE and amounts owned by Edison must be
respected. The SPE is distinct from Edison, and in light of bankruptcy
considerations it would be inappropriate for the Commission to order that such
amounts be paid by the SPE to Edison.
The ratemaking can be accomplished, while respecting this distinction.
Edison's rates charged to residential and small commercial customers will be
periodically reduced while transition property remains outstanding to reflect
(1) distributions by the SPE to Edison, and (2) any increase in the value of
Edison's ownership interest in the SPE. It is expected that, after payment of
SPE expenses, any undistributed earnings or overcollateralization actually
collected as a part of the FTA charges and returned to the SPE will result in a
corresponding increase in Edison's ownership in the SPE.
To the extent that residential and small commercial customers do not
receive rate reductions during the rate-freeze period commensurate with the
savings created by the RRBs, Edison will provide them with the remaining revenue
requirement reductions to which they are entitled. Edison proposes that after
the rate-freeze period ends, the Commission make a determination whether the
amount of credit should be returned by means of a one-time bill credit or should
be used to reduce otherwise applicable rates during the remainder of the term of
the RRBs. This determination will be made in Edison's first Revenue Adjustment
Proceeding (or its successor) which occurs after the rate-freeze period ends.
The Utility Reform Network (TURN) and the Office of Ratepayer Advocates
point out that the appropriate carrying cost for the revenue requirement
reductions not provided to residential and small commercial customers during the
rate-freeze period is Edison's authorized rate of return until the savings are
actually passed on to those customers through lower rates.
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After the rate-freeze period ends, Edison shall consolidate any annual
credit or debit amounts described above and record them in the Rate Reduction
Bond Memorandum Account. Those amounts will then be consolidated annually with
other pending rate changes considered in the annual Revenue Adjustment
Proceeding, or successor ratemaking proceeding authorized by the Commission.
FINDINGS OF FACT
1. The rates that residential and small commercial customers of Edison
would have paid if this financing order were not adopted are the rates in effect
as of June 10, 1996.
2. The designation of the fixed transition amounts and the issuance of up
to $3.0 billion of SPE Debt Securities and RRBs in connection with such fixed
transition amounts will reduce rates that residential and small commercial
customers of Edison would have paid if this financing order were not adopted.
3. Residential and small commercial customers will benefit from the
issuance of rate reduction bonds and the reduction of rates provided that the
net present value of fixed transition amounts and rate reductions is positive
when calculated in accordance with the methodology set forth by Edison in its
application and related testimony.
4. Edison's request for recovery of a portion of its transition costs and
the costs of providing, recovering, financing and refinancing transition costs
in an aggregate principal amount of up to $3.0 billion from proceeds of SPE Debt
Securities and RRBs, including all costs of issuance, is reasonable in relation
to estimates of the total amount of such transition costs.
5. Edison estimates the total costs of issuance to be less than $21.5
million.
6. The owner of the transition property will have the right to recover
principal, interest, and related costs (including taxes) associated with the SPE
Debt Securities and the RRBs through fixed transition amounts, which are
authorized by this financing order.
7. The methodology used to calculate the FTA charges associated with rate
reduction bond issuance as described in Edison's prepared testimony is
reasonable.
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8. The methodology to calculate routine FTA charge adjustments as
described in Edison's prepared testimony is reasonable.
9. If residential or small commercial customers fail to pay their
utility bills in full, any shortfall in revenues received must be allocated
between FTA charges and Edison's charges based on the ratio of the amount of the
bills relating to the FTA charges and the amount relating to Edison's charges,
to avoid Edison favoring its own interests.
10. The rate collection methods described in Edison's application to
ensure that the FTA charges are nonbypassable are reasonable.
11. The ratemaking mechanisms described in the application, including
the Rate Reduction Bond Memorandum Account, FTA charges tariff language, and
modifications to Edison's Preliminary Statement and Transition Cost Balancing
Account are reasonable; provided, however, that balances that are to be credited
to ratepayers in respect of issuances of rate reduction bonds that subsequently
were determined not to be necessary in order to financing a rate reduction,
should bear interest at Edison's authorized rate of return.
CONCLUSIONS OF LAW
1. Because the designation of the Fixed Transition Amounts and the
issuance of up to $3.0 billion of SPE Debt Securities and RRBs in connection
with such Fixed Transition Amounts will reduce rates that residential and small
commercial customers of Edison would have paid if this financing order were not
adopted, a financing order should be adopted, as required by PU Code Section
841(a).
2. The amount of SPE Debt Securities and RRBs to be issued should be
determined using the sizing methodology described in Edison's prepared testimony
based on market conditions at the time of RRBs are priced.
3. The Principal on the SPE Debt Securities and the RRBs should be
repaid in substantially equal annual amounts so that FTA charges will decline
over time.
4. Consistent with Edison's showing of ratepayer benefit, the expected
final maturity of the SPE Debt Securities and the RRBs should be no later than
ten years from
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the date of issuance with a legal final maturity to be determined by the
Infrastructure Bank.
5. The Infastructure Bank and/or STO should determine the
overcollateralization amount required.
6. The Infrastructure Bank and/or STO should determine bond counsel
fees, underwriter fees, underwriter counsel fees, bond trustees fees,
Infrastructure Bank fees, rating agency fees, SEC registration fees, printing
fees, and other expenses related to the sale of the RRBs pursuant to an
agreement to which the Infrastructure Bank or the STO is a party.
7. Costs of issuance for the first $2.6 billion aggregate principal
amount of RRBs should be limited to $21.5 million and for the next $400 million
aggregate principal amount, to 1%.
8. The methodology used to calculate the FTA charges associated with rate
reduction bond issuance should be as described in Edison's prepared testimony.
9. FTA charges should be filed with the Commission in advice letters (the
Issuance Advice Letters).
10. FTA charges should be included as a separate lien item on customers'
bills, if practicable.
11. The rate collection methods described in Edison's application to
ensure that the FTA charges are nonbypassable should be approved; provided,
however, that customers who were served on a rate schedule in Edison's GS-1 rate
group on or after January 1, 1998 (and who received a 10% rate reduction) who
voluntarily switch to service on a rate schedule which is not obligated for FTA
charges, should continue to pay the applicable FTA charge for GS-1 customers
until the payment obligations for the rate reduction bonds have been discharged.
12. Each Issuance Advice Letter associated with the financing order should
be effective five business days after filing, upon which it should be deemed to
constitute the plan approved by this financing order for purposes of PU Code
Section 841(c), and the FTA charges established thereby will constitute fixed
transition amounts.
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13. Procedures are required for the expeditious approval by the Commission
of periodic True-Up Mechanisms to the FTA charges (as may be necessary to ensure
timely recovery of (a) the principal amount of all transition costs that are
the subject of the financing order, and (b) the costs of capital associated with
the provision, recovery, financing, or refinancing thereof, including the costs
of issuing, servicing and retiring (including, without limitation, interest) the
SPE Debt Securities and RRBs contemplated by this financing order).
14. The methodology to calculate routine FTA charge adjustments should be
as described in Edison's prepared testimony.
15. Routine FTA charge adjustments should be filed with the Commission in
routine True-Up Mechanism advice letters.
16. Changes to FTA charges proposed by routine True-Up Mechanism advice
letters should be filed with the Commission annually at least 15 days before the
end of each calendar year, and the resulting adjustments to the FTA charges
should be implemented at the beginning of the calendar year next following the
date of such filing.
17. Routine True-Up Mechanism advice letters should be permitted to be
filed at least 15 days before the end of any calendar quarter and the resulting
adjustments to the FTA charges should be implemented at the beginning of the
calendar quarter next following the date of such filing. These quarterly
adjustments should be required when a variance from the scheduled principal
amortization schedule as set forth in the related Issuance Advice Letter
triggers a requirement for such a filing.
18. Because routine True-Up Mechanism advice letters to be filed in
accordance with the adjustment calculation methodology found reasonable in this
financing order are to use the pro forma FTA charge annual and quarterly True-Up
Mechanism advice letters attached to this financing order as Appendix A, no
protest to such advice letter filings should be allowed, and the resulting FTA
charge adjustments should be effective as requested in such filings.
19. The provisions described in Edison's application to ensure that the
FTA charges are nonbypassable should be approved.
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20. Upon the effective date of each Issuance Advice Letter associated
with this financing order, all of the transition property identified in such
advice letter will constitute a current property right and will thereafter
continuously exist as property for all purposes.
21. The transition property identified in an Issuance Advice Letter
associated with this financing order will, without limitation, include (1) the
right, title and interest in and to the FTA charges set forth in such advice
letter, as adjusted from time to time, (2) the right to be paid the total
amounts set forth in such advice letter, (3) the right, title and interest in
and to all revenues, collections, claims, payments, money, or proceeds of or
arising from such FTA charges, and (4) all rights to obtain adjustments to such
FTA charges under the True-Up Mechanisms.
22. The holders of the transition property will be entitled to
recover fixed transition amounts in the aggregate amount equal to the
principal amount of the SPE Debt Securities or the RRBs (as applicable), all
interest thereon, the overcollateralization amount and all related fees, costs
and expenses in respect of the scheduled payment of the SPE Debt Securities and
RRBs.
23. The Commission should approve the sale by Edison of the transition
property identified in an Issuance Advice Letter to one or more SPEs, as
identified in such advice letter.
24. Upon the sale by Edison of the transition property to one or more
SPEs, (1) each such SPE will have all of the rights originally held by Edison
with respect to such transition property, including, without limitation, the
right to exercise any and all rights and remedies to collect any amounts
payable by any customer in respect of such transition property, notwithstanding
any objection or direction to the contrary by Edison and (2) any payment by any
customer to such SPE will discharge such customer's obligations in respect of
such transition property to the extent of such payment, notwithstanding any
objection or direction to the contrary by Edison.
25. Upon the sale by Edison of the transition property to one or more
SPEs, Edison will not be entitled to recover the FTA charges associated with
such transition
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property other than for the benefit of the holders of the SPE Debt Securities
and the RRBs, in accordance with Edison's duties as servicer.
26. Each SPE identified in an Issuance Advice Letter, upon approval by the
Infastructure Bank, will constitute financing entities for all purposes of AB
1890.
27. The pledge by the SPE identified in an Issuance Advice Letter of such
SPE's right, title and interest in and to the transition property and such SPE's
other assets as security for the SPE Debt Securities should be approved.
28. Each Issuer, identified in an Issuance Advice Letter and approved by
the Infrastructure Bank, is approved to issue RRBs directly or indirectly
through the SPE on terms to be approved by the Infrastructure Bank. The
aggregate principal amount of RRBs related to all such Edison Issuance Advice
Letters associated with this financing order should not exceed $3.0 billion.
29. To the extent stated in an Issuance Advise Letter, the Commission
should approve the pledging by the Issuer, as security for the RRBs, of such
Issuer's right, title and interest in and to the SPE Debt Securities and all
security therefor.
30. Any default under the documents relating to the SPE Debt Securities or
the RRBs will entitle the holders of the SPE Debt Securities or RRBs or the
trustees or representatives for such holders to exercise any and all rights or
remedies such holders or such trustees or representatives therefore may have
pursuant to any statutory lien on the transition property.
31. In the event of default by Edison in payment to or for the benefit of
the SPE of the FTA charges, the Commission, upon application by (1) the holders
of the SPE Debt Securities or the RRBs and the trustees or representatives
therefor as beneficiaries of any statutory lien permitted by the PU Code, (2)
the SPE or its assignees, (3) the Issuer, or (4) pledgees or transferees,
including transferees under PU Code Section 844, of the transition property,
should order the sequestration and payment to or for the benefit of the SPE or
such other party of revenues arising with respect to the transition property.
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32. For purposes of eligibility to receive the rate reduction and
responsibility to pay for FTA charges, Edison's residential and small commercial
customers should be determined as described in Edison's prepared testimony.
33. The ratemaking mechanisms described in the application, including
the Rate Reduction Bond Memorandum Account, FTA charges tariff language, and
modifications to Edison's Preliminary Statement and Transition Cost Balancing
Account should be approved; provided, however, that balances that are to be
credited to ratepayers in respect of issuances of rate reduction bonds that
subsequently were determined not to be necessary in order to finance a 10% rate
reduction from the rates in effect as of June 10, 1996, should bear interest at
Edison's authorized rate of return.
34. Edison should not voluntarily resign as initial servicer without
the prior approval of the Commission.
ORDER
IT IS ORDERED that
1. The application of Southern California Edison Company (Edison) for
a financing order pursuant to Public Utilities (PU) Code Section 841(a) is
approved subject to the terms and conditions stated in the following ordering
paragraphs.
2. Edison may recover an aggregate total principal amount of three
billion dollars ($3.0 billion) in transition costs, as defined by PU Code
Section 840(f), which may be recovered through fixed transition amounts (FTA) as
defined by PU Code Section 840 (d), to the extent of the sum of the principal
amount of (i) related rate reduction bonds, as defined by PU Code Section
840(e),issued by a financing entity, as defined by (PU) Code Section 840(b) and
(ii) the transition property, as defined in PU Code Section 840(g), pledged as
overcollateralization for the issuance of such rate reduction bonds.
3. Edison may sell and assign all or portions of its interest in
transition property arising from or constituting the FTA that are the subject
of this financing order to one or more affiliates of Edison, of the character
described in the application as a Special Purpose Entity (SPE). Upon the sale by
Edison of the transition property to one or more SPEs, (1) such SPE shall have
all of the rights originally held by Edison with
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respect to such transition property, including, without limitation, the right to
exercise any and all rights and remedies to collect any amounts payable by any
customer in respect of such transition property, notwithstanding any objection
or direction to the contrary by Edison and (2) any payment by any customer to
such SPE shall discharge such customer's obligations in respect of such
transition property to the extent of such payment, notwithstanding any objection
or direction to the contrary by Edison. Upon the sale by Edison of the
transition property to one or more SPEs, Edison shall not be entitled to recover
the FTA charges associated with such transition property other than for the
benefit of the holders of the SPE debt securities and the related rate reduction
bonds in accordance with Edison's duties as servicer with respect to such rate
reduction bonds.
4. The initial FTA charges for such transition property shall be filed
with the Commission in advice letters substantially in the form attached to this
financing order as Appendix A as a pro forma Issuance Advice Letter, which shall
not be subject to protest, which shall be completed in accordance with the
methodology described by Edison in its application and supporting testimony,
which shall state that the net present value of benefits to ratepayers is a
positive number, and which shall be effective five business days after filing
with the Commission, whereupon each such Issuance Advice Letter shall be deemed
to constitute the plan approved by this Commission within the meaning of PU Code
Section 840(d).
5. Edison or an SPE may sell or assign all or portions of its interest in
such transition property to one or more financing entities.
6. Edison or an SPE may pledge all or portions of its interest in such
transition property to one or more financing entities, and an SPE may pledge any
other asset, to secure debt securities of the related SPE that are not
themselves rate reduction bonds but substantially mirror the financial terms and
conditions of the rate reduction bonds issued in connection with such pledge;
provided, that, subject to the approval of the California Infrastructure and
Economic Development Bank (Infrastructure Bank), in the case of rate reduction
bonds bearing a variable rate of interest, such debt securities may pay a fixed
rate of interest.
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7. One or more financing entities may pledge such transition property
as collateral for rate reduction bonds.
8. One or more financing entities may issue rate reduction bonds in
connection with such transition property upon the terms and conditions approved
by the Infrastructure Bank; provided, however, that the principal on rate
reduction bonds shall be repaid in substantially equal annual amounts and shall
have expected maturities of ten years or less from the date of issuance.
9. To the extent that any interest in such transition property is so
sold or assigned, or is so pledged as collateral, Edison is authorized to
continue to operate its system to provide service to its customers, and, as
servicer under the transition documents associated with the related rate
reduction bonds, collect amount in respect of the FTA for the benefit and
account of the financing entity, and account for and remit these amounts to or
for the account of the financing entity.
10. Edison and each successor servicer shall separately state FTA
charges for the purpose of each customer's bill if practicable. Otherwise, FTA
charges will be stated as required for other charges described in PU Code
Section 367(a)(1)-(6).
11. Edison and each successor servicer shall allocate amounts collected
from a customer pro rata between FTA and other charges.
12. In the event of failure of any customer to pay FTA charges, Edison
is authorized to shut-off power of such customer in accordance with Commission-
approved shut-off policies, at the direction of the related servicers.
13. Edison is authorized to implement the rate collection methods
described in the application to ensure that the FTA charges are nonbypassable.
14. Edison, or a successor servicer, on behalf of the related financing
entity is authorized to file routine, non-routine, and statutorily required FTA
charge adjustments (True-Up Mechanisms), which shall continue until the all
payments of principal and interest to which the holders of the related rate
reduction bonds are entitled have been paid in full. True-Up Mechanism advice
letter filings shall be in substantially the form attached to this Financing
Order as Appendix A and shall be
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completed in accordance with the methodology described in Edison's application
and supporting testimony.
15. A non-routine True-Up Mechanism advice letter may be filed at least 90
days before the end of any calendar quarter and the resulting adjustments to the
FTA charges shall be implemented at the beginning of the next calendar quarter.
Non-routine True-Up Mechanism advice letters are subject to confirmation by the
Commission's Energy Division. However, if the Energy Division believes
modifications to such Advice Letters are needed, unless such differences are
resolved between the Energy Division and Edison, or a successor servicer, or if
the Commission issues a resolution to resolve any dispute, Edison, or a
successor servicer, will be authorized to implement the FTA charge adjustments
it has proposed on the 90th day after the filing.
16. A True-Up Mechanism advice letter shall be filed at least 15 days
before each anniversary of the issuance of this financing order. The Commission
shall determine on the financing order issuance anniversary, as required by PU
Code Section 841(c), whether adjustments to the FTA charges are required, with
the resulting adjustments to the FTA charges, if necessary, to be implemented
within 90 days of the financing order issuance anniversary.
17. To the extent that rate reduction bonds have been issued, beginning
January 1, 1998, Edison shall reduce the rate to eligible residential and (as
defined in PU Code Section 331(h)) small commercial customers, from the rates
that were in effect on June 10, 1996 by providing a 10% bill credit. For such
purpose, eligible customers shall include all residential customers, commercial
customers in the Domestic and General Service (GS-1) rate groups.
18. In the event that Edison concludes that rate reduction bonds cannot be
issued on time to commence the rate reduction on January 1, 1998, Edison shall
submit a revised application pursuant to PU Code Section 368 for approval of a
cost recovery plan that provides for a 10% rate reduction for residential and
small commercial customers, as of January 1, 1998.
19. Edison is authorized to establish by advice letter filing, the Rate
Reduction Bond Memorandum Account, FTA charges tariff language, and
modifications to
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Edison's Preliminary Statement and Transition Cost Balancing Account as
described in the application; provided, that balances that are to be credited to
ratepayers in respect of issuances of rate reduction bonds that subsequently
were determined not to be necessary in order to finance a 10% rate reduction
from the rates in effect as of June 10, 1996, should bear interest at Edison's
authorized rate of return.
20. Edison shall not voluntarily resign as initial servicer without the
prior approval of the Commission.
21. This financing order shall become effective in accordance with its
terms and conditions only when Edison files with the Commission its written
consent to all terms and conditions of this financing order.
22. This financing order shall be void and of no force or effect if
Edison does not file its written consent to all terms and condition of this
financing order on or prior to November 3, 1997.
23. On or after the effective date of this financing order, upon
request of the Infrastructure Bank or the State Treasurer's Office (STO), or
both of them, the President of the Commission, a Commissioner assigned to this
application, the Executive Director of the Commission, his nominee in a notice
filed in this docket, or any of them, are hereby authorized and directed, for
and on behalf of and in the name of the Commission to execute and deliver a
certificate to the Infrastructure Bank or the STO or both of them, that attaches
a true, correct, and complete copy of this financing order and certifies such
copy to be the act and deed of this Commission, and the recipient of such
certificate may relay upon such certificate for all purposes in connection with
the issuance of any series of rate reduction bond authorized by this financing
order. Thereafter, upon request of the Infrastructure Bank or the STO, or both
of them, the President of the Commission, a Commissioner assigned to this
application, the Executive Director of the Commission, his nominee in a notice
filed in this docket, or any of them, are hereby authorized and directed, for
and on behalf of and in the name of the Commission to execute and deliver a
certificate to the Infrastructure Bank or the STO, or both of them, to certify
that this financing order has not been altered, rescinded,
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amended, modified, revoked, or supplemented as of the date of the closing of any
issuance of rate reduction bonds authorized by this financing order.
24. Application 97-05-018 is closed effective at the close of business
on November 3, 1997 or upon filing of Edison of its consent to the terms and
conditions of this financing order, whichever first occurs.
Dated September 3, 1997, at San Francisco, California.
P. GREGORY CONLON
President
JESSIE J. KNIGHT, JR.
HENRY M. DUQUE
JOSIAH L. NEEPER
RICHARD A. BILAS
Commissioners
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APPENDIX A
PRO FORMA
ISSUANCE
ADVICE LETTER
[date]
ADVICE______-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION
SUBJECT: Issuance Advice Filing for Rate Reduction Bonds
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-056
(Decision), Ordering Paragraph No. 4, Southern California Edison Company
(Edison) hereby transmits for filing, on the pricing date of this series of Rate
Reduction Bonds, the initial FTA charges for the series. This Issuance Advice
Filing is for the Rate Reduction Bonds series ________ class(es)_________.
PURPOSE
- -------
This filing establishes initial FTA charges for rate schedules for residential
and eligible small commercial customers. This filing also establishes the
Transition Property to be sold to the Transition Property Owner (SPE).
BACKGROUND
- ----------
In Decision No. 97-09-056, the Commission authorized Edison to file Issuance
Advice Letters when pricing terms for Rate Reduction Bonds have been
established. Issuance Advice Letter filings are those in which Edison uses the
bond sizing methodology and FTA charge formulas found reasonable by the
Commission in Decision No. 97-09-056 to establish initial FTA charges for a
series of Rate Reduction Bonds. Using the methodology approved by the
Commission in Decision No. 97-09-056, this filing establishes FTA charges.
Because this series of Rate Reduction Bonds is being issued prior to January 1,
1998, to preserve the rate freeze mandated by AB 1890, concurrent with the
implementation of the FTA charges, the Energy Cost Adjustment Clause rate
component will be reduced by an amount equal to the FTA charges so that total
rates remain frozen.
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ISSUANCE INFORMATION
- --------------------
Rate Reduction Bond Name:_________
Rate Reduction Bond Issuer:_________
Transition Property Owner (SPE):_________
Trustee(s):_________
Closing Date:_________
Bond Rating:________
Amount Issued:_________
Issuance Costs:_________
Issuance Costs Approved by Infrastructure Bank or STO:_________
Issuance Costs as a Percent of Amount Issued:_________
Cumulative Aggregate Cumulative Issuance Costs for all Series:_________
Transition Costs Financed:_________
Coupon Rate(s):_________
Call Features:_________
California Tax Exempt (yes/no):_________
Expected Principal Amortization Schedule: See Attachment 1
Expected Final Maturity:_________
Legal Final Maturity:_________
Distributions to Investors (monthly or quarterly):_________
Annual Servicing Fee as a percent of the issuance amount:_________
Overcollateralization amount for the series:_________
Pledges by Issuer of SPE Debt Securities and all security therefor:______
Quarterly Variance Trigger Mechanism
- ------------------------------------
Each quarter the servicer will compare the actual FTA outstanding balance with
the expected FTA outstanding balance as set forth in Attachment 2. If the
variance is greater than_______%, a change to the FTA charges will be requested
via a True-Up Mechanism Advice Letter in accordance with Decision No. 97-09-056.
Confirmation of Ratepayer Benefits
- ----------------------------------
Decision No. 97-09-056 requires Edison to demonstrate, using the bond sizing
model found reasonable in that Decision, that the actual pricing terms of the
Rate Reduction Bonds result in net present value benefits. Attached to this
Advice Filing is a spreadsheet calculation which shows expected net present
value benefits of $___million for this series of Rate Reduction Bonds.
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FTA Charges
___________
Table I below shows the current assumptions for each of the variables used in
the FTA charges calculation.
TABLE I
INPUT VALUES FOR FTA CHARGES
Monthly residential kWh sales
Monthly eligible small commercial kWh sales
Percent of revenue requirement allocated to residential customers
Percent of revenue requirement allocated to eligible small commercial
customers
Percent of residential customers' revenue written off
Percent of eligible small commercial customers' revenue written off
Percent of residential customers' billed amounts expected to be uncollected
Percent of small commercial customers' billed amounts expected to be uncollected
Percent of billed amounts collected in current month
Percent of billed amounts collected in second month after billing
Percent of billed amounts collected in third month after billing
Percent of billed amounts collected in fourth month after billing
Percent of billed amounts collected in fifth month after billing
Percent of billed amounts collected in sixth month after billing
Monthly ongoing transaction expenses
Expected FTA outstanding balance as of ___/___/___
Table II shows the initial FTA charges calculated for residential and eligible
small commercial customers. The FTA calculations are shown in Attachment 3.
<TABLE>
<CAPTION>
TABLE II
<S> <C>
Residential Customer FTA Charge c/kWh
Eligible Small Commercial Customer
FTA Charge c/kWh
</TABLE>
-3-
<PAGE>
Attached are proposed changes to Part I of Edison Preliminary Statement to show
FTA charges to be effective__________ [year].
Transition Property
- -------------------
Transition property is the property described in Public Utilities Code (S)840(g)
relating to the FTA charges set forth herein, including, without limitation, all
of the following:
(1) The right, title and interest in and to the FTA charges set forth herein,
as adjusted from time to time.
(2) The right to be paid the total amounts shown on Attachment 2.
(3) The right, title and interest in and to all revenues, collections, claims,
payments, money, or proceeds of or arising from the FTA charges, set forth
herein.
(4) All rights to obtain adjustments to the FTA charges under the True-Up
Mechanism.
These FTA charges, as adjusted from time to time, shall remain in place until
the total amounts in Attachment 2 are paid in full to the owner of the
transition property, or its assignee(s).
EFFECTIVE DATE
- --------------
In accordance with Decision No. 97-09-056, these FTA charges shall be effective
five business days after filed and will continue to be effective, unless they
are changed by subsequent FTA Charge Issuance Advice Letter, or an FTA Charge
True-Up Mechanism Advice Letter.
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A. 97-05-018. In accordance with Public Utilities Code
(S)491, notice to the public is hereby given by filing and keeping this filing
open for public inspection at the Company's corporate headquarters.
Enclosures
cc: CPUC, SF-Attn: Paul Clanon, Energy Division
CPUC, SF-Attn: Elena Schmid, ORA
CPUC, SF-Attn: Juanita Porter, Energy Division
-4-
<PAGE>
ATTACHMENT I
EXPECTED PRINCIPAL AMOUNT AMORTIZATION
SERIES_______, CLASS_______
-1-
<PAGE>
ATTACHMENT 2
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $_____principal amount, plus
interest on such the principal amount, plus a $___ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D. 97-09-056.
The FTA charges shall be adjusted from time to time, at least annually,
via the FTA Charge True-Up Mechanism in accordance with D. 97-09-056.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Payment Date Receipt Amount Payment Amount Outstanding Principal
- ------------ -------------- -------------- ---------------------
[date 1] [$receipt 1] [$payment 1] [$outstanding principal 1]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal n]
[$0]
</TABLE>
-1-
<PAGE>
APPENDIX A
PRO FORMA
ROUTINE ANNUAL FTA CHARGE TRUE-UP MECHANISM
ADVICE LETTER
[DRAFT PRO FORMA ANNUAL FTA CHARGE ADJUSTMENT ADVICE FILING]
[date]
ADVICE________-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION
SUBJECT: Annual FTA Charge True-Up Mechanism Advice Filing
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-056
(Decision), Ordering Paragraph No. 14, Southern California Edison Company
(Edison) as servicer of the Rate Reduction Bonds and on behalf of [the Note
Trustee as assignee of] [Special Purpose Entity] is required to apply for
adjustment to FTA charges at least 15 days before the end of each calendar year.
PURPOSE
- -------
This filing establishes revised FTA charges for rate schedules for residential
and eligible small commercial customers. During the rate-freeze period, changes
in the FTA charges will be offset by equal and offsetting changes in the
residual Competition Transition Charge (CTC) component of customers' rates.
-1-
<PAGE>
BACKGROUND
- ----------
In Decision No. 97-09-056, the Commission authorized Edison to file routine
True-Up Mechanism Advice Letters on an annual basis, at least 15 days before the
end of the calendar year. Routine Advice Letter filings are those where Edison
uses the methodology found reasonable by the Commission in Decision No.
97-09-056 to revise existing FTA charges.
Using the methodology approved by the Commission in Decision No. 97-09-056, this
filing modifies the variables used in the FTA charge calculation and provides
the resulting modified FTA charges. Table I shows the revised assumptions for
each of the variables used in calculating the FTA charges for residential and
small commercial customers. The assumptions underlying the current FTA charges
were filed in Advice ________-E, an Issuance Advice Letter, as authorized by
Decision No. 97-09-056.
Attachment 1 shows the revised payment schedule.
TABLE 1
INPUT VALUES FOR REVISED FTA CHARGES
Monthly residential kWh sales
Monthly eligible small commercial kWh sales
Percent of revenue requirement allocated to residential customers
Percent of revenue requirement allocated to eligible commercial customers
Percent of residential customers' revenue written off
Percent of eligible small commercial customers' revenue written off
Percent of residential customers' billed amounts expected to be uncollected
Percent eligible small commercial customers' billed amounts expected to be
uncollected
Percent of billed amounts collected in current month
Percent of billed amounts collected in second month after billing
Percent of billed amounts collected in third month after billing
Percent of billed amounts collected in fourth month after billing
Percent of billed amounts collected in fifth month after billing
Percent of billed amounts collected in sixth month after billing
Percent of billed amounts remaining less uncollectibles
Monthly ongoing transaction expenses
Expected FTA outstanding balance as of ___/___/___
Over-or undercollection of principal to be reflected in the new FTA charges
Table II shows the revised FTA charges calculated for residential and eligible
small commercial customers. The FTA calculations are shown in Attachment 2.
-2-
<PAGE>
<TABLE>
<CAPTION>
TABLE II
<S> <C>
Residential Customer FTA Charge c/kWh
Eligible Small Commercial Customer
FTA Charge c/kWh
</TABLE>
Attached are proposed changes to Part I of Edison's Preliminary Statement to
show FTA changes to be effective January 1, [year].
EFFECTIVE DATE
- --------------
In accordance with Decision 97-09-056, routine True-Up Mechanism Advice Letters
for required annual FTA charge adjustments shall be filed at least 15 days
before the end of each calendar year and these adjustments to FTA charges shall
be effective at the beginning of the next calendar year. No Commission
resolution is required. Therefore, these FTA charges shall be effective January
1, [year] through December 31, [year], unless they are changed by a quarterly
adjustment prior to December 31, [year].
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A.97-05-018. In accordance with Public Utilities Code
(S)491, notice to the public is hereby given by filing and keeping this filing
open for public inspection at the Edison's corporate headquarters.
Enclosures
cc: CPUC, SF-Attn: Paul Clanon, Energy Division
CPUC, SF-Attn: Elena Schmid, ORA
CPUC, SF-Attn: Juanita Porter, Energy Division
-3-
<PAGE>
A97-05-018 COM/PGC/HMD/wav *
ATTACHMENT 1
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $______ principal amount, plus
interest on such principal amount, plus a $______ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D.97-09-056.
The FTA charges shall be adjusted from time to time, at least annually, via
the FTA Charge True-Up Mechanism in accordance with D.97-09-056.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
Payment Date Receipt Amount Payment Amount Outstanding Principal
- ------------ -------------- -------------- ---------------------
<S> <C> <C> <C>
[date 1] [$receipt 1] [$payment 1] [$outstanding principal]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal]
[$0]
</TABLE>
-1-
<PAGE>
APPENDIX A
PRO FORMA
ROUTINE QUARTERLY FTA CHARGE TRUE-UP MECHANISM
ADVICE LETTER
[DRAFT PRO FORMA QUARTERLY FTA CHARGE ADJUSTMENT ADVICE LETTER]
-------, [year]
ADVICE_______-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION
SUBJECT: Quarterly FTA Charge True-Up Mechanism Advice Filing
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-056
(Decision), Ordering Paragraph No. 14, Southern California Edison Company
(Edison) as servicer of the Rate Reduction Bonds and on behalf of [the Note
Trustee as assignee of] [Special Purpose Entity] is required to apply for FTA
charges at least 15 days before the end of each quarter, if in the previous
quarter the variance between the expected outstanding FTA principal balance and
the actual outstanding principal balance exceeds certain limits.
Attachment 1, Edison's Quarterly Servicer Certificate for the ______ quarter of
19__ shows that the variance between the expected FTA outstanding balance and
the actual FTA outstanding balance exceeds the limit of ____%. Therefore, in
accordance with Ordering Paragraph No. 14, Edison, as servicer of the Rate
Reduction Bonds, hereby transmits for filing this Advice Letter to revise the
FTA charges.
PURPOSE
- -------
This filing establishes revised FTA charges for rate schedules for residential
and eligible small commercial customers. During the rate-freeze period, changes
in the FTA charges will be offset by equal and offsetting changes in the
residual Competition Transition Charge (CTC) component of customers' rates.
-1-
<PAGE>
A.97-05-018 COM/PGC/HMD/wav *
BACKGROUND
- ----------
In Decision No. 97-09-056, the Commission authorized Edison to file routine
True-Up Mechanism Advice Letters on a quarterly basis, at least 15 days before
the end of the calendar quarter. Routine Advice Letter filings are those where
Edison uses the methodology found reasonable by the Commission in Decision No.
97-09-056 to revise existing FTA charges.
Using the methodology approved by the Commission in Decision No. 97-09-056, this
filing modifies the variables used in the FTA charge calculation and provides
the resulting modified FTA charges. Table I shows the revised assumptions for
each of the variables used in calculating the FTA charges for residential and
small commercial customers. The assumptions underlying the current FTA charges
were filed in Advice ____-E, an Issuance Advice Letter, as authorized by
Decision No. 97-09-056 Attachment 2 shows the revised payment schedule.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE I
INPUT VALUES FOR REVISED FTA CHARGES
- --------------------------------------------------------------------------------
<S> <C>
Monthly residential kWh sales
- --------------------------------------------------------------------------------
Monthly eligible small commercial kWh sales
- --------------------------------------------------------------------------------
Percent of revenue requirement allocated to residential customers
- --------------------------------------------------------------------------------
Percent of revenue requirement allocated to eligible small commercial
customers
- --------------------------------------------------------------------------------
Percent of residential customers' revenue written off
- --------------------------------------------------------------------------------
Percent of eligible small commercial customers' revenue written off
- --------------------------------------------------------------------------------
Percent of residential customers' billed amounts expected to be uncollected
- --------------------------------------------------------------------------------
Percent of eligible small commercial customers' billed amounts expected to be
uncollected
- --------------------------------------------------------------------------------
Percent of billed amounts collected in current month
- --------------------------------------------------------------------------------
Percent of billed amounts collected in second month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in third month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in fourth month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in fifth month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in sixth month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts remaining less uncollectibles
- --------------------------------------------------------------------------------
Monthly ongoing transaction expenses
- --------------------------------------------------------------------------------
Expected FTA outstanding balance as of __/__/__
- --------------------------------------------------------------------------------
Over- or undercollection of principal to be reflected in the new FTA charges
- --------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
Table II shows the FTA charges calculated for residential and eligible small
commercial customers. The FTA calculations are shown in Attachment 3.
<TABLE>
<CAPTION>
TABLE II
<S> <C>
Residential Customer FTA Charge c/kWh
Eligible Small Commercial FTA
Charge c/kWh
</TABLE>
Attached are proposed changes to Part I of Edison's Preliminary Statement to
show FTA charges to be effective____1, [year]__.
EFFECTIVE DATE
- --------------
In accordance with Decision No. 97-09-056, routine True-Up Mechanism Advice
Letters for quarterly FTA charge adjustments shall be filed at least 15 days
before the end of a calendar quarter and these adjustments to FTA charges shall
be effective at the beginning of the next calendar quarter. No Commission
resolution is required. Therefore, these FTA charges shall be effective ___1,
[year]__ through December 31, [year]__, unless they are changed by a quarterly
adjustment prior to December 31, [year]__.
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A. 97-05-018. In accordance with Public Utilities Code
(S)491, notice to the public is hereby given by filing and keeping this Advice
Filing open for public inspection at the Company's corporate headquarters.
Enclosures
cc: CPUC, SF - Attn: Paul Clanon, Energy Division
CPUC, SF - Attn: Elena Schmid, ORA
CPUC, SF - Attn: Juanita Porter, Energy Division
-3-
<PAGE>
ATTACHMENT 1
EDISON'S QUARTERLY SERVICER CERTIFICATE
-1-
<PAGE>
A.97-05-018 COM/PGC/HMD/wav *
ATTACHMENT 2
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $____ principal amount, plus
interest on such principal amount, plus a $____ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D.97-09-056.
The FTA charges shall be adjusted from time to time, at least annually, via
the FTA Charge True-Up Mechanism in accordance with D.97-09-056.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
Payment Date Receipt Amount Payment Amount Outstanding Principal
- ------------ -------------- -------------- ---------------------
<S> <C> <C> <C>
[date 1] [$receipt 1] [$payment 1] [$outstanding principal]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal]
[$0]
</TABLE>
-1-
