Position of the Parties

A. DWR

According to DWR's October 8, 2002 memorandum, DWR distributed the proposed modifications to SCE's servicing arrangements on October 3 and 4, 2002. As of October 8, 2002, DWR was unable to ascertain whether the proposed modifications were acceptable to SCE.

DWR has proposed modifying the Amended Servicing Agreement by making certain changes to the accounting and reporting procedures. According to DWR, these changes are found in Attachments C and J of the Servicing Order, and parallel accounting and reporting provisions are contained in Exhibits C and F of the Operating Order. DWR states that these accounting and reporting procedures are consistent with the policy set forth in the Contract Allocation Decision.

In its October 23, 2002 memorandum, DWR noted that, consistent with AB X1 and the Contract Allocation Decision, it is still subject to continuing obligations with respect to the DWR contracts. In particular, these obligations include:

· Servicing the bonds as issuer;

· Managing legal and financial obligations under its long-term contracts;

· Ensuring the integrity of its revenues; and

· Fulfilling its substantial reporting obligations associated with the above.

DWR states that it is working to ensure that there is an efficient and timely transition to the utilities of the operational functions of the DWR contracts, while ensuring that DWR is able to fulfill its continuing obligations. To accomplish this goal:

"DWR believes that certain principles and arrangements must be established regarding utilities' performance of certain functions under the allocated DWR long-term contracts on behalf of DWR. The operating agreement is a compilation of such principles and arrangements that DWR believes are necessary to achieve these goals.

...

"In preparing the operating agreement, DWR's objective has been to minimize DWR's involvement in the utilities' operation of the integrated portfolio, consisting of utility and allocated DWR contract resources, and to allow the utilities to make substantially all the operating decisions. The operating agreement is intended to provide appropriate mechanisms that allow the utilities to optimize the use of the integrated portfolio of resources on a service territory basis.... After the operational transition, DWR will continue to be legally and financially responsible for the direct costs under the allocated DWR long-term contracts, including gas-related costs. As a result, DWR needs to receive timely reporting of data outlined in Exhibit F of the operating agreement.

"To implement checks and balances while operating the integrated portfolio, DWR has proposed certain accounting and revenue sharing principles in Exhibit C of the operating agreement. DWR believes that the proposed accounting and revenue sharing principles provide greater certainty of revenues and cash flows to the utilities and DWR and, accordingly, aid the utilities in their quest for creditworthy status. Finally, DWR believes that the pro rata revenue-sharing methodology articulated in the Contract Allocation Decision and further reflected in DWR's accounting and revenue sharing principles results in an equitable sharing of risk and reward. The information and data being requested under Exhibit F of the operating agreement are to facilitate DWR's verification of the utilities' remittances to DWR and costs incurred under the allocated contracts rather than to conduct an operational review of the utilities decisions.

"At this time, DWR does not believe that there is a consensus on the accounting and revenue sharing principles proposed by DWR. ... The resolution of the issues related to the accounting and revenue sharing principles will require a significant shift from the existing remittance policy and DWR believes that such a policy implementation can only be achieved with the Commission's support and active involvement." (DWR October 23, 2002 Memorandum, pp. 1-2.)

B. SCE

A review of SCE's comments to the proposed modifications to the Amended Servicing Agreement and related attachments disclose seven different concerns, which fall into the following categories:

· Although DWR and the utilities have engaged in numerous negotiations, they have been unable to reach a consensus on the scope or the specific language of the proposed modifications.

· The proposed modifications to the Amended Servicing Agreement are duplicative of some of the provisions in the proposed Operating Agreement. SCE believes that the provisions relating to the mutual financial obligations of SCE and DWR should remain in the servicing agreement, and that the Operating Agreement should be limited to defining the nature of SCE's use of the generating assets allocated to it, and the mutual duties and obligations of the parties arising from that use.

· SCE is concerned that a broad agency relationship may be created, instead of an agency relationship which is specifically limited in its duties and obligations. The broadening of the relationship could be interpreted to allow DWR to micromanage SCE's use of the generation resources, or to direct the appearance of SCE's customer bills.

· SCE is concerned that the proposed modifications to the Amended Servicing Agreement and attachments is that DWR is given a priority to the revenues in preference to SCE resources.

· SCE believes that a mechanism should be established to allow each utility to allocate and track costs on a monthly basis as a result of the DWR contracts that have been allocated to each utility. A triggering mechanism should also apply in the event an adjustment to the forecasted revenue requirement is needed because of an over or under forecast. Once such mechanisms are developed, they should be reflected in the servicing agreement.

· SCE does not believe that it should be required to post collateral or collateral-like instruments in connection with its administration of the DWR contracts.

· SCE should not be exposed to, or assume any additional risk, with respect to the DWR contracts. That is, from a risk and liability standpoint, SCE should not be in any worse position than DWR was prior to the adoption of the Servicing Order.

As part of SCE's comments and reply comments, SCE appended its proposed modifications to the Amended Servicing Agreement and attachments.