8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date earliest event reported) August 18, 2010

Commission File Number	Registrant, State of Incorporation, Address of Principal Executive Offices, Telephone Number, and IRS Employer Identification No.	Commission File Number	Registrant, State of Incorporation, Address of Principal Executive Offices, Telephone Number, and IRS Employer Identification No.
333-168010	ENTERGY ARKANSAS, INC. (an Arkansas corporation) 425 West Capitol Avenue Little Rock, Arkansas 72201 Telephone (501) 377-4372 71-0005900	333-168010-01	ENTERGY ARKANSAS RESTORATION FUNDING, LLC (a Delaware limited liability company) 425 West Capitol Avenue, 27th Floor Little Rock, Arkansas 72201 (501) 377-5886 27-2875268

________________________________________________________________________

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 9.01. Financial Statements and Exhibits

(d) Exhibits.

Exhibit No.	Description
5.1	Opinion of Sidley Austin LLP with respect to legality.
8.1	Opinion of Sidley Austin LLP with respect to federal tax matters.
23.1	Consent of Sidley Austin LLP (included in its opinions filed as Exhibits 5.1, 8.1 and 99.6).
23.2	Consent of Williams & Anderson PLC (included in its opinion filed as Exhibit 99.7).
99.6	Opinion of Sidley Austin LLP with respect to federal constitutional matters.
99.7	Opinion of Williams & Anderson PLC, with respect to Arkansas constitutional matters.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

                                                                             ENTERGY ARKANSAS, INC.

By:  /s/ Theodore H. Bunting, Jr.

Name: Theodore H. Bunting, Jr.

Title:  Senior Vice President and

Chief Accounting Officer

Date: August 18, 2010

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

ENTERGY ARKANSAS RESTORATION FUNDING, LLC

By:  /s/ Theodore H. Bunting, Jr.

      Theodore H. Bunting, Jr.

      Chief Accounting Officer

Date: August 18, 2010

INDEX TO EXHIBITS

Exhibit No.	Description
5.1	Opinion of Sidley Austin LLP with respect to legality
8.1	Opinion of Sidley Austin LLP with respect to federal tax matters
23.1	Consent of Sidley Austin LLP (included in its opinions filed as Exhibits 5.1, 8.1 and 99.6).
23.2	Consent of Williams & Anderson PLC (included in its opinion filed as Exhibit 99.7).
99.6	Opinion of Sidley Austin LLP with respect to federal constitutional matters.
99.7	Opinion of Williams & Anderson PLC, with respect to Arkansas constitutional matters.

EX-5

SIDLEY AUSTIN LLP 787 SEVENTH AVENUE NEW YORK, NY  10019 (212) 839 5300 (212) 839 5599 FAX	BEIJING BRUSSELS CHICAGO DALLAS [Missing Graphic Reference] FRANKFURT GENEVA HONG KONG LONDON	LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.
	FOUNDED 1866

August 18, 2010

Exhibit 5.1

Entergy Arkansas, Inc.

425 West Capitol Avenue

Little Rock, Arkansas 77201

Entergy Arkansas Restoration Funding, LLC

425 West Capitol Avenue, 27th Floor

Little Rock, Arkansas 77201

Re: Entergy Arkansas Restoration Funding, LLC

Ladies and Gentlemen:

We have acted as special counsel to Entergy Arkansas Restoration Funding, LLC, a Delaware limited liability company (the “Company”), in connection with the preparation of the Registration Statement filed on Form S-3  (Registration No. 333-168010) filed on July 7, 2010 and as amended by Amendment No. 1 filed on August 4, 2010 (collectively, the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), relating to the registration of storm recovery bonds (the “Storm Recovery Bonds”) of the Company to be offered in such manner as described in the form of the prospectus (the “Prospectus”) included as part of the Registration Statement.  The Storm Recove ry Bonds are to be issued in an aggregate amount of $124,100,000 under an Indenture (the “Indenture”) dated August 18, 2010 between the Company and The Bank of New York Mellon, a New York banking corporation, as indenture trustee (the “Indenture Trustee”).

We are familiar with the proceedings taken and proposed to be taken by the Company in connection with the proposed authorization, issuance and sale of the Storm Recovery Bonds.  We have examined and relied upon originals, or copies of originals, certified or otherwise identified to our satisfaction of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and other instruments, and examined such questions of law and satisfied ourselves to such matters of fact as we deemed relevant or necessary as a basis for this letter.  In rendering the opinions expressed in this letter, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original documents of any copies thereof submitted to us for examination.  As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company or others.

Based upon the foregoing, we are of the opinion that:

1.           The Company is a limited liability company validly existing and in good standing under the laws of the State of Delaware.

2.           The Company has limited liability company power and authority to execute and deliver the Indenture and to authorize and issue the Storm Recovery Bonds and to perform its obligations under the Indenture and the Storm Recovery Bonds.

3.           The Storm Recovery Bonds will be legally issued and binding obligations of the Company, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar laws affecting creditors’ and contracting parties rights generally or general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) when such Storm Recovery Bonds shall have been duly executed and authenticated as provided in the Indenture and shall have been duly delivered to the purchasers thereof against payment of the agreed consideration therefor.

For the purposes of this letter, we have assumed that there will be no changes in the laws currently applicable to the Company and the validity, legally binding character or enforceability of the Storm Recovery Bonds, and that such laws will be the only laws applicable to the Company and the Storm Recovery Bonds.

This letter is limited to the Limited Liability Company Act of the State of Delaware, the laws of the State of New York and the federal laws of the United States of America. We do not find it necessary for the purposes of this letter to cover, and accordingly we express no opinion as to, the application of the securities or blue sky laws of the various states to sales of the Storm Recovery Bonds.

We hereby consent to the filing of this letter as an exhibit  to the report on Form 8-K filed on August 18, 2010 with respect  to the above-referenced Registration Statement and to all references to our firm included in or made a part of the Registration Statement. In giving the foregoing consents, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the related rules and regulations of the Commission.  Except as stated above, without our prior written consent, this letter may not be furnished or quoted to, or relied upon by, any other person for any purpose.

Very truly yours,

    /s/ Sidley Austin LLP

Sidley Austin LLP is a limited liability partnership practicing in affiliation with other Sidley Austin partnerships

EX-8

SIDLEY AUSTIN LLP 787 SEVENTH AVENUE NEW YORK, NY  10019 (212) 839 5300 (212) 839 5599 FAX	BEIJING BRUSSELS CHICAGO DALLAS [Missing Graphic Reference] FRANKFURT GENEVA HONG KONG LONDON	LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.
	FOUNDED 1866

August 18, 2010

Exhibit 8.1

Entergy Arkansas, Inc.

425 West Capitol Avenue

Little Rock, Arkansas  72201

Entergy Arkansas Restoration Funding, LLC

425 West Capitol Avenue

27th Floor

Little Rock, Arkansas 72201

Re: Entergy Arkansas Restoration Funding, LLC

Ladies and Gentlemen:

We have acted as special counsel to Entergy Arkansas, Inc., an Arkansas corporation (“EAI”) and Entergy Arkansas Restoration Funding, LLC, a Delaware limited liability company (the “Company”), in connection with the preparation of the Registration Statement filed on Form S-3 and as amended by Amendment No. 1 thereto (collectively, the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), relating to the proposed issuance of up to $124,100,000 of storm recovery bonds (the “Storm Recovery Bonds”) of the Company to be offered in such manner as described in the form of prospectus (the “Prospectus”) and the form of prospectus supplement (the “Prospectu s Supplement”) included as part of the Registration Statement.  The Storm Recovery Bonds are to be issued under an Indenture (the “Indenture”) between the Company and The Bank of New York Mellon, a New York banking corporation, as indenture trustee (the “Indenture Trustee”).

We are familiar with the proceedings taken and proposed to be taken by the Company in connection with the proposed authorization, issuance and sale of the Storm Recovery Bonds.  We have examined and relied upon originals, or copies of originals, certified or otherwise identified to our satisfaction of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and other instruments, and examined such questions of law and satisfied ourselves to such matters of fact as we deemed relevant or necessary as a basis for this letter.  In rendering the opinions expressed in this letter, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original documents of any copies thereof submitted to us for examination.  As to any facts material to the opinions expressed herein that we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company or others.

Based upon the foregoing, it is our opinion that for U.S. federal income tax purposes, (1) the Company will not be treated as a taxable entity separate and apart from EAI and (2) the Storm Recovery Bonds will be treated as debt of EAI.

Our opinion is limited to the United States federal income tax matters specifically covered hereby, and we have neither been asked to address, nor have we addressed, any other tax consequences regarding the transaction referred to above or any other transaction. This opinion is based on the current provisions of the Internal Revenue Code and the Treasury Regulations issued or proposed thereunder, revenue rulings, revenue procedures and other published releases of the Internal Revenue Service and current case law, any of which can change at any time.  Any change could apply retroactively and modify the legal conclusions upon which our opinions are based.  This opinion is rendered as of the date hereof and we do not undertake, and hereby disclaim, any obligation to advise you of any changes in law or fact, whether or no t material, that may be brought to our attention at a later date.

We are furnishing this opinion to you solely in connection with the issuance of the Storm Recovery Bonds described above, and this opinion is not to be relied on, circulated, quoted or otherwise referred to for any other purpose. However, we hereby consent to the filing of this opinion as an exhibit to the report on Form 8-K filed on August 18, 2010 with respect to the above-referenced Registration Statement and to the references to this Firm in the Prospectus under the section captioned “Prospectus Summary – U.S. Federal Income Tax Status,” the Prospectus under the section captioned “Material U.S. Federal Income Tax Consequences,” the Prospectus under the section captioned “Legal Matters,” and the Prospectus Supplement under the section captioned “Material U.S. Federal Income Tax Consequen ces.” In giving such consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act, or the rules and regulations of the Commission thereunder.

Very truly yours,

/s/ Sidley Austin LLP

Sidley Austin LLP is a limited liability partnership practicing in affiliation with other Sidley Austin partnerships

EX-99.1

SIDLEY AUSTIN LLP 787 SEVENTH AVENUE NEW YORK, NY  10019 (212) 839 5300 (212) 839 5599 FAX	BEIJING BRUSSELS CHICAGO DALLAS [Missing Graphic Reference] FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES	NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.
	FOUNDED 1866

Exhibit 99.6 Opinion

August 18, 2010

To Each of the Persons Listed

on Schedule A Attached Hereto

Re: Entergy Arkansas Restoration Funding, LLC Senior Secured Storm Recovery Bonds - Federal Constitution Issues

Ladies and Gentlemen:

We have served as special counsel to Entergy Arkansas, Inc., an Arkansas corporation (“EAI”), in connection with the issuance and sale on the date hereof by Entergy Arkansas Restoration Funding, LLC, a Delaware limited liability company (the “Issuer”), of $124,100,000 aggregate principal amount of the Issuer’s Senior Secured Storm Recovery Bonds (the “Bonds”), which are more fully described in the Prospectus Supplement dated August 11, 2010.  The Bonds are being sold pursuant to the provisions of the Underwriting Agreement dated August 11, 2010 (the “Underwriting Agreement”) among EAI, the Issuer and the underwriter named in Schedule II to such Underwriting Agreement.  The Bonds are being issued pursuant to the provisions of the Indenture dated as of August 18, 2010 (the “Indenture”), as supplemented by the Series Supplement dated as of August 18, 2010 (together with the Indenture, the “Indenture”), between the Issuer and The Bank of New York Mellon, a New York banking corporation, as indenture trustee (the “Indenture Trustee”).  Under the Indenture, the Indenture Trustee holds, among other things, storm recovery property as described below (the “Storm Recovery Property”) as collateral security for the payment of the Bonds.  This opinion is being deliv ered pursuant to Section 9(m) of the Underwriting Agreement.

“Storm Recovery Property” is defined in the applicable provisions of Title 23, Chapter 18, Subchapter 9 of the Arkansas Code (the “Act”)1  The Storm Recovery Property was created in favor of EAI, pursuant to a financing order issued by the Arkansas Public Service Commission (the “APSC”) on June 16, 2010, in Docket No. 10-008-U (the “Order”) and simultaneously with the sale of such property and the issuance of the Bonds; and the Storm Recovery Property was sold and assigned to the Issuer pursuant to the provisions of the Storm Recovery Property Purchase and Sale Agreement dated as of August 18, 2010 between EAI and the Issuer in consideration for the payment by the Issuer to EAI of the proceeds of the sale of the Bonds, net of certain issuance costs.  The Storm Recovery Property includes the right to impose and receive certain “non-bypassable” charges described in the Order (the “Charges”).  The Charges constitute “storm recovery charges” as defined in the Securitization Law and may be periodically adjusted, in the manner authorized in the Order, in order to enhance the probability that the revenues received by the Issuer from the Charges are sufficient to (i) amortize the Bonds pursuant to the amortization schedule to be followed in accordance with the provisions of the Bonds and the Indenture, (ii) pay interest thereon and related fees and expenses and (iii) maintain the required reserves for the payment of the Bonds.

The Order was issued in response to an application for its issuance that was filed by EAI with the APSC pursuant to the provisions of the Act.  The Order will become irrevocable as of the date hereof.

Questions Presented and Opinions

Legislative Repeal, Amendment or Revocation

You have requested our opinion as to:

(a)           whether the State Pledge creates a contractual relationship between the State of Arkansas (the “State”) and the holders of the Bonds (the “Bondholders”);

(b)           whether the Bondholders could challenge successfully under the “contract clause” of the United States Constitution (Article I, Section 10 (the “Federal Contract Clause”)) the constitutionality of any legislation passed by the Arkansas legislature (the “Legislature”) which becomes law, or any legislation approved by the voters of the State in exercising their powers of initiative2, or any action of the APSC exercising legislative powers (“Legislative Ac tion”) that in either case limits, alters, impairs or reduces the value of the Storm Recovery Property or the Charges so as to impair (i) the terms of the Indenture or the Bonds or (ii) the rights and remedies of the Bondholders (or the Indenture Trustee acting on their behalf) (any impairment described in clause (i) or (ii) being referred to herein as an “Impairment”) prior to the time that the Bonds are fully paid and discharged;3

(c)           whether preliminary injunctive relief would be available under federal law to delay implementation of Legislative Action that limits, alters, impairs or reduces the value of the Storm Recovery Property or the Charges so as to cause an Impairment pending final adjudication of a claim challenging such Legislative Action under the Federal Contract Clause and, assuming a favorable final adjudication of such claim, whether relief would be available to prevent permanently the implementation of the challenged Legislative Action; and

(d)  whether, under the Fifth Amendment to the United States Constitution (made applicable to the State by the Fourteenth Amendment to the United States Constitution), which provides in part “nor shall private property be taken for public use, without just compensation” (the “Federal Takings Clause”), the State could repeal or amend the Act or take any other action in contravention of the State Pledge without paying just compensation to the Bondholders, as determined by a court of competent jurisdiction, if doing so (a) constituted a permanent appropriation of a substantial property interest of the Bondholders in the Storm Recovery Property or denied all economically productive use of the Storm Recovery Property; (b) destroyed the Storm Recovery Property other than in response to emergency conditions; or (c) substantially reduced, altered or impaired the value of the Storm Recovery Property so as to unduly interfere with the reasonable expectations of the Bondholders arising from their investments in the Bonds (a “Taking”).

Based upon our review of relevant judicial authority, as set forth in this letter, but subject to the qualifications, limitations and assumptions (including the assumption that any Impairment would be “substantial”) set forth in this letter, it is our opinion that a reviewing court  of competent jurisdiction, in a properly prepared and presented case:

(i)           would conclude that the State Pledge constitutes a contractual relationship between the Bondholders and the State;

(ii)           would conclude that, absent a demonstration by the State that an Impairment is necessary to further a significant and legitimate public purpose, the Bondholders (or the Indenture Trustee acting on their behalf) could successfully challenge under the Federal Contract Clause the constitutionality of any Legislative Action determined by such court to limit, alter, impair or reduce the value of the Storm Recovery Property or the Charges so as to cause an Impairment prior to the time that the Bonds are fully paid and discharged;

(iii)           should conclude that permanent injunctive relief is available under federal law to prevent implementation of Legislative Action hereafter taken and determined by such court to limit, alter, impair or reduce the value of the Storm Recovery Property or the Charges so as to cause an Impairment in violation of the Federal Contract Clause; and although sound and substantial arguments support the granting of preliminary injunctive relief, the decision to do so will be in the discretion of the court requested to take such action, which will be exercised on the basis of the considerations discussed in subpart B of Part II below; and

(iv)           would conclude that the State would be required to pay just compensation to Bondholders if the State’s repeal or amendment of the Act or taking of any other action in contravention of the State Pledge (a) constituted a permanent appropriation of a substantial property interest of the Bondholders in the Storm Recovery Property or denied all economically productive use of the Storm Recovery Property; (b) destroyed the Storm Recovery Property other than in response to emergency conditions; or (c) substantially reduced, altered or impaired the value of the Storm Recovery Property so as to unduly interfere with the reasonable expectations of the Bondholders arising from their investments in the Bonds.

Our opinion in the immediately preceding paragraph (i) is based upon our evaluation of existing judicial decisions and arguments related to the factual circumstances likely to exist at the time of a Federal Contract Clause challenge to Legislative Action; such precedents and such circumstances could change materially from those discussed below in this letter.  Accordingly, such opinion is intended to express our belief as to the result that should be obtainable through the proper application of existing judicial decisions in a properly prepared and presented case.

We also note, with respect to such opinion, that existing case law indicates that the State would have to establish that any Impairment is necessary and reasonably tailored to address a significant public purpose, such as remedying or providing relief for a broad, widespread economic or social problem.  The cases also indicate that the State’s justification would be subjected to a higher degree of scrutiny, and that the State would bear a more substantial burden, if the Legislative Action impairs a contract to which the State is a party (which we believe to be the case here), as contrasted to a contract solely between private parties.

We note, under the Arkansas Constitution, the electorate has both the power to initiate a change of law through the power of initiative and to revoke a law through the power of referendum.  The approval of any initiative or referendum requires the approval of a majority of the voters in the state casting their vote.  There are also procedural requirements to place an initiative or referendum before the voters, including the circulation of a petition and its signature by a requisite number of voters within a specified time period.  You have received that opinion of Williams & Anderson PLC to the effect that the time period for challenging the Act through the referendum process has expired.  However, the voters may still exercise their right of initiative.

We note that our work in connection with the preparation of this opinion and the issuance of the Bonds did not bring to our attention any reported judicial decision which we believe would provide a basis on which a court would declare the provisions of the Act to be invalid under the United States Constitution and it is our opinion that the Act is constitutional in all material respects under the United States Constitution.  As discussed in our opinion delivered to you of even date herewith concerning certain bankruptcy matters, however, there is some judicial authority providing a basis for an argument that certain provisions of the Act with respect to the commingling of funds may be preempted by the United States Bankruptcy Code under the Supremacy Clause (Article VI) of the United States Constitution.  Our analy sis as to the merits of such an argument is set forth in that other opinion.  If such provisions of the Act were so preempted by the Bankruptcy Code and declared invalid, such preemption would not, in our view, provide a grounds for changing the opinions otherwise set forth herein.

Discussion

I.           Protection of State Pledge Under the Federal Contract Clause

Section 23-18-911 of the Act provides:

(a) For purposes of this subsection, the term "bondholder" means a person who holds, owns, or is the beneficial holder or owner of a storm recovery bond.

(b) The state and its agencies, including the Arkansas Public Service Commission, pledge to and agree with bondholders, the owners of the storm recovery property, and other financing parties that the state will not:

   (1) Alter the provisions of this section which make the storm recovery charges imposed by a financing order irrevocable, binding, and nonbypassable charges;

   (2) Take or permit any action that impairs or would impair the value of storm recovery property; or

   (3) Except as allowed under this section, reduce, alter, or impair storm recovery charges that are to be imposed, collected, and remitted for the benefit of the bondholders and other financing parties until any and all principal, interest, premium, financing costs and other fees, expenses, or charges incurred, and any contracts to be performed in connection with the related storm recovery bonds have been paid and performed in full.

   Nothing in this paragraph shall preclude limitation or alteration if full compensation is made by law for the full protection of the storm recovery charges collected pursuant to a financing order and of the holders of storm recovery bonds and any assignee or financing party entering into a contract with the electric utility.

(c) Any person or entity that issues storm recovery bonds may include the pledge specified in subsection (b) of this section in the bonds and related documentation.

the Act § 23-18-911.  As authorized by the foregoing statutory provision and the Order, the language of the State Pledge has been included in the Indenture and in the Bonds.  Based on our analysis of relevant judicial authority, as set forth below, it is our opinion, subject to all of the qualifications, limitations and assumptions (including the assumption that any Impairment would be “substantial”) set forth in this letter, that, absent a demonstration by the State that an Impairment is necessary to further a significant and legitimate public purpose, a reviewing court would conclude that the State Pledge provides a basis upon which the Bondholders (or the Indenture Trustee acting on their behalf) could challenge successfully, under the Federal Contract Clause, the constitutionality of any Le gislative Action determined by such court to reduce, alter, or impair the value of the Storm Recovery Property or the Charges so as to cause an Impairment prior to the time that the Bonds and related financing costs are fully paid and discharged.

Article I, Section 10 of the United States Constitution prohibits any state from impairing the “obligation of contracts,” whether among private parties or among such state and private parties.4  The general purpose of the Federal Contract Clause is “to encourage trade and credit by promoting confidence in the stability of contractual obligations.”5 The law is well-settled that “the [Federal] Contract Clause limits the power of the States to modify their own contracts as well as to regulate those between private parties.”6
60; Although the Federal Contract Clause appears literally to proscribe any impairment, the United States Supreme Court has made it clear that the proscription is not absolute:  “Although the language of the Federal Contract Clause is facially absolute, its prohibition must be accommodated to the inherent police power of the State ‘to safeguard the vital interests of its people.’”7

In recent cases, the United States Supreme Court has applied a three-part analysis to determine whether a particular legislative action violates the Federal Contract Clause:8

(1) whether the legislative action operates as a substantial impairment of a contractual relationship;

(2) assuming such an impairment, whether the legislative action is justified by a significant and legitimate public purpose; and

(3) whether the adjustment of the rights and responsibilities of the contracting parties is reasonable and appropriate given the public purpose behind the legislative action.

The first inquiry contains three components:9

(1) does a contractual relationship exist;

(2) does the change in law impair that contractual relationship; and

(3) is the impairment substantial.

In addition, to succeed with a claim under the Federal Contract Clause, a party must show that the contractual relationship is not an invalid attempt to restrict or limit a state’s “reserved powers.”10

The following three subparts address:  (i) whether a contract exists between the State and the holders of the Bonds; (ii) if so, whether such contract violates the “reserved powers” doctrine, which would render such contract unenforceable; and (iii) the State’s burden in justifying an impairment.  The determination of whether particular Legislative Action constitutes a substantial impairment of a particular contract is a fact-specific analysis, and nothing in this letter expresses any opinion as to how a court would resolve the issue of “substantial impairment” with respect to the Order, the Storm Recovery Property or the Bonds vis-a-vis a particular Legislative Action.  Therefore, we have assumed for purposes of this letter that any Impairment resulting from the Legislative Action being challenged under the Federal Contract Clause would be substantial.11  In the final subpart of this Part I, we address what relief would be likely to be granted if a Federal Contract Clause challenge were successfully asserted.

A.           Existence of a Contractual Relationship

The courts have recognized the general presumption that, absent some clear indication that a legislature intends to bind itself contractually, “a law is not intended to create private contractual or vested rights but merely declares a policy to be pursued until the legislature shall ordain otherwise.”12  This presumption is based on the fact that the legislature’s principal function is not to make contracts, but to make laws that establish the policy of the state.  Thus, a person asserting the creation of a contract with the State must overcome this presumption.

This general presumption can be overcome where the language of the statute indicates an intention to create contractual rights.  In determining whether a contract has been created by statute, “it is of first importance to examine the language of the statute.”13    The courts have ruled that a statute creates a contractual relationship between a state and private parties if the statutory language contains sufficient words of contractual undertaking.14  The United States Supreme Court has stated that a contract is created “when the language and circumstances evince a legislative intent to create private rights of a contractual nature enforceable against the State.”15

In U.S. Trust, the United States Supreme Court affirmed the trial court’s finding, which was not contested on appeal, that a statutory covenant of two states for the benefit of the holders of certain bonds gave rise to a contractual obligation between such states and the bondholders.16  The covenant at issue limited the ability of the Port Authority of New York and New Jersey to subsidize rail passenger transportation from revenues and reserves pledged as security for such bonds.  In finding the existence of a contract between such states and bondholders, the Court stated “[t]he intent to make a contract is clear from the statutory language:  0;‘The two States covenant and agree with each other and with the holders of any affected bonds. . . .’”17  Later, in Nat’l R.R., the Court discussed the U.S. Trust covenant and noted: “[r]esort need not be had to a dictionary or case law to recognize the language of contract” in such covenant.18

Similarly, in Brand, the United States Supreme Court determined that the Indiana Teachers’ Tenure Act created a contract between the state and specified teachers because the statutory language demonstrated a clear legislative intent to contract.  The Court based its decision, in part, on the legislature’s use of the word “contract” throughout the statute to describe the legal relationship between the state and such teachers.19

Like the language of the covenant considered in U.S. Trust, the language of the State Pledge plainly manifests the Legislature’s intent to bind the State.20  Indeed, the biggest difference between such language and the U.S. Trust statute is the use of the verbs “pledge” and “agree,” rather than “covenant,” but that difference is not, in our view, material.  The definition of the Legislature’s term -- “pledge” -- is “to bind by a promise.”21   Accordingly, this slight variation between the State Pledge and the language contained in the U.S. Trust statute appears inconsequential and not to provide a basis for distinguishing the wording of the two statutes. Unlike the statute construed in Nat’l R.R., the Act expressly includes language indicating the State’s obligation with respect to storm recovery bond transactions.  See the Act § 23-18-911 (“The [S]tate and its agencies, including the Arkansas Public Service Commission, pledge . . . that state will not take or permit any action that impairs or would impair the value of storm recovery property . . . until any and all principal, interest, premium, financing costs and other fees. . . and any contract s to be performed in connection with the related storm recovery bonds have been paid and performed in full.”).  Id.  (emphasis added).  Moreover, it is important to note that the State also authorizes an issuer of storm recovery bonds to include the State Pledge in contracts with the holders of storm recovery bonds (such as the Bonds).  Id.

In summary, the language of the State Pledge supports the conclusion that it constitutes a contractual relationship between the State and the Bondholders.  We are not aware of any circumstances surrounding enactment of the Act that suggests that the Legislature did not intend to bind the State contractually by the State Pledge.22

B.           Reserved Powers Doctrine

The “reserved powers” doctrine limits the State’s ability to bind itself contractually in a manner which surrenders an essential attribute of its sovereignty.23  Under this doctrine, if a contract limits a state’s “reserved powers” -- powers that cannot be contracted away -- such contract is void.24  Although the scope of these “reserved powers” has not been precisely defined by the courts, case law has established that a state cannot contract away its police powers25 or its power of eminent domain.26  In contrast, the United States Supreme Court has stated that a state’s “power to enter into effective financial contracts cannot be questioned.”27

Under existing case law, the State Pledge does not, in our view, limit any “reserved powers” of the State.  The State Pledge does not purport to contract away, or constitute a waiver of, the State’s power of eminent domain or otherwise restrict the State’s ability to legislate for the public welfare or to exercise its police powers.  Through “financing orders” (such as the Order), the State will authorize electric utilities to issue “storm recovery bonds” (such as the Bonds) and pledges not to impair the value of the “storm recovery property” (such as the Storm Recovery Property) securing such instruments.  In other words, the State Pledge constitutes an agreement made by the State not to impair the financial security for storm recovery bonds in order to foster the capital markets’ acceptance of such bonds, which are expressly authorized and will be issued as part of the storm recovery to a new electric utility industry structure.  The State Pledge is clearly an inducement offered by the State to investors to purchase the Bonds.  As such, we believe that the State Pledge is akin to the type of “financial contract” involved in U.S. Trust, a promise that revenues and reserves securing the bonds at issue there would not be depleted beyond a certain level.28

C.           State’s Burden to Justify an Impairment

Any substantial impairment by a state of contractual rights which cannot be upheld under the “reserved powers” doctrine must be justified as a legitimate exercise of the state’s police powers in order to be successfully defended against a challenge pursuant to the Federal Contract Clause.29  In Blaisdell,30 referred to by the United States Supreme Court in U.S. Trust as “the leading case in the modern era of [Federal] Contract Clause interpretation,”31 the Court found that the economic exigencies of the time (the Depression) justified a Minnesota law which (i) authorized county courts to extend the period of redemption from foreclosure sales on mortgages previously made “for such additional time as the court may deem to be just and equitable,” subject to certain limitations, and (ii) limited actions for deficiency judgments.32  The Court stated that the “reserved powers” doctrine could not be construed “to permit the state to adopt as its policy the repudiation of debts or the destruction of contracts or the denial of means to enforce them.”  On the other hand, the Court also indicated that the Federal Contract Clause could not be construed33

to prevent limited and temporary interpositions with respect to the enforcements [of contracts] if made necessary by a great public calamity such as fire, flood, or earthquake.  [citation omitted]  The reservation of state power appropriate to such extraordinary conditions may be deemed to be as much a part of all contracts, as is the reservation of state power to protect the public interest in other situations to which we have referred.  And if state power exists to give temporary relief from the enforcement of contracts in the presence of disasters due to physical causes such as fire, flood or earthquake, that power cannot be said to be non-existent when the urgent public need demanding such relief is produced by other and economic causes.

In upholding the Minnesota law, the Court relied on the following:  (1) an economic emergency existed which threatened the loss of homes and lands which furnish those persons in possession with necessary shelter and means of subsistence; (2) the law was not enacted for the benefit of particular individuals but for the protection of a basic interest of society; (3) the relief provided by the law was appropriate to the emergency, and could only be granted upon reasonable conditions; (4) the conditions on which the period of redemption was extended by the law did not appear to be unreasonable; and (5) the law was temporary in operation and limited to the emergency on which it was based.34  In 1983, the United States Supreme Court stated in its Energy Reserves opinion that “a significant and legitimate public purpose” is required to justify a substantial impairment of contract.35  Similarly, the Court had earlier stated that, to be justifiable, an impairment must deal with “a broad, generalized economic or social problem.”36

The deference to be given by a court to a legislature’s determination of the need for a particular impairment depends on whether the contract is purely private or the state is a contracting party.  In a 1987 decision evaluating a state statute under the Federal Contract Clause, the United States Supreme Court noted that it has repeatedly held that, unless a state is a contracting party (which we believe to be the case here), courts should defer to legislative judgment as to the necessity and reasonableness of a particular action.37  Both the Energy Reserves and Spannaus opinions noted, however , that when a state is a contracting party the “stricter standard” of justification set forth in the U.S. Trust opinion is applicable.38  The Energy Reserves Court also noted that “[i]n almost every case, the Court has held a governmental unit to its contractual obligations when it enters financial or other markets.”39

In U.S. Trust, the United States Supreme Court stated that an impairment of a contract with a state “may be constitutional if it is reasonable and necessary to serve an important public purpose.”40  The Court further stated, however, that “complete deference to a legislative assessment of reasonableness and necessity is not appropriate.”41  The “public purposes” advanced as justifications for the contractual impairment were the promotion of mass transportation, energy conservation and environmental protection, and encouragement of the use of public transportation rather than private automobiles.42  The Court rejected those justifications because repeal of the covenant was “neither necessary to achievement of the plan nor reasonable in light of the circumstances.”43  The Court stated that a modification less drastic than total repeal would have permitted the states to achieve their plan to improve commuter rail service, and, in fact, the states could have achieved that goal without modifying the covenant at all.44   For example, the states “could discourage automobile use through taxes on gasoline or parking . . . and use the revenues to subsidize mass transit projects.”45

The U.S. Trust Court contrasted the legislation under consideration with the statute challenged in El Paso v. Simmons,46 which limited to five years the reinstatement rights of defaulting purchasers of land from the state.  For many years prior to the enactment of this statute, defaulting purchasers had been allowed to reinstate their claims upon written request and payment of delinquent interest, unless the rights of third parties had intervened.  In the judgment of the U.S. Trust Court, this older (19th century) statute “had ef fects that were unforeseen and unintended by the legislature when originally adopted,” i.e., “speculators were placed in a position to obtain windfall benefits,” and therefore adoption of a statute of limitations was reasonable to restrict parties to gains reasonably expected from the contract when the original statute was adopted.47  In contrast, the U.S. Trust Court stated that the need for mass transportation was not a new development and the likelihood that publicly owned commuter railroads would produce substantial deficits was well known when the covenant was adopted.48  Although, the Court noted, public perception of the importance of mass transit undoubtedly grew bet ween 1962, when the covenant was adopted, and 1974, when it was repealed, “these concerns were not unknown in 1962, and the subsequent changes were of degree and not of kind . . . . and [did not] cause the covenant to have a substantially different impact in 1974 than when it was adopted in 1962.”49

The U.S. Trust Court also distinguished its earlier decision in Faitoute Iron & Steel Co. v. City of Asbury Park,50 which, according to the Court, was the “only time in this century that alteration of a municipal bond contract has been sustained.”51  Faitoute involved a state municipal reorganization act under which bankrupt local governments could be placed in receivership by a state agency.  Pursuant to that act, the holders of c ertain municipal revenue bonds received new securities bearing lower interest rates and later maturities.  According to the Court in U.S. Trust, the earlier decision rejected the dissenting bondholders’ Federal Contract Clause claims on the theory that the “old bonds represented only theoretical rights; as a practical matter the city could not raise its taxes enough to pay off its creditors under the old contract terms,” and thus the plan “enabled the city to meet its financial obligations more effectively.”52  The U.S. Trust Court further quoted Faitoute to the effect that the obligation in that case was “discharged, not impaired” by the plan.53

The Court’s opinion in Winstar, even though not a Federal Contract Clause case, is consistent with U.S. Trust in imposing a more rigorous standard of justification where the government is a contracting party.  One issue in Winstar was whether the contract claim was barred by the “sovereign acts” doctrine, i.e., the government’s “public and general” acts cannot amount to a breach of contract.  Although the legislation alleged to constitute a contractual breach had as its purposes “preventing the collapse of the [thrift] industr y, attacking the root causes of the crisis, and restoring public confidence”,54 the Court held a “sovereign acts” defense was unavailable:  “[w]hile our limited enquiry into the background and evolution of the thrift crisis leaves us with the understanding that Congress acted to protect the public in the FIRREA legislation, the extent to which this reform relieved the Government of its own contractual obligations precludes a finding that the statute is a ‘public and general’ act for purposes of the sovereign acts defense.”55

Thus, the relevant case law demonstrates that a state bears a substantial burden  when attempting to justify an impairment of a contract to which it is a party.  A mere recitation that the impairment is in the public interest is insufficient.  Instead, a specific and significant state interest must be established, and the impairment must be necessary to further that interest.  Furthermore, “a state is not free to impose a drastic impairment when an evident and more moderate course would serve its purposes equally well.”56

II.           Relief Granted in a Federal Contract Clause Challenge

A.           Permanent Injunctive Relief

In a Federal Contract Clause challenge to Legislative Action alleged to cause an Impairment, the remedies which the plaintiff would be expected to seek are (i) a declaration of the invalidity of such Legislative Action and (ii) an order permanently enjoining State officials from enforcing the provisions of such Legislative Action; a claim for money damages against the State would appear less likely.  Whether such a declaration of invalidity could be obtained will depend on application of the principles discussed in Part I, as well as a demonstration that such law effected a substantial impairment.  If such a declaration were obtained, the plaintiff would then have to meet several requirements in order to obtain a permanent injunction.  Arkansas law would govern the requirements for issuance of a permanent injunction if the case were brought in State court,57 while federal law would govern those requirements if the case were brought in federal court.58 The following discussion relates to federal law only.

Federal case law balances the following factors in determining whether to grant permanent injunctive relief: (i) the threat of irreparable harm to the moving party; (ii) the balance of harms with any injury an injunction might inflict on other parties; (iii) actual success on the merits; and (iv) the public interest.59  The party seeking equitable relief such as a permanent injunction must also establish that it has no adequate remedy at law, for example, money damages.60  It seems doubtful that the Bondholders (or the Indenture Trustee acting on their behalf) could obtain adequate money damages from the State or its officials.61  Such party must further show that without permanent injunctive relief, it would suffer irreparable harm.  The “irreparable harm” and “inadequate legal remedies” tests are closely related.  However, one way to distinguish the two tests is to interpret the “irreparable harm” requirement to mean that the wrongful act be of a continuing nature, as opposed to a one-time denial of rights.62  It appears to us that any substantial Impairment would, in all likelihood, constitute a transgression of a continuing nature supporting the grant of permanent injunctive relief.63  For the reasons stated above, we believe that a substantial Impairment in this case would constitute the unusual circumstances that are required for the grant of permanent injunctive relief from a court sitting in the Eighth Circuit.

B.           Preliminary Injunctive Relief

Whether a preliminary injunction delaying implementation of Legislative Action being challenged under the Federal Contract Clause as a substantial Impairment could be obtained by the Bondholders (or the Indenture Trustee acting on their behalf) pending an adjudication on the merits of such claim will depend on several considerations.  As noted in subpart A of this Part II with respect to the availability of permanent injunctive relief, an action challenging such Legislative Action, and therefore an accompanying request for preliminary injunctive relief, could be brought in either a Arkansas court or a federal court, and Arkansas law or federal law, respectively, would provide the basis for determining whether such relief should be granted.64  The following discussion relates to federal law only.

The function of preliminary injunctive relief is to preserve the latest uncontested status quo prior to the action which is the subject of the legal challenge.65  The latest uncontested status quo with respect to the Bonds prior to the challenged Legislative Action would appear to be the continued effectiveness of the Order and the validity of the Storm Recovery Property and Charges.  The factors considered by federal courts in ruling on a request for preliminary injunctive relief are: (i) the threat of irreparable harm to the movant; (ii) the state of the balance between this harm and the injury in granting the injunction on other parties; (iii) the probability of the movant succeeding on the merits; and (iv) the public inter est.66  The four-part test is often conducted on a “sliding scale” basis: the court should flexibly weigh the case’s particular circumstances and balance the equities to determine whether or not to intervene.67  A preliminary injunction is, however, considered an “extraordinary remedy.”68

Assuming that the injunction is not adverse to the public interest, that the Federal Contract Clause claim appears to the court to be meritorious (based on the application of the principles discussed in Part I), and further assuming that the challenged Legislative Action effects a substantial Impairment, the requirement of likelihood of success on the merits should be met.  However, decisions in several federal courts have found that a delay in the scheduled receipt of payments until final judgment is not the type of “irreparable harm” which a preliminary injunction seeks to prevent, absent countervailing circumstances -- such as the possibility that such delay could result in the insolvency or the destruction of the business of the party seeking the preliminary injunction or could result in the other party’ ;s insolvency (thereby rendering a judgment worthless).69  Notwithstanding these decisions, there are arguments why payment delays on the Bonds should be accepted as “irreparable harm,” and why the Bondholders would experience greater harm if preliminary injunctive relief were denied than any other party would suffer if it were granted.  For example, if imposition and collection of the Charges, and accordingly payments to the Issuer, were stopped or reduced, the ratings on the Bonds would likely be downgraded, causing a loss of value in the Bonds and possibly causing institutional Bondholders to sell their Bonds at depressed market prices, and Bondholders could experience delays or omissions in the receipt of payments of interest or principal on their Bonds.  In addition, any such loss on sale or additional interest due the Bondholders as the result of the payment interruption p robably could not be recovered from the likely defendant (the State) in the proceeding on the merits.

III.           Federal Takings Clause

A.           Analysis

The Federal Takings Clause --- “nor shall private property be taken for public use, without just compensation.”  --- is made applicable to state action via the Fourteenth Amendment.70    The Federal Takings Clause covers both tangible and intangible property.71   Rights under contracts can be property for purposes of the Federal Takings Clause72, but legislation that “disregards or destroys” contract rights does not always constitute a taking.73    Where intangible property is at issue, state law will determine whether a property right exists.  Based on the opinion of Williams & Anderson PLC of even date herewith with respect to constitutional issues under the “takings” clause of the Arkansas State Constitution, it is our understanding that the Storm Recovery Property would be treated as a property interest under Arkansas law, and it is therefore our belief that the Storm Recovery Property would constitute a cognizable property interest for purposes of the Federal Takings Clause.  If a court determines that an intangible asset is property, a court will next look to whether the owner of the property interest had a “reasonable investment-backed expectation” that the property right would be protected.74

The United States Supreme Court has suggested that the Federal Takings Clause may be implicated by a diverse range of government actions, including when the government (a) permanently appropriates or denies all economically productive use of property;75 (b) destroys property other than in response to emergency conditions;76 or (c) reduces, alters or impairs the value of property so as to unduly interfere with reasonable investment-backed expectations.77  In determining what is an undue interference, a court would consider the nature of the governmental action and weigh the public purpose served thereby against the degree to which it interferes with legitimate property interests and distinct investment-backed expectations of the Bondholders.

In Lingle,78 the Supreme Court identified two categories where regulatory action constitutes per se takings – regulations that involve a permanent physical invasion of property and regulations that deprive the owner of all economically beneficial use of the property – plus a third category of other regulatory takings.  In cases in this third category, the Supreme Court has eschewed any set formula and has relied instead on “ad hoc, factual inquiries into the circumstances of each particular case.”79  According to the Connolly decision, a regulation constitutes a taking if it denies a property owner “economically viable use” of that property, which is determined by three factors:  (i) the character of the governmental action; (ii) the economic impact of the regulation on the claimant; and (iii) the extent to which the regulation has interfered with distinct investment-backed expectations.80

The first factor described above requires the court to examine “the purpose and importance of the public interest reflected in the regulatory imposition” and “to balance the liberty interest of the private property owner against the Government’s need to protect the public interest through imposition of the restraint.”81

The second factor described above incorporates the principle enunciated by Justice Holmes:  “Government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law.”82  “Not every destruction of injury to property by governmental action has been held to be a ‘taking’ in the constitutional sense.”83  Diminution in property value alone, thus, does not constitute a taking; there must be serious economic harm.

The third factor described above is “a way of limiting recovery under the Federal Takings Clause to owners who could demonstrate that they bought their property in reliance on a state of affairs that did not include the challenged regulatory regime.”84    The burden of showing such interference is a heavy one.85    Thus, a reasonable investment-backed expectation “must be more than a ‘unilateral expectation or an abstract need.”86 Further, “[l]egislation adjusting rights and burdens is not unlaw ful solely because it upsets otherwise settled expectations.”87   “[T]he fact that legislation disregards or destroys existing contractual rights does not always transform the regulation into an illegal taking….  This is not to say that contractual rights are never property rights or that the Government may always take them for its own benefit without compensation.”88  In order to sustain a claim under the Federal Takings Clause, the private party must show that it had a “reasonable expectation” at the time the contract was entered that it “would proceed without possible hindrance” arising from changes in government policy.89    With respect to this third factor, we note that the Act expressly provides for the creation of storm recovery property in connection with the issuance of the Bonds, and further provides that the Order is irrevocable upon issuance of the Bonds.  Moreover, through the State Pledge, the State and its agencies, including the Arkansas Public Service Commission, has pledged, “to and agree with bondholders, the owners of storm recovery property and other financing parties” not to impair the value of such Storm Recovery Property.  Given the foregoing, we believe it would be hard to dispute that Bondholders have reasonable investment expectations with respect to their investments in the Bonds.

We are not aware of any case law which addresses the applicability of the Federal Takings Clause in the context of the proper exercise by a state of its police power to abrogate or impair contracts otherwise binding on the state.  The outcome of any claim that interference by the State with the value of the Storm Recovery Property without compensation is unconstitutional, would likely depend on factors such as the State interest furthered by that interference and the extent of financial loss to Bondholders caused by that interference, as well as the extent to which courts would consider that Bondholders had a reasonable expectation that changes in government policy and regulation would not interfere with their investment.

B.           Conclusion

Based on our analysis of relevant judicial authority, as set forth above, it is our opinion, subject to all of the qualifications, limitations and assumptions set forth in this letter, that, under the Federal Takings Clause, a reviewing court would hold that the State would be required to pay just compensation to Bondholders if the State’s repeal or amendment of the Act or taking of any other action by the State in contravention of the State Pledge (a) constituted a permanent appropriation of a substantial property interest of the Bondholders in the Storm Recovery Property or denied all economically productive use of the Storm Recovery Property; (b) destroyed the Storm Recovery Property other than in response to emergency conditions; or (c) substantially reduced, altered or impaired the value of the Storm Recovery Property so as to unduly interfere with the reasonable expectations of the Bondholders arising from their investments in the Bonds.  As noted earlier, in determining what is an undue interference, a court would consider the nature of the governmental action and weigh the public purpose served thereby against the degree to which it interferes with the legitimate property interests and distinct investment-backed expectations of the Bondholders.  There can be no assurance, however, that any such award of just compensation would be sufficient to pay the full amount of principal of and interest on the Bonds.90

* * * * *

We note that judicial analysis of issues relating to the Federal Contract Clause and the retroactive effect to be given to judicial decisions has typically proceeded on a case-by-case basis and that the court’s determination, in most instances, is usually strongly influenced by the facts and circumstances of the particular case.  We further note that there are no reported controlling judicial precedents of which we are aware directly on point. Our analysis is necessarily a reasoned application of judicial decisions involving similar or analogous circumstances.  Moreover, the application of equitable principles (including the availability of injunctive relief or the issuance of a stay pending appeal) is subject to the discretion of the court which is asked to apply them.  We cannot predict the facts and circumstances which will be present in the future and may be relevant to the exercise of such discretion.  Consequently, there can be no assurance that a court will follow our reasoning or reach the conclusions which we believe current judicial precedent supports.  It is our and your understanding that none of the foregoing opinions is intended to be a guaranty as to what a particular court would actually hold; rather each such opinion is only an expression as to the decision a court ought to reach if the issue were properly prepared and presented to it and the court followed what we believe to be the applicable legal principles under existing judicial precedent. The recipients of this letter should take these considerations into account in analyzing the risks associated with the subject transaction.

Any opinion expressed herein with respect to enforceability is subject to the qualifications, limitations and assumptions set forth in the Bankruptcy Opinion.

This letter is limited to the federal laws of the United States of America.

While a copy of this letter may be posted to an internet website required under Rule 17g-5 under the Exchange Act and maintained by EAI solely for the purpose of complying with such rule, this letter is solely for your benefit in connection with the transactions described in the first paragraph above and may not be quoted, used or relied upon by, nor may copies be delivered to, any other Person (including without limitation all purchasers of Bonds other than the underwriter named in Schedule II to the Underwriting Agreement), nor may you rely on this letter for any other purpose, without our prior written consent.

This letter is being delivered solely for the benefit of the persons to whom it is addressed; accordingly, it may not be quoted, filed with any governmental authority or other regulatory agency or otherwise circulated or utilized for any other purpose without our prior written consent.  We hereby consent to the filing of this letter as an exhibit to the Form 8-K filed on August 18, 2010 with respect to the above-referenced Registration Statement filed on Form S-3 with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), relating to the registration of the Bonds and to all references to our firm included in or made a part of the Registration Statement.  In giving the foregoing consents, we do not thereby admit that we are w ithin the category of persons whose consent is required under Section 7 of the Securities Act or the related rules and regulations of the Commission.  We assume no obligation to update or supplement this letter to reflect any facts or circumstances which may hereafter come to our attention with respect to the opinions or statements expressed above, including any changes in applicable law which may hereafter occur.

Very truly yours,

/s/Sidley Austin LLP

 

1  Arkansas Electric Utility Storm Recovery Securitization Act, Ark. Util. Code Ann. §§ 23-18-901 et seq.

 

2           We note, under the Arkansas Constitution, the electorate has both the power to initiate a change of law through the power of initiative and to revoke a law through the power of referendum.  The approval of any initiative or referendum requires the approval of a majority of the voters in the state casting their vote.  There are also procedural requirements to place an initiative or referendum before the voters, including the circulation of a petition and its signature by a requisite number of voters within a specified time period.  You have received that opinion of Williams & Anderson PLC to the effect that the time period for challenging the Act through the referendum process has expired.  However, the voters may still exercise their right of initiative.

 

3 As discussed in more detail in the opinion of Williams & Anderson PLC of even date herewith, the APSC has acknowledged that it is bound by the State Pledge.  Consequently, a breach of the State Pledge by the APSC exercising legislative powers would be treated the same as a breach of the State Pledge by the Legislature under the Federal Contract Clause.

 

4 Article I, Section 10, provides, in relevant part, “No State shall . . . pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, . . . .”  U.S. Const. art. I,  10.  Please see opinion of Williams & Anderson PLC, of even date herewith, with respect to the Contract Clause in the Arkansas Constitution.

 

5 See United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 15 (1977) (cited in the text as “U.S. Trust”).

 

6 Id. at 17 (citations omitted).

 

7 Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410 (1983) (cited in the text as “Energy Reserves”) (citing Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 434 (1934) (cited in the text as “Blaisdell”)).

 

8 Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411-12 (1983).  See also Toledo Area AFL-CIO Council v. Pizza, 154 F.3d 307, 323 (6th Cir. 1998) (stating the three-part analysis) and Equipment Manufacturers Institute, et al v. Janklow, et al, 300 F.3d 842, 850 (8th Cir. 2002) (stating the three- part analysis).

 

9 General Motors Corp. v. Romein, 503 U.S. 181, 186 (1991).

 

10 See discussion under subpart B of this Part I.

 

11 We note, however, that in U.S. Trust the United States Supreme Court found a substantial impairment where the States of New York and New Jersey repealed outright an ”important security provision” securing repayment of bonds without any form of compensation to the bondholders, even in the absence of a finding of the extent of financial loss suffered by the bondholders as a result of the repeal.  431 U.S. 1, 19 (1977).  See also Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 429-35  (1934).

 

12 National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451, 466 (1985) (cited in the text as “Nat’l R.R.”)  (quoting Dodge v. Board of Educ., 302 U.S. 74, 78 (1937) (cited in the text as “Dodge”)).

 

13 Dodge v. Board of Educ., 302 U.S. 74, 78 (1937).

 

14 See Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 104-05 (1938) (cited in the text as “Brand”) (noting “the cardinal inquiry is as to the terms of the statute supposed to create such a contract”); United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 18 (1977).

 

15 United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 17 n.14 (1977).

 

16 Id. at 18.

 

17 Id. at 17.  Although the issue of whether a contract existed between such states and the bondholders was never disputed on appeal, the Court reviewed the language of the covenant and the circumstances surrounding the covenant, and stated, “We therefore have no doubt that the 1962 covenant has been properly characterized as a contractual obligation of the two States.”  Id. at 18.

 

18 See National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451, 470 (1985).

 

19 Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 105 (1938).   However, the mere use of the word “contract” in a statute will not necessarily evince the requisite legislative intent.  As the Court cautioned in Nat’l R.R., the use of the word “contract” alone would not signify the existence of a contract with the government.  National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451,  470 (1985).  In Nat’l R.R., the Court found that use of the word “contract” in the Rail Pa ssenger Service Act defined only the relationship between the newly-created nongovernmental corporation (Amtrak) and the railroads, not the relationship between the United States and the railroads. The Court determined that “[l]egislation outlining the terms on which private parties may execute contracts does not on its own constitute a statutory contract.”  Id.,  at 467.

 

20 It could be contended that the factual situation in the U.S. Trust case is distinguishable from the factual situation surrounding the issuance of the Bonds.  In U.S. Trust, the bonds were issued by the Port Authority -- a governmental agency -- while the Bonds are being issued by a private entity.  However, the Act dictates that a utility must obtain a financing order before any “storm recovery bonds” such as the Bonds are issued.  The authority to issue such an order rests with the State, acting through the APSC, and therefore the issuance of the Bonds is state-sanctioned in a manner closely analogous to the situation in U.S . Trust.

 

21 Webster’s New World Dictionary 573 (2d ed. 1982).

 

22 In addition to the State Pledge, the PUCT’s financing order contains the following language: “The Commission guarantees that it will act pursuant to this Financing Order as expressly authorized by PURA to ensure that expected transition charge revenues are sufficient to pay on a timely basis scheduled principal and interest on the transition bonds issued pursuant to this Financing Order and other costs, including fees.”  We refer you to the opinion with respect to constitutional law issues of Clark, Thomas & Winters, a Professional Corporation of even date herewith for a discussion of this language.

 

23 United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 23 (1977).

 

24 Id.  See generally United States v. Winstar Corp., 518 U.S. 839, 888-90 (1996) (cited in the text as “Winstar”).

 

25 Stone v. Mississippi, 101 U.S. 814, 817 (1880).

 

26 West River Bridge Co. v. Dix, 47 U.S. 507, 525-26 (1848).

 

27 United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 24 (1977).

 

28 Id. at 25.

 

29 Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411-12 (1983).

 

30 Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934).

 

31 United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 15 (1977).

 

32 The mortgagor was required to continue to pay the reasonable income or rental value of the property, as determined by the court, toward payment of taxes, insurance, interest and principal.  The law stated that it was to remain in effect only during the current emergency and no later than May 1, 1935; no redemption period could be extended beyond the expiration of the law.  Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. at 415-18.

 

33 Id. at 439-40.

 

34 Id. at 444-47.  Contemporaneous cases in which the United States Supreme Court struck down laws passed in response to an economic emergency reinforce the notion that, to be justified, the impairment must be a reasonable and specific response to the conditions.  See  Treigle v. Acme Homestead Ass’n, 297 U.S. 189 (1936); W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935) (cited in the text as “Worthen”); W.B. Worthen Co. v. Thomas, 292 U.S. 426 (1934).

 

35 Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411 (1983).

 

36 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 250 (1978) (cited in the text as “Spannaus”).

 

37 Keystone Bituminous Coat Ass’n v. DeBenedictis,  480 U.S. 470 (1987) (cited in the text as “DeBenedictis”).  The decision involved a 1966 Pennsylvania law which authorized a state agency to revoke a coal mine operator’s mining permit if removal of the coal caused damage to a structure or area protected by the law and the operator had not within six months taken certain remedial action.  Several mine operators claimed that the law impaired their rights to enforce contractual waivers by  the owners of the affected surface rights of any claims for liability due to surface damage.  While agreeing that the 1966 law operated as a substantial impairment of the operators’ contracts, the Court held that the state had a strong public interest in preventing the damage caused by underground mining, “the environmental effect of which transcends any private agreement between contracting parties.”  480 U.S. at 505.  Since 1966, the operators had conducted mining operations under approximately 14,000 structures protected by the law.  The Court noted the “devastating effects” of subsidence caused by underground mining, including substantial damage to foundations, walls and other structural members, and the integrity of houses and buildings; sinkholes which made land difficult or impossible to develop or farm; and loss of groundwater and surface ponds.  Id. at 475.  The Court concluded that the law “plainly survives scrutiny under our standards for evaluating impairments of private contracts.”  Id. at 505-06 .

 

38 Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 412-13 n.14 (1983); Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 n.15 (1978).  See also United States v. Winstar Corp., 518 U.S. 839, 876 (1996) (noting “heightened Contract Clause scrutiny when States abrogate their own contractual obligations”).

 

39 Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 412 n.14 (1983) (citing United States Trust Co. of New York v. New Jersey, 431 U.S. 1 (1977); W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935); and Murray v. Charleston, 96 U.S. 432 (1878) (cited in the text as “Murray”)).  In Worthen, the United States Supreme Court reversed a decision of the Arkansas Supreme Court upholding the validity of legislative enactments which, in the words of the former, take “from [the] mortgage [ securing bonds issued by municipal improvement districts pursuant to state law] the quality of an acceptable investment for a rational investor” by making it much more difficult and time consuming to foreclose upon the collateral posted as security for the mortgage.  295 U.S. at 60.  Such enactments were accompanied by a legislative “declaration of an emergency, which was stated to endanger the peace, health and safety of a multitude of citizens.”  In Murray, the United States Supreme Court reversed a judgment of the Supreme Court of South Carolina upholding an ordinance of the City of Charleston which permitted the City to withhold, as a tax, a portion of the interest that was otherwise payable with respect to bonds issued by the City.  This “tax” was held to violate the Federal Contract Clause:  “no municipality of a State can, by its own ordinances, under t he guise of taxation, relieve itself from performing to the letter all that it has expressly promised to its creditors.”  96 U.S. at 448.

 

40 United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 25 (1977).

 

41 Id. at 26.

 

42 Id. at 28-29.  The Court noted that when the bills to repeal the covenant were pending “a national energy crisis was developing.”  Id. at 13-14.

 

43 Id. at 29.

 

44 Id. at 30.

 

45 Id. at 30 n.29.

 

46 El Paso v. Simmons, 379 U.S. 497 (1965).

 

47 United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 31 (1977).

 

48 Id. at 31-32.

 

49 Id. at 32.

 

50 Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502 (1942) (cited in the text as “Faitoute”).

 

51 United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 27 (1977).

 

52 Id. at 28.

 

53 Id. (quoting 316 U.S. at 511).

 

54 United States v. Winstar Corp., 518 U.S. 839, 856 (1996).

 

55 Id. at  903.

 

56 United States Trust Co. of New York v. New Jersey, 431 U.S. 1,  31 (1977).

 

57 Please see the Williams & Anderson PLC opinion, of even date herewith, for an analysis of Arkansas law and permanent injunctive relief.

 

58 However, if the case is brought to federal court via diversity jurisdiction, it is possible that the federal court  would use state law in deciding whether or not to issue an injunction.

 

59 Oglala Sioux Tribe v. C & W Enters., 542 F.3d 224, 229 (8th Cir. 2008); Bank One, N.A. v. Guttau, 190 F.3d 844, 847 (8th Cir. 1999); Fogie v. THORN Ams., Inc., 95 F.3d 645, 654 (8th Cir. 1996).

 

60           Taylor Corp. v. Four Seasons Greetings, LLC, 403 F.3d 958, 967 (8th Cir. 2005).

 

61 Examples of hurdles to the receipt of such damages might include, but are not limited to, State sovereign immunity to suit in a particular forum, State administrative procedures for filing claims, legislative refusal to appropriate funds to pay a damages award, and the limited funds available to State officials.

 

62 United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953); Inland Oil & Transp. Co. v. United States, 600 F.2d 725, 727 (8th Cir. 1979); Wachovia Sec., L.L.C. v. Stanton, 571 F. Supp. 2d 1014, 1029 (N.D. Iowa 2008); Trans World Airlines, Inc. v. International Assoc. of Machinists & Aerospace Workers, 629 F. Supp. 1554, 1561 (W.D. Mo. 1986).

 

63 Gilleo v. City of Ladue, 986 F.2d 1180, 1184 (8th Cir. 1993) (affirming permanent injunction against enforcement of unconstitutional ordinance).

 

64 Once again, if the case enters federal court via diversity jurisdiction, the federal court may use Arkansas law in deciding whether to issue an injunction.

 

65 Univ. of Texas v. Camenisch, 451 U.S. 390, 395 (1981) (“The purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held.”); Dataphase Sys. V. C L Sys., 640 F.2d 109, 113 (8th Cir. 1981) (“The very nature of the inquiry on petition for preliminary relief… is whether the balance of equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined.”).

 

66 Phelps-Roper v. Nixon, 545 F.3d 685, 689-90 (8th Cir. 2008); Watkins Inc. v. Lewis, 346 F.3d 841, 844 (8th Cir. 2003).  The Eighth Circuit has noted that a key difference between the standards for preliminary and permanent injunctive relief is that permanent relief requires a showing of success on the merits, while preliminary relief requires a showing of probability of success.  Oglala Sioux Tribe, 542 F.3d at 229; Guttau, 190 F.3d at 847.

 

67 Calvin Klein Cosmetics Corp. v. Lenox Labs., Inc., 815 F.2d 500, 503 (8th Cir. 1987) (“[T]he focus in determining probable success should not be to apply the probability language with mathematical precision.  Rather, a court should flexibly weigh the case’s particular circumstances ….”); United Centrifugal Pumps v. Cusimano, 708 F. Supp. 1038, 1042 (W.D. Ark. 1988) (“the four factors set forth above are to be considered but the court is to apply them on some sliding scale to ‘do right’”).

 

68           Watkins, 346 F.3d 841, 844.

 

69 See, e.g., Centurion Reinsurance Co. v. Singer, 810 F.2d 140 (7th Cir. 1987); Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 386 & n.1 (7th Cir. 1984). Federal courts with jurisdiction over Arkansas have similar, if less explicit, case law.  See also Airlines Reporting Corp. v. Barry, 825 F.2d 1220, 1227 (8th Cir. 1987) (affirming district court grant of preliminary injunction where plaintiff demonstrated a clear probability that defendants “will not be able to satisfy an award of adequate damages” ).

 

70           Webb’s Fabulous Pharmacies v. Beckwith, 449 U.S. 155, 160 (1980).

 

71 Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1003 (1984). The Monsanto case involved a federal law requiring disclosure of certain data related to Monsanto products.  The Supreme Court was asked to determine whether Monsanto had a property interest in this information as a trade secret and whether that property interest was protected under the Federal Takings Clause.  One focus of the Supreme Court’s analysis was whether Monsanto had a reasonable investment-backed expectation in the privacy of this property.  The Court concluded that at most times prior to the enactment of the law and at all times after the enactment of the law, Monsanto did not have and would not have a reasonable expectation that its information would be kept private.  Howeve r, the Court noted for a six year period from 1972 to 1978, federal law had provided that an entity submitting information to the government could designate such information as a trade secret and that federal law guaranteed such information would be kept a secret.  Accordingly, the Court concluded that with respect to such information designated as a trade secret from 1972 to 1978, Monsanto had a property interest that was protected by the Federal Takings Clause.

 

72 Lynch v. United States, 292 U.S. 571, 577 (1934).

 

73 Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224 (1986).

 

74 2 Rotunda and Nowack, Treatise on Constitutional Law: Substance and Procedure 702 (3d ed. 1999).

 

75 Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 225 (1986) (noting that in that case the government did not “permanently appropriate” any of the employer’s assets for its own use) (cited in the text as “Connolly”); Palazzolo v. Rhode Island, 533 U.S. 606, 617 (2001)(“regulation which ‘denies all economically beneficial or productive use of land’ will require compensation under the Takings Clause”) (citing Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1015 (1992), which notes that for personal property, however, some regulations that limit use of personal property may not be compensable taki ngs given the state’s “traditionally high degree of economic control over commercial dealings”); United States v. Security Indus. Bank, 459 U.S. 70, 77 (1982) (citing Armstrong v. United States, 364 U.S. 40, 48 (1960) (“The total destruction by the Government of all values of these liens, which constitute compensable property, has every possible element of a Fifth Amendment ‘taking’ and is not a mere ‘consequential incidence’ of a valid regulatory measure”));   See also Lingle v. Chevron USA, 544 U.S. 528, 538 (2005) (noting that regulatory action will be deemed a per se taking of property if it requires an owner to suffer a “permanent” physical invasion of property or completely deprives the owner of all economically beneficial use of such property) (cited in the text as “Lingle”).   The Supreme Court has also held that legislation that terminates a property interest can be considered a taking for which compensation is due.  Hodel v. Irving, 481 U.S. 704 (federal law escheating certain fractional interests in tribal property to an Indian tribe was a compensable taking).  See also 2 Rotunda and Nowack, Treatise on Constitutional Law: Substance and Procedure 746 (3d ed. 1999).

 

76 The emergency exception to the just compensation requirement of the Federal Takings Clause appears in several Supreme Court decisions.  See generally Rotunda and Novack Volume 2 at 738.  Several of these decisions involve the government’s activities during military hostilities.  See, e.g., United States v. Caltex, Inc., 344 U.S. 149 (1952) (no compensable taking when Army destroys property to prevent enemy forces from obtaining it); United States v. Cent. Eureka Mining Co., 357 U.S. 155 (1958) (no compensable taking when government forces gold mines to cease operations to conserve resources for war effort); Nat’l Bd. of Young Men’s Christian Ass’ns v. United States, 395 U.S. 85 (1969) (no compensable taking where private property destroyed when US troops take shelter there).  Compare United States v. Pewee Coal Co., 341 U.S. 114 (1951)(compensable taking when occupation is physical rather than regulatory, emergency notwithstanding).  The emergency exception is not limited to wartime activities, however.  See, e.g., Miller v. Schoene, 276 U.S. 272 (1928)(no compensable ta king where trees destroyed to prevent disease from spreading to other trees); Dames & Moore v. Regan, 453 U.S. 654 (1981) (no compensable taking resulting from executive order nullifying attachments on Iranian assets and permitting those assets to be transferred out of the country).  The emergency exception is not limited to the physical destruction of property by the government, see Cent. Eureka Mining, 357 U.S. at 168, but the Supreme Court has suggested it does not apply to physical occupation of property, see Pewee, 341 U.S. at 116-17, or permanent appropriation, see Lingle, 544 U.S. at 538, both of which constitute a per se taking.  Moreover, we believe that a permanent appropriation of property by the government would be generally inconsistent with the concept of an “emergency”.  See Cent. Eureka Mining, 357 U.S. at 168 (describing wartime restrictions as “temporary in character”).

 

77 Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 225 (1986)(nothing that one point of Federal Takings Clause analysis is “the extent to which the regulation has interfered with distinct investment-backed expectations”)) (citing Penn Cent. Transp. Co. v. New York, 438 U.S. 104, 124 (1978)); United States v. Cent. Eureka Mining Co., 357 U.S. 155 (1958), rehearing denied 358 U.S. 858 (1958) (no compensable taking when government forces gold mines to cease operations to conserve resources for war effort).

 

78           Lingle v. Chevron USA, 544 U.S. 528 (2005).

 

79 Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224 (1986); Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 124 (1978).

 

80 Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224 (1986)  (citing Penn Central Transp. Co. v. New York, 438 U.S. 104, 124 (1978)).

 

81 Loveladies Harbor, Inc. v. United States, 28 F.3d 1171, 1176 (Fed. Cir. 1994); see Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470 (1987).

 

82 Penn Coal Co. v. Mahon, 260 U.S. 393 (1922); Loveladies Harbor, Inc. v. United States, 28 F.3d 1171, 1176-77 (Fed. Cir. 1994).

 

83           Armstrong v. United States, 364 U.S. 40, 48 (1960)

 

84           Loveladies Harbor, Inc. v. United States, 28 F.3d 1171, 1177 (Fed. Cir. 1994).

 

85           Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 493 (1987).

 

86           Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1005 (1984) (Internal Citations Omitted)

 

87            Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16 (1976).

 

88           Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224 (1986).

 

89           Chang v. United States, 859 F. 2d 893, 897 (Fed Cir. 1988).

 

90 We express no opinion as to whether any court would have or exercise jurisdiction to hear such a Federal Taking Clause challenge, when such a challenge would be ripe, or whether the State would be entitled to assert sovereign immunity in a particular forum.  As to the question of sovereign immunity, to the extent that there is a taking without just compensation and just compensation is unavailable through State or federal procedures, Bondholders (or the Indenture Trustee on their behalf) or the Issuer could seek to enjoin enforcement of the State action by suing individual officers under Ex Parte Young, 209 U.S. 123 (1908) and 42 U.S.C. §1983.

Sidley Austin LLP is a limited liability partnership practicing in affiliation with other Sidley Austin partnerships

SCHEDULE A

The Bank of New York Mellon

101 Barclay Street, Floor 4W

New York, New York  10286

Moody’s Investors Service, Inc.

7 World Trade Center at 250 Greenwich Street

New York, New York 10007

Standard & Poor’s Ratings Services,

 a Standard & Poor’s Financial Services LLC business

55 Water Street, 41st Floor

New York, New York  10041

Fitch Ratings

One State Street Plaza

New York, New York  10004

Morgan Stanley & Co. Incorporated

1585 Broadway

New York, New York 10036

EX-99.2

Exhibit 99.7

August 18, 2010

To Each of the Persons Listed on

Schedule A Attached Hereto

Re:           Entergy Arkansas Restoration Funding, LLC

Senior Secured Storm Recovery Bonds

Special Arkansas Counsel – Arkansas Constitutional Issues

Ladies and Gentlemen:

We have acted as special Arkansas counsel to Entergy Arkansas, Inc., an Arkansas Corporation ("EAI"), and Entergy Arkansas Restoration Funding, LLC, a Delaware limited liability company (the "Issuer"), in connection with the issuance and sale on the date hereof by the Issuer of $124,100,000 aggregate principal amount of the Issuer’s Senior Secured Storm Recovery Bonds (the "Bonds").  The Bonds are being sold pursuant to the provisions of the Underwriting Agreement dated August 11, 2010 (the "Underwriting Agreement") among EAI, the Issuer and the underwriters named in Schedule II to the Underwriting Agreement. The Bonds are being issued pursuant to the provisions of the Indenture, dated as of August 18, 2010 as amended and supplemented by the first Series Supplement, dated as of August 18, 2010 (collectively, the "Inden ture"), between the Issuer and The Bank of New York Mellon, as indenture trustee (the "Indenture Trustee").  Under the Indenture, the Indenture Trustee holds, among other things, storm recovery property as described below (the "Storm Recovery Property") as collateral security for the payment of the Bonds.  This opinion is being delivered pursuant to Section 9(i) of the Underwriting Agreement.

"Storm Recovery Property" is defined in the applicable provisions of Title 23, Chapter 18, Subchapter 9 of the Arkansas Code (the "Act").1  The Storm Recovery Property was authorized to be created in favor of EAI, pursuant to a financing order issued by the Arkansas Public Service Commission (the "APSC") on June 16, 2010, in Docket No. 10-008-U (the "Order"); and simultaneously with the transfer of such property to the Issuer and the issuance of the Bonds and the Storm Recovery Property was sold and assigned to the Issuer pursuant to the provisions of the Storm Recovery Property Purchase and Sale Agreement dated as of August 18, 2010 between EAI and the Issuer in consideration for the payment by the Issuer to EAI of the proceeds of the sale of the Bonds, net of certain issuance costs.  The Storm Recovery Property includes the right to impose and receive certain "non-bypassable" charges described in the Order (the "Charges").  The Charges constitute "storm recovery charges" as defined in the Act and may be periodically adjusted, in the manner authorized in the Order, in order to enhance the probability that the revenues received by the Issuer from the Charges are sufficient to (i) amortize the Bonds pursuant to the amortization schedule to be followed in accordance with the provisions of the Bonds and the Indenture, (ii) pay interest thereon and related fees and expenses, and (iii) maintain the required reserves for the payment of the Bonds.

The Order was issued in response to an application for its issuance that was filed by EAI with the APSC pursuant to the provisions of the Act.  The Order will become irrevocable as of the date hereof.

Section 23-18-911 of the Act provides:

(a) For purposes of this subsection, the term "bondholder" means a person who holds, owns, or is the beneficial holder or owner of a storm recovery bond.

(b) The state and its agencies, including the Arkansas Public Service Commission, pledge to and agree with bondholders, the owners of the storm recovery property, and other financing parties that the state will not:

(1) Alter the provisions of this section which make the storm recovery charges imposed by a financing order irrevocable, binding, and nonbypassable charges;

(2) Take or permit any action that impairs or would impair the value of storm recovery property; or

(3) Except as allowed under this section, reduce, alter, or impair storm recovery charges that are to be imposed, collected, and remitted for the benefit of the bondholders and other financing parties until any and all principal, interest, premium, financing costs and other fees, expenses, or charges incurred, and any contracts to be performed in connection with the related storm recovery bonds have been paid and performed in full.

Nothing in this paragraph shall preclude limitation or alteration if full compensation is made by law for the full protection of the storm recovery charges collected pursuant to a financing order and of the holders of storm recovery bonds and any assignee or financing party entering into a contract with the electric utility.

(c) Any person or entity that issues storm recovery bonds may include the pledge specified in subsection (b) of this section in the bonds and related documentation.

The provisions of Ark. Code Ann. § 23-18-911(b) shall hereinafter be referred to as the "State Pledge."  As authorized by the foregoing statutory provision and the Order, the language of the State Pledge has been included in the Indenture and in the Bonds.

As used herein, "Transaction Documents" means, collectively, the documents described in Schedule B hereto, and “Transaction” means the transactions contemplated by the Transaction Documents and the Financing Order.

We have made no independent investigation of the facts referred to herein, and with respect to such facts have relied, for the purpose of rendering this opinion and, except as otherwise stated herein, exclusively on the statements contained and matters provided for in the Transaction Documents.

Our clients have requested that we provide you with our reasoned opinion as to:

1. whether the holders of the Bonds (the "Bondholders") could challenge successfully under the "contract clause" of the Arkansas Constitution (Article 2, Section 17 (the "Arkansas Contract Clause")) the constitutionality of any legislation passed by the Arkansas General Assembly (the "Legislature") which becomes law, or any constitutional amendment or initiated act approved by the voters of the State in exercising their powers of initiative or referendum, or any action of the APSC exercising legislative powers ("Legislative Action") that in any case limits, alters, impairs or reduces the value of the Storm Recovery Property or the Charges so as to cause a substantial impairment, of (x) the terms of the Indenture or the Bonds or (y) the rights and remedies of the Bondholders (or the Trustee acting on their behalf) prior to the time that the Bonds are fully paid and discharged ("Impairs" or an "Impairment");

2. whether preliminary injunctive relief would be available under Arkansas law to delay implementation of Legislative Action that limits, alters, impairs or reduces the value of the Storm Recovery Property or the Charges so as to cause an Impairment pending final adjudication of a claim challenging such Legislative Action under the Arkansas Contract Clause and, assuming a favorable final adjudication of such claim, whether relief would be available to prevent permanently the implementation of the challenged Legislative Action; and

3. whether a Legislative Action that repeals the State Pledge or substantially impairs or reduces the value of the Storm Recovery Property or Charges so as to cause a substantial impairment of (a) the terms of the Indenture or the Bonds or (b) the rights and remedies of the Bondholders (or the Trustee acting on their behalf) prior to the time the Bonds are fully paid and discharged, would constitute a compensable taking under the "takings clause" of the Arkansas Constitution (Article 2, Section 22) (the "Arkansas Takings Clause")).

Our opinions assume that any Legislative Action that prevents payment of the Bonds or significantly affects the security for the Bonds is Legislative Action that "substantially limits, alters, impairs or reduces the value" of the Bonds.  We do not offer any opinion as to how a court would determine whether any specific action would "impair the value of storm recovery property" or "reduce, alter, or impair the storm recovery charges," or what facts would be required to prevail on those claims.

In rendering the opinions expressed herein, we have also relied, with your permission, upon the conclusions expressed in the opinion of Sidley Austin LLP addressed to you as of this date with respect to the "contract clause" and "takings clause" of the Constitution of the United States.

I.           CONTRACT CLAUSE

An Impairment could be challenged as an impairment of the obligation of contract under the Arkansas Contract Clause.  The analysis of whether a Legislative Action impermissibly impairs a contract involves three basic questions:

1.  Does a contract exist?

 

1  Arkansas Electric Utility Storm Recovery Securitization Act, Ark. Code Ann. §§ 23-18-901 et seq.

2.  Has there been a substantial impairment?

3.  Is the impairment a reasonable (and necessary) means to an important public purpose?

We note that case law in Arkansas specific to each element of this analysis is neither abundant nor particularly well-developed.  Therefore, we have reviewed the analysis of the federal Contract Clause set forth in the opinion of Sidley Austin LLP of even date herewith.  We concur with the analysis set forth therein.  We are not aware of any judicial precedent in Arkansas that would discourage an Arkansas court from seeking guidance from the federal case law in performing an analysis of the Arkansas Contract Clause.2

Whether a law establishes contractual obligations on a state or another governmental body is dependent on the intent of the legislative body, as evidenced by the language of the law and the circumstances surrounding its passage.  Because the courts view the state as having reserved its authority to exercise the police power to safeguard public interests, the Arkansas Contract Clause is not absolute.  See Hand v. H&R Block, Inc., 258 Ark 774, 781, 528 S.W.2d 916, 920 (1975); Beaumont v. Faubus, 239 Ark. 801, 805, 394 S.W.2d 478, 481-482 (1965).  A Legislative Action that does impair the obligation of contracts may nevertheless be constitutional if it is a reasonable and necessary means to a chieve an important public purpose.  Id. at 805, 394 S.W.2d at 482.  Both federal and state courts have applied a balancing test by which the degree of impairment of the contract is weighed against the public purpose to be achieved by the challenged Legislative Action, and in so doing the courts weigh the reasonableness and necessity of the Legislative Action in meeting that objective.  Generally, the courts will apply closer and stricter scrutiny to Legislative Actions impairing contracts where the state or a governmental body is a party to the contract, such as in public debt obligations.3

The Act provides in the State Pledge that "the state and its agencies, including the Arkansas Public Service Commission, pledge to and agree with bondholders, the owners of the storm recovery property, and other financing parties . . ."4, evidencing an intent by the Legislature to enter into a contractual relationship with bondholders, the owners of the Storm Recovery Property, and other financing parties.  As is the case with legislation authorizing governmental bonds, the Act's provision for a revenue source is relied upon as a vital part of the contract with holders of storm recovery bonds, and a court would likely find that such authority and ability to provide payment for storm recovery bonds should be subjected to the strict scrut iny applied to obligations of governmental bodies. Beaumont, 239 Ark. at 805, 394 S.W.2d at 481.

Nonetheless, the courts will still apply the balancing test and inquire whether a Legislative Action is a reasonable and necessary means towards an important public purpose.  The result of this inquiry is dependent on the nature of the Legislative Action subsequently enacted and the circumstances surrounding its enactment, and therefore, cannot reasonably be predicted. Hand, 258 Ark. at 783-784, 528 S.W.2d 916, 921-922.

A.           Interplay Between Parallel U.S. and Arkansas Constitutional Doctrine

The Arkansas Constitution provides that "No bill of attainder, ex post facto law, or law impairing the obligation of contracts shall ever be passed . . . ."  Ark. Const. of 1868, art. II, § 17.

The Arkansas Contract Clause is substantially identical to the Contract Clause of the U.S. Constitution.5  Not unexpectedly, Arkansas courts have commonly cited and followed U.S. Supreme Court formulations of Contract Clause doctrine in cases challenging Legislative Actions under the Arkansas Constitution.  See, e.g., Hand, 258 Ark. at 780, 528 S.W.2d at 919; Beaumont,239 Ark. at 805, 394 S.W.2d at 482; Miller Levee District No. 2 v. Evers, 200 Ark. 53, 60, 137 S.W.2d 915, 918 (1940).

B.           The Existence of Contractual Relationship

An analysis of a claim under the Contract Clause has three basic components: (1) whether a contract existed between the parties, (2) whether the obligations under the contract were substantially impaired and (3) whether the impairment was reasonable and necessary to meet an important public purpose.  See United States Trust Co. of New York v. New. Jersey, 431 U.S. 1, 17-18 (1977); General Motors Corp. v. Romein, 503 U.S. 181, 186 (1992).

 

2 Kellar v. Fayetteville Police Dep’t., 339 Ark. 274, 279, 5 S.W.2d 402, 405 (1999) (Arkansas Supreme Court looked to both state and federal law in interpreting the Arkansas ex post facto clause that was substantially similar to the U.S. Constitution's ex post facto clause).

 

3 See opinion of Sidley Austin LLP of even date herewith.

 

4 Ark. Code Ann. § 23-18-911(b).

 

5 See opinion of Sidley Austin LLP, of even date herewith, with respect to the Contract Clause in the U.S. Constitution.

A contract may be created from a law authorizing a contract or the contract itself.  Whether a statute constitutes a contractual arrangement between the state and the other parties that have entered into contracts pursuant to such a statute depends on whether the legislature intended to create enforceable contractual rights binding upon the state.  In determining legislative intent, both the language of the statute and the circumstances of the enactment of law are relevant.  National Railroad Passenger Corp. v. Atchison, Topeka and Santa Fe Railway Co., 470 U.S. 451, 466-467 (1985); United States Trust Co., 431 U.S. at 18 and n. 14.  The Court in United States Trust Co. found the state's intent to make a contract was clear from the statutory language, where the statute itself provided:

The 2 States covenant and agree with each other and the holders of any affected bonds, . . . that so long as any of such bonds remain outstanding and unpaid and the holders thereof shall not have given their consent as provided in their contract with the port authority; . . . neither the States nor the port authority nor any subsidiary corporation . . . will apply any of the rentals, tolls, fares, fees, charges, revenues or reserves, which have been pledged in whole or in part as security for such bonds, for any railroad purposes whatsoever other than permitted purposes hereinafter set forth.

United States Trust Co., 431 U.S. at 9-10, 18.  Additionally, the Court pointed out that the purpose of the covenant was to invoke the protection of the Contract Clause as security against repeal and to increase the public marketability of the bonds.  Id. at 18.

"It is well settled that the law in effect at the date of the contract becomes a part of it, and the law cannot thereafter be changed so as to alter the contractual rights of the parties thereto to their detriment." City of Little Rock v. Community Chest of Greater Little Rock, 204 Ark. 562, 567, 163 S.W.2d 522, 524 (1942) (citing Worthen v. Kavanaugh, 295 U.S. 56 (1935)).

Section 23-18-905 of the Act makes clear the intent of the Legislature that the revenue contemplated to be created through storm recovery charges in all events remains available to support the repayment of storm recovery bonds issued in reliance upon such revenue sources.  Section 23-18-905 of the Act provides in relevant part:

(a) All storm recovery property that is specified in a financing order shall constitute an existing, present intangible property right or interest therein, notwithstanding that the imposition and collection of storm recovery charges depend on the electric utility to which the financing order is issued performing its servicing functions relating to the collection of storm recovery charges and on future electricity consumption.  Such property shall exist whether or not the revenues or proceeds arising from the property have been billed, have accrued, or have been collected and notwithstanding the fact that the value or amount of the property is or may be dependent on the future provision of service to customers by the electric utility or its successors or assignees and the future consumption by customers of electricity.

(b) Storm recovery property specified in a financing order shall continue to exist until the storm recovery bonds issued pursuant to the financing order are indefeasibly paid in full and all financing costs of the bonds have been paid in full.

(c) All or any portion of storm recovery property specified in a financing order issued to an electric utility, if storm recovery bonds are to be issued, shall be sold, assigned, or transferred to a successor or an assignee, including an affiliate or affiliates of the electric utility created for the limited purpose of acquiring, owning, or administering storm recovery property or issuing storm recovery bonds under the financing order.  All or any portion of storm recovery property may be encumbered by a security interest to secure storm recovery bonds issued pursuant to the financing order, amounts payable to financing parties and to counterparties under any ancillary agreements, and other financing costs.  Each such sale, assignment, transfer, conveyance, or pledge made by or security interest granted by an ele ctric utility or affiliate of an electric utility or assignee is considered to be a transaction in the ordinary course of business.

(d) The description of storm recovery property being sold, assigned, or transferred to an assignee in any sale agreement, purchase agreement, or other transfer agreement, being encumbered, granted, or pledged to a secured party in any security agreement, pledge agreement, or other security document, or indicated in any financing statement is only sufficient if such description or indication refers to the specific financing order that created the storm recovery property and states that such agreement or financing statement covers all or part of such storm recovery property described in such financing order.  A description of storm recovery property in a financing statement shall be sufficient if it refers to the financing order creating the storm recovery property.  This subsection applies to all purported sales, assignments, or transfers of and all purported grants of liens or security interests in storm recovery property, regardless of whether the related sale agreement, purchase agreement, other transfer agreement, security agreement, pledge agreement, or other security document was entered into, or any financing statement was filed, before or after April 1, 2009.

(e) If an electric utility defaults on any required payment of charges arising from storm recovery property specified in a financing order, the court specified in § 23-18-903(f) upon application by an interested party and without limiting any other remedies available to the applying party shall order the sequestration and payment of the revenues arising from the storm recovery property to the financing parties or their representatives.  Any such order shall remain in full force and effect notwithstanding any reorganization, bankruptcy, or other insolvency proceedings with respect to the electric utility or its successors or assigns.

(f) The interest of a transferee, purchaser, acquirer, assignee, or secured party in storm recovery property specified in a financing order is not subject to setoff, counterclaim, surcharge, or defense by the electric utility or any other person or in connection with the reorganization, bankruptcy, or other insolvency of the electric utility, its successors or assignees or any other entity.

(g) Any successor to an electric utility, whether pursuant to any reorganization, bankruptcy, or other insolvency proceeding or whether pursuant to any merger or acquisition, sale, or other business combination or transfer by operation of law, as a result of electric utility restructuring or otherwise, shall perform and satisfy all obligations of, and have the same rights under a financing order as the electric utility under the financing order in the same manner and to the same extent as the electric utility, including collecting and paying to the person entitled to receive them, the revenues, collections, payments, or proceeds of the storm recovery property.

(h) Storm recovery bonds shall be nonrecourse to the credit or any assets of the electric utility other than the storm recovery property as specified in the financing order and any rights under any ancillary agreement.

Similar to the New Jersey statute in United States Trust Co., supra, the statute here, including the State Pledge, explicitly expresses the "intent of the Legislature" that the committed source of revenues necessary to repay the Bonds be protected.  The statutory language is similar to the New Jersey statute in its foreseeable effect of inducing reliance by potential investors.

C.           The Balancing of Impairment Versus Public Purpose

The test to determine if a statute violates the Contract Clause has three parts: (1) The first inquiry is whether the state law has, in fact, operated as a substantial impairment on pre-existing contractual relationships.  If there is no substantial impairment on contractual relationships, the law does not violate the Contract Clause.  If, however, the law does constitute a substantial impairment, the second part of the test is addressed:  (2) The State must have a significant and legitimate public purpose behind the regulation.  The requirement of a legitimate public purpose guarantees that the State is exercising its police power, rather than providing a benefit to special interests.  If there is no significant and legitimate public purpose, the state law is unconstitutional under th e Contract Clause.  If a significant and legitimate public purpose has been identified, the third part of the test is applied: (3) The court must determine whether the adjustment of the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation's adoption.  Equipment Manufacturers Institute, et al v. Janklow, et al, 300 F.3d 842 (8th Cir. 2002) (citing Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411, 103 S. Ct. 697, 704-705 (1983); Educational Employees Credit Union v. Mutual Guar. Corp., 50 F.3d 1432, 1438 (8th Cir. 1995)) (quotation marks omitted).

The Arkansas Supreme Court has stated that "there are many . . . federal court decisions and decisions from other states, both pro and con, as to the validity of statutes enacted under the police power but they all turn on the particular statutes as related to the facts of the particular case, and the extent to which the public interest, peace, health or welfare were involved was the final deciding factor in all of them."  Hand, 258 Ark. at 783, 528 S.W.2d at 921.  "Whatever enactment abrogates or lessens the means of enforcement of a contract impairs it obligations."  Scougale v. Page, 194 Ark. 280, 293, 106 S.W.2d 1023, 1030 (1937) (citing St ate of Louisiana v. Jumel, 107 U.S. 711 (1883)).  Although Arkansas courts have acknowledged the necessity to balance the impairment versus the public purpose, Arkansas case law does not include specific examples of the application of the balancing test.  We refer to the opinion of Sidley Austion LLP of even date herewith for an analysis of federal case law relating to the balancing test.

D.           Arkansas Cases on Governmental Debt Obligations and State Contracts

If the existence of State contractual obligations under the Act were found, courts would find persuasive the following Arkansas cases on governmental debt obligations. Most of the Arkansas cases involving governmental debt obligations, as discussed below, are long-standing jurisprudence and are rather absolute in protecting the integrity of public securities contracts against impairment by subsequent Legislative Actions adversely affecting their security and debt service payment.

"When the outstanding . . . bonds were issued and delivered, a contract was made between the state and the bondholders with the provisions of [the act], the covenants and pledges executed pursuant thereto and the bonds themselves constituting a part of this contract."  Beaumont, 239 Ark. at 804, 394 S.W.2d at 481 (citing W.B. Worthen Co. v. Kavanaugh, supra).

Decided in 1965, Beaumont involved a pledge of highway revenues to the State's outstanding highway bonds.  239 Ark. at 803, 394 S.W.2d at 481.  A proposed act provided for the issuance of additional bonds to advance refund the highway bonds.  Id.  The proceeds of the refunding bonds were to be placed in the highway bonds' reserve account and invested in US government securities that would be sufficient to pay the principal and interest on the highway bonds when due and would be solely used for paying the outstanding highway bonds.  Id. at 804, 394 S.W.2d at 481. 
60;A holder of highway bonds asserted that the proposed act impaired the obligation of the contract between the State and the bondholders.  The court stated that not every change affecting a contract constitutes an impairment.  Id. at 805, 394 S.W.2d at 481.  All unilateral changes in contracts could be technical breaches of the contract, but not all changes will impair the contractual obligation.  Id. at 805, 394 S.W.2d at 482.

The test for determining whether the obligation has been impaired when there has been a change in the method of enforcement of a contractual obligation is whether the new procedure is as "'adequate and efficacious" as the old, or stated differently,  "[w]hether the contracting party receives a substantial equivalent of what he has been required to give up."  Id. at 806, 394 S.W.2d at 482 (quoting State of Louisiana ex rel Southern Bank v. Pilsbury, 105 U.S. 278 (1882) and Woodruff Electric Coop. Corp. v. Ark. Public Service Comm., 234 Ark. 118, 351 S.W.2d 136 (1961)).  The Beaumont Court defined "Impair" as "to make worse, to diminish in quality, value, excellence or strength; to deteriorate."  239 Ark. at 806, 394 S.W.2d at 482.

The real obligation, in the case of a bond contract impairment question, is the obligation of the issuer to pay the principal of and interest on the bonds when due.  Id.  The bondholders expect and have a right to be paid.  Id. However, payment does not always have to made from a particular fund or source.  Id.

There is a distinction between the breach of contract and the impairment of the obligation of a contract, and where the state enacted a statute which had the effect of annulling or breaking the contract, but contained a provision for payment of the obligation, it does not constitute an impairment of the obligation of the contract.  It follows, therefore, that any change involving a substitution of security which does not diminish the prospects of, or adversely interfere with, expected payment does not constitute a contractual impairment.

Id. at 807, 394 S.W.2d at 482-483 (citing enactment Caldwell v. Donaghey, 108 Ark. 60, 1913 Ark. LEXIS 15 (1913); Morgan Engineering Co. v. Cache River Drainage Dist., 115 Ark. 437, 1914 Ark. LEXIS 166 (1914) (internal quotation marks omitted).  The Beaumont court went on to find that there was no impairment in that case, because the bondholders’ prospects of payment were not diminished.  239 Ark. at 806, 394 S.W.2d at 482.

In Kurrus v. Priest, the Arkansas Supreme Court examined whether bond contracts where the collection of the sales and use tax were security for the bonds would be impaired if the sales and use tax statute was altered.  342 Ark. 434, 445, 29 S.W.3d 669, 675 (2000).  The proposed change in the tax statute would have caused a portion of the revenues from the sales and use taxes on used goods to no longer be available for the payment of the bonds.  Id. at 446, 29 S.W.3d at 675.  The court stated:

[U]nder the terms of the proposed amendment, an impairment clearly arises under the stipulated facts in this case because the [city] covenanted that its bonds would be payable from and secured by a pledge of sales and use taxes upon all goods.  Significantly, the proposed amendment's terms fail to provide a substituted source of revenue that would replace these abolished sales and use taxes on used goods.  If the proposal had contained such a provision and assurance, any impairment caused by the loss of sales and use taxes could have been precluded.

Id. (citing Beaumont, supra).  The court went on to note that it "has also held that, where collateral which has been pledged to secure the repayment of bonds is removed, then the obligation of the contract between the bondholder and the bond issuer is impaired."  Id. at 446, 29 S.W.3d at 676 (citing Bacon v. Road Imp. Dist. No. 1, 157 Ark. 309, 248 S.W. 267(1923)).

One party argued that the bondholders were made aware that there was the possibility that taxes might be reduced through changes in definitions or the granting of exemptions.  The court, however, stated that there was nothing in the language of the bond documents that would indicate that "an entire source of the sales and use tax revenues might be abolished and no longer available to secure the bond indebtedness."  Id.  The court found the change unconstitutional under the U.S. and Arkansas Constitutions.

In City of Little Rock, supra, the court found that the legislature could not impair the bondholders' contract by allowing the waterworks commission to make donations of money to the Community Chest from the municipal waterworks revenues which were pledged to the bonds.  204 Ark. at 567, 163 S.W.2d at 524.  Although there was ample revenue to pay the bonds, the court found that if the commission were permitted to make a small donation under the act, then a broad reading of the act would permit a larger donation.  Id.

In a 1927 act, the Legislature set out its intention to take over, construct, repair, maintain, and control all the public roads in Arkansas which made up the highways.  Scougale, 194 Ark. at 281, 106 S.W.2d at 1024.  Many of the roads had been built by improvement districts that issued bonds in order to construct the roads.  Id.  The bonds were paid with assessments levied against the lands that were benefited by the roads.  Id. As part of this plan, the State agreed to make annual appropriations to the counties and to maintain the highways.  At the same time new roads were constructed with funds raised by the sale of notes by the State Highway Commission.  Id.  The State eventually defaulted on the notes.  Refunding bonds were issued under an act in 1934.  Id.

In 1937 an act was passed which contained various provisions regarding the allocation and application of the funds that came into the Highway Commission.  Id.  at 287, 106 S.W.2d at 1027.  A taxpayer sued alleging that the 1937 act was an attempt by the State to impair the obligation of the contract with the bondholders.  Id.  The court stated that if the terms of the 1934 act under which the bonds were issued were not substantially changed, the obligation of the contract was not weakened, the contract was not rendered less operative or the enforcement of some right conferred on the bondholders was not lessened by the passage of the 1937 act, then there was no impairment.  Id.  The court stated that the appellants had not pointed out anything in the 1937 act which would indicate that any right possessed by the bondholders under the 1934 act had been taken from them.  The court found that "[e]very remedy possessed under the original bonds, such as the enforcement of liens and assessments against the lands lying in the road districts, is still held by the owners of the original obligations.  By the new refunding laws the full faith and credit of the state and its resources has been repledged."  Id.  at 294, 106 S.W.2d at 1030.  The court found no impairment.  Id.

The court in Scougale also stated:  "Although the value of state bonds, like other bonds, may rise and fall on the open market, that would have no bearing on the question of impairment of the state's obligation, as there was no undertaking on the part of the state to guarantee any particular market price for the bonds." Id. at 298, 106 S.W.2d 1032.  Taken out of context, this quote might be troubling to a bondholder who does not want the market value of its bonds reduced by Legislative Action.  We note that the court in Scoulage also recognizes that "'Impair' means to make worse; to diminish in quality value, excellence or strength, to d eteriorate."  Id. at 293, 106 S.W.2d 1029 (citing Swinburne v. Mills, 17 Wash. 611 (1897); Gladney v. Sydnor, 172 Mo. 318 (1903) (reversed on other grounds)).  Further, in subsequent cases, the Arkansas Supreme Court has recognized that one of the tests that a contract has been impaired is that its value has been diminished by legislation. Miller Levee District No. 2, 200 Ark. at 60, 137 S.W.2d at 918 (citing Bank of Minden v. Clement, 256 U.S. 126 (1921)).  Therefore, we believe that Arkansas courts would distinguish its statement in Scoulage as specific to the facts in that case and would not rely on that analysis if evaluating an impairment in the context of the Bonds.

E.           Unpredictability Under Balancing Test – General Guidelines

In applying the above case law to the Act, it is apparent that the outcome of the cases turns on particular facts in the balancing of the contract rights impaired versus the reasonableness and necessity of an impairment serving a public purpose.  There is no way to predict or describe the precise form of a future Legislative Action impairing the Indenture and the Bonds, the circumstances under which it might be enacted, or the public purpose to be effectuated thereby.  Moreover, the form of and nature of, and any facts surrounding, any litigation that might arise challenging a Legislative Action as an unconstitutional impairment of contract cannot be predicted.  Thus, whether a court would determine that a future Legislative Action would work a substantial impairment of the Indenture and the Bonds, and wh ether such a Legislative Action would be viewed as a reasonable and necessary means toward an important public purpose, cannot reasonably be predicted.

Only some general guides to what might be permissible and impermissible can be discerned from the cases.  Obviously, the less severe the impairment, the greater the likelihood that a court will find the impairing Legislative Action to be reasonable.  See Kurrus, 342 Ark. at 446, 29 S.W.2d at 676 (proposed amendment did not provide a substituted source of revenue to replace abolished tax, but if it had the impairment could have been precluded).  If no less drastic means exist to accomplish the public purpose, the more likely the Legislative Action would be found necessary and reasonable.  See United States Trust Co., 431 U. S. at 29-30.  If a statute affected only a very nar row segment of a population or an industry, a court might infer that the public purpose was not so important and that the Legislative Action was unnecessary.  See Allied Structural Steel, 438 U.S. 234, 248 (1978).  If the Legislative Action operated in a way that was foreseeable at the time the contract was entered into, such as in an already regulated area, then the courts will more likely find the impairing Legislative Action to be reasonable; however, when analyzing a governmental entity's own contract, courts have used a stricter standard in determining an impairment's reasonableness.  See Energy Reserves Group, 459 U.S. at 416.  However, even if a Legislative Action worked a severe or "total" impairment, the courts might still defer to the legislating body's determination of the reasonableness and necessity of the Legislative Action in light of an impo rtant public purpose.  See Keystone Bituminous  Coal Association, 480 U.S. 470, 504 (1987).

Thus, for example, a court might uphold a Legislative Action temporarily suspending or limiting the authority of an electric utility, or its assignees, to collect storm recovery charges or other revenues for the purpose of providing relief to electric utility customers in an emergency situation, such as the occurrence of an event or a series of events widely creating economic havoc among customers.  The court might reason that the utility industry is already heavily regulated and that such a Legislative Action would not unreasonably interfere with the contractual rights of bondholders, the owners of storm recovery property or other financing parties.  This is not to suggest that a more severe impairment might not be sustained; rather, that could depend on the court's view of the urgency and unavoidable necessity of the measures taken by the legislative body to protect public interests, such as the health, safety and welfare of the people of the State.

F.           Voter Initiative or Referendum Affecting the Act

The Arkansas Constitution is fundamentally an act of the people of the State and is a product of what the people intended.6  The Arkansas Constitution reserves to the people "the power to propose legislative measures, laws and amendments to the Constitution, and to enact or reject the same at the polls independent" of the Legislature.  Ark. Const. amend. VII.  This power includes the rights of initiative and referendum.

 

6"We the People of the State of Arkansas…do ordain and establish this Constitution."  Ark. Const. pmbl.

In order to place an initiated act or amendment to the constitution before the voters, among other procedural requirements, at least eight percent (8%) or ten percent (10%), respectively, of the legal voters must sign and file a petition with the Arkansas Secretary of State requesting that the initiative be placed on the ballot.  If the requirements are met, this would allow the proposed initiated act or amendment to be placed on a statewide ballot for approval by the voters.  An initiative petition with subsequent passage by the electors could, therefore, amend or repeal the Act or amend the Arkansas Constitution in a manner that amends, repeals or affects the Act.  We are unaware of any petition which has been circulated among the voters or filed with the Secretary of State which attempts to amend the A ct or otherwise which affects the issuance of or security for the Bonds.

In order to place a referendum before the voters, among other procedural requirements, at least six percent (6%) of the legal voters must sign and file a petition with the Secretary of State requesting that the referendum be placed on the ballot.  Such petition must be filed with the Secretary of State not later than ninety (90) days after the final adjournment of the session at which such Act was passed.  The time in which voters could amend or repeal the Act by voter referendum has expired.

Generally, Arkansas courts have analyzed a subsequent amendment to the Arkansas Constitution or a subsequent amendment to or repeal of an act as being an impairment in light of the cases construing the Contract Clause.  See Kurrus, 342 Ark. at, 445, 29 S.W.3d at 675.  In Kurrus, the court held that if a proposed amendment clearly conflicts with the Contract Clause, the proposal should not be submitted to the electorate.  Id., (citing Donovan v. Priest, 326 Ark. 353, 931 S.W.2d 119, 121 (1996), cert. denied, 519 U.S. 1149 (199 7)).

The case law directs, therefore, that an amendment to the Arkansas Constitution or an amendment to or repeal of the Act would be subject to an impairment analysis under the Contract Clause.  Although the Arkansas Constitution has its own contract clause, Arkansas courts generally analyze the Arkansas Contract Clause in light of federal case law.  An amendment to the Arkansas Constitution or an amendment to or repeal of the Act would also likely trigger this same federal Contract Clause analysis.  Kurrus, 342 Ark. at 447; 29 S.W.3d at 676 (holding that a proposed ballot measure, if passed, would violate both the Arkansas and United States Contract Clauses).

Therefore, in light of these cases, a constitutional amendment or amendment to or repeal of the Act would be subject to an impairment clause analysis to the extent such amendment or repeal is applied retroactively or prospectively to impair existing contractual obligations.

* * *

Based upon the foregoing analysis, assuming that Arkansas courts would rely on the same legal criteria and precedent established in the federal courts' analysis of the U. S. Constitution's contract clause, and subject to the qualifications and limitations set forth herein, in our opinion, a reviewing court in a properly prepared and presented case would conclude that (a) the State Pledge constitutes a contractual relationship between the Bondholders and the State, and (b) absent a demonstration by the State that an Impairment is necessary to further a significant and legitimate public purpose, the Bondholders (or the Trustee acting on their behalf) could challenge successfully, under the Arkansas Contract Clause, the constitutionality of any Legislative Action subsequently passed by the Legislature, any law voted by the people as a co nstitutional amendment or amendment to or repeal of the Act, or any action of the APSC exercising legislative powers determined by such court to reduce, alter, or impair the value of the Storm Recovery Property or the Charges so as to cause an Impairment prior to the time that the Bonds are fully paid and discharged.

II.           AVAILABILITY OF INJUNCTIVE RELIEF

A.           PRELIMINARY OR TEMPORARY INJUNCTIVE RELIEF

Arkansas law provides a forum to adjudicate the constitutionality of Legislative Action.  Here, we address specifically the remedies of preliminary and permanent injunctive relief enjoining state officials from enforcing the provisions of such Legislative Action.  Whether such relief could be obtained will depend on application of the principles discussed earlier in this opinion, including a demonstration that (i) such Legislative Action violates the State Pledge; (ii) the State Pledge is a contract of the State; and (iii) the Legislative Action was not a legitimate and reasonable exercise of the state’s sovereign powers and reasonable and necessary to serve a legitimate public purpose.

Whether preliminary injunction delaying implementation of Legislative Action being challenged under the Arkansas Contract Clause as a substantial impairment could be obtained by Bondholders (or the Indenture Trustee acting on their behalf) pending an adjudication on the merits of such claim will depend on several considerations.

The purpose of an injunction is to preserve an existing state or condition and to afford relief against future acts that are against equity and good conscience and to keep or preserve a thing in status quo.  American Investors Life Ins. Co. v. TCB Transp., 312 Ark. 343, 345, 849 S.W.2d 509, 510 (1993); Comer v. Woods, 210 Ark. 351, 354, 195 S.W.2d 542, 544 (1946).  The existing state or condition with respect to the Bonds prior to the challenged Legislative Action would appear to be the continued effectiveness of the Order and the validity of the Storm Recovery Property and Charges.

Under Arkansas law, in order to obtain a temporary or preliminary injunction, the party seeking the injunctive must establish that:  (1) irreparable harm will result absent an injunction and (2) the moving party is likely to succeed on the merits.  Three Sisters Petroleum, Inc. v. Langley, 348 Ark. 167, 175, 72 S.W.3d 95, 101 (2002).

Rule 65 of the Arkansas Rules of Civil Procedureprovides, in pertinent part, that:

A preliminary injunction or temporary restraining order may be granted without written or oral notice to the adverse party or his attorney where it appears by affidavit or verified complaint that irreparable harm or damage will or might result to the applicant if such preliminary injunction or temporary restraining order is not granted. [Emphasis added.]

Of the two required factors, the Arkansas Supreme Court has held that irreparable harm is "the touchstone of injunctive relief."  Manila Sch. Dist. No. 15 v. Wagner, 356 Ark. 149, 153, 148 S.W.3d 244, 246 (2004).  Thus, it is well established under Arkansas law that a plaintiff must show irreparable harm.

Harm is considered irreparable when it cannot be adequately compensated by money damages or redressed in a court of law.  AJ&K Operating Co. v. Smith, 355 Ark. 510, 518, 140 S.W.3d 475, 481 (2003). It seems doubtful that the Bondholders (or the Indenture Trustee acting on their behalf) could obtain adequate money damages from the State or its officials.7  Furthermore, payment delays on the Bonds should be accepted as “irreparable harm,” and an argument could be made that the Bondholders would experience greater harm if preliminary injunctive relief were denied than any other party would suffer if it were granted.  For example, if imposition and collection of the Charges, and accordingly payments to the Issuer, were stopped or reduced, the ratings on the Bonds would likely be downgraded, causing a loss of value in the Bonds and possibly causing institutional Bondholders to sell their Bonds at depressed market prices, and Bondholders could experience delays or omissions in the receipt of payments of interest or principal on their Bonds.  In addition, any such loss on sale or additional interest due the Bondholders as the result of the payment interruption probably could not be recovered from the likely defendant (the State) in the proceeding on the merits.

In a ruling on a motion for a preliminary injunction, a circuit court may consider the public interest and the balancing of the harms between the parties.  See City of Dover v. City of Russellville, 363 Ark. 458, 460-61, 215 S.W.3d 623, 625 (2005); United Food & Commercial Workers v. Wal-Mart Stores, 353 Ark. 902, 906, 120 S.W.3d 89, 92 (2003).  Assuming that the injunction is not adverse to the public interest, that the Arkansas Contract Clause claim appears to the court to be meritorious (based on the application of the principles discussed in Part I above), and further assuming that the challenged Legislative Action effects a substantial impairment, the requirement of likelihood of success on the merits should be met.

Based upon the foregoing analysis, and subject to the qualifications and limitations set forth herein, in our opinion, although sound and substantial arguments support the granting of preliminary injunctive relief, the determination of whether preliminary injunctive relief delaying implementation of Legislative Action being challenged under the Arkansas Contract Clause would be available under Arkansas law will depend upon the facts before the court and upon whether, after balancing the equities and considering the public interest, the Bondholders have demonstrated (a) irreparable harm will result absent an injunction and (b) they are likely to succeed on the merits.

B.           PERMANENT INJUNCTIVE RELIEF

In Arkansas courts, the standard for a permanent injunction is essentially the same as that for a preliminary injunction.  See Ark. R. Civ. P. 65(c).  The duration of the injunction is the only material difference between the two.

A preliminary injunction or temporary restraining order not otherwise earlier dissolved shall remain in effect until a final judgment or decree is entered; provided that such preliminary injunction or temporary restraining order may, upon motion and for good cause shown, be made permanent upon final hearing of the cause.  Id.

Based upon the foregoing analysis, and subject to the qualifications and limitations set forth herein and although the decision to grant injunctive relief will be in the discretion of the court requested to such action, in our opinion, a reviewing court in a properly prepared and presented case should conclude that permanent injunctive relief is available under Arkansas law to prevent implementation of Legislative Action passed hereafter and determined by such court to cause an Impairment of the Bonds or rights of the Bondholders that is in violation of the Arkansas Contract Clause (based on the application of the principles discussed hereinbefore).

III.           TAKINGS CLAUSE

You have further requested that we provide you with an opinion whether a reviewing court would hold that the State would be required to pay just compensation to Bondholders if the repeal or amendment of the Act or the taking of any other Legislative Action in contravention of the State Pledge constitutes a permanent appropriation of a substantial property interest of the Bondholders in the Storm Recovery Property and deprived the Bondholders of their reasonable expectation arising from their investments in the Bonds.

Article 2, Section 22 of the Arkansas Constitution provides that:  "The right of property is before and higher than any constitutional sanction; and private property shall not be taken, appropriated or damaged for public use, without just compensation therefor." The Arkansas Supreme Court has stated that "[j]ust compensation means full compensation."  Arkansas State Hwy. Comm'n v. Stupenti, 222 Ark. 9, 13, 257 S.W.2d 37, 40 (1953).  Furthermore, a taking does not require permanency or an irrevocable injury.  City of Fayetteville v. Stanberry, 305 Ark. 210, 215, 807 S.W.2d 26, 28 (1991).

Arkansas courts consistently look to United States Supreme Court decisions in interpreting the Arkansas Takings Clause.  For example, in El Paso Prod. Co. v. Blanchard, 371 Ark. 634, 643, 269 S.W.3d 362, 370 (2007), the court acknowledged the U.S. Supreme Court's analysis in Agins v. Tiburon, 447 U.S. 255, 260 (1980) holding that a zoning regulation amounts to a constitutional taking only if the ordinance denies an owner economically viable use of his land.  In Barrett v. Poinsett, 306 Ark. 270, 272-273, 811 S.W.2d 324, 325 (1991), the Arkansas Supreme Court, as have many other U.S. and state courts, cited the landmark case, Penn. Central Transp. Co. v. City of New York, 438 U.S. 104 (1978) in its analysis of takings jurisprudence.  Under Penn. Central, once a court determines that the rights constitute "property" for purposes of the Takings Clause, it should then examine whether the state action constitutes a compensatory taking.  Courts will generally make an ad hoc factual determination of takings allegations based on an examination of (i) the character of the government action; (ii) the economic impact of the regulation; and (iii) the extent to which the regulation interfered with distinct investment backed expectations.

Although Arkansas courts have provided some guidance for determining whether a taking has occurred, this determination rests on a factual inquiry that must be made on a case-by-case basis.  There is no set formula in Arkansas for determining "where regulation ends and taking begins."  Winters v. State, 301 Ark. 127, 133, 782 S.W.2d 566, 569 (1990).  The U.S. Supreme Court stated in Easter Enterprises v. Apfel that "the process for evaluating a regulation's constitutionality involves an examination of the 'justice and fairness' of the governmental action.  That inquiry, by its nature, does not lend itself to any set formula, . . . and the determination . . . require[s] that economic i njuries caused by public action [must] be compensated by the government, . . . [and] is essentially ad hoc and fact intensive."  524 U.S. 498, 523 (1998).

The case law in Arkansas primarily deals with real property rights.  However, the U.S. Supreme Court has held that property not constituting real property or tangible personal property may nevertheless be entitled to protections afforded by the Takings Clause.  Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1003-04 (1984).  An independent source, however, such as state law or existing rules, and not the United States Constitution, must create the protected property right.  In Ruckelshaus, the Court determined that trade secrets, which are cognizable under state law, constitute property rights for purposes of the taking clause because a trade secret can be assigned, form the res of a trust, and pass to a trustee in bankruptcy.  Ruckeshaus, 467 U.S. at 103.  Additionally, in Duquesne Light Co. v. Barasch, 488 U.S. 299, 208 (1989), the Court recognized that a utility's rights to a fair return on investment is a property right for purposes of the Takings Clause.  An Arkansas court would likely undertake a similar analysis of, and reach a similar conclusion regarding, the rights under the Act in determining whether they constitute "property" for purposes of the Arkansas Constitution.8

In United States Trust Co., supra, the Supreme Court recognized that "contract rights are a form of property and as such may be taken for a public purpose provided that just compensation is paid."  431 U.S. at 19, n. 16.  The Supreme Court stated that states are free to exercise their power of eminent domain to abrogate constitutional rights upon payment of just compensation.  However, at least one court has noted that the government's interference with contractual rights does not necessarily constitute a taking of property if the contract deals with a subject matter within the control of Congress.  See Greenbriar v. U.S., 193 F.3d 1348, 1356 (Fed. Cir. 1999).

A court's response to a Takings Clause challenge will be affected by the nature of the Impairment action which could include, but is not limited to legislation that:  (i) repeals or alters the State Pledge; (ii) prevents the imposition of the Charges; (iii) revises the regulatory basis for establishing utility rates in such a way that adversely impacts the collection of the Charges; (iv) diverts the Storm Recovery Property from payment of the Bonds to other public purposes; or (v) adversely affects the assets that generated the Charges.

Section 23-18-905(a) provides that storm recovery property "shall constitute an existing, present intangible property right or interest therein, notwithstanding that the imposition and collection of storm recovery charges depends on the electric utility to which the order is issued performing its servicing functions relating to the collection of storm recovery charges and on future electricity consumption."  Even though the statute characterizes the storm recovery property as a present property right, in order to determine that State action will constitute a compensable taking, a court must determine that the Storm Recovery Property, and the pledge of the Storm Recover Property to payment of the Bonds provided for under the Act, in the Financing Order and in the Indenture are property of the type protected by the Arkansas Ta kings Clause.

Bondholders would have a strong argument based on the United States Supreme Court's decision in U.S. Trust Co., supra, that the Bondholders' rights are "property" warranting the protections afforded by the Port Authority bondholders by the New Jersey legislature, pledging that the revenues supporting the subject Port Authority bonds would not be diverted for unauthorized purposes.  The New Jersey Legislature later repealed the covenant, and the United States Supreme Court found the repeal to impair the contract rights of the bondholders.  In dicta, the Supreme Court indicated that "[c]ontract rights are a form of property" that, if taken, would require the payment of just compensation.  In Beaumont, the Arkansas Supreme Court recognized that the obligation of the issuer to pay the principal and interest of the bonds when due is "a matter that is of vital significance to the bondholders." 239 Ark. at 806, 394 S.W.2d at 482.

As noted in the opinion of Sidley Austin, LLP of even date herewith, it is well established under Federal law that investment backed expectations can be property for the purposes of takings analysis.  Therefore, although many factors will have an impact on the market price of the Bonds, arguably, the maintenance of the market price of the Bonds could be a reasonable investment-backed expectation.  See Miller Levee District No. 2, 200 Ark. at 60, 137 S.W.2d at 918 (citing Bank of Minden, supra, for the proposition that one of the tests that a contract has been impaired is that its value has been diminished by legislation).  Legislative Action that prevents the Bonds from being paid, therefore, would likely support a takings claim.  See Beaumont, 239 Ark. at 806, 394 S.W.2d at 482.  Such Legislative Action would clearly interfere with Bondholders' reasonable investment-backed expectations, since timely payment of the Bonds is the primary expectation of the Bondholders.  Id.  Additionally, the State Pledge itself may form the basis for reasonable investment-backed expectations.  In Miller Levee District No. 2, the court recognized a right of redemption as a substantial right, and not merely a remedy, that should not be disturbed by subsequent legislation.  200 Ark. at 60, 137 S.W.2d at 918 (citing Smith v. Spillman, 135 Ark. 279, 205 S.W. 107 (1918)).  The United States Supreme Court has held that a governm ent guarantee of confidentiality could form the basis for such an expectation.  See Ruckelshaus, 467 U.S. at 1011.  The Bondholders would likely argue that they would not have invested in the Bonds in the absence of the State's undertaking contained in the State Pledge and, therefore, that the State Pledge created reasonable investment-backed expectations.  It is reasonable and logical that Bondholders who have invested their funds in the Bonds expect that the Bonds will be paid and that, based on the State Pledge, the State will not impair the State Pledge so as to endanger or imperil their investment.  See Beaumont, 239 Ark. at 806, 394 S.W.2d at 482.  Based on the Act and the referenced case law, we believe that a reviewing court would conclude that the bondholders' rights are "property" warranting the protection of the Arkansas Constitution.

A court would reasonably conclude, therefore, that Legislative Action constitutes a compensable taking under the Arkansas Takings Clause if it determines that the Legislative Action: (i) is an intentional action by the Legislature or the APSC, (ii) effects a regulatory taking of the Storm Recovery Property, and (iii) is for public use.  Specifically, an Arkansas court would reasonably conclude that the repeal or amendment of the Act or taking of any other action in contravention of the State Pledge would constitute a permanent appropriation of a substantial property interest of the Bondholders requiring full compensation.  To determine whether a compensable taking had occurred, the court would consider applying principles developed in the land use context to an analysis of the rights of the Bondholders.   Those principles would require an analysis of whether the State action denied the Bondholders all economically beneficial or productive use of the rights, such as, preventing the use of the Storm Recovery Property to pay the Bonds.

Based upon the foregoing analysis, and subject to the qualifications and limitations set forth therein, in our opinion, under the Arkansas Takings Clause, a reviewing court would hold that the State would be required to pay just compensation to Bondholders if the State’s repeal or amendment of the Act or taking of any other action in contravention of the State Pledge (a) constituted a permanent appropriation of a substantial property interest of the Bondholders in the Storm Recovery Property or denied all economically productive use of the Storm Recovery Property; (b) destroyed the Storm Recovery Property; or (c) substantially reduced, altered or impaired the value of the Storm Recovery Property so as to unduly interfere with the reasonable expectations of the Bondholders arising from their investments in the Bonds.

In determining what is an undue interference, a court would consider the nature of the governmental action and weigh the public purpose served thereby against the degree to which it interferes with the legitimate property interests and distinct investment-backed expectations of the Bondholders.  Moreover, there can be no assurance that any such award of just compensation would be sufficient to pay the full amount of principal of and interest on the Bonds.

***

All of the opinions set forth above are limited to the specific issues addressed, are given as of the date hereof, are limited in all respects to laws and facts existing on the date of this letter, and are based on the reasonable exercise of legal judgment.  Due to the absence of controlling judicial precedent, our analysis is necessarily a reasoned application of judicial decisions involving similar or analogous circumstances.  These opinions are specifically limited to the laws of the State of Arkansas.  We note that there are no reported controlling judicial precedents of which we are aware directly on point and that judicial analysis of issues relating to the Arkansas Contract Clause and the Arkansas Takings Clause has typically proceeded on a case-by-case basis and that the court’s determinatio n, in most instances, is usually strongly influenced by the facts and circumstances of the particular case.  We do not undertake to advise you of any changes in the opinions expressed therein from matters that might hereafter arise or be brought to our attention.

None of the foregoing opinions is intended to be guaranty as to what a particular court would actually hold; rather, each opinion is only an expression of our belief as to the decision a court of competent jurisdiction ought to reach if the issues were properly prepared an d presented to it and the court follows what we believe to be the applicable legal principles under existing judicial precedent.  There can be no assurance that a repeal of or amendment to the Act will not be sought or adopted or that any action by the State of Arkansas, the voters of the State of Arkansas or the APSC may not occur, any of which might constitute a violation of the State Pledge.  We cannot predict the facts and circumstances that will be present in the future and may be relevant.  Consequently, there can be no assurance that a court will follow our reasoning or reach the conclusions we believe current judicial precedent supports.  Furthermore, the outcome of any litigation cannot be predicted with any degree of certainty.

In the event of any Arkansas legislation, voter initiative or acts of the APSC that adversely impacts the rights of the Bondholders, costly and time-consuming litigation might ensue, adversely affecting, at least temporarily, the price and liquidity of the Bonds.  Moreover, the application of equitable principles (including the availability of injunctive relief or the issuance of a stay pending appeal) is subject to the discretion of the court asked to apply them.

It is understood that the Storm Recovery Property may be subject to bankruptcy, insolvency, reorganization moratorium, and other laws affecting creditors’ rights generally heretofore or hereafter enacted to the extent applicable and that their enforcement may also be subject to the exercise of judicial discretion in appropriate cases.

This opinion is given solely for your benefit in connections with the issuance of the Bonds and may not be furnished to or relied upon by any other person or for any other purpose without our prior written consent, provided that a copy of this letter may be posted to an internet website required under Rule 17g-5 under the Exchange Act and maintained by EAI solely for the purpose of complying with such rule..  We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to all references to our firm included in or made a part of the Registration Statement.  In giving the foregoing consents, we don not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the related rules and regulations of the Securities and Exch ange Commission.

Very truly yours,

WILLIAMS & ANDERSON PLC

 

7  Examples of hurdles to the receipt of such damages might include, but are not limited to, State sovereign immunity to suit in a particular forum, State administrative procedures for filing claims, legislative refusal to appropriate funds to pay a damages award, and the limited funds available to State officials.

 

8 In a 1990 case, the Arkansas Supreme Court treated a horse as property for purposes of an Arkansas Takings Clause analysis. Winters v. State, 301 Ark. 127, 782 S.W. 2d (1990).

SCHEDULE A

ADDRESSEES

Entergy Arkansas, Inc.

425 West Capitol Avenue

27th Floor

Little Rock, Arkansas  72201

Entergy Arkansas Restoration Funding, LLC

425 West Capitol Avenue

27th Floor

Little Rock, Arkansas  72201

Moody's Investors Service, Inc.

99 Church Street

New York, New York  10007

Standard & Poor's Rating Services,

   A division of The McGraw-Hill Companies, Inc.

55 Water Street

New York, New York  10041

Fitch Ratings

One State Street Plaza

New York, New York  10004

Morgan Stanley & Co. Incorporated

1585 Broadway

New York, New York 10036

SCHEDULE B

TRANSACTION DOCUMENTS

1. Indenture, dated as of August 18, 2010, as amended and supplemented by the first Series Supplement, dated as of August 18, 2010 (collectively, the "Indenture"), between Entergy Arkansas Restoration Funding, LLC, a Delaware limited liability company (the "Issuer"), and The Bank of New York Mellon, as Indenture Trustee and Securities Intermediary, providing for the issuance and sale on the date hereof by the Issuer of $124,100,000 aggregate principal amount of the Issuer's Senior Secured Storm Recovery Bonds (the "Bonds");

2. Storm Recovery Property Purchase and Sale Agreement, dated as of August 18, 2010, (the "Sale Agreement") between Entergy Arkansas, Inc., an Arkansas corporation ("EAI"), and the Issuer;

3. Bill of Sale, dated as of August 18, 2010, from EAI in favor of the Issuer;

4. UCC-1 Financing Statement, naming EAI, as assignor, and the Issuer, as assignee, filed with the Arkansas Secretary of State (the "Transfer Financing Statement") on August 16, 2010;

5. UCC-1 Financing Statement, naming the Issuer, as debtor, and the Trustee, as financing party, filed with the Arkansas Secretary of State (the "Security Interest Financing Statement") on August 16, 2010;

6. UCC-1 Financing Statement, naming EAI, as debtor, the Issuer, as financing party/purchaser/assignor, and the Trustee, as assignee of financing party, filed with the Arkansas Secretary of State (the "Back-Up Security Interest Financing Statement") on August 16, 2010;

7. Letter, dated August 18, 2010, from the Issuer authorizing the pre-filing of the Security Interest Financing Statement;

8. Letter, dated August 18, 2010, from EAI and the Issuer authorizing the pre-filing of the Transfer Financing Statement and the Back-Up Security Interest Financing Statement;

9. Storm Recovery Property Servicing Agreement, dated as of August 18, 2010, between the Issuer and EAI;

10. Administration Agreement, dated as of August 18, 2010, between the Issuer and EAI; and

11. Underwriting Agreement, dated as of August 11, 2010, between EAI, the Issuer, and Morgan Stanley & Co. Incorporated, as underwriter.