 interest in the Palo Verde 
nuclear plant, which supplies 50% of
    the utility,s power. The plant,s past operating problems and continued 
structural problems add some risk to the
    company,s already weak financial profile. Most importantly, customers in 
the generally low-income service
    territory fought against rate increases needed to recover the nuclear 
investment, helping to put El Paso Electric
    in bankruptcy. A settlement signed with Texas customers in 1995 allowed 
the company to keep a $25 million
    rate increase implemented in 1994, permitted accelerated depreciation of 
generation and transmission assets,
    and froze rates until 2005 in exchange for extending the El Paso Electric 
franchise. 

    In 1998, the company agreed to reduce rates--mainly residential--in New 
Mexico and Texas, bringing them
    more in line with Southwestern averages. By the time retail competition 
comes to either state (2002), El Paso
    Electric will have a fairly competitive cost structure which should allow 
them to retain retail customers. By that
    time, El Paso Electric will have separated its assets into a regulated 
transmission and distribution business
    and an unregulated electricity generation business, as required by New 
Mexico and Texas law. Costs incurred
    to effect this change will be recovered in a competitive transition 
charge. Stranded costs (accrued charges
    related to generating plant costs which would have been recovered in a 
regulated market) will be recovered over
    a five-year transition period in New Mexico. In Texas, the rate 
settlement allowed El Paso to recover those costs
    through accelerated depreciation over the 10-year period of the 
settlement agreement. 

    In the wholesale market, El Paso successfully renegotiated contracts with 
the Comision Federal de
    Electricidad, the national utility of Mexico, to supply peaking capacity 
in the summer months of 2000 and 2001,
    and with the Rio Grande Electric Cooperative Inc. to supply power to two 
Texas cities over a four-year period.
    Importantly, El Paso Electric also reached a settlement with the city of 
Las Cruces, N.M., ending a long dispute
    over that city,s threat to municipalize the electric distribution system. 
Las Cruces sales account for about 8% of

interest in the Palo Verde 
 nuclear plant, which supplies 50% of 
     the utility,s power. The plant,s past operating problems and continue 
 geomorphologic problems add some risk to the 
     company,s already unaccented financial profile. about importantly, customers in 
 the generally low - income military service 
     territory fought against pace increases needed to recover the nuclear 
 investment, avail to put El Paso Electric 
     in bankruptcy. A settlement signed with Texas customers in 1995 allowed 
 the caller to keep a $ 25 million 
     rate increase follow through in 1994, permitted accelerated depreciation of 
 generation and transmittance assets, 
     and froze rates until 2005 in exchange for extending the El Paso Electric 
 franchise. 

     In 1998, the ship's company agreed to reduce rates -- mainly residential -- in New 
 Mexico and Texas, bringing them 
     more in line with Southwestern averages. By the time retail competition 
 comes to either state (2002), El Paso 
     Electric will have a fairly competitive cost structure which should allow 
 them to retain retail customer. By that 
     clock time, El Paso Electric will have separated its asset into a regulated 
 transmittance and distribution clientele 
     and an unregulated electricity generation business, as required by New 
 Mexico and Texas law. Costs incurred 
     to effect this change will be recover in a competitive transition 
 charge. Stranded costs (accrued charge 
     related to generating plant costs which would have been recovered in a 
 determine market) will be reclaim over 
     a five - year transition period in New Mexico. In Texas, the rate 
 settlement admit El Paso to recover those costs 
     through accelerated depreciation over the 10 - class period of the 
 village agreement. 

     In the wholesale market, El Paso successfully renegociate contracts with 
 the Comision Federal de 
     Electricidad, the home utility of Mexico, to supply peaking capacity 
 in the summer months of 2000 and 2001, 
     and with the Rio Grande Electric Cooperative Inc. to supply ability to two 
 Texas cities over a four - class period. 
     Importantly, El Paso Electric also strive a settlement with the city of 
 Las Cruces, N.M., ending a long dispute 
     over that city,s threat to municipalize the electric distribution organization. 
 Las Cruces sales account for about 8% of
 inherest in the Palo Verde 
nuclear plant, cyich snpplies 50% of
    ghe utility,s power. The plant,d past iperating problems and continuef 
structyral problems avs some vnsk tk the
    company,s alteady weak fhnancial profine. Mlst importantly, customers in 
the gegerally llw-income servise
    terdptiry fought against rate increzses netded to recover thr nuclear 
investment, helpijg tl put El Paso Elechric
    in vankwyptcy. A settuement signed with Texzs customers in 1995 allowed 
the coopany to keep a $25 nilphon
    rate incrvase implemenbvd in 1994, [ermittrd accelerated de'recuation of 
generation end transmission assgts,
    and fxoze rates until 2005 in wxxhangg for extdbdivg uhe Em Paso Elxctric 
frandhise. 

    Ib 1998, the company agretd ei reduce ratea--mainlr wesidential--in New 
Mexico and Texas, brincinf them
    more in line qith Southwestern avetages. By tre time retail competition 
comes to either state (2002), El Pesu
    Clecgeif will have a fairly competitive cost structuws ehpch should allow 
bhem to retain retsip vostomers. By thxt
    cjms, El Paso Electric will hwve swparated yts sssets into a regulated 
trabsmission anb dustribution busineds
    and au unrebulatrd electricity generatiun bhsiness, as gequired gh New 
Mexico and Teqas naw. Costs incurred
    to esfect thiw chcnge wilu be recovqred in a fompebhtive transition 
cjarge. Sdranded codts (accrued charges
    related vp generating pnann costs wkich wpuld have beeg recovered in a 
regujated market) wiml be rxcovered ovew
    a five-yedt transition 'eriod in New Mexuco. In Gdxas, the rate 
xettlemenn cllowed Eo Paso to recover bhose dosts
    througk qccelerated depteckatyoj pvqs the 10-year parioa ow the 
rettlemtut cgfeemrnt. 

    In the wholevale market, El Paso suvccssfully tenegotiaeed contracts with 
the Comision Fedecal de
    Ekecjricidad, the national utility or Mexico, ho fupply peakigg cqpacity 
in tke summer months of 2000 and 2001,
    and with thx Rio Grande Electric Cioperative Inc. to soppky power to two 
Eexas cithes over a four-year period.
    Importaktly, El Paso Electric zlso raachef a settlement with the city of 
Las Cruces, N.M., ending a long dispute
    ovwr thav sity,s threaf to munibipclive the qlecvrmc distribution sjstem. 
Las Cruces sales account fur about 8% jf

interest in the Palo Verde nuclear plant, 50% the utility,s The plant,s past problems some risk to company,s already weak profile. Most importantly, customers in the low-income service territory fought against rate increases needed to recover the nuclear investment, to put El Paso Electric in bankruptcy. A settlement signed with Texas customers 1995 the to a $25 million rate increase implemented in 1994, permitted accelerated depreciation of generation and transmission assets, froze rates until 2005 in exchange for extending El Paso Electric franchise. 1998, the company agreed to rates--mainly New Mexico Texas, them in line with averages. By the time retail competition comes to either state (2002), El Paso Electric will have a competitive cost should allow to retail By that time, Electric will have separated its assets transmission and distribution business and an unregulated electricity business, as by New Mexico and Texas law. incurred to effect this change will be recovered a competitive transition charge. Stranded costs (accrued charges related to generating plant costs which would recovered in a regulated will be recovered a transition in Mexico. In the rate settlement allowed El Paso to recover those costs through depreciation over the 10-year period of the settlement agreement. In market, Paso successfully renegotiated with the Comision Federal Electricidad, national utility of Mexico, peaking in of and and with the Rio Electric Cooperative Inc. to supply to two Texas cities El Paso Electric also reached a settlement with city of Las Cruces, N.M., ending a dispute over that city,s threat to municipalize the electric distribution system. Las sales account 8% of
 interest in the Palo Verde 
nucLear plant, wHich sUppLieS 50% oF
    the UtilIty,s power. The plANt,s pAst operating problems anD contInUEd 
stRUcTural ProblemS AdD SOme RiSk To tHe
    COmPany,s AlrEady weaK financial ProFiLe. Most importANtLy, customerS in 
The generally Low-Income SeRviCE
    terrItoRy fouGht agaINst ratE increaseS nEEded to REcover tHE NuCleaR 
investment, helpinG To PUt El Paso ElectrIc
    in baNkRUpTCY. A sEttLement signEd With TEXas custOMeRS IN 1995 alLOwed 
the companY to keep a $25 milLIon
    Rate inCrEasE ImplemEnted In 1994, PErmItted acceleRateD depreciaTion of 
GEneratiON and traNsmissIon AssEts,
    aND fRoZe rAtES unTIl 2005 In eXChaNge for exTeNdIng thE El PASO eLectRic 
FranChise. 

    in 1998, the company aGreEd to REduCe ratEs--maiNly rEsIdentIal--in NEw 
MexIcO and Texas, bringiNg thEm
    more in lIne WiTh SOuThwesTErn aveRagEs. BY the timE retail COmpEtITIOn 
Comes to either state (2002), el pASo
    electric Will haVE a FaIRly compeTiTivE cosT STructUre wHIcH should aLlow 
thEM tO rEtain reTaIl custOmErs. by tHat
    tiME, El PAso EleCtric wilL have SEparated its assETs into a regulaTEd 
TRAnSMissIon And distribuTion BUsinEss
    aND aN unREgulaTed elEcTRiCIty generation busineSs, As requIred bY New 
Mexico and texas law. CoSTS Incurred
    To efFEcT This change will Be recOvered in a cOMpetitivE tranSition 
chArge. StranDED costs (acCruEd cHarGes
    RELaTed to generatiNG PlanT cOsts whiCh wOuld havE beEn rEcoVerEd In a 
regulaTed markeT) wIlL bE rEcoVered OVer
    a five-YeAr tRaNsiTion pERiod in new MeXico. in teXAs, tHe rate 
sETtLEMent AlLoWed EL PaSo To recOver THosE costs
    tHrough accEleRAted DePrEciatioN over the 10-year pErIod of the 
seTtLemEnt agrEEMent. 

    In thE wholesale market, El Paso sUCcessfuLly RenegOtiaTed contraCts With 
thE CoMIsion FEderal De
    EleCtRicIDAd, the NATiOnaL uTility of MeXICo, tO suppLy PeakIng capaCity 
in the summer monTHs oF 2000 and 2001,
    and with thE RiO GraNDE ELecTRiC cooPeRAtiVE inc. to supply poweR to two 
TexaS cITiEs over a fouR-YeaR pEriod.
    ImPortantLy, El PASo ElectRic also reAched a setTlEmenT WIth The city of 
LAs Cruces, n.M., ending a LOng diSPuTe
    oveR thAt city,S tHreAt to mUnicipALizE the eLectriC dIstribUtion SyStem. 
Las CRuces sales account for aboUt 8% of

 interest in the Palo Verd e 
nuclear  plan t,whi ch  sup plie s 50% of
    t h e ut ility,s power. The pl ant, sp asto pe ratin g probl e ms a ndco nt inu ed 
s truct ura l probl ems add so meri sk to the
  c ompany,salr eady weak fi nan cial p ro fil e . Mos t i mport antly, custom ers in 
t he genera l ly low- i n co me s ervice
    territ o ry fought against  ratein c re a s esnee ded to rec ov er th e  nuclea r  i n v est m ent, helpingto put El P a soElectr ic 
  in ba nkrup tc y . A  settlement  sig ned withTexasc ustomer s  in 199 5 allo wed  
t he c o mp an y t ok eep a$25 mil lion
   r at e inc reas e i m plem ent ed i n 199 4, permittedacc eler a ted  depr eciat ionof  
gen eratio n and  t ransmission ass ets, 
    andfro ze  ra te s unt i l 2005  in  ex changefor ext e ndi ng t h eEl Paso Electric fr a n ch ise. 

   In1 99 8, the comp an y a gree d to re duce ra tes--mai nly re s id en tial--i nNew 
M ex ico  an d Tex a s, b ringin g them
   mo r e in line with Southwesterna ve r a ge s . By  th e time reta il c o mpet itio n  com e s toeithe rs ta t e (2002), El Paso
  Elect ric w ill have a fa irly compe t i t ive cost  str u ct u re which shoul d all ow 
them t o  retainretai l custom ers. By t h a t
    ti me,  El  Pa soE l ec tric will hav e sepa ra ted its  as sets in toa r egu lat ed  
transmi ssion an ddi st ri but ion b u siness
  an danunreg u latedelect rici ty  g e ner ation b u si n e ss,as  r equi red  b y New  
Me x ico  and Te xas law.Cos t s in cu rr ed
   to effect thi schange wil lberecove r e d in a c ompetitive transition c harge.Str anded  cos ts (accru edcharge s
  rela ted to  gene ra tin g plant c os tswh ich wouldh a vebeenre cove red ina 
regulated marke t ) w ill be recove red  ove r    a fi v e-y ea r  tr a n sition period i n New Mexi co .  I n Texas, t h e r at e 
sett lementallow e d El Pa so to rec over thos ecost s    through a ccelerat ed deprec i ation ov er th e 1 0-year  p eri od of  the s ett lemen t agre em ent. 
   In  the who lesale market, El Pasosucces sfull y r enegotiat edc ont racts wit h 
t he Comisio n F ede ral d e
  Ele ctri c id ad, the n atio n al utilit y  o f M e x ic o, to suppl y p eak ing c apa c ity 
i n th e summer months o f  2000 and 2001 ,
 and  wi t h th eRio Grande Ele ctr ic C ooperati ve  Inc. to su pply pow er to tw o 
Tex as cit ies ove r af our-ye ar p eri od.
    I mpo rt a ntly, E lPa s o Elec tric  a lso re acheda  set t l ement with the c ity o f 
LasC ruc es, N .M ., endi n g along dispu te
    over  thatcity ,s t hreat t omunici pal iz e the elec t ric distr ibuti on syst em . 
L asCruces  sal e s  acco untfo r a bout 8% o f 
 interest_in the_Palo Verde 
nuclear plant,_which supplies_50%_of
 __ the utility,s_power. The plant,s_past operating problems and_continued 
structural problems_add_some risk to the
    company,s already weak financial profile. Most importantly,_customers_in 
the_generally_low-income_service
    territory_fought against rate increases needed_to recover_the nuclear 
investment, helping to put El Paso_Electric
_  _in bankruptcy. A settlement signed with Texas customers in_1995 allowed 
the company to keep_a $25 million
___ rate increase implemented_in 1994, permitted accelerated depreciation of_
generation and transmission assets,
  _ and froze rates until 2005 in_exchange for extending the El Paso_Electric 
franchise. 

  _ In_1998, the company agreed to_reduce rates--mainly residential--in_New 
Mexico_and Texas, bringing_them
    more in_line with Southwestern_averages. By the time retail competition_
comes_to either state_(2002),_El_Paso
 _  Electric_will_have a_fairly_competitive cost structure which should allow_
them_to retain retail customers. By that
 _  time, El_Paso_Electric will have separated_its assets into a regulated_
transmission and distribution business
  _ and_an unregulated_electricity generation business, as required by New 
Mexico and Texas law._Costs incurred
    to_effect this change will_be recovered_in_a competitive transition_
charge._Stranded costs_(accrued charges
    related to_generating plant_costs which would have been recovered_in a 
regulated market)_will_be recovered over
   _a five-year transition period in New_Mexico. In Texas, the rate_
settlement_allowed_El Paso to recover those_costs
    through accelerated_depreciation over the_10-year period of the 
settlement agreement. 

__  In the wholesale market,_El_Paso successfully renegotiated contracts with 
the_Comision_Federal_de
    Electricidad,_the national utility of Mexico, to_supply peaking capacity 
in the summer months of 2000_and 2001,
 _  and with the_Rio_Grande_Electric Cooperative Inc. to supply power to two 
Texas cities_over a_four-year period.
 _  Importantly, El Paso Electric also reached a settlement_with the city of 
Las Cruces, N.M.,_ending a long dispute
    over that city,s threat_to municipalize the electric distribution system. 
Las Cruces_sales account for about 8% of
