Hearing on Temporary Rates. EXHIBIT A Page 1 of 48

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1 Hearing on Temporary Rates October 25, 2011 EXHIBIT A Page 1 of 48

2 Page 2 of 48 EPE Overview Serving El Paso for over 110 years 1 of 3 publicly l traded d companies in El Paso Over 950 employees Significant contribution to improving our community Contributed more than $2 million of shareholder money to local, community-based non-profits in 2010 Over 12,000 community hours by employees Major economic impact on local economy Over a quarter of a billion dollars economic impact annually (excludes any multiplier effect) Anticipate $800 million of infrastructure investment spending in the next four years 2

3 Page 3 of 48 Service Area 3

4 Page 4 of 48 EPE s Reliability Ranking Among Texas Investor-Owned Electric Utilities EPE has been the most reliable investor-owned electric utility in Texas over the last 10 years Shortest t Average Outage Duration (SAIDI) - #1 Least Average Outage Frequency (SAIFI) - #1 Source: PUCT 4

5 Page 5 of 48 Regulation Ratemaking Balance Rates are set in an open process by an objective third party Utility Consumer Concerned with rates, service, safety, and efficiency of management Balance utility right to fair return with consumer right to just and reasonable rates Just and Fair Return Reasonable Rates Regulation 5

6 Page 6 of 48 Rates Recover the Cost of Providing Utility Service (Return on Investment) Gross Plant + Working Capital - Accumulated Depreciation _ Deferred Taxes = Net Rate Base X Rate of Return (ROR) = Return on Investment (ROI) 6

7 Page 7 of 48 Rates Recover the Cost of Providing Utility Service (Operating Costs) Gross Plant X Depreciation = Depreciation Rate Expense Operating Costs + O&M costs; G&A costs + Taxes + Other 7

8 Page 8 of 48 Rates Recover the Cost of Providing Utility Service (Cost of Service) Depreciation = Depreciation Gross Plant X Rate Expense + + Working Capital O&M costs; - G&A costs Operating + Accumulated Costs Taxes Depreciation _ + Deferred Taxes = Net Rate Base X Rate of Return (ROR) = Other + Return on Investment (ROI) = Cost of Service (Revenue Req t) 8

9 Page 9 of 48 Rate Design Rates are based on the number of customers and kwh of each rate class Rate design is basic math allocations equal the revenue requirement Cost of Service (Allocated) Residential Small Commercial Large Commercial Industrial 9

10 Page 10 of 48 Consumption Impacts Rates Assume cost of service - $500 million; residential class - $200 million Scenario 1: Total Usage: 2 billion kwh Energy charge per kwh: $ Scenario 2: Total Usage: 3 billion kwh Energy charge per kwh: $ Scenario 3: Total Usage: 4 billion kwh Energy charge per kwh: $ Total Customers: 250,000 Annual Customer Bill: $800 Total Revenue Generated: $200,000,000 10

11 Page 11 of 48 Average Residential Usage 1,600 Residential Average Monthly kwh by Utility 1,400 1,200 1,301 1,373 kwh per Month 1, , , EPE SWEPCO Entergy Texas SPS Sharyland Utilities Source: PUCT Monthly Bill Comparisons Austin Energy CPS Energy 11

12 Page 12 of 48 Average Residential Rate per kwh $0.14 Residential Average Total Rate per kwh (Includes Fuel) $0.12 $0.119 $0.10 $0.106 $ per kwh $0.08 $0.06 $0.091 $ $0.086 $0.093 $0.093 $0.04 $0.02 $0.00 EPE Austin Energy SWEPCO Entergy Texas SPS CPS Energy Sharyland Utilities 12 Source: PUCT Monthly Bill Comparisons

13 Page 13 of 48 Average Residential Bills $ Average Total Residential Bill per Month (Includes Fuel) $ $ $ $ $ $ nth $80.00 $91.38 $87.15 $ per Mo $60.00 $71.45 $ $20.00 $ EPE SWEPCO Entergy Texas SPS Sharyland Utilities Austin Energy CPS Energy 13 Source: PUCT Monthly Bill Comparisons & Current Tariffs

14 Page 14 of 48 Affordability of Residential Bills 4% Average Residential Bills as a Percentage of Median Household Income 3.51% 3% 2% 1.97% 2.24% 2.66% 2.71% 2.72% 1% 0% Austin El Paso Dallas - Ft Houston San Antonio Corpus $56,267 $36,231 Worth $54,225 $48,074 Christi $54,540 $42, Source: PUCT Monthly Bill Comparisons & US Census Bureau

15 Page 15 of 48 Affordability of Residential Bills 10% 8% 6% 4% Average Residential Bills as a Percentage of Federal Poverty Thresholdh 8.34% 8.45% 8.55% 7.53% 6.38% 4.68% 2% 0% El Paso Austin San Antonio Dll Dallas Ft Houston Corpus Worh Christi Source: PUCT Monthly Bill Comparisons & Health & Human Services 2010 Poverty Guidelines. EPE s rates noted here do not reflect the benefit of the low income rider. 15

16 Page 16 of 48 Map of Texas Integrated Utilities SPS SWEPCO EPE ETI 16

17 Comparison of Generation Mix (Capacity) EXHIBIT A Page 17 of 48 EPE SPS 6% 0% 38% 56% % Coal % Natural Gas % Nuclear 49% % Coal 50% %N Natural lgas % Nuclear ETI 11% 0% SWEPCO % Coal % Coal % Natural Gas 50% 50% % Natural Gas % Nuclear % Nuclear 89% Source: 2010 FERC Form 1 17

18 Page 18 of 48 % of Retail Sales by Customer Class 60% 51% 50% 40% 30% 34% 31% 37% 26% 26% 35% 36% 34% 29% 20% 21% 20% 15% 10% 0% 3% 2% EPE SPS Entergy SWEPCO 0% % of Retail sales from Residential % of Retail sales from Commercial % of Retail sales from Industrial % of Retail sales from OPA Source: 2010 FERC Form 1 18

19 Page 19 of 48 Operating Cost Comparisons $4,500 Annual Operating Cost per Customer $4,000 $3,988 $3,819 $3,500 $3,233 $3,000 $2,500 $2,148 $2,000 $1,500 $1,000 $500 $- Source: 2010 FERC Form 1 EE SPS Entergy SWEPCO 19

20 Page 20 of 48 Load vs. Peak Profile 1,700 1,600 1,500 1,610 1,615 1,616 1,527 1,400 1,383 and, MW Dem 1,300 1,200 1,100 1,000 1,078 1, ,048 1,286 1,070 1, Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Native Peak Demand Average Annual Demand 20

21 Page 21 of 48 Comparison of Total Commercial & Industrial Load Factor by Electric Utility 90.0% 80.0% r Annual CP Load Facto 70.0% 60.0% 50.0% 40.0% 0% 30.0% 58.4% 77.1% 75.0% 68.9% 20.0% 10.0% 0.0% EPE SPS ETI SWEPCO Source: PUCT-Data taken from most recent Texas rate case filings 21

22 Page 22 of 48 Industrial Rate Example Description EPE Customer SPS Customer ETI Customer SWEPCO Customer Peak demand Cost per KW $400 $400 $400 $400 Total cost of service $100,000 $100,000 $100,000 $100,000 Customer load factor 58.4% 77.1% 75.0% 68.9% Annual KWH usage 1,278,960 1,688,490 1,642,500 1,508,910 Cost per KWH $0.078 $0.059 $0.061 $0.066 Variance from EPE -24% -22% -15% 22

23 Page 23 of 48 Commercial and Industrial Rate Subsidies Percentage Increase Rate Class Rate Subsidy (000) (Decrease) Required to Eliminate i Subsidy Residential $18, % Government street lighting $4, % Municipal pumping % Commercial and Industrial Small commercial service ($1,615) (6.7%) General service ($15,991) (14.5%) Large power service ($4,481) (13.0%) Petroleum refining service ($1,079) (7.39%) Transmission voltage service ($676) (42.5%) University service ($987) (28.9%) Source: Internal Company data from Settlement Revenue Requirements Docket No

24 Page 24 of 48 EPE Cost of Service EPE Texas Jurisdictional Revenue Requirement (000's) Rate Base $ 1,092,224 Rate of Return 8.66% Return on Investment (ROI) $ 94,624 Plus: Operating Expenses $ 526,006 TotalCostofService of $ 620, Less: Current Revenues $ 602,191 Revenue Deficiency/Increase Needed $ 18,439 24

25 Page 25 of 48 Preliminary Cost of Capital Balance June 30, Percent of Embedded Weighted Cost Description 2011 (000) Capital Cost of Capital Common stock equity $818, % %* 5.42% Long-term debt 709, % 6.979% 3.24% Total $1,528, % 8.66% *Source: FERC Form 3-Q Quarterly Financial Report. AFUDC rate approved in Docket No Recent regulatory uncertainty necessitates a higher return on equity. 25

26 Page 26 of 48 Setting the Record Straight Information previously presented to the City Council concerning rates paid by EPE directors was wrong in every case Rates in Detroit are more expensive than El Paso Stock repurchases benefit customers by lowering the cost of capital EPE has always had adequate generation to meet its customers needs EPE provided justification of the reasonableness of its rates to the City on August 17,

27 Reconciliation of GAAP Earnings to Texas Jurisdictional Earnings Description Twelve Months Ended 6/30/2011 Return on Year-end Equity (000) Net income with extraordinary item $107, % Extraordinary gain for regulatory asset (10,286) -1.26% Net income before extraordinary item 97, % Adjustments to Reflect Texas Jurisdiction: EXHIBIT A Page 27 of 48 City franchise tax increase (257) -0.03% 03% Revenues above normal weather (4,399) -0.54% AFUDC on Newman 5 (8,200) -1.00% Depreciation on Newman 5 (1,932) -0.24% Palo Verde life extension depreciation 4, % Deregulated PV 3 revenues in NM (2,031) -0.25% Other income/deductions (3,437) -0.42% Texas regulatory earnings $81, % * Source: FERC Form 3-Q Quarterly Financial Report and internal company data 27

28 Page 28 of 48 Conclusion EPE and its employees provide significant value to our communities EPE s customers benefit from EPE s actions Most reliable electric utility in Texas Lowest average residential customer bills in Texas Customer profiles directly impact rates EPE s rates are just and reasonable There is no justification for a show cause proceeding or temporary rates at the current time 28

29 Page 29 of 48 Questions and Answers Newman 5 29

30 Page 30 of 48 Appendix 30

31 Page 31 of 48 Average Total Residential Rate per kwh (Includes Fuel) $ $ $ $ $ $ $ $ per Month $ $ $ $ $ $ $ $ $ $ $- LADWP TX NM DC CA CT NY CA SCE El Paso Santa Fe Washington Los Angeles Greenwich New York Los Angeles 31

32 Page 32 of 48 EPE Residential Average Monthly Electric Bills & Rates Comparison Electric Utilities Typical Monthly Bills Actual Average Monthly Bills October 4 Difference from Actual 500 kwh 1,000 kwh Usage Bill RATE PowerPoint Average Residential Rate City State Service Provider ($) ($) kwh ($) kwh Rate per kwh $ % El Paso TX El Paso Electric Company $ $ $ $ Santa Fe NM Public Service Co. of New Mexico $ $ $ $ $ $ % Washington DC Potomac Edison Power Co. $ $ $ $ $ $ % Los Angeles CA LA Dept. of Water and Power $ $ $ $ $ $ % Greenwich CT Connecticut Light and Power $ $ $ $ $ $ % New York NY Consolidated Edison Company $ $ $ $ $ $ % Los Angeles CA Southern California Edison $ $ $ $ $ $ % 32

33 Page 33 of 48 Typical Small Industrial Bill Comparison EPE vs. DTE 500 kw Demand $30,000 $25,000 $25,037 $25,875 $20,000 $20,901 $19,834 $15,000 $16,598 $16,702 $16,029 $17,261 $10,000 40% Load Factor 60% Load Factor 40% Load Factor 60% Load Factor General Service - Standard El Paso Electric Company (EPE) Source: Internal Company Data and filed tariffs DTE Energy (DTE) General Service - Time of Use 33

34 Page 34 of 48 EPE Rates are Comparable to Rates of Competitive Service Providers in Texas EPE Residential Rate vs. Texas Retail Electric Providers Fixed Pi Price Plans Average Prices at 500 kwh per Month EPE Avera age Cents per kwh EPE Residential and All Texas REP Fixed Price Residential Plans 34

35 Page 35 of 48 EPE has generation to meet customer needs Purchased Capacity Installed Capacity Native Peak Source: Internal Company Data 35

36 Page 36 of 48 Why Stock Repurchases Save Customers Money Before Repurchases After Repurchases Equity 1 25% Equity 2 25% Debt 1 25% Debt 2 25% Equity 1 33% Debt 1 33% Debt 2 33% ** Assumed equity cost - 12%. Assumed debt cost - 6%. Cost Before Stock Repurchases Debt Equity Total Cost Rate Base Financed $ 1,500,000,000 $ 1,500,000,000 Percent of Debt/Equity in Capital Structure 50.0% 50.0% Cost of Debt/Equity 6.00% 12.00% Annual cost to customers $ 45,000,000 $ 90,000,000 $ 135,000,000 Cost After Stock Repurchases Rate Base Financed $ 1,500,000,000 $ 1,500,000,000 Percent of Debt/Equity in Capital Structure 66.7% 33.3% Cost of Debt/Equity 6.00% 12.00% Annual cost to customers $ 60,030,000 $ 59,940,000 $ 119,970,000 DIFFERENCE $ (15,030,000) 36

37 Page 37 of 48 Why Good Credit Lowers Costs to Customers 6.00% 5.00% 4.00% 3.00% 2.00% Spread totreasuries 10 year Treasury (10/7/11) 1.00% 0.00% EPE (BBB) PNM (BBB-) EPE s credit rating BBB on an unsecured credit basis; PNM is rated BBB-, one notch lower than EPE On October 6, 2011, PNM issued 10 year unsecured notes for a coupon rate of 5.35% (10 year Treasury %) EPE has recently been quoted as being able to issue 10 year unsecured notes at a coupon rate of 3.85% (10 year Treasury %) EPE is seeking regulatory action to issue up to $300 million in fixed rate debt in the next couple of years to finance capital expenditures. A difference in coupon of this magnitude would result in a $4.5 million annual cost increase to customers or ~ $45 million over the life of the bond issuance S&P issued an issuer comment on EPE on September 21, 2011 stating, We could lower the rating if a rate reduction is imposed that diminishes credit metrics from 37 current levels.

38 EPE has the Newest Generation Fleet of Comparable Utilities Weighted Average Age of Generation Fleet EXHIBIT A Page 38 of EPE ETI SPS SWEPCO EPE ETI SPS SWEPCO Source: PUCT-Data taken from most recent Texas rate case filings 38

39 Page 39 of 48 Operating Cost Comparison Cost per Customer Analysis EE SPS ETI SWEPCO Net Production Plant 817, , ,944 1,093,213 Net Transmission Plant 148, , , ,875 Net Distribution Plant 521, , , ,220 NetRegional Transmission & Market OperPlant 0 0 3,406 0 Net General Plant 65, ,538 85, ,128 Net Electric Plant 1,552,163 2,092,556 1,923,716 2,834,436 Fixed Charge Percentage 12% 12% 12% 12% Cost of Electric Plant Recovery $ 186,260 $ 251, $ 230,846 $ 340,132 Depreciation Recovery $ 49,303 $ 20,721 $ 27,602 $ 144,243 Total Electric Operation & Maintenance Expense $ 274,020 $ 285,838 $ 181,715 $ 340,044 Fuel and Purchased Power $ 291,822 $ 1,011,623 $ 1,114,252 $ 747,170 Total Costs $ 801,405 $ 1,569,289 $ 1,554,415 $ 1,571,589 Total Customers 373, , , ,174 Annual Cost per Customer $ 2,148 $ 3,988 $ 3,819 $ 3,233 Source: FERC Form 1 39

40 Page 40 of 48 EPE Net Assets Serving Customers As of June 30, 2011 (000) Assets (UNADJUSTED) Generation Transmission Distribution General Total Plant in Service $ 2,252,136 $ 324,177 $ 807,204 $ 205,143 $ 3,588,660 Accumulated Depreciation ,383, , , , ,955,254 Net Plant in Service $ 868,667 $ 137,338 $ 533,425 $ 93,976 $ 1,633,406 Measure of fcomparison KW Peak Demand (000) 1,679 1,679 1,679 1,679 1,679 Number of customers 375, , , , ,784 Amount per KW Demand $ 517 $ 82 $ 318 $ 56 $ 973 Amount per Customer $ 2,312 $ 365 $ 1,419 $ 250 $ 4,347 Source: FERC Form 3-Q Quarterly Financial Report 40

41 Page 41 of 48 Public Utility Regulatory Act (PURA) PURA Section states: In establishing an electric utility's rates, the regulatory authority shall establish the utility's overall revenues at an amount that will permit the utility a reasonable opportunity to earn a reasonable return on the utility's invested capital used and useful in providing service to the public in excess of the utility's reasonable and necessary operating expenses. * Emphasis added 41

42 Page 42 of 48 Preliminary Rate Base as of June 30, 2011 Rate Base (Texas jurisdiction) Balance Pro Forma Adjusted June 30, 2011 Adjustments June 30, 2011 (000) * (000) (000) Electric plant in service $3,588,659 (864,820) $2,723,839 Accumulated depreciation (1,955,254) 899,348 (1,055,906) Net plant in service 1,633,405 34,528 1,667,933 Deferred taxes (278,751) 4,821 (273,930) Working capital and other 76, ,035 Total $1,430,689 $39, $1,470, Rate of Return 8.66% Return on invested capital $127,355 * Source: FERC Form 3-Q Quarterly Financial Report 42

43 Page 43 of 48 Preliminary Revenue Requirements Description June 30, 2011 (000) Pro Forma June 30, 2011 Adjustments Adjusted (000) (000) Fuel & purchased power in fuel clause $279,907 $0 $279,907 Purchase power capacity payments 2, ,536 Operation and maintenance expense 285,269 6, ,376 Depreciation 76,307 (924) 75,383 Decommissioning 7,629 (3,988) 3,641 Other taxes 56,079 1,490 57,569 Income taxes 49,149 (4,377) 44,772 Return 123,527 3, ,355 Total revenue requirements $880,403 $2,136 $882,539 * Source: FERC Form 3-Q Quarterly Financial Report and internal company data 43

44 Page 44 of 48 Preliminary Texas Rate Base Adjusted Texas Texas June 30, 2011 Jurisdiction Jurisdiction Rate Base (Texas jurisdiction) (000) Allocation (000) Electric plant in service $2,723, % $2,064,609 Accumulated depreciation (1,055,906) 77.01% (813,201) Net plant in service 1,667, % 1,251,408 Deferred taxes (273,930) 79.23% (217,039) Working capital and other 76, % 57,855 Total $1,470,038 $1,092,224 Rate of Return 8.66% 8.66% Return on invested capital $127, % $94,623 * Source: FERC Form 3-Q Quarterly Financial Report and internal company data 44

45 Description Preliminary Texas Revenue Requirements June 30, 2011 Texas Adjusted Jurisdiction (000) Allocation June 30, 2011 Adjusted (000) Fuel & purchased power energy $279, % $150,371 EXHIBIT A Page 45 of 48 Purchase power capacity expense 2, % 2,009 Operation and maintenance 291, % 229,307 Depreciation 75, % 58,112 Decommissioning and other 3, % 2,885 Other taxes 57, % 49,578 Income taxes 44, % 56% 33,744 Return 127, % 94,624 Total revenue requirements $882,539 $620,630 Less: Current revenues 602,191 Revenue deficiency $18,439 45

46 Page 46 of 48 Changes Since Last Rate Case Rate Base Texas Docket Jurisdiction Settlement (000) (000) Changes (000) Electric plant in service $2,064,609 $1,666,233 $398,376 Accumulated depreciation (813,201) (645,404) (167,797) Net plant in service $1,251,408 $1,020,829 $230,579 Revenue requirements Cost of service excluding fuel $470,259 $417,245 $53,014 Less: Other revenues (25,259) 259) (25,047) (212) Base revenue requirements $445,000 $392,198 $52,802 *Source: Approved in Docket No

47 Page 47 of 48 Projected Rate Base Additions (000 s) Projected Plant Depreciation Net Plant Year Additions Expense Additions July 2011 Dec $ 71,264 $ 46,016 $ 25, $157,868 $ 86,687 $ 71, $233,537 $ 92,416 $141, $208,974 $ 98,592 $110,382 Totals $671, $323,711 $347,932 Source: Internal Company Projections 47

48 Page 48 of 48 Electric Grid EPE Service Territory 48