BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION

IN THE MATTER OF THE IN-SERVICE DATES,    )
PERFORMANCE STANDARDS AND RATEMAKING      )
TREATMENT FOR DECOMMISSIONING COSTS       )
CONCERNING PNM'S PARTICIPATION IN         )
THE PALO VERDE NUCLEAR GENERATING         )    CASE NO. 2004
STATION,                                  )
                                          )
PUBLIC SERVICE COMPANY OF NEW MEXICO,     )
                                          )
               Applicant.                 )


                        FINAL ORDER APPROVING STIPULATION
                        ---------------------------------


         THIS  MATTER  comes  before the New Mexico  Public  Service  Commission
("Commission")  upon the Certification of Stipulation issued by Hearing Examiner
Michael Barlow on July 15, 1987, and upon the Stipulation  filed on June 2, 1987
by Public Service Company of New Mexico, New Mexico Industrial Energy Consumers,
Attorney  General of the State of New Mexico and the New Mexico  Public  Service
Commission  Staff.  The  Commission  having  considered the  Certification,  the
Stipulation, the recorded in this case and being otherwise fully informed in the
premises;

         THE COMMISSION FINDS AND CONCLUDES:

         1. The Certification of Stipulation of the Hearing  Examiner,  attached
to this Order as Exhibit 1, and the Stipulation attached to the Certification as
Attachment A, and all findings and conclusions  contained in either,  whether or
not numbered, are ADOPTED, APPROVED and ACCEPTED as the findings and conclusions
of the Commission.

         2. The  Stipulation is just,  reasonable and in the public interest and
should be approved.

<PAGE>


         IT IS THEREFORE ORDERED:

         A. The Orders  recommended by the Hearing  Examiner as set forth in the
Certification  of Stipulation  attached hereto as Exhibit 1 are  incorporated by
reference  as if fully set forth  herein and are hereby  ADOPTED,  APPROVED  and
ACCEPTED as Orders of the Commission.

         B. The decommissioning  plan is approved by the Commission,  subject to
Commission  Staff  review  and  approval  of all  documents  executed  by PNM to
implement the plan.

         C. All  documents  executed by PNM to implement the plan shall be filed
with the Commission within seven days of their execution.

         D. This Order is effective immediately.

         E. A copy of this Order shall be served upon the  Commission  Staff and
all parties to this case or their counsel.

         ISSUED  under the Seal of the  Commission  at Santa Fe, New Mexico this
30th day of July, 1987.
                                    NEW MEXICO PUBLIC SERVICE COMMISSION



                                    ---------------------------------------
           (Seal)                   JOSEPH E. SAMORA, JR., CHAIRMAN

                                    ---------------------------------------
                                    MARTIN J. BLAKE, COMMISSIONER

                                    ---------------------------------------
                                    S. PETER BICKLEY, COMMISSIONER

Final Order
Case No. 2004

                                       2
<PAGE>





                 BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION
                 -----------------------------------------------


IN THE MATTER OF THE IN-SERVICE DATES,  )
PERFORMANCE STANDARDS AND RATEMAKING    )
TREATMENT FOR DECOMMISSIONING COSTS     )
CONCERNING PNM'S PARTICIPATION IN       )
THE PALO VERDE NUCLEAR GENERATING       )     Case No. 2004
STATION,                                )
                                        )
PUBLIC SERVICE COMPANY OF NEW MEXICO,   )
                                        )
               Applicant.               )

                          CERTIFICATION OF STIPULATION
                          ----------------------------

         COMES NOW Michael Barlow,  Hearing Examiner in this case, and certifies
the  Stipulation on  Decommissioning  appended hereto as Attachment A to the New
Mexico Public Service  Commission  pursuant to Rule R14-2(e)(1) of Third Revised
General Order No. 1.

STATEMENT OF THE CASE
---------------------

         This case was  instituted  by the  Commission  with the issuance of its
Order Docketing case. Included in that Order were specifications relating to how
and when Public  Service  Company of New Mexico ("PNM") should recover its share
of the  costs of  decommissioning  the Palo  Verde  Nuclear  Generating  Station
("PVNGS") units. The undersigned was appointed as Hearing Examiner for this case
pursuant to NMSA 1978, Section 62-10-7 (Repl.Pamp. 1984).

         The Hearing  Examiner issued a Procedural Order which divided this case
into  separate  phases  for  in-service  dates,   performance   standards,   and
decommissioning  costs.  On April 21,  1986,  the  Commission  issued  its Order
Approving Stipulation which addressed the in-service phase. On May 18, 1987, the
Commission issued a Final order Adopting  Recommended  Decision which related to
the performance standards phase.


                                       1

CERTIFICATION OF STIPULATION                                 
Case No. 2004

<PAGE>



         On June 2, 1987, the  decommissioning  costs phase of this case came on
for hearing. The following appearances were entered at that hearing:

         For PNM:
         --------

         Kathryn J. Kuhlen, Esq.


         For Attorney General of the State of New Mexico ("AG"):
         -------------------------------------------------------

         Steven S. Michel, Esq.


         For Commission Staff:
         ---------------------

         Charles F. Noble, Esq.


No  appearance  was made by  intervenor  United State Air Force or for commentor
Texas-New Mexico Power Company.

         At the  outset  of the  hearing,  the  Stipulation  on  Decommissioning
("Stipulation") was presented. By agreement of the parties, the direct testimony
that had been filed in this case was  admitted  into  evidence  for the  limited
purpose of providing background information. That prefiled testimony consists of
the following:

         For PNM:
         --------

         Ms. Marilyn Mason-Plunkett
         Mr. Billy D. Lackey
         Mr. Thomas S. LaGuardia
         Mr. John E. Lyons
         Mr. Robert B. Starnes

         For AG:
         -------

         Mr. Paul L. Chernick

         For Commission Staff:
         ---------------------

         Mr. Domingo Sanchez, III
         Mr. John Curl


                                       2
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>

Mr. Lackey  presented oral testimony  explaining and supporting the Stipulation.
Messrs. Sanchez and Curl also testified in support of the agreement.

DISCUSSION
----------

         As reflected on page 15 of the Stipulation, it was executed by PNM, the
AG,  NMIEC and the  Commission  Staff.  Paragraph 2 on page 2 provides  that the
Stipulation  was entered  into by the parties for the purpose of  determining  a
decommissioning  plan for  PNM's  interest  in PVNGS  and the  appropriate  rate
treatment  for such  decommissioning  costs.  One party to the  proceeding,  the
United States Air Force, did not participate in this phase of the case. Tr. 2.

         Paragraph 2 also contains the usual language that the Stipulation  must
be adopted in its  entirety to have any effect.  In the case of rejection by the
Committee,  the parties have  provided  that the  Stipulation  cannot be used as
evidence of factual or legal concessions by any of the parties.

         As provided in paragraph 3, an external  unqualified sinking fund ("the
Fund")  would be utilized to fund PNM's  share of  decommissioning  costs if the
Stipulation is approved. An external sinking fund is one that is established and
funded by periodic deposits in an account which is administered  separately from
internal  corporate funds. The Fund would be used exclusively for payment of the
decommissioning costs, administrative costs and taxes on income of the Fund.
Mason-Plunkett, pp.7-8.

         The Fund cannot be a "qualified"  one pursuant to the Tax Reform Act of
1984 because of the sale and subsequent  leaseback of PNM's share of PVNGS Units
1 and 2.  Therefore,  PNM  cannot  qualify  to deduct a certain  portion  of the
contributions to a decommissioning reserve fund. Lackey, p. 10.


                                       3
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>


         Paragraph  4  establishes   the  initial  funding  based  on  estimated
decommissioning  costs.  The parties have agreed that such initial funding would
be based on the total  estimated  decommissioning  costs for the PVNGS  units as
determined   by  an   engineering   study  and  based  on  the  DECON   mode  of
decommissioning.  The  engineering  study was  undertaken  at the request of the
Arizona  Nuclear  Power  Project  ("ANPP") to establish  decommissioning  costs.
LaGuarda, p. 5. The DECON mode is a Nuclear Regulatory Commission classification
for removal or  decontamination  of all equipment,  structures and portions of a
facility and a site of radioactive  contaminants shortly after operations cease.
Mason-Plunkett,  p.4.  The DECON  mode has been  chosen by the  Engineering  and
Operating Committee of ANPP for PVNGS.  Mason-Plunkett,  p. 6; Tr. 20. The other
decommissioning  modes  considered  were storage and subsequent  decontamination
("SAFSTOR") and entombment ("ENTOMB").   Mason-Plunkett, p.5.

         The cost of  DECON  and for the  other  modes  of  decommissioning  are
summarized below in 1986 dollars:

                                        Unit 1                   Unit 2
                                        ------                   ------

         DECON                       $208,241,300             $194,978,500
         ENTOMB                       233,645,000              216,823,000
         SAFSTOR                      237,034,000              224,831,000

LaGuardia,  TSL-2,  pp.1-3.  The actual  funding  amounts  to account  for these
decommissioning  costs assumes a 5% average cost escalation which is an estimate
of inflation over the period until decommissioning. Lackey, p.5; Tr. 22.




                                       4
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>



         PNM's  share  of the  decommissioning  costs  is  based  on  its  10.2%
participation in PVNGS. The amounts required by PNM are reflected in paragraph 4
of the  Stipulation.  These  costs  would be  funded  through  annual  levelized
deposits for the remaining useful lives of the units. The useful lives are based
on a forty year operating authority issued by the Nuclear Regulatory Commission.
Tr.  23.   Funding  would  be   terminated   before  the  useful  lives  end  if
decommissioning actual occurs earlier and the fund contains sufficient resources
for decommissioning. The Commission has the discretion to docket the appropriate
case to determine the ratemaking treatment for any deficiency in the Fund in the
case of early decommissioning. Tr. 23.

         Paragraph 5 sets our the funding  requirements  of the  decommissioning
costs  for  PVNG's  Units  1 and 2.  Unit 3 was  not  included  since  it is not
in-service  yet,  but that  unit  could be  brought  into the plan by PNM in the
future.  Tr. 25. As noted in the last sentence of the  paragraph,  the levelized
annual  deposits  would be in the amount of $396,000  per unit.  This amount was
computed and reflected on line 10, column 10 of the first page of PNM Exhibit 3.
This is an increase  from  $365,000 per unit in November 1986 when PNM filed its
testimony.  Lackey,  p.16.  The  increase is due to the  shorter  length of time
available to collect the costs and not a result of increased  costs. Tr. 28. The
amount of annual per unit deposit in the Fund can change as noted in paragraph 7
of the Stipulation.

         Paragraph 5 provides that PNM will make the 1987 and 1988 contributions
to the Fund upon approval of the  Stipulation as well as a partial  repayment of
the 1989 contribution, for a total of $2,178,000. The purpose of the prepayments
is to avoid increasing the annual revenue  requirement due to a further lapse in
time and to have cash to make the  premium  payments on the  insurance  policies
which  are  discussed  later.  Tr.  25-26.  There is some  requirement  that the
premiums  for the first  three or four years of the plan must be paid in cash by
PNM rather than by taking our loans. Tr. 26. The partial  prepayment of the 1989
decommissioning  contribution  in the  amount of  $594,000  was the result of an
analysis  of the amount of cash  necessary  to pay those  premiums.  Tr. 27. The
total  of the  1987  contribution,  the 1988  prepayment  and the  1989  partial
repayment  would be deposited on or before  December 31, 1987.  The next deposit
would involve the balance for the 1989  contribution  of $198,000 per unit.  Tr.
27.


                                       5
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>

         The administration of the Fund would be accomplished through investment
thereof  in the  Cost of Money  Reduction  Plan  ("COMReP")  as  referred  to in
paragraph 6 of the  Stipulation.  COMReP was  developed by  Financial  Marketing
Services,  Inc. and would allow PNM to accumulate funds for decommissioning on a
tax-deferred  basis by the use of permanent life  insurance  policies on certain
management and administrative  employees.  Lyons,  p.102. COMReP is explained in
paragraphs 12 through 14 on pages 10 through 12 of the  Stipulation.  It is also
described  in  detail  in the  prefiled  testimony  of  PNM  witness  Lyons  and
summarized on page 9 of his testimony.

         As previously noted, PVNGS Unit 3 decommissioning  costs are not made a
part of the funding  requirements of paragraph 5. However,  paragraph 6 provides
that PNM may use COMReP for deposits of Unit 3 decommissioning.  If PNM utilizes
COMReP for that unit,  the amount to be  deposited  annually  shall be  $396,000
which is the same as for the other two  units.  The  paragraph  also  contains a
requirement  that in case PNM elects not to use COMReP for Unit 3, it would file
a proposal for alternative funding which the Commission,  Staff or other parties
could contest.

         Paragraph 7 contains the requirement  that PNM file updates every three
years for  decommissioning  cost estimates.  PNM had originally proposed to file
every five years  (Mason-Plunkett,  p.16),  but the parties agreed with the AG's
position  that  because of  uncertainties  in the cost  estimates,  useful  life
estimates,  interest projections,  tax laws and inflation, review should be more
frequent.  Chernick, p.45; Tr. 30. The Stipulation also requires that changes in
the decommissioning  cost estimates would be reflected in the rate treatment for
such costs unless they are  contested by Staff or  intervenors  to this case and
disapproved by the Commission.  PNM's witness Lackey testified that any increase
or decrease in revenue requirements  associated with a change in decommissioning
cost estimates would be subject to Commission approval. Tr. 31.


                                       6
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>

         In connection with the decommissioning cost estimate updates, PNM would
review the adequacy of the decommissioning funding amounts. If these amounts are
inadequate,  PNM would notify the  Commission,  Staff and the intervenors of the
required change. Finally,  paragraph 7 provides for an annual report to be filed
with the Commission on or before March 1 on the  performance of the Fund for the
prior year.  The Fund would  consist of the  insurance  policies and a side fund
which is discussed later.  This report would measure the investment  performance
of both components of the Fund. Tr. 32.

         Pursuant  to  paragraph  8,  the  Fund  would  be  administered  by  an
independent  trustee.  It would be  administered  separate  and apart from PNM's
internal  funds  and  used  only  for  PNM's  share  of  decommissioning  costs,
administrative  costs of the fund and for taxes on the  income of the Fund.  The
paragraph   also   defines   "decommissioning"   and   "decommissioning   costs"
specifically  and in  conformity  with the trust  agreements.  Tr.  34.  This is
intended to bind the parties and the trustee to a uniform  understanding  of the
costs that would be paid by the Fund.

         Paragraph  9 refers  to the  appointment  of an  independent  financial
institution  to act as trustee  for the Fund.  At the time of the  hearing,  PNM
anticipated  that this trustee would be First Interstate Bank. Tr. 35. The trust
is to be composed of the COMReP  insurance  policies and a "side fund". The side
fund is to be composed of all deposits  that are not used to purchase  insurance
policies or to pay administrative costs and taxes of the fund. Tr. 35.

         Paragraph 9 also contains the general  provisions for the trust and the
trust  agreement.  The agreement  would be subject to review by the  Commission,
Staff and  Intervenors  and could be  contested.  The trustee  would  administer
investments  of the side fund while  investments  in the insurance  policy funds
would be handled pursuant to COMReP.  Investments would be subject to a "prudent
man rule" and certain  investments in such things as PNM  securities,  other New
Mexico utility securities,  securities of other PVNGS  participants,  and highly
speculative  securities  would be  prohibited.  Paragraph  10  provides  for the
removal of the trustee and execution of a new trust agreement with the same safe
guards as for the original appointment and trust agreement.

                                       7
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>

         Pursuant to paragraph 11, PNM could transfer its rights and interest in
the Fund to others.  This  provision  would allow such a transfer if PNM were to
transfer its decommissioning responsibility in PVNGS, presumably with a transfer
of the rights and interests in PVNGS itself, to another utility. Tr. 37-38. Such
a  transfer  does not  apply to sale and  leaseback  transactions  such as those
approved by the  Commission  for PNM's  interests  in Units 1 and 2 in Case Nos.
1995 and 2019. Tr. 38.

         As previously  noted,  paragraphs 12 through 14 explain the COMReP plan
and are taken form Mr.  Lyon's  prefiled  testimony.  As noted in paragraph  13,
loans may be taken against the insurance policies in order to match the premiums
to be made by the fund and the levelized  deposits into the Fund.  PNM would pay
the  interest  on such  loans and  would be able to  deduct  up to a maximum  of
$50,000 per policy for tax purposes.  Tr. 11.  Otherwise,  those  paragraphs are
self-explanatory.

         PNM would be required to allocate  the  decommissioning  funds  between
Units 1 and 2 in proportion  to each units portion of the total  decommissioning
costs  pursuant  to  paragraph  15.  This is to  ensure  that PNM will not pay a
majority of the fund to decommissioning  one unit to the detriment of the other.
Although  PNM has sold all or a portion of its interest in Units 1 and 2, it has
retained the  decommissioning  obligations  so the  owners/lessors  of the units
should be treated  equally  and  fairly  insofar  as  decommissioning  costs are
concerned. Tr. 41.

         Paragraph  16  sets  out  the  revenue   requirement   associated  with
decommissioning  costs of  $646,000  per unit.  The  decommissioning  expense of
$396,000  comes  from  paragraph  5 of the  Stipulation.  In  order  to  collect
sufficient funds to have the $396,000  remaining after taxes are paid, a revenue
requirement  of $646,000 is necessary  because of PNM's  combined  effective tax
rate of 38.66 percent.  Tr. 42. In other words,  PNM would pay $250,000 in taxes
on $646,000 which will leave  $396,000 for  decommissioning  purposes.  This tax
expense is reflected on line c of the paragraph. Lines b and d thereof represent
the booking of a refund and a deferred  tax expense on such refund  which offset
each other. Tr. 43.


                                       8
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>

         The effects of the Inventory  methodology  on  decommissioning  revenue
requirements  are covered by paragraph  17. Such revenue  requirements  would be
treated as  depreciation  expenses  for  ratemaking  purposes for so long as the
Inventory  methodology is in effect. This would be true even if the plant is not
in "inventory" and is placed in rate base. Tr. 44-45.  The revenue  requirements
would be "at-risk" costs for PNM while the plant is inventoried. As advocated by
Staff,  decommissioning  costs are a cost of  removal  which is a  component  of
depreciation. Sanchez, p.5. By treating the decommissioning revenue requirements
"at-risk," the amounts would only be recoverable by PNM through economy sales or
off-system sales pursuant to the Inventory methodology. Tr. 45. The parties have
also agreed  that the  prepayment  of funding  requirements  will be  considered
"at-risk"  in the year they are  expensed  rather than when they are paid.  This
would  levelize  the  prepayment  amounts  provided  for in  paragraph  5 of the
Stipulation  so the entire  $2,178,000  would not be "at-risk" only in 1987. Tr.
46.

         Book and tax timing  differences for the  decommissioning  expenditures
would be normalized for ratemaking purposes pursuant to paragraph 18. This is an
adaptation  of the AG's  criticism  of PNM  proposed  method of booking  prepaid
taxes.  Chernick,  pp.21.22.  The result is that revenue  requirements  would be
levelized.  While prepaid taxes would be booked and will build up as a rate base
item, that would be offset by a higher revenue  requirement and establishment of
the refund payable. Tr. 47.

         If tax laws do not change,  PNM's witness  Lackey  testified that there
will be tax  savings  at the time of  decommissioning  that will  arise from the
payment of  decommissioning  costs. Tr. 13. Paragraph 19 provides for a priority
for applying any tax savings related to decommissioning expenditures.  The order
would be the refund payable account, decommissioning costs and related expenses,
the  accumulated  deferred  income taxes,  and refunds to ratepayer  relative to
total  contributions  from ratepayers and shareholders to the costs and taxes of
decommissioning.  Shareholders  could have contributed to decommissioning if the
plant  were not  allowed  into  ratebase  by the  Commission  or if  there  were
insufficient incentive revenues to recover the at-risk costs. Tr. 14, 50.

                                       9
CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>

         PNM would pay any  insufficiency in the fund and tax savings  resources
and actual  decommissioning  costs since PNM is ultimately  responsible for such
costs. Paragraph 20; Tr. 50. The ratemaking treatment for such payment by PNM is
reserved by the Stipulation. Finally, pursuant to paragraph 21, any excess funds
after  decommissioning  costs are paid would to be  distributed  pursuant to the
priorities established in paragraph 19.

CONCLUSION
----------

         As  stated  by Staff  witness  Curl,  the  Stipulation  is fair,  just,
reasonable and in the public  interest.  Tr. 80. Pursuant to Rule R14-2(e)(2) of
Third Revised  General  Order No. 1, the Hearing  Examiner  recommends  that the
Commission approve the Stipulation.

         The Hearing Examiner recommends that the Commission F I N D and C O N C
L U D E as follows:

         1. The Certificate of Stipulation of the Hearing Examiner,  attached to
this  Order,  and the  Stipulation  appended  thereto as  Attachment  A, and all
findings and  conclusions  contained  in either,  whether or not  numbered,  are
adopted, approved and accepted as findings and conclusions of the Commission.


                                       10

CERTIFICATION OF STIPULATION                                 
Case No. 2004
<PAGE>



          2. The Stipulation is just,  reasonable and in the public interest and
should be approved. The Hearing Examiner recommends that the Commission ORDER
as follows:

         A. The Stipulation on  Decommissioning  filed in this case and appended
to the  Certification  of  Stipulation  as  Attachment A is hereby  approved and
adopted as an Order of the Commission as if fully set forth herein.

         B. This Order is  effective  immediately.  

         I S S U E D at Santa Fe, New Mexico this 15th day of July, 1987.

                                         NEW MEXICO PUBLIC SERVICE COMMISSION

                                         ------------------------------------
                                         MICHAEL BARLOW
                                         Hearing Examiner



                                       11
<PAGE>




                 BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION

IN THE MATTER OF THE IN-SERVICE DATES,      )
PERFORMANCE STANDARDS AND RATEMAKING        )
TREATMENT FOR DECOMMISSIONING COSTS         )
CONCERNING PNM'S PARTICIPATION IN           )
THE PALO VERDE NUCLEAR GENERATING           )        CASE NO. 2004
STATION,                                    )        (DECOMMISSIONING
                                            )        PHASE)
PUBLIC SERVICE COMPANY OF NEW MEXICO,       )
                                            )
               Applicant.                   )

                         STIPULATION ON DECOMMISSIONING
                         ------------------------------

         This  Agreement  and  Stipulation  is  entered  into by and  among  the
undersigned parties as of the date set forth below.

                                    RECITALS:
                                    ---------

         WHEREAS,  the New Mexico Public Service Commission (the  "Commission"),
on  December  5, 1985,  docketed  NMPSC Case No.  2004 to explore  the issues of
in-service   dates,   performance   standards  and   ratemaking   treatment  for
decommissioning  costs concerning the participation by Public Service Company of
New Mexico ("PNM") in Palo Verde Nuclear Generating Station ("PVNGS"); and

         WHEREAS,  the  Commission has separated the three areas of concern into
separate proceedings under the same docket; and

         WHEREAS,  on November 3, 1986,  PNM filed its direct  testimony  in the
decommissioning  phase of NMPSC Case No. 2004; on February 16, 1987,  Commission
Staff ("Staff") filed its direct  testimony on  decommissioning  and on February
16, 1987 the Attorney General of the State of New Mexico ("AG") filed its direct
testimony on decommissioning; and

                                  ATTACHMENT A


                                       1
<PAGE>


         WHEREAS,  the  undersigned  parties are  desirous  of entering  into an
agreement settling the decommissioning phase of NMPSC Case No. 2004; and

         WHEREAS,  undersigned  parties  desire to  establish  a secure  funding
mechanism to provide for the decommissioning of PNM's interest in PVNGS;

         NOW,  THEREFORE,  in  consideration  of the foregoing  premises and the
mutual covenants  contained herein, the undersigned  parties agree and stipulate
as follows:
                                   AGREEMENT:
                                   ----------

         1. This Agreement and Stipulation ("Stipulation") is being entered into
for the purpose of settling the decommissioning phase of NMPSC Case No. 2004.

         2. This  Stipulation  is entered into by the parties for the purpose of
determining  a  decommissioning  plan  for  PNM's  interest  in  PVNGS  and  the
appropriate rate treatment for PNM's decommissioning  costs, and is submitted to
the  Commission  for  its  adoption.  If the  Commission  does  not  adopt  this
Stipulation in its entirety,  it is agreed that this  Stipulation  shall have no
further force or effect.  If litigation  or other  proceedings  ensue after such
non-adoption by the Commission,  this Stipulation may not be used as evidence of
a  concession  by any party as to any factual or legal issue  addressed  in this
Stipulation.

         3. PNM shall use an external  unqualified  sinking  (reserve) fund (the
"Fund") to fund its share of decommissioning  costs for PVNGS. The Fund shall be
established  and maintained by periodic  deposits made by PNM to a trust account
which shall be segregated from and external to PNM's assets.

         4. The estimated decommissioning costs which PNM shall use as the basis
for its initial funding shall be PNM's 10.2 percent share of the total estimated
decommissioning  costs for each PVNGS  unit as  determined  in the  August  1986
"Decommissioning  Cost Estimate for the Palo Verde Nuclear Generating  Station,"
prepared for the Arizona Nuclear Power Project ("ANPP") by TLG Engineering, Inc.
(the "TLG  Study"),  which is stated in 1986  dollars  and is based on the DECON
mode  of   decommissioning,   which  ANPP  has   determined   to   utilize   for
decommissioning PVNGS. PNM's share of these estimated costs, in 1986 dollars, is


                                       2
<PAGE>


as  follows:  $21,241,000  for PVNGS Unit 1;  $19,888,000  for PVNGS Unit 2; and
$21,669,000 for PVNGS Unit 3. In order to determine the funding amount,  PNM has
assumed an average  cost  escalation  of 5 percent  over the  estimated  time of
decommissioning.  The funding shall be made through a series of annual levelized
(except for the first year)  deposits to the Fund over the  estimated  remaining
useful life of each PVNGS unit (through  December 31, 2024 with respect to PVNGS
Unit 1, through December 9, 2025 with respect to PVNGS Unit 2, and through March
25, 2027 with respect to PVNGS Unit 3).  Funding may be terminated  earlier than
these  dates  in  the  event  decommissioning  occurs  earlier  and  the  Fund's
resources,  together with any other  resources  received in connection with such
early  decommissioning,  are adequate to cover the  decommissioning  costs.  PNM
shall notify the Commission prior to making expenditures for decommissioning. In
the  event  of the  decommissioning  of a unit  earlier  than  the  above-stated
estimated  useful life of such unit,  the  Commission,  at its own discretion or
upon the motion of Staff or an  intervenor  in this  case,  may docket a case to
determine the proper ratemaking  treatment of decommissioning from that point in
time forward.


                                       3
<PAGE>


         5. PNM shall begin funding for the  decommissioning  costs  relating to
its  interest  in PVNGS Units 1 and 2 in 1987.  The 1987  funding  amount  shall
include  the  1987  decommissioning  contribution,  a  prepayment  of  the  1988
decommissioning   contribution,   and  a   partial   prepayment   of  the   1989
decommissioning contribution, as follows:

      Description                                              Amount

      1987 Decommissioning Contribution PVNGS
        Units 1 and 2                                       $    792,000
      Prepayment of 1988 Contribution PVNGS
        Units 1 and 2                                            792,000
      Partial  Prepayment of 1989  Contribution
        PVNGS Units 1 and 2                                      594,000

      Total 1987 Fund Payment                                 $2,178,000

The initial  deposit shall be in the amount of $2,178,000,  and shall be made on
or before December 31, 1987. No deposit will be made in 1988. In 1989, a deposit
in the amount of $198,000 will be made. Subsequent annual deposits shall be made
in the amount of $396,000  per unit for PVNGS  Units 1 and 2, unless  changed as
provided for in Paragraph 7.

         6. The  deposits to the Fund made with  respect to PNM's  interests  in
PVNGS Units 1 and 2 shall be invested in an investment plan known as the Cost of
Money Reduction Plan ("COMReP") designed by Financial  Marketing Services,  Inc.
PNM shall be permitted to use COMReP for its deposits with respect to PVNGS Unit
3 as well;  however,  it shall not be  required  to do so. If the COMReP Plan is
utilized  for  PNM's  share of the  decommissioning  costs of PVNGS  Unit 3, the
annual  deposit for PVNGS Unit 3 is estimated to be $396,000  unless  changed as
provided for in Paragraph 7. In the event PNM  determines  not to use COMReP for
its  deposits  with  respect to PVNGS  Unit 3, it shall  file a report  with the
Commission,  Staff and  intervenors in this case detailing the proposed  funding
method it intends to use instead.  In such event, the Staff or intervenors shall
have an opportunity to litigate the proposed  funding method for PVNGS Unit 3 if
they so desire.


                                       4
<PAGE>


         7. Every three years after the date of the final order  approving  this
Stipulation, PNM shall file with the Commission,  copying Staff and intervenors,
an updated  decommissioning  cost estimate.  The rate treatment specified herein
for  PNM's  estimated  decommissioning  costs  shall  apply to any such  changed
estimates,  unless such  estimates are contested by Staff or intervenors in this
case and the Commission  disapproves  such estimates.  The updated cost estimate
shall incorporate any changes in  decommissioning  technology,  revisions of the
cost estimates and changes in the escalation  rate. Also at this time, PNM shall
review the  adequacy of the  decommissioning  funding  amounts to  determine  if
adjustments  in the funding amount are required to pay all costs of the Fund and
to maintain an adequate  asset level in the fund  consistent  with the  earnings
projections  then in effect,  and,  if they are so  required,  shall  change the
amount  accordingly  and notify the  Commission,  Staff and  intervenors of such
change.  In addition,  on or before March 1 of every year PNM will file a report
with the  Commission,  Staff and  intervenors  in this case,  setting  forth the
Fund's  performance  for the  prior  calendar  year and the  transactions  which
occurred in the prior calendar year.

                                       5
<PAGE>



         8. The Fund shall be held by an independent trustee selected by PNM and
administered separately from internal corporate funds. Withdrawals from the Fund
will be used exclusively for payment of PNM's share of the decommissioning costs
for  PVNGS,  associated  administrative  costs of the Fund and taxes on  taxable
income of the Fund.  For this purpose,  "decommissioning"  and  "decommissioning
costs" shall have the following meanings:

     "Decommissioning"  shall mean the  decommissioning and retirement from
     service of a PVNGS Unit, and the related  possession,  maintenance and
     disposal of radioactive  material used in or produced  incident to the
     possession and operation of the Unit,  including,  without limitation,
     (i)  placement  and  maintenance  of the Unit in a state of protective
     storage,  (ii) in-place  entombment and maintenance of the Unit, (iii)
     dismantlement of the Unit, (iv) any other form of decommissioning  and
     retirement  from service  required by or acceptable to the NRC and (v)
     all activities  undertaken incident to the implementation  thereof and
     to  the  obtaining  of  NRC  authority  therefor,  including,  without
     limitation,  maintenance,  storage, custody, removal, decontamination,
     and  disposition of materials,  equipment and fixtures,  razing of the
     Unit,  removal and  disposition  of debris  from the PVNGS  site,  and
     restoration  of the PVNGS site  related  to the Unit for  unrestricted
     use.

     "Decommissioning Cost" shall mean all costs,  liabilities and expenses
     relating  or  allocable  to,  or  incurred  in  connection  with,  the
     decommissioning of the Unit,  including,  without limitation,  (i) any
     and all costs of  activities  undertaken  to terminate  NRC  licensing
     authority and requirements to own, operate and possess the Unit and to
     possess  radioactive  material  used in or  produced  incident  to the
     possession  and  operation of the Unit;  and (ii) any and all costs of
     activities  undertaken,  prior  to  termination  of all NRC  licensing
     authority  and   requirements   with  respect  to  the  Unit  and  the
     radioactive  material used in or produced  incident to the  possession
     and  operation  of the Unit,  to  possess,  maintain,  and  dispose of
     radioactive  material used in or produced  incident to the  possession
     and operation of the Unit.

         9. To establish the Fund, PNM will enter into a trust agreement with an
independent  financial  institution  which will act as trustee of the Fund.  The
assets held by the trust will  include  the COMReP  insurance  policies  and the
"side fund", as further  described  herein.  Any portion of the  decommissioning
deposits not used to purchase life insurance contracts pay administrative  costs
of the  Fund or pay  taxes  shall be  segregated  in the side  fund.  The  Trust
Agreement  will  delineate the purpose of the trust,  how the funds in the trust
are to be handled and the duties and  responsibilities of the trustee. PNM shall


                                     6
<PAGE>

provide the  Commission,  Staff and  intervenors in this case with a copy of the
executed Trust  Agreement.  Staff or intervenors  shall have the  opportunity to
contest  the  terms of such  agreement  only on the  grounds  such  terms may be
inconsistent  with this  Stipulation.  Investments of the insurance policy funds
held in the Fund shall be made by the  insurance  companies  selected  under the
COMReP plan.  Investments  of the side fund portion of the Fund shall be made by
the trustee at PNM's direction,  separately from the investment of the insurance
policy  funds,  with  the  objective  of  seeking  the  highest  net  return  on
investments  commensurate  with levels of investment risk that PNM determines to
be reasonable,  with the act of providing  sufficient  funds to cover the actual
costs of decommissioning  when needed. All investment  decisions of PNM shall be
made in accordance  with the "prudent man rule;" that is, PNM shall use the same
degree of care and diligence as an ordinarily prudent man would use in investing
his own funds in similar  circumstances.  Investments of side fund monies in the
following shall be prohibited:

             a. securities issued by PNM or its affiliates,
             b. securities issued by New Mexico utilities or utilities operating
         in New Mexico,
             c.  securities  issued by PVNGS  participants  (as  defined  by the
         Arizona Nuclear Power Project Participation  Agreement dated August 23,
         1973, as heretofore and hereafter amended),
             d. margin purchases,
             e. commodity speculation,
             f. fixed income  securities that are not rated at least "investment
         grade" by at least one of the nationally recognized  statistical rating
         services, and
             g. commercial paper that is not rated at least  "investment  grade"
         by at  least  one  of  the  nationally  recognized  statistical  rating
         services.

         10. PNM shall be  permitted  to remove and replace the trustee  with or
without cause and to amend or revoke the trust agreement, whether to comply with
changes in the law or otherwise, subject, however, to the restrictions set forth
in this Stipulation.  PNM shall provide the Commission, Staff and intervenors in
this case with any new or amended trust  agreement.  Staff or intervenors  shall
have the  opportunity to contest the terms of such agreement only on the grounds
such terms may be inconsistent with this Stipulation.


                                       7
<PAGE>

         11.  Subject to Commission  approval,  PNM may convey any or all of its
rights and interests in the Fund if the transferee  has the requisite  power and
authority to enter into and carry out the activities required or contemplated to
be  performed  by PNM under the trust  agreement,  and enters into an  agreement
satisfactory  to the trustee  confirming to be bound by all the terms of, and to
undertake  all the  obligations,  contained in the trust  agreement.  In such an
event,  PNM shall be released and discharged of its obligations  under the trust
agreement  (or  that  portion  of  its  obligations  relating  to  the  interest
conveyed).  Staff  or  intervenors  in  this  case  may  contest  such  proposed
transaction.

         12. The COMReP  investment  plan  allows  PNM to  accumulate  funds for
decommissioning PNM's interest in the PVNGS units on a tax-deferred basis by the
use of permanent life insurance  policies taken on certain  employees of PNM and
its affiliates.  PNM analyzed  several  external funding methods and determined,
based on its  analysis,  that COMReP would  produce the lowest amount of revenue
requirements of those methods,  due to its utilization of a tax-advantaged build
up of insurance  policy cash value.  In addition,  COMReP is designed to provide
investment  flexibility,  thus increasing the assurance that adequate funds will
be available  for  decommissioning.  Under the plan,  permanent  life  insurance
policies   will  be  purchased  by  the  trustee  on  certain   management   and
administrative employees of PNM and its affiliates,  utilizing the deposits made
by PNM to the Fund.  The COMReP plan  provides  that the insured  employee  will
designate the  beneficiary  of the "pure" term death benefit of the policies and
that the  investment  component  will be utilized to provide the funding for the
decommissioning  of PNM's  interest  in the PVNGS  Units.  The  portion of PNM's
contributions  to the Fund which are  applied  to obtain  the "pure"  term death
benefit will replace current pure term death benefits for the selected employees
under  existing  policies.   For  ratemaking  purposes,   this  portion  of  the
contributions  shall be treated in the same manner as are other employee benefit
costs.

                                       8
<PAGE>


         13. Loans may be taken against the life insurance  policies in order to
match the insurance  premium payments made by the Fund as closely as possible to
the levelized fund  deposits.  The proceeds of these loans will be placed in the
side fund and will be used to defer a portion of the annual premium payment to a
later period when  additional cash build-up will be utilized to repay the policy
loans. PNM will be obligated to pay the interest expense arising from the policy
loans,  which expense,  within  certain  limitations,  is tax  deductible  under
current  law.  This  policy loan  feature  allows the  crediting  of policy loan
interest payments to the policies' cash surrender value,  which then will accrue
a return on a tax deferred basis. In addition, this feature permits borrowing of
funds  for  reinvestment  purposes,   thus  allowing  flexibility  in  selecting
alternate investments in changing market environments.

         14. In the event of the death of an employee covered under COMReP,  the
employee's  designated  beneficiary  will receive the "pure" term death  benefit
component  and the Fund will  receive the balance of the policy  death  benefit,
representing  the investment  component.  These funds may be reinvested in other
insurance  policies,  or may be  segregated  in the side fund and used for other
permissible investments.

         15. At the time decommissioning commences with respect to PVNGS Units 1
and 2, the  decommissioning  funds for such units shall be  allocated to each of
such units on the ratio of each unit's estimated cost of decommissioning at such
time to the  combined  total of the  estimated  decommissioning  costs for those
units.


                                       9
<PAGE>



         16.   The   annual   revenue   requirements    resulting   from   PNM's
decommissioning  expenses relating to its interest in PVNGS Units 1 and 2, based
on annual  deposits in the amount of  $396,000  per unit,  will be $646,000  per
unit, and consist of the following components:

              Description                                  Amount

     a.  Decommissioning Expense                          $396,000
     b.  Provision for Refund                              250,000
     c.  Current Tax Expense                               250,000
     d.  Deferred Tax Expense                             (250,000)

     Total Annual Revenue Requirements                    $646,000

         17. The decommissioning revenue requirements relating to PNM's interest
in PVNGS shall be deemed to be  "depreciation"  expenses  for  purposes of their
ratemaking  treatment  pursuant  to the  inventory  Stipulation  approved by the
Commission  on December 12,  1984,  for so long as the  Inventorying  ratemaking
methodology is in effect with respect to PNM. Consequently, they will be treated
as  "at-risk"  costs under the  Inventory  Stipulation.  Prepayments  of funding
requirements  shall be  deemed  to be  "at-risk"  in the year in which  they are
charged to expense, rather than in the year paid.


                                       10
<PAGE>



         18. The undersigned  parties agree that book and tax timing differences
arising  from  PNM's  decommissioning   expenditures  shall  be  normalized  for
ratemaking  purposes,  which  normalization  shall have the effect of levelizing
revenue requirements.  The accounting entries for years 1 through 38 of funding,
assuming a  decommissioning  contribution  of $396,000,  would be as follows (in
thousands):

  (a) Decommissioning Contribution                         396
        Cash                                                           396
          To record the contribution to the
          decommissioning trust

  (b) Provision for Refund (expense account)               250
        Refund Payable                                                 250
          To record advance payment from
          customers for taxes, which is
          refundable in future years

  (c) Accumulated Deferred Income Taxes                    250
        Current Tax Expense                                250
          Deferred Tax Expense                                         250
          Cash                                                         250
             To record taxes paid on
             $646 of taxable income

         19. Any tax savings related to the decommissioning expenditures will be
applied on a unit by unit basis as follows:  First,  added to the balance in the
Refund Payable account;  second,  to pay any  decommissioning  costs and related
administrative  expenses in excess of the trust balance; third, to eliminate the
Accumulated Deferred Income Tax balance; and fourth, to be refunded to customers
in  proportion  to  the  contribution  of  ratepayers   relative  to  the  total
contribution of ratepayers and shareholders to the costs and associated taxes of
decommissioning.

         20. In the event there are insufficient funds from Fund and tax savings
resources  to  cover  the  costs  of  decommissioning,  PNM  shall  provide  the
additional funds necessary to cover such costs. The ratemaking treatment of such
additional funds shall be determined by the Commission at such time.



                                       11
<PAGE>


         21. In the event there are excess funds in the Fund after  covering the
costs of  decommissioning,  such excess  funds  shall be  combined  with any tax
savings and distributed in accordance with Paragraph 19 of this Stipulation.

         WHEREFORE, the undersigned parties have executed this Stipulation as of
the 2nd day of June, 1987.

PUBLIC SERIVCE COMPANY                    ATTORNEY GENERAL OF THE
OF NEW MEXICO                             STATE OF NEW MEXICO


By                                        By
-------------------------------------     ------------------------------------
     Richard B. Cole, Esq.                    Steve Michel, Esq.
     Kathryn J. Kuhlen, Esq.                  Assistant Attorney General
     P. O. Drawer AA                          P. O. Drawer 1508
     Albuquerque, NM  87103                   Santa Fe, NM  87504



NEW MEXICO INDUSTRIAL                     NEW MEXICO PUBLIC SERVICE
ENERGY CONSUMERS                          COMMISSION STAFF




By                                        By
-------------------------------------     ------------------------------------

     Lewis O. Campbell, Esq.                  Charles F. Noble, Esq.
     Wayne Shirley, Esq.                      NM Public Service Commission
     Campbell, Rica & Olson                   224 E. Palace
     P. O. Drawer 965                         Santa Fe, NM  87503
     Albuquerque, NM  87103


                                       12
<PAGE>



                 BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION

IN THE MATTER OF THE IN-SERVICE DATES,    )
PERFORMANCE STANDARDS AND RATEMAKING      )
TREATMENT FOR DECOMMISSIONING COSTS       )
CONCERNING PNM'S PARTICIPATION IN         )
THE PALO VERDE NUCLEAR GENERATING         )   CASE NO. 2004
STATION,                                  )
                                          )
PUBLIC SERVICE COMPANY OF NEW MEXICO,     )
                                          )
                Applicant.                )

                                  ERRATA NOTICE
                                  -------------

         COMES NOW Michael Barlow,  Hearing Examiner in this case, and, pursuant
to Rule  R20-7 of Third  Revised  General  Order  No.  1,  gives  notice  of the
following  typographical  errors in the  Certification of Stipulation  issued on
July 15, 1987:

         1.  The  word  "repayment"  in the  third  line of the  last  paragraph
starting on page 6 is corrected to read "prepayment."

         2. The next to last sentence in the second full paragraph on page 10 is
corrected  to read:  "PNM  would pay the  interest  on such  loans and while the
transcript indicates that PNM would be able to deduct up to a maximum of $50,000
per policy for tax purposes (Tr. 11; Tr. 40-41),  current tax legislation limits
loans on  insurance  policies to a maximum of $50,000 per  employee for interest
deduction purposes. PNM Exhibit 1, Lyons, p.4, lines 12-15."

         I S S U E D at Santa Fe, New Mexico this 28th day of July 1987.

                                        NEW MEXICO PUBLIC SERVICE COMMISSION



                                        -------------------------------------
                                        MICHAEL BARLOW
                                        Hearing Examiner


                                       1
<PAGE>