EXHIBIT 4.40 AUCTION AGENT AGREEMENT

EXHIBIT 4.40

AUCTION AGENT AGREEMENT

Dated as of August 1, 2005

among

EL PASO ELECTRIC COMPANY

and

UNION BANK OF CALIFORNIA, N.A.,

as Trustee

and

THE BANK OF NEW YORK,

as Auction Agent

Relating to

$63,500,000

Maricopa County, Arizona Pollution Control Corporation

Pollution Control Refunding Revenue Bonds, 2005 Series B

(El Paso Electric Company Palo Verde Project)

and

$37,100,000

Maricopa County, Arizona Pollution Control Corporation

Pollution Control Refunding Revenue Bonds, 2005 Series C

(El Paso Electric Company Palo Verde Project)

TABLE OF CONTENTS

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AUCTION AGENT AGREEMENT

THIS AUCTION AGENT AGREEMENT, dated as of August 1, 2005 (the “Auction Agent Agreement”), among EL PASO ELECTRIC COMPANY (the “Borrower”), THE BANK OF NEW YORK, as Auction Agent (the “Auction Agent”), and UNION BANK OF CALIFORNIA, N.A., as Trustee (the “Trustee”).

WITNESSETH

WHEREAS, concurrently with the execution and delivery of this Auction Agent Agreement, Maricopa County, Arizona Pollution Control Corporation (the “Issuer”) is offering $63,500,000 in aggregate principal amount of its Pollution Control Refunding Revenue Bonds, 2005 Series B (El Paso Electric Company Palo Verde Project) and $37,100,000 in aggregate principal amount of its Pollution Control Refunding Revenue Bonds, 2005 Series C (El Paso Electric Company Palo Verde Project) (collectively, the “Bonds”) pursuant to separate Indentures of Trust, each dated as of July 1, 2005 (as may be supplemented, each, an “Indenture” and collectively, the “Indentures”) by and between the Issuer and the Trustee;

WHEREAS, the Trustee is entering into this Auction Agent Agreement as agent for the holders of the Bonds pursuant to each Indenture; and

WHEREAS, the Borrower hereby directs that the Auction Agent shall perform certain duties set forth herein;

NOW, THEREFORE, the Borrower, the Trustee and the Auction Agent hereby agree as follows:

ARTICLE I

DEFINITIONS AND RULES OF CONSTRUCTION

Section 1.01. Terms Defined by Reference to Each Indenture . Capitalized terms not defined herein shall have the respective meanings specified in each Indenture.

Section 1.02. Terms Defined Herein . As used herein, the following terms shall have the following meanings, unless the context otherwise requires:

“Auction Agent Fee” means the annual administration fee set forth in a written agreement between the Auction Agent and the Borrower.

“Authorized Representative” shall mean (i) in the case of the Auction Agent, each Vice President, Assistant Vice President and Assistant Treasurer in the Dealing and Trading Group of the Corporate Trust Department of the Auction Agent and every other officer or employee of the Auction Agent designated an “Authorized Representative” for purposes hereof in a written communication delivered to the Trustee, (ii) in the case of the Borrower, its Chief Financial Officer, its Treasurer and its Assistant Treasurer or any officer holding a substantially equivalent position and every other officer or employee of the Borrower designated an “Authorized

Representative” for purposes hereof in a written communication delivered to the Trustee, and (iii) in the case of the Trustee, every officer or employee of the Trustee designated as an “Authorized Representative” for purposes hereof in a written communication delivered to the Auction Agent.

“BMA Recommendation” is defined in Section 2.03 hereof.

“Bond Register” is defined in Section 2.02(c) hereof.

“Broker-Dealer Agreement” shall mean each agreement among the Auction Agent, the Borrower and a Broker-Dealer pursuant to which the Broker-Dealer agrees to participate in Auctions as set forth in the Auction Procedures, as from time to time amended or supplemented. Each Broker-Dealer Agreement shall be substantially in the form of the Broker-Dealer Agreement, dated as of August 1, 2005, by and among the Auction Agent, the Borrower and Citigroup Global Markets Inc., as Broker-Dealer relating to the Bonds.

“Existing Owner” means (a) with respect to and for the purpose of dealing with the Auction Agent in connection with an Auction, a Person who is a Broker-Dealer listed in the records of the Auction Agent at the close of business on the Business Day immediately preceding the Auction Date for such Auction and (b) with respect to and for the purpose of dealing with a Broker-Dealer in connection with an Auction, a Person who is a beneficial owner of the Bonds in the records of the Auction Agent.

“Person” means an individual, a corporation, a partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof.

“Settlement Procedures” shall mean the Settlement Procedures set forth in Exhibit B to the Broker-Dealer Agreement.

“Submission Processing Deadline” shall mean the earlier of (i) 40 minutes after the Submission Deadline and (ii) the time when the Auction Agent begins to disseminate the results of the Auction to the Broker-Dealers.

“Submission Processing Representation” shall have the meaning specified in Section 2.10 hereof and shall be substantially in the form attached to the Broker-Dealer Agreement as Exhibit D.

Section 1.03. Rules of Contruction . Unless the context or use indicates another or different meaning or intent, the following rules shall apply to the construction of this Auction Agent Agreement.

Words importing the singular number shall include the plural number and vice versa.

The captions and headings herein are solely for the convenience of reference and shall not constitute a part of this Auction Agent Agreement nor shall they affect its meaning, construction or effect.

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The words “hereof,” “herein” and other words of similar import refer to this Auction Agent Agreement as a whole.

All references herein to a particular time of day shall be to New York City time.

Each reference to the purchase, sale or holding of Bonds shall refer to beneficial ownership interests in the Bonds unless the context clearly requires otherwise.

ARTICLE II

AUCTION

Section 2.01. Purpose; Appointment; Incorporation by Reference of Auction Procedures and Settlement Procedures .

Each Indenture provides that the interest rate on the Bonds for each Auction Period shall be the Auction Rate which shall be, except as otherwise provided therein, the interest rate on the Bonds that the Auction Agent determines to have resulted from the implementation of the Auction Procedures.

Pursuant to Section 3A.06 of each Indenture, the Trustee hereby appoints The Bank of New York to act as Auction Agent. The Bank of New York hereby accepts such appointment to perform the Auction Procedures, the Settlement Procedures and other duties herein, in the Broker-Dealer Agreement and in each Indenture specified to be performed by the Auction Agent.

The Settlement Procedures contained in Exhibit B to the Broker-Dealer Agreement, the Auction Procedures contained in Exhibit B to each Indenture and other provisions relating to the Auction Procedures contained in each Indenture are hereby incorporated herein by reference in their entirety, and shall be deemed to be a part hereof to the same extent as if such provisions were expressly set forth herein. In the event of a conflict between any of the provisions hereof and the provisions of the Settlement Procedures, the Auction Procedures and other procedures of the Indentures, the provisions hereof shall control. No amendment of any provision of the Settlement Procedures, the Auction Procedures or any other provision of each Indenture that adversely affects any right, duty or obligation of the Auction Agent shall be binding upon the Auction Agent without its consent.

Section 2.02. Preparation for Each Auction; Maintenance of Registry of Beneficial Owners .

(a) Prior to any Auction Date for which any change in Broker-Dealer is to be effective, the Trustee shall notify or cause to be notified the Auction Agent and the Borrower in writing of such change and, if such change is the addition of a Broker-Dealer, the Borrower shall cause to be delivered to the Auction Agent, for execution by the Auction Agent pursuant to Section 2.06 hereof, a Broker-Dealer Agreement manually signed by such Broker-Dealer. The Auction Agent shall have entered into a Broker-Dealer Agreement with each Broker-Dealer prior to the participation of any such Broker-Dealer in any Auction. The Auction Agent shall be entitled to assume that there has been no change in the Broker-Dealer unless and until it has actual receipt of such notification from an Authorized Representative of the Trustee.

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(b) On each Auction Date, the Auction Agent shall determine the All-Hold Rate and the Auction Rate. Not later than 9:30 A.M. (New York City time) on each Auction Date, the Auction Agent shall advise the Trustee, the Borrower and the Broker-Dealer by facsimile or electronic transmission or by telephone (promptly confirmed by facsimile or electronic transmission) of the All-Hold Rate and the Index used in determining such rate.

(c) The Auction Agent shall maintain a registry of the Existing Owners (the “Bond Register”) based on information provided to it from the Broker-Dealer and shall indicate thereon the identity of the respective Broker-Dealer of each beneficial owner, if any, on whose behalf such Broker-Dealer submitted the most recent Order in any Auction which resulted in such Existing Owner continuing to hold or purchase such Bonds. The Auction Agent shall keep such Bond Register current and accurate based solely on information provided to the Auction Agent by the Broker-Dealer and DTC or another Securities Depository. Each Broker-Dealer may under the Broker-Dealer Agreement to which it is a party to deliver to the Auction Agent on the date of such Broker-Dealer Agreement, and from time to time thereafter as the Auction Agent may request, a list of the initial Existing Owners that purchased such Bonds through such Broker-Dealer. The Auction Agent may conclusively rely upon, as evidence of the identities of the Existing Owners, the following: such lists; the results of Auctions; notices from DTC or another Securities Depository regarding the results of redemptions or mandatory tenders; notices from any Existing Owner, the Participant of any Existing Owner or the Broker-Dealer of any Existing Owner with respect to such Existing Owner’s transfer of the Bonds to another Person.

(d) The Trustee shall provide to the Auction Agent any notice of redemption, mandatory purchase or adjustment in the mode of determining the interest rate of the Bonds at or before the time any such notice is first given by the Trustee to any Existing Owner thereof. In the event of any partial redemption or mandatory purchase of the Bonds, the Trustee shall promptly request DTC or another Securities Depository to notify the Auction Agent of the Participants whose Bonds have been called for redemption or mandatory purchase and the person or department at such Participant to contact regarding such redemption or mandatory purchase and, within two Business Days, request each such Participant to disclose to the Auction Agent (upon selection by such Participant of the Existing Owners whose Bonds are to be redeemed) the principal amount of Bonds of each such Existing Owner, if any, which are subject to such redemption or mandatory purchase, provided the Auction Agent shall have been furnished with the name and telephone number of a person or department at such Participant from which it is to request such information. In the absence of receiving any such information with respect to an Existing Owner from such Existing Owner’s Participant (or otherwise), the Auction Agent may continue to treat such Existing Owner as the beneficial owner of the principal amount of Bonds shown in the Auction Agent’s registry.

(e) The Auction Agent may refuse to register a transfer of beneficial ownership of Bonds from an Existing Owner to another Person unless (a) such transfer is pursuant to an Auction or (b) the Auction Agent has been notified in writing (I) in a notice in the form of Exhibit B to the Broker-Dealer Agreement by such Existing Owner, the Broker-Dealer or a Participant for such Existing Owner of such transfer, (II) in a notice in the form of Exhibit C to the Broker-Dealer Agreement by the Broker-Dealer of any Person that purchased or sold such Bonds in an Auction of the failure of such Bonds to be transferred as a result of such Auction, or (III) in a notice from DTC or another Securities Depository regarding the results of mandatory

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tenders. In the event a notice referred to in the preceding clause (II) is received, the Auction Agent shall register the beneficial ownership of the Bonds covered thereby in the name of the Existing Owner thereof prior to the Auction referred to in such notice. The Auction Agent shall not be required to accept any notice delivered pursuant to the terms of the foregoing sentence if received by the Auction Agent after 3:00 P.M. (New York City time) on the Business Day next preceding an Auction Date.

(f) The Auction Agent may, but shall have no obligation to, request a Broker-Dealer, as set forth in the applicable Broker-Dealer Agreement, to provide the Auction Agent with a list of their respective customers that such Broker-Dealer believes are Existing Owners of Bonds. The Auction Agent shall not disclose such information so provided to any Person other than the Trustee, the Issuer, the Borrower and the Broker-Dealer that provided the same; provided, however, that the Auction Agent reserves the right and is authorized to disclose any such information if (A) it is ordered to do so by a court of competent jurisdiction or a regulatory, judicial or quasi judicial agency or authority having the authority to compel such disclosure, (B) it is advised by its counsel that its failure to do so would be unlawful or (C) failure to do so would expose the Auction Agent to loss, liability, claim, damage or expense for which it has not received indemnity satisfactory to it.

(g) In the event that the notice referred to in clause (vii) of paragraph (a) of the Settlement Procedures states an Auction Date that is subsequently changed, the Auction Agent, by such means as the Auction Agent deems practicable, shall give notice of the new Auction Date not later than 9:15 A.M. (New York City time) on the earlier of the new Auction Date or the old Auction Date.

(h) The Auction Agent shall forward a copy of any notice of redemption, mandatory purchase or adjustment in the mode of determining the interest rate of the Bonds received by it from the Trustee pursuant to the foregoing paragraph (d) to the Broker-Dealers on the Business Day following its receipt thereof by facsimile or other electronic communication acceptable to the parties.

(i) If any Auction Bonds are to be redeemed and those Bonds are held by a Securities Depository, the Borrower shall include in the notice of the call for redemption delivered to the Securities Depository (i) a date placed under an item entitled “Publication Date for Securities Depository Purposes” and such date shall be three Business Days after the Auction Date immediately preceding such redemption date and (ii) an instruction to Securities Depository to (x) determine on such Publication Date after the Auction held on the immediately preceding Auction Date has settled, the Participants whose Securities Depository positions will be redeemed and the principal amount of such Auction Bonds to be redeemed from each such position (the “Securities Depository Redemption Information”), and (y) notify the Auction Agent immediately after such determination of the positions of the Participants in such Auction Bonds immediately prior to such Auction settlement, the position of the Participants in such Auction Bonds immediately following such auction settlement, and the Securities Depository Redemption Information.

Section 2.03. Auction Schedule . The Auction Agent shall conduct Auctions for the Bonds in accordance with the schedule set forth below. Such schedule may be changed at any

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time by the Auction Agent at the written direction of the Borrower to reflect then currently accepted market practices for similar auctions. The Auction Agent shall give written notice of any such change to each Broker-Dealer, the Borrower, the Issuer and the Trustee, which notice shall be given prior to the close of business on the Business Day next preceding the first Auction Date on which any such change shall be effective. Notwithstanding the foregoing, the Auction Agent will follow the Bond Market Association’s Market Practice U.S. Holiday Recommendations for shortened trading days for the bonds markets (the “BMA Recommendation”) unless the Auction Agent is instructed otherwise. In the event of a BMA Recommendation on an Auction Date the Submission Deadline will be 11:30 a.m., instead of 1:00 p.m., and as a result the notice set forth in Section 2.04 will occur earlier.