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Exhibit 10.17

        EXECUTION COPY

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GUARANTEE AND AGREEMENT
(LA PALOMA)

made by

PG&E NATIONAL ENERGY GROUP, INC.

in favor of

CITIBANK, N.A.,
as Security Agent

Dated as of April 6, 2001

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TABLE OF CONTENTS

 
   
  Page

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SECTION I DEFINED TERMS   1
1.01.
 
Definitions
 
1 1.02.   Other Definitional Provisions   15
SECTION II GUARANTEE
 
16
2.01.
 
Guarantee; Payment
 
16 2.02.   Extent of Liability   16 2.03.   Nature of Guarantee   16 2.04.  
Demands and Notice; Application of Proceeds   17 2.05.   Consent to
Modifications, Waivers   17 2.06.   Subrogation   18 2.07.   Substitute Credit
Support   18
SECTION III REPRESENTATIONS AND WARRANTIES
 
18
3.01.
 
Organization; Powers; Ownership of Property
 
18 3.02.   Authorization   19 3.03.   Enforceability   19 3.04.   Financial
Statements   19 3.05.   Litigation   19 3.06.   Federal Reserve Regulations   20
3.07.   Investment Company Act; Public Utility Holding Company Act   20 3.08.  
No Material Misstatements   20 3.09.   Taxes   20 3.10.   Employee Benefit Plans
  20 3.11.   Governmental Approval; Compliance with Law and Contracts   20 3.12.
  Environmental Matters   21 3.13.   Ranking   21 3.14.   Unrestricted
Subsidiaries   24 3.15.   Separateness from PG&E   24
SECTION IV COVENANTS
 
24
4.01.
 
Maintenance of Ownership
 
24 4.02.   Existence   24 4.03.   Compliance with Law; Business and Properties  
24 4.04.   Financial Statements, Reports, Etc.   26 4.05.   Insurance   26 4.06.
  Taxes, Etc.   26 4.07.   Maintaining Records; Access to Properties and
Inspections   26 4.08.   Risk Management Procedures   26 4.09.   Merger   26
4.10.   Investments   26 4.11.   Liens   27 4.12.   Indebtedness   28 4.13.  
Transactions with Affiliates   30 4.14.   Distributions   30 4.15.   Financial
Covenants   30 4.16.   Separateness from PG&E Corp.   33 4.17.   PG&E Gen Credit
Agreement Covenants   33
SECTION V NEG TRIGGER EVENTS
 
33

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5.01.
 
NEG Trigger Events
 
33
SECTION VI MISCELLANEOUS
 
34
6.01.
 
Amendments
 
34 6.02.   Successors and Assigns   34 6.03.   GOVERNING LAW   34 6.04.   No
Waiver, Cumulative Remedies   34 6.05.   Authority and Rights of Security Agent
  35

Schedules

1.01A   Existing Sale-Leaseback Transactions 1.01B   Terms and Conditions of
Subordination for Indebtedness to Affiliates 1.01C   Terms and Conditions of
Subordination for Indebtedness to Non-Affiliates 3.05   Litigation 3.12  
Environmental Matters 3.14   Unrestricted Subsidiaries 4.01   Certain Restricted
Subsidiaries not Subject to Sections 4.01 or 4.02 4.10   Other Existing
Investments 4.11   Other Existing Liens 4.12(a)   Indebtedness under Certain
Credit Agreements 4.12(f)   Other Existing Indebtedness 4.13   Description of
Existing Management, Operation, Sharing and Similar Arrangements with Affiliates

Exhibits

A   Form of Payment Demand

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GUARANTEE AND AGREEMENT

        GUARANTEE AND AGREEMENT dated as of April 6, 2001 (this "Guarantee and
Agreement") by PG&E NATIONAL ENERGY GROUP, INC., a Delaware corporation (this
"Guarantor"), in favor of Citibank, N.A. as security agent (in such capacity,
the "Security Agent") for the Creditors.

W I T N E S S E T H

        WHEREAS, as contemplated by the Participation Agreement, dated as of
March 7, 2000, among La Paloma Generating Company, LLC, La Paloma Generating
Trust Ltd., Wilmington Trust Company, the Lenders party thereto, the Tranche A
Banks party thereto, the Investors party thereto and Citibank, N.A., as
administrative agent and security agent (the "Participation Agreement"), the
Lenders, Investors and other Creditors have agreed to make extensions of credit
subject to the terms of the Operative Documents;

        WHEREAS, as contemplated by the Omnibus Restructuring Agreement, dated
as of April 6, 2001, among PG&E Corporation, the Guarantor, PG&E Generating
Company, LLC, La Paloma Generating Company, LLC, La Paloma Generating
Trust Ltd., Wilmington Trust Company, the Lenders party thereto, the Tranche A
Banks party thereto, the Investors party thereto, Citibank, N.A. and the other
parties thereto (the "Omnibus Restructuring Agreement"), the parties thereto
have agreed to certain amendments, waivers and modifications regarding the
transactions contemplated by the Operative Documents (as defined in the
Participation Agreement) in accordance with the terms of the Omnibus
Restructuring Agreement;

        WHEREAS, it is a condition precedent to the effectiveness of the Omnibus
Restructuring Agreement that the Guarantor shall have executed and delivered
this Guarantee and Agreement to the Security Agent for the benefit of the
Creditors;

        WHEREAS, the Guarantor owns directly or indirectly all of the membership
interests in the Company, and the Guarantor will derive substantial direct and
indirect benefit from the extensions of credit pursuant to the Operative
Documents;

        NOW, THEREFORE, in consideration of the Creditors agreeing to make
further extensions of credit pursuant to the Operative Documents as amended by
the Omnibus Restructuring Agreement and the agreements contemplated thereby, the
Guarantor agrees as follows:

SECTION I DEFINED TERMS

        1.01.    Definitions.    (a) Unless otherwise defined herein,
capitalized terms used herein shall have the meanings given to them in the
Participation Agreement (as amended by the Omnibus Restructuring Agreement).

        (b)  The following terms shall have the following meanings:

        "$1.1 Billion PG&E Gen Credit Agreement" shall mean the $1,100,000,000
Credit Agreement, dated as of September 1, 1998, as amended as of the date
hereof, among PG&E Gen and the lenders party thereto.

        "Actual Knowledge" shall mean, with respect to any Person as to any
event or circumstance, the actual knowledge of the Responsible Officer of such
Person or receipt by such Person from the Administrative Agent or Security
Agent, as the case may be, of notice of such event or circumstance.

        "Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly or indirectly controls or is controlled by or is
under common control with the Person specified. For this purpose, "control" of a
Person shall mean the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such Person, whether
through ownership of voting shares, by contract or otherwise.

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        "Asset Company" shall mean any entity (a) (i) whose principal purpose is
the acquisition, improvement, installation, design, engineering, construction,
development, completion, financing, maintenance or operation of all or any part
of a project or projects, or any asset related thereto, used in the business of
generating, transmitting, transporting, distributing, producing or storing
electric power, thermal energy, natural gas or other fuel or other
energy-related businesses and (ii) substantially all its assets are limited to
those assets being financed (or to be financed), or the operation of which is
being financed (or to be financed), in whole or in part by a Project Financing
Facility entered into by such entity and/or any Investment Vehicle that owns
such entity or by contributions or intercompany loans from the Guarantor, any
Restricted Subsidiary or any such Investment Vehicle or (b) which entity is a
Subsidiary of an entity described in clause (a) and the business and assets of
which are related to the business of such entity and which does not incur any
Indebtedness other than (A) intercompany loans from an Asset Company which is
the parent of such Subsidiary, the Guarantor, any Restricted Subsidiary or any
Investment Vehicle that indirectly owns such Subsidiary, (B) Indebtedness of the
type described in Section 4.12(i) or (C) Indebtedness under a Project Financing
Facility.

        "Business Day" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in New York City are authorized or required by law
to close.

        "Cash Equivalents" shall mean (a) any evidence of indebtedness with a
maturity of 180 days or less issued or directly and fully guaranteed or insured
by the United States, Canada or any U.S. agency or instrumentality;
(b) certificates of deposit or acceptances or Eurodollar time deposits with a
maturity of 180 days or less of, and overnight bank deposits and demand accounts
with (i) any financial institution that is not a foreign bank or a foreign bank
holding company that has a bankwatch rating of at least B/C by Fitch and a
commercial paper rating of at least A-1 by S&P, F1 by Fitch or P-1 by Moody's or
(ii) any financial institution that is a foreign bank or a foreign bank holding
company that has a sovereign risk rating of at least AA by Fitch, a bankwatch
rating of at least B by Fitch, a commercial paper rating of at least A-1 by S&P,
F1 by Fitch or P-1 by Moody's and a minimum of US$20 billion in assets;
(c) commercial paper with a maturity of 180 days or less issued by a U.S. or
Canadian incorporated company that is not an Affiliate of the Guarantor and
rated at least A-1 by S&P, F1 by Fitch or at least P-1 by Moody's;
(d) Repurchase Agreements with a maturity of 90 days or less made with banks
which meet the criteria in clause (b) above and primary government security
dealers (as defined by the Federal Reserve System) which meet the criteria in
clause (c) above, and are fully collateralized by investments meeting the
criteria of clause (a) above; (e) tax-exempt municipal obligations of any state
of the United States, or any municipality of any such state which mature within
180 days from the date of acquisition thereof and which, in each case, are rated
at least MIG-1 or VMIG-1 by Moody's, and SP-1/A-1 or AA/A-1 by S&P; and
(f) institutional money market funds that exclusively invest in any of the
foregoing.

        "Cash Flow Available for Fixed Charges" for any period shall mean,
without duplication, (i) EBITDA of the Guarantor and its Consolidated
Subsidiaries which are not Unrestricted Subsidiaries for such period, minus
(ii) EBITDA for such period of such Consolidated Subsidiaries that are financed
with Indebtedness of such Subsidiary or which are direct or indirect
Subsidiaries of a Financed Subsidiary of the Guarantor, plus (iii) Distributions
received by the Guarantor from Subsidiaries described in the foregoing
clause (ii) during such period except to the extent the amount of such
Distributions previously constituted "Cash Flow Available for Fixed Charges"
during such period as a result of clause (viii) below, minus (iv) Distributions
described in the foregoing clause (iii) that are attributable to extraordinary
gains or other non-recurring items described in clause (iii) of the definition
of "EBITDA", minus (v) any income reported by the Guarantor for such period for
Persons that are not Consolidated Subsidiaries of the Guarantor, plus
(vi) Distributions received by the Guarantor from Persons described in the
foregoing

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clause (v) during such period, minus (vii) Distributions described in the
foregoing clause (vi) that are attributable to extraordinary gains or other
non-recurring items described in clause (iii) of the definition of "EBITDA",
plus,(viii) cash and Cash Equivalents of Subsidiaries described in clause (ii)
above that are legally and contractually available to such Subsidiary for the
payment of dividends to the Guarantor, but only to the extent that the source of
such cash and Cash Equivalents is from such Subsidiary's EBITDA for such period
or from repayments during such period to such Subsidiary of loans made by such
Subsidiary.

        "Consolidated Net Worth" shall mean, as of any date of determination
thereof, the amount which would be reflected as stockholders' equity upon a
consolidated balance sheet of the Guarantor (but excluding any portion thereof
attributable to Unrestricted Subsidiaries) determined in accordance with GAAP,
excluding other comprehensive income arising from the accounting treatment of
hedging and mark-to-market transactions.

        "Consolidated Subsidiary" shall mean with respect to any Person at any
date any Subsidiary or other entity the accounts of which would be consolidated
in accordance with GAAP with those of such Person in its consolidated financial
statements as of such date.

        "Consolidated Tangible Net Assets" shall mean at any date the total net
assets of the Guarantor and its Consolidated Subsidiaries (other than
Unrestricted Subsidiaries) determined in accordance with GAAP, excluding,
however, from the determination of total net assets (i) goodwill, organizational
expenses, research and product development expenses, trade marks, trade names,
copyrights, patents, patent applications, licenses and rights in any thereof,
and other similar intangibles, (ii) all deferred charges or unamortized debt
discount and expenses, (iii) all reserves carried and not deducted from assets,
(iv) securities which are not readily marketable, (v) cash held in sinking or
other analogous funds established for the purpose of redemption, retirement or
prepayment of capital stock or other equity interests or Indebtedness, and
(vi) any items not included in clauses (i) through (v) above which are treated
as intangibles in conformity with GAAP.

        "Credit Support Arrangements" shall mean any Guaranty, letter of credit
or other instrument or arrangement issued as support for the payment or
performance obligations of a party under any Trading Arrangement.

        "Distribution" shall mean, in respect of any Person, (i) any payment of
any dividends or other distributions with respect to the capital stock or other
equity interests of such Person (except distributions in such capital stock or
other equity interests) and (ii) any purchase, redemption or other acquisition
or retirement for value of any capital stock or other equity interests of such
Person or any Affiliate of such Person unless made contemporaneously from the
net proceeds of the sale of capital stock or other equity interests.

        "EBITDA" shall mean, with respect to any Person for any period, the
(i) income (or loss) before interest and taxes of such Person, plus (ii) to the
extent deducted in determining such income (or loss), depreciation, amortization
and other similar non-cash charges and reserves, minus (iii) to the extent
recognized in determining such income (or loss), extraordinary gains (or
losses), restructuring charges or other non-recurring items, plus (iv) to the
extent deducted in determining such income (or loss), Lease Payment Obligations
described in clause (iii) of the definition of "Lease Payment Obligations".

        "Equity Funding Arrangement" shall mean (i) an agreement to provide a
capital contribution to or other equity investment in any Asset Company or
Investment Vehicle in connection with any Project Financing Facility, (ii) a
Guaranty, letter of credit or other similar arrangement with respect to any
obligations of any Asset Company or Investment Vehicle under a Project Financing
Facility, (iii) a Guaranty of any Investment Vehicle's obligation to make a
capital contribution to or

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other equity investment in any Asset Company or Investment Vehicle in connection
with a Project Financing Facility or (iv) a Guaranty, letter of credit or other
similar arrangement to support any of the obligations or arrangements described
in clauses (i) through (iii) hereof.

        "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as the same may be amended from time to time.

        "ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) that is a member of a group of (i) organizations described in
Sections 414(b) or 414(c) of the Code and (ii) solely for purposes of the Lien
created under Section 412(n) of the Code, organizations described in Sections
414(m) or 414(o) of the Code of which the Guarantor is a member.

        "ERISA Event" shall mean (i) the Guarantor or any ERISA Affiliate shall
fail to pay when due an amount or amounts aggregating in excess of $15,000,000
which it shall have become liable to pay under Title IV of ERISA; or (ii) notice
of intent to terminate a Material Plan shall be filed under Title IV of ERISA by
the Guarantor or any ERISA Affiliate, any plan administrator or any combination
of the foregoing; or (iii) the PBGC shall institute proceedings under Title IV
of ERISA to terminate, to impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to
administer any Material Plan; or (iv) a condition shall exist by reason of which
the PBGC would be entitled to obtain a decree adjudicating that any Material
Plan must be terminated; or (v) there shall occur a complete or partial
withdrawal from, or a default, within the meaning of Section 4219(c)(5) of
ERISA, with respect to, one or more Multiemployer Plans which could cause the
Guarantor or any ERISA Affiliate to incur a current payment obligation in excess
of $15,000,000; or (vi) receipt by the Guarantor or any ERISA Affiliate of
notice from one or more Multiemployer Plans of intent to terminate or that it is
insolvent or in reorganization (within the meaning of Section 4241 or 4245 of
ERISA, as applicable) which termination, insolvency or reorganization,
individually or together with other such events, could cause the Guarantor
and/or any ERISA Affiliate, individually or in the aggregate, to incur a current
payment obligation in excess of $15,000,000; or (vii) the Guarantor or any ERISA
Affiliate shall engage in one or more non-exempt "prohibited transactions" (as
defined in Section 406 of ERISA or Section 4975 of the Code) which could result
in a current payment obligation of the Guarantor and/or any ERISA Affiliate
individually or in the aggregate, in an amount or amounts aggregating in excess
of $15,000,000; or (viii) the occurrence of any event or series of events of
which the nature described in clauses (i) through (vii) with respect to any Plan
or Multiemployer Plan which, individually or in the aggregate, could result in a
liability to the Guarantor and/or any ERISA Affiliate, individually or in the
aggregate, in an amount or amounts aggregating in excess of $50,000,000.

        "ET Credit Agreements" shall mean (i) the $50,000,000 Credit Agreement,
dated as of November 13, 1998, between PG&E Energy Trading Gas Corporation, PG&E
Energy Trading, Canada Corporation, ET Holdings, PG&E Energy Trading Power, L.P.
and Bank of Montreal and (ii) the $35,000,000 Credit Agreement, dated as of
November 13, 1998, between PG&E Energy Trading—Gas Corporation, PG&E Energy
Trading, Canada Corporation, PG&E Energy—Trading Power Holdings Corporation,
PG&E Energy Trading Power, L.P. and The Chase Manhattan Bank, as each may be
amended, modified or supplemented from time to time.

        "ET Holdings" shall mean PG&E Energy Trading Holdings Corporation, a
California corporation.

        "Federal Reserve System" shall mean the Federal Reserve System of the
United States of America.

        "Financed Subsidiary" shall mean any direct or indirect Subsidiary of
the Guarantor that is financed with Indebtedness of such Subsidiary.

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        "Financial Officer" of any Person shall mean the chief financial
officer, principal accounting officer, treasurer, associate or assistant
treasurer, or any responsible officer analogous to the foregoing or designated
by the one of the foregoing Persons, of such Person.

        "Fitch" shall mean Fitch, Inc.

        "Fixed Charges" shall mean, with respect to the Guarantor for any
period, the sum, without duplication, of (i) the aggregate amount of interest
expense and commitment and other fees with respect to Funded Indebtedness of the
Guarantor Scheduled to be Paid for such period, including (A) the net costs
under Swaps, (B) all capitalized interest, (C) the interest portion of any
deferred payment obligation and (D) the Lease Payment Obligations of the
Guarantor Scheduled to be Paid by the Guarantor during such period, and (ii) the
aggregate amount of all mandatory scheduled payments (whether designated as
payments or prepayments) and scheduled sinking fund payments with respect to
principal of any Funded Indebtedness of the Guarantor, including payments in the
nature of principal under Lease Obligations, provided that with respect to any
Funded Indebtedness of the Guarantor consisting of Equity Funding Arrangements,
"Fixed Charges" shall not include any of the foregoing enumerated items to the
extent paid by a Subsidiary of the Guarantor (so long as the funds used to make
such payments were not provided by the Guarantor).

        "Funded Indebtedness" of a Person shall mean all Indebtedness of such
Person (after intercompany eliminations) other than any Guaranty obligations
that are not reasonably quantifiable under standard accounting practices as of
the date of determination.

        "GAAP" shall mean generally accepted accounting principles, applied on a
consistent basis.

        "Governmental Approvals" shall mean all authorizations, consents,
approvals, licenses and exemptions of, registrations and filings with, and
notices and reports to all Governmental Authorities.

        "Government Authority" shall mean any Federal, state, county, municipal
or other local governmental authority or judicial or regulatory agency, board,
body, commission or instrumentality.

        "GTN" shall mean PG&E Gas Transmission, Northwest Corporation, a
California corporation.

        "GTN Credit Agreements" shall mean (i) the $750,000,000 Indenture, dated
as of May 22, 1995, between GTN and The First National Bank of Chicago, as
trustee and (ii) the $100,000,000 Amended and Restated Credit Agreement and
$50,000,000 364-Day Credit Agreement, each dated May 24, 1999, between GTN, the
lenders party thereto and Citicorp USA, Inc., as administrative agent for such
lenders, including any commercial paper supported by credit facilities made
available under such credit agreements, as the same may be amended, modified or
supplemented from time to time.

        "Guarantee Draw Amount" shall mean, as of the date of payment by the
Guarantor, the Maximum Guarantee Amount on such date.

        "Guaranteed Obligations" shall mean the collective reference to all
payment obligations and liabilities of the Company (including, without
limitation, interest accruing at the applicable rate provided in the applicable
Operative Document and interest accruing at the applicable rate provided in the
applicable Operative Document after the filing of any petition in bankruptcy, or
the commencement of any insolvency, reorganization or like proceeding relating
to the Company, whether or not a claim for post-filing or post-petition interest
is allowed in such proceeding) to any Creditor, whether direct or indirect,
absolute or contingent, due or to become due, or now existing or hereafter
incurred under the Participation Agreement, the Construction Agency Agreement,
the Lease, the Structural Guarantee or any of the other Operative Documents.

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        "Guarantor" shall be defined as in the recitals hereto.

        "Guaranty" shall mean (a) a guaranty by a Person (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business), directly or indirectly, in any manner, of any part or all of the
obligations of another Person; and (b) an agreement by a Person, direct or
indirect, contingent or otherwise, and whether or not constituting a guaranty,
the practical effect of which is to assure the payment or performance (or
payment of damages in the event of nonperformance) of any part or all of the
obligations of another Person (other than in respect of operating leases not
otherwise included in the definition of "Lease Obligations"), whether by (i) the
purchase of securities or obligations, (ii) the purchase, sale or lease of
property or the purchase or sale of services primarily for the purpose of
enabling the obligor with respect to such obligation to make any payment or
performance (or payment of damages in the event of nonperformance) of or on
account of any part or all of such obligation, or to assure the obligee of such
obligation against loss, (iii) repayment of amounts drawn down by beneficiaries
of letters of credit, (iv) the maintenance of working capital, equity capital,
available cash or other financial statement condition so as to enable the
primary obligor to pay Indebtedness; (v) the provision of equity or other
capital under or in respect of equity or other capital subscription
arrangements, (vi) the supplying of funds to or investing in a Person on account
of all or any part of such Person's obligation or indemnifying or holding
harmless, in any way, such Person against any part or all of such obligation or
(vii) the placing of any Lien on property (including, without limitation,
accounts and contract rights) of a Person to secure another Person's
Indebtedness.

        "Incipient NEG Trigger Event" shall mean any condition or event which,
with notice or lapse of time or both, would become a NEG Trigger Event.

        "Indebtedness" of any Person shall mean (i) all indebtedness of such
Person for borrowed money, (ii) all obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person to pay the deferred purchase price of property or services, (iv) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property),
(v) all Lease Obligations of such Person, (vi) all obligations, contingent or
otherwise, of such Person under any issued and outstanding acceptance, letter of
credit or similar instruments, (vii) all obligations of such Person to redeem or
purchase any capital stock of such Person which is mandatorily redeemable,
(viii) all Swaps of such Person and (ix) any Guaranty of such Person with
respect to liabilities of the type described in clauses (i) through
(viii) hereof.

        "Investment" shall mean the acquisition of any interest in any Person or
property, a loan or advance to any Person or other arrangement for the purpose
of providing funds or credit to any Person, a capital contribution in or to any
Person, or any other investment in any Person or property, or any Guaranty of
any of the foregoing.

        "Investment Vehicle" shall mean each Subsidiary of the Guarantor which
is organized solely to acquire, make or hold one or more Investments in an Asset
Company or Asset Companies, either directly or indirectly through one or more
other Investment Vehicles.

        "Lease Obligations" shall mean, without duplication, (i) any
Indebtedness represented by obligations under a lease that is required to be
capitalized for financial reporting purposes and (ii) the present value,
determined using a discount rate equal to the incremental borrowing rate (as
defined in Statement of Financial Accounting Standards No. 13) of the Person
incurring such obligations, of rent obligations under leases of electric
generating assets or natural gas pipelines and related facilities.

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        "Lease Payment Obligations" shall mean, with respect to any Person for
any period, (i) the interest component of all Lease Obligations of such Person
that are described in clause (i) of the definition of "Lease Obligations" and
that are Scheduled to be Paid during such period, plus (ii) the principal
portion of all Lease Obligations of such Person that are described in clause (i)
of the definition of "Lease Obligations" that are Scheduled to be Paid during
such period, plus (iii) all rent payment obligations relating to Lease
Obligations of such Person described in clause (ii) of the definition of "Lease
Obligations" and that are Scheduled to be Paid during such period.

        "Letter Agreement" shall mean the letter agreement, dated as of April 6,
2001, from NEG LLC addressed to the Security Agent, for the benefit of the
Creditors.

        "Lien" shall mean, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset or any interest or title of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement relating to such
asset.

        "Material Adverse Effect" shall mean a materially adverse change in
(a) the business, assets, property or condition (financial or otherwise) or
operations of the Guarantor and its Subsidiaries taken as whole, or (b) the
ability of the Guarantor to perform its obligations under this Guarantee and
Agreement.

        "Material Plan" shall mean any Plan or Plans having aggregate Unfunded
Liabilities in excess of $50,000,000.

        "Maximum Guarantee Amount" shall mean, as of any date of payment by the
Guarantor, the aggregate of the amount of the unpaid principal of all Tranche A
Loans (or, if higher, an amount equal to the aggregate outstanding Tranche A
Loan Commitments in effect at such time, or, if not in effect at such time, in
effect immediately prior to any termination thereof) and the amount of all
accrued and unpaid interest thereon and other amounts payable in connection with
the Tranche A Loans.

        "Minimum Consolidated Net Worth" shall mean US$1.8 billion.

        "Minimum Non-Trading Consolidated Net Worth" shall mean US$1.4 billion.

        "Moody's" shall mean Moody's Investors Service, Inc.

        "Multiemployer Plan" shall mean a multiemployer plan as defined in
Section 4001(a)(3) of ERISA to which the Guarantor or any ERISA Affiliate is
making, or accruing an obligation to make, contributions, or has within any of
the preceding six years made, or accrued an obligation to make, contributions.

        "NEG/ET Letter of Credit Facilities" shall mean a letter of credit
facility entered into by ET Holdings, any of its Subsidiaries and/or the
Guarantor in an aggregate amount not to exceed $500,000,000, as the same may be
amended, modified or supplemented from time to time.

        "NEG Downgrade Event" shall mean (i) unless the NEG Guarantee Release
Date has occurred, the Guarantor's senior unsecured long term debt (x) ceases to
be rated at least BBB- by S&P and (y) ceases to be rated at least Baa3 by
Moody's (or if ratings of such debt have not been issued by such rating
agencies, such debt ceases to be impliedly rated by an issuer rating or
indicative rating at least BBB- by S&P and Baa3 by Moody's) and the Guarantor
fails to provide to the Security Agent, within thirty (30) days after the date
on which such event occurs, a Substitute Credit Support Instrument in the amount
of the Substitute Credit Support Amount or (ii) if a Substitute Credit Support
Instrument in the form of a guaranty pursuant to clause (b) of the definition
thereof has been provided in accordance with Section 2.07, from and after the

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effectiveness of such Substitute Credit Support Instrument, the senior unsecured
long term debt of the guarantor thereunder (x) ceases to be rated at least BBB-
by S&P and (y) ceases to be rated at least Baa3 by Moody's (or if ratings of
such debt have not been issued by such rating agencies, such debt ceases to be
impliedly rated by an issuer rating or indicative rating at least BBB- by S&P
and Baa3 by Moody's) and the guarantor thereunder fails to provide to the
Security Agent, within thirty (30) days after the date on which such event
occurs, a Substitute Credit Support Instrument in the amount of the Substitute
Credit Support Amount.

        "NEG Guarantee Release Date" shall mean the earliest of (x) the date on
which the Guaranteed Obligations have been paid in full, (y) the date on which
NEG pays an amount equal to the Maximum Guarantee Amount to the Security Agent
in accordance with the terms of this Guarantee and Agreement and (z) the date on
which this Guarantee and Agreement terminates in accordance with Section 2.07(b)
hereof.

        "NEG LLC" shall mean PG&E National Energy Group, LLC, a Delaware limited
liability company.

        "NEG Trigger Event" shall mean any of the events set forth in Section V
of this Guarantee and Agreement.

        "Non-Trading Consolidated Net Worth" shall mean, as of any date of
determination thereof, the amount which would be reflected as stockholders'
equity upon a consolidated balance sheet of the Guarantor (but excluding any
portion thereof attributable to (i) Unrestricted Subsidiaries or (ii) ET
Holdings or any Subsidiary thereof) excluding other comprehensive income arising
from the accounting treatment of hedging and mark-to-market transactions.

        "Other NEG Guarantees" shall mean (i) the Guarantee and Agreement, dated
as of April 6, 2001, made by the Guarantor in favor of Citibank, N.A., for the
benefit of the lenders and investors under the Participation Agreement, dated as
of August 28, 1999, among Lake Road Generating Company, L.P., Lake Road
Trust Ltd., Wilmington Trust Company, the Lenders party thereto, the Tranche A
Banks party thereto, the Investors party thereto and Citibank, N.A. (as amended
by the Omnibus Restructuring Agreement, dated as of April 6, 2001, among the
same parties and other parties thereto), (ii) the Guarantee and Agreement to be
delivered by the Guarantor in favor of the security agent thereunder, for the
benefit of the lenders and investors under the Participation Agreement, dated as
of November 22, 2000, among Harquahala Generating Company, LLC, Harquahala
Generating Trust of Delaware Ltd., Wilmington Trust Company, the Lenders party
thereto, the Investors party thereto, Société Générale and State Street Bank and
Trust Company and (iii) the Guarantee and Agreement to be delivered by the
Guarantor in favor of Société Générale, for the benefit of the lenders under the
Credit Agreement to be executed among PG&E National Energy Group Construction
Company, LLC, the lenders party thereto and Société Générale.

        "Payment Demand" shall mean the payment demand in the form of Exhibit A.

        "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

        "Permitted Encumbrances" shall mean, as to any Person at any date, any
of the following:

          (i)  Liens for taxes, assessments or governmental charges not then
delinquent, and Liens for taxes, assessments or governmental charges then
delinquent but the validity of which is being contested at the time by such
Person in good faith and for which adequate reserves have been established in
accordance with GAAP, and (ii) Liens incurred or created in connection with or
to secure the performance of bids, tenders, contracts (other than for the
payment of money), leases, statutory obligations, surety bonds or appeal bonds,
and carriers',

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warehousemen's, mechanics' or materialmen's Liens, assessments or similar
encumbrances incurred in the ordinary course of business;

        (ii)  easements, restrictions, exceptions or reservations in any
property and/or rights of way of such Person for the purpose of roads, pipe
lines, substations, transmission lines, transportation lines, distribution
lines, removal of oil, gas, lignite, coal or other minerals or timber, and other
like purposes, or for the joint or common use of real property, rights of way,
facilities and/or equipment, and defects, irregularities and deficiencies in
titles of any property and/or rights of way, which do not individually or in the
aggregate materially impair the use or value of such property and/or rights of
way for the purposes for which such property and/or rights of way are held by
such Person;

        (iii)  rights reserved to or vested in any municipality or public
authority to use, control or regulate any property of such Person;

        (iv)  any obligations or duties, affecting the property of such Person,
to any municipality or public authority with respect to any franchise, grant,
license or permit;

        (v)  any judgment Lien against such Person securing a judgment for an
amount not exceeding $50,000,000, so long as the finality of such judgment is
being contested by appropriate proceedings conducted in good faith and execution
thereon is stayed;

        (vi)  any Lien arising by reason of deposits with or giving of any form
of security to any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, for
any purpose at any time as required by law or governmental regulation as a
condition to the transaction of any business or the exercise of any privilege or
license, or to enable such Person to maintain self-insurance or to participate
in any fund for liability on any insurance risks or in connection with workers'
compensation, unemployment insurance, old age pensions or other social security
or to share in the privileges or benefits required for companies participating
in such arrangements; or

      (vii)  any landlords' Lien on fixtures or movable property located on
premises leased by such Person in the ordinary course of business so long as the
rent secured thereby is not in default.

        "Permitted Sale-Leaseback Transactions" shall mean (i) Sale-Leaseback
transactions by any Restricted Subsidiary or Asset Company, entered into on or
prior to the date of this Guarantee and Agreement and identified on
Schedule 1.01A and (ii) one or more Sale/Leaseback transactions entered into by
any Asset Company in connection with or as part of a Project Financing Facility
entered into after the date of execution of this Guarantee and Agreement.

        "Permitted Subordinated Indebtedness" shall mean all unsecured
Indebtedness of the Guarantor that shall have been subordinated to all
Indebtedness of the Guarantor under this Guarantee and Agreement and otherwise
containing terms and conditions set forth in Schedule 1.01B with respect to
Indebtedness of the Guarantor to Affiliates of the Guarantor or in
Schedule 1.01C with respect to Indebtedness of the Guarantor to non-Affiliates
of the Guarantor.

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        "Person" shall mean any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization, governmental authority or any other entity.

        "PG&E" shall mean Pacific Gas & Electric Company, a California
corporation.

        "PG&E Corp." shall mean PG&E Corporation, a California corporation.

        "PG&E Gen" shall mean PG&E Generating Company, LLC, a Delaware limited
liability company.

        "PG&E Gen Credit Agreements" shall mean (i) the $1.1 Billion PG&E Gen
Credit Agreement, including any commercial paper supported by credit facilities
made available thereunder, and (ii) the $10,000,000 Credit Agreement, dated as
of December 14, 1999, between PG&E Gen and ABN AMRO Bank N.V., as each may be
amended, modified or supplemented from time to time.

        "PG&E Gen Credit Agreement Refinancing Date" shall mean the date on
which the commitments and all amounts outstanding under the $1.1 Billion PG&E
Gen Credit Agreement are refinanced by one or more credit facilities of the
Guarantor.

        "Plan" shall mean any employee pension benefit plan described under
Section 3(2) of ERISA (other than a Multiemployer Plan) subject to the
provisions of Title IV of ERISA that is maintained by the Guarantor or any ERISA
Affiliate or with respect to which the Guarantor or any ERISA Affiliate could
have liability under Section 4069 of ERISA.

        "Project Financing Facility" shall mean any loan, note purchase
agreement, indenture, lease, credit agreement, reimbursement agreement, letter
of credit or other facility pursuant to which an Asset Company or Investment
Vehicle which directly or indirectly owns an Asset Company incurs Indebtedness,
provided that any such Indebtedness is recourse only to (a) the assets of such
Asset Company or any Asset Company which is a Subsidiary of such Asset Company,
(b) the equity or ownership interests of such Asset Company or any Investment
Vehicle which owns such Asset Company or (c) any Equity Funding Arrangements
provided with respect to such Asset Company or Investment Vehicle or a Lien on
any such Equity Funding Arrangements.

        "Projections" shall mean the projections contained in the presentation
materials distributed by the Guarantor to the Creditors during the bank meeting
held on March 21, 2001 in New York City.

        "Ratio of Cash Flow to Fixed Charges" shall mean, as of the end of each
fiscal quarter the Guarantor, the ratio of (a) Cash Flow Available for Fixed
Charges of the Guarantor for the period of four consecutive fiscal quarters
ending on, or most recently ended prior to, such date to (b) Fixed Charges of
the Guarantor for such period, excluding from the calculation of Fixed Charges
all Trading Arrangements and Credit Support Arrangements.

        "Ratio of Debt to Capitalization" shall mean, as of any date, the ratio
of the aggregate principal amount of Funded Indebtedness of the Guarantor and
PG&E Gen to the Total Capitalization of the Guarantor (excluding from the
calculation of Funded Indebtedness all Trading Arrangements, Credit Support
Arrangements and Swaps); provided that any Equity Funding Arrangements shall
only be included in Funded Indebtedness in an amount equal to the lesser of
(x) the maximum amount that would be payable under such Equity Funding
Arrangements (assuming a drawing is permissible as of the date of determination)
and (y) the amount outstanding under any underlying Indebtedness to which any
payment under such Equity Funding Arrangements would be applied (assuming such
Indebtedness were due and payable as of the date of determination).

        "Refinanceable Facilities" has the meaning ascribed thereto in
Section 4.12(a).

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        "Repurchase Agreement" shall mean any written agreement:

          (i)  that provides for (i) the transfer of one or more United States
or Canadian Governmental Securities or any security issued by a U.S. agency or
instrumentality in an aggregate principal amount at least equal to the amount of
the Transfer Price (defined below) to the Guarantor or any Restricted Subsidiary
from a financial institution that is (1) a member of the Federal Reserve System
having a minimum of US$20 billion in assets, and (2) has commercial paper rated
at least A-1 by S&P, at least F1 by Fitch or at least P-1 by Moody's, against a
transfer of funds (the "Transfer Price") by the Guarantor or such Restricted
Subsidiary to such financial institution and (ii) a simultaneous agreement by
the Guarantor or such Restricted Subsidiary, in connection with such transfer of
funds, to transfer to such financial institution the same or substantially
similar United States or Canadian Governmental Securities or any security issued
by a U.S. agency or instrumentality for a price not less than the Transfer Price
plus a reasonable return thereon at a date certain not later than 180 days after
such transfer of funds,

        (ii)  in respect of which the Guarantor or such Restricted Subsidiary
shall have the right, whether by contract or pursuant to applicable law, to
liquidate such agreement upon the occurrence of any default thereunder, and

        (iii)  in connection with which the Guarantor or such Restricted
Subsidiary, or an agent thereof, shall have taken all action required by
applicable law or regulations to perfect a Lien in such United States or
Canadian Governmental Securities or any security issued by a U.S. agency or
instrumentality.

        "Responsible Officer" of the Guarantor, shall mean any president or
senior vice president of the Guarantor.

        "Restricted Subsidiary" shall mean any Subsidiary of the Guarantor that
is not (x) an Asset Company, (y) an Investment Vehicle or (z) an Unrestricted
Subsidiary.

        "S&P" shall mean Standard & Poor's Ratings Service, a division of McGraw
Hill Companies, Inc.

        "Sale/Leaseback" shall mean any lease whereby any Person becomes or
remains liable as lessee or as guarantor or other surety of any property,
whether now owned or hereafter acquired, that such Person has sold or
transferred or is to sell or transfer to any other Person (other than any
Subsidiary of such Person), as part of a financing transaction to which such
Person is a party, in contemplation of leasing such property to such Person.

        "Scheduled to be Paid" shall mean, with respect to any liability or
expense for any period, the amount of such liability or expense scheduled to be
paid during such period or the amount of such liability or expense that would
have been scheduled to be paid during such period had the payment schedule with
respect to such liability or expense been divided equally into successive
periods having a duration equal to the duration of such period.

        "Subsidiary" shall mean, with respect to any Person (the "Parent"), any
corporation or other entity of which sufficient securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other Persons performing similar functions are at the time directly
or indirectly owned by such Parent.

        "Substitute Credit Support Amount" shall mean, as of the date any
Substitute Credit Support Instrument is provided, 105% of the amount of the
outstanding principal of all Tranche A Loans (or, if higher, an amount equal to
105% of the aggregate outstanding Tranche A Loan Commitments in effect at such
time, or, if not in effect at such time, in effect immediately prior to any
termination thereof) as determined by the Administrative Agent.

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        "Substitute Credit Support Instrument" shall mean either (a) an
irrevocable letter of credit issued in form and substance satisfactory to the
Security Agent in its reasonable judgment and from a bank or trust company with
a combined capital and surplus of at least $1,000,000,000 whose unsecured senior
long term debt is rated at least "A" by S&P and "A2" by Moody's; provided that
such letter of credit shall contain provisions that authorize a draw on such
letter of credit in the event that (i) either (A) there is a downgrade in the
credit rating of the issuer of such letter of credit to below the level
specified above or (B) such issuer is no longer rated by both S&P and Moody's
and such letter of credit is not replaced with a Substitute Credit Support
Instrument within thirty (30) days after such event, (ii) such letter of credit
is not replaced or renewed by no later than fifteen (15) Business Days prior to
its date of expiration or (iii) an Event of Default shall have occurred and be
continuing and the Guaranteed Obligations are then due and payable or (b) a
Guaranty in form and substance satisfactory to, and issued by a Subsidiary of
the Guarantor acceptable to, each Creditor in its sole discretion.

        "Swaps" shall mean, with respect to any Person, payment obligations with
respect to interest rate swaps, currency swaps and similar obligations
obligating such Person to make payments, whether periodically or upon the
happening of a contingency. The amount of the obligation under any Swap shall be
the amount determined in respect thereof as of the end of the then most recently
ended fiscal quarter of such Person, based on the assumption that such Swap had
terminated at the end of such fiscal quarter, and in making such determination,
if any agreement relating to such Swap provides for the netting of amounts
payable by and to such Person thereunder of if any such agreement provides for
the simultaneous payment of amounts by and to such Person, then in each such
case, the amount of such obligation shall be the net amount so determined.

        "Total Capitalization" shall mean, with respect to the Guarantor, the
sum, without duplication, of (i) total common stock equity or analogous
ownership interests of the Guarantor, (ii) preferred stock and preferred
securities of the Guarantor, (iii) additional paid in capital or analogous
interests of the Guarantor, (iv) retained earnings of the Guarantor, excluding
other comprehensive income arising from accounting treatment of hedging and
mark-to-market transactions and (v) the aggregate principal amount of Funded
Indebtedness of the Guarantor and PG&E Gen.

        "Trading Arrangement" shall mean any transaction entered into by PG&E
Energy Trading—Power, L.P., a Delaware limited partnership, PG&E Energy Trading
Gas Corporation, a California corporation, or PG&E Energy Trading, Canada
Corporation, an Alberta corporation, any other Restricted Subsidiary, Asset
Company or Investment Vehicle, whether pursuant to master trading agreements or
otherwise, for (1) the purchase and sale of energy, capacity, ancillary services
and other energy or energy-related products, including transmission rights,
environmental allowances and offsets and storage; (2) the purchase and sale of
natural gas, coal, oil and other fuel, including transportation and storage
rights; (3) the purchase and sale of fuel conversion services, including tolling
arrangements; (4) the purchase and sale of any energy or energy-related
derivatives, including weather derivatives; (5) hedging arrangements with
respect to any of the foregoing and interest rate, foreign currency or credit
exposure; or (6) any similar arrangements entered into in the ordinary course of
business as conducted by such Persons or by other Persons in the energy trading,
energy services, power generating, electric transmission or gas transmission and
storage businesses (including technologies related to such businesses).

        "Unfunded Liabilities" shall mean, with respect to any Plan at any time,
the amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability

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of the Guarantor or any ERISA Affiliate to the PBGC or any other Person under
Title IV of ERISA.

        "United States" or "U.S." or "US" shall mean the United States of
America.

        "United States or Canadian Governmental Securities" shall mean
securities issued, or fully guaranteed or insured by the United States or
Canadian government.

        "Unrestricted Subsidiary" shall mean any Subsidiary of the Guarantor
designated as such on the Closing Date, or, after the Closing Date, designated
as such at the time of formation thereof or, if acquired by the Guarantor, at
the time of acquisition thereof, but, in any such case, only if at such time
(i) no NEG Trigger Event, Incipient NEG Trigger Event or NEG Downgrade Event has
occurred and is continuing or would occur as a result thereof and (ii) such
Subsidiary or any of its Subsidiaries does not own any capital stock or
Indebtedness of or have any Investment in, or own or hold any Lien on any
property of, any other Subsidiary of the Guarantor which is not a Subsidiary of
the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary.

        "USGenNE" shall mean USGen New England, Inc., a Delaware corporation and
an indirect, wholly-owned Subsidiary of the Guarantor.

        "USGenNE Credit Agreement" shall mean the $575,000,000 Credit Agreement,
dated as of September 1, 1998, among USGenNE, the lenders party thereto, The
Chase Manhattan Bank, as competitive advance facility agent and as
administrative agent for the lenders thereunder, and The Chase Manhattan Bank,
as the issuer of letters of credit thereunder, the same may be amended, modified
or supplemented from time to time.

        1.02.    Other Definitional Provisions.    The following rules of usage
shall apply unless otherwise required by the context or unless otherwise
specified herein:

        (a)  Definitions set forth herein shall be equally applicable to the
singular and plural forms of the terms defined.

        (b)  References in any document to articles, sections, paragraphs,
clauses, annexes, appendices, schedules or exhibits are references to articles,
sections, paragraphs, clauses, annexes, appendices, schedules or exhibits in
such document.

        (c)  The headings, subheadings and table of contents used herein are
solely for convenience of reference and shall not constitute a part hereof nor
shall they affect the meaning, construction or effect of any provision hereof.

        (d)  References to any Person shall include such Person, its successors
and permitted assigns and transferees.

        (e)  Reference to any agreement means such agreement as amended,
supplemented or otherwise modified from time to time in accordance with the
applicable provisions thereof.

        (f)    References to any law includes any amendment or modification to
such law and any rules or regulations issued thereunder or any law enacted in
substitution or replacement thereof.

        (g)  The words "hereof," "herein", "hereto" and "hereunder" and words of
similar import when used in this Guarantee and Agreement shall refer to this
Guarantee and Agreement as a whole and not to any particular provision of this
Guarantee and Agreement.

        (h)  References to "including" means including without limiting the
generality of any description preceding such term and for purposes hereof the
rule of ejusdem generis shall not be applicable to limit a general statement,
followed by or referable to an enumeration of specific matters, to matters
similar to those specifically mentioned.

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        (i)    Each of the parties to this Guarantee and Agreement and their
counsel have reviewed and revised, or requested revisions to this Guarantee and
Agreement, and the usual rule of construction that any ambiguities are to be
resolved against the drafting party shall be inapplicable in the construing and
interpretation of this Guarantee and Agreement and any amendments hereto.

        (j)    Except as otherwise expressly provided herein, all terms of an
accounting or financial nature shall be construed in accordance with GAAP, as in
effect from time to time; provided that for purposes of determining compliance
with any covenant set forth herein, such terms shall be construed in accordance
with GAAP as in effect on the date hereof applied on a basis consistent with the
application used in preparing the Guarantor's audited financial statements.

SECTION II GUARANTEE

        2.01.    Guarantee; Payment.    (a) Subject to the terms herein, the
Guarantor unconditionally guarantees to the Security Agent for the benefit of
the Creditors, the prompt and complete payment when due of the Guaranteed
Obligations. This is a guarantee of payment and not of collection.

        (b)  When and at such time as an Event of Default shall have occurred
and be continuing, the Security Agent shall be entitled to make a Payment Demand
to the Guarantor in accordance with Section 2.04 for the payment of all due and
unpaid Guaranteed Obligations, subject to the provisions of Section 2.02. The
Guarantor shall pay such Guaranteed Obligations to the Security Agent within
five (5) Business Days of receipt of such Payment Demand.

        (c)  When and at such time as a NEG Trigger Event (whether or not an
Event of Default is then continuing) shall have occurred and be continuing, the
Security Agent shall be entitled (to the extent that a Payment Demand has not
been made pursuant to paragraph (b) of this Section) to make a Payment Demand
for the payment of the Guarantee Draw Amount. The Guarantor shall pay the
Guarantee Draw Amount to the Security Agent within five (5) Business Days of
receipt of such Payment Demand.

        (d)  If an Event of Default is continuing at any time after payment of
the Guarantee Draw Amount is made pursuant to paragraph (c) of this Section, the
Security Agent shall be entitled to make a Payment Demand in an amount equal to
the Maximum Guarantee Amount applicable at such time less any amount previously
paid by the Guarantor pursuant to paragraph (c) of this Section. The Guarantor
shall pay such amount to the Security Agent within five (5) Business Days of
receipt of such Payment Demand.

        2.02.    Extent of Liability.    The Guarantor's liability for the
Guaranteed Obligations under this Guarantee and Agreement is limited to the
Maximum Guarantee Amount. Except as the same comprise Guaranteed Obligations
under the Operative Documents, the Guarantor shall not be liable hereunder for
special, consequential, exemplary, tort or other damages. The Guarantor agrees
to pay all out-of-pocket expenses (including the reasonable fees and expenses of
Security Agent's counsel) incurred for the enforcement of the rights of Security
Agent hereunder; provided that the Guarantor shall not be liable for any such
expenses if no payment in respect of the Guaranteed Obligations is due. Subject
to reinstatement pursuant to Section 2.03, this Guarantee and Agreement shall
remain in full force and effect until the NEG Guarantee Release Date unless
otherwise terminated in writing by the Guarantor and the Security Agent.

        2.03.    Nature of Guarantee.    The Guarantor acknowledges and agrees
that its guarantee obligations under this Guarantee and Agreement shall be
construed as continuing, absolute and unconditional without regard to (a) the
validity, regularity or enforceability of any Operative Documents, any of the
Guaranteed Obligations or any other collateral security therefor or guaranty or
right of offset with respect thereto at any time or from time to time held by
the Security Agent or any

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Creditor, (b) any defense, set-off or counterclaim (other than a defense of
payment or performance) which may at any time be available to or be asserted by
the Company or the Guarantor against the Security Agent or any Creditor, or
(c) any other circumstance whatsoever (with or without notice to or knowledge of
the Company or the Guarantor) which constitutes, or might be construed to
constitute, an equitable or legal discharge of the Guaranteed Obligations (other
than payment or performance), in bankruptcy or in any other instance. The
Guarantor's obligations hereunder with respect to any Guaranteed Obligations
shall not be affected by the existence, validity, enforceability, substitution,
perfection, or extent of any collateral for such Guaranteed Obligations. The
Security Agent shall be entitled but shall not be obligated to file any claim
relating to the Guaranteed Obligations owing to it if the Company becomes
subject to a bankruptcy, reorganization or similar proceeding and the failure of
the Security Agent to so file shall not affect the Guarantor's obligations
hereunder. If any payment to the Security Agent made by the Company or the
Guarantor with respect to any Guaranteed Obligations is rescinded or must
otherwise be returned for any reason whatsoever, the Guarantor shall remain
liable therefor hereunder (and its obligations reinstated hereunder if
previously terminated) with respect to such Guaranteed Obligations as if such
payment had not been made. The Guarantor reserves the right to assert defenses
that the Company may have under the Operative Documents to payment of any
Guaranteed Obligation other than (i) defenses arising from the bankruptcy,
insolvency, incapacity, liquidation or dissolution of the Company, and
(ii) defenses arising out of the matters described above in this Section 2.03 or
any other circumstance or event that might otherwise constitute a legal or
equitable discharge of a guarantor or a surety generally.

        2.04.    Demands and Notice; Application of Proceeds.    (a) A Payment
Demand shall be sufficient notice to the Guarantor to pay under this Guarantee
and Agreement. The Guarantor shall make all payments of amounts owing pursuant
to this Guarantee and Agreement by wire transfer of immediately available funds
to the account specified by the Security Agent in the Payment Demand. Notices
under this Guarantee and Agreement shall be deemed received if sent to the
address specified below: (i) on the day received if served by overnight express
delivery, (ii) on the next Business Day if served by facsimile transmission when
sender has machine confirmation that facsimile was transmitted to the correct
fax number listed below, and (iii) four Business Days after mailing if sent by
certified, first class mail, return receipt requested. Any party may change its
address to which notice is given hereunder by providing notice thereof in
accordance with this Section 2.04.

To the Guarantor:   PG&E National Energy Group, Inc.
7500 Old Georgetown Road, 13th floor
Bethesda, MD 20814
Attention: General Counsel
Fax: 301.280.6913
To the Security Agent:
 
Citibank, N.A.
111 Wall Street, 14th Floor, Zone 3
New York, NY 10005
Attention: Citibank Agency & Trusts
Fax: 212.657.3862
Tel: 212.657.7403

        (b)  The Security Agent shall apply the proceeds of any payment made
hereunder to the Security Agent in accordance with Section 5.13(e) of the
Security Deposit Agreement and the other provisions of the Operative Documents.

        2.05.    Consent to Modifications, Waivers.    The Security Agent and
the Company may mutually agree to modify the Operative Documents, extend the
time of payment or otherwise modify the terms of payment of any of the
Guaranteed Obligations, without in any way impairing or affecting this Guarantee
and Agreement. The Security Agent may resort to the Guarantor for payment of any
of the

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Guaranteed Obligations, whether or not the Security Agent shall have resorted to
any collateral security, or shall have proceeded against (or otherwise exhausted
Security Agent's remedies against) the Company or any other obligor principally
or secondarily obligated with respect to any of the Guaranteed Obligations. The
Guarantor hereby waives demand (except in accordance with Sections 2.01 and
2.04), promptness, diligence (subject to any applicable statute of limitations),
notice of acceptance of this Guarantee and Agreement, and also presentment,
protest and notice of protest or dishonor of any evidences of obligations hereby
guaranteed.

        2.06.    Subrogation.    The Guarantor waives any rights of subrogation
or reimbursement from the Company or any other Person that may accrue to
Guarantor with respect to the payment of any Guaranteed Obligation by Guarantor
to Security Agent under this Guarantee and Agreement until the time that all
Guaranteed Obligations owing to the Security Agent and the Creditors are fully
and indefeasibly paid and the Commitments are terminated. Upon such full and
indefeasible payment of all the Guaranteed Obligations owing to the Security
Agent and the Creditors and the termination of the Commitments, the Guarantor
shall be subrogated to the rights of the Security Agent and the Creditors
against the Company, and the Security Agent agrees to take at Guarantor's
expense such steps as the Guarantor may reasonably request to cause the
implementation of such subrogation.

        2.07.    Substitute Credit Support.    Notwithstanding anything to the
contrary set forth herein, the following provisions shall apply:

        (a)  At any time prior to the termination of the Guaranteed Obligations,
the Guarantor may deliver or cause to be delivered to Security Agent a
Substitute Credit Support Instrument with a stated amount at least equal to the
Substitute Credit Support Amount in substitution for this Guarantee and
Agreement in accordance with this Section 2.07.

        (b)  Upon delivery of a Substitute Credit Support Instrument together
with a legal opinion satisfactory to the Administrative Agent that the delivery
of such instrument would not constitute a preference in a bankruptcy of the
Guarantor or, if no legal opinion is delivered with such Substitute Credit
Support Instrument, upon the 91st day after the delivery of such Substitute
Credit Support Instrument (so long as no bankruptcy, insolvency or other similar
event has occurred with respect to the Guarantor), this Guarantee and Agreement
shall terminate and the Guarantor shall be relieved of any liability hereunder.
Within ten (10) days of the receipt of such Substitute Credit Support Instrument
together with such legal opinion, if applicable, or on the 91st day after
delivery of such Substitute Credit Support Instrument (so long as no bankruptcy,
insolvency or other similar event has occurred with respect to the Guarantor),
if applicable, the Security Agent shall return to the Guarantor this Guarantee
and Agreement together with any certificate or other documentation reasonably
requested by the Guarantor in order to confirm the cancellation of this
Guarantee and Agreement.

SECTION III REPRESENTATIONS AND WARRANTIES

        The Guarantor represents and warrants to the Security Agent and each of
the Creditors as of the date hereof and on each date extensions of credit are to
be made pursuant to the Participation Agreement and on or prior to the
Conversion Date as follows (except to the extent that any representation or
warranty hereunder is made with respect to an earlier date, in which case such
representation and warranty shall be deemed to have been made on such earlier
date):

        3.01.    Organization; Powers; Ownership of Property.    The Guarantor
and each of its Subsidiaries (other than Unrestricted Subsidiaries) (a) is duly
formed, validly existing and in good standing under the laws of the jurisdiction
of its formation, except, with respect to such Subsidiaries, where the failure
to be validly existing or in good standing is not reasonably likely to result in
a Material Adverse Effect, (b) has all requisite power and authority to own its
property and assets and to carry on its business as now conducted and as
proposed to be conducted, (c) is qualified to do business in every jurisdiction

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where such qualification is required, except where the failure so to qualify is
not reasonably likely to result in a Material Adverse Effect, (d) as to the
Guarantor only, has the power and authority to execute, deliver and perform its
obligations under this Guarantee and Agreement, and (e) owns and has good and
marketable title to all of its properties and assets, subject to no Liens other
than those permitted by Section 4.11 hereof, except where the failure to own or
to have good and marketable title to such property or asset is not reasonably
likely to result in a Material Adverse Effect.

        3.02.    Authorization.    The execution, delivery and performance by
the Guarantor of this Guarantee and Agreement (a) have been duly authorized by
all requisite corporate action on the part of the Guarantor, and (b) will not
(i) violate (A) any provision of any law, statute, rule or regulation to which
the Guarantor is subject, (B) the articles of incorporation or by-laws of the
Guarantor, (C) any order of any Governmental Authority to which the Guarantor is
subject, or (D) any material provision of any indenture, agreement or other
instrument to which the Guarantor is a party or by which it or any of its
property is or may be bound, which such violation is reasonably likely to result
in a Material Adverse Effect, (ii) constitute (alone or with notice or lapse of
time or both) a default under any such indenture, agreement or other instrument,
which such default is reasonably likely to result in a Material Adverse Effect
or (iii) result in the creation or imposition of any Lien upon any property or
assets of the Guarantor, which such Lien is reasonably likely to result in a
Material Adverse Effect.

        3.03.    Enforceability.    This Guarantee and Agreement constitutes a
legal, valid and binding obligation of the Guarantor enforceable in accordance
with its terms except to the extent that enforcement may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights generally.

        3.04.    Financial Statements.    (a) The unaudited consolidated balance
sheet of the Guarantor and its Consolidated Subsidiaries as of December 31,
1999, and the related consolidated statements of income, retained earnings and
cash flows for the fiscal period then ended, a copy of which was delivered to
the Administrative Agent on March 21, 2000, fairly presented in conformity with
GAAP, the consolidated financial position of the Guarantor and its Consolidated
Subsidiaries as of such date and their consolidated results of operations and
cash flows for such period ending on such date.

        (b)  The unaudited consolidated balance sheet of the Guarantor and its
Consolidated Subsidiaries as of December 31, 2000, and the related consolidated
statements of income and retained earnings for the fiscal period then ended, a
copy of which was delivered to the Administrative Agent on March 21, 2000,
fairly presented in conformity with GAAP, the consolidated financial position of
the Guarantor and its Consolidated Subsidiaries as of such date and their
consolidated results of operations for such period ending on such date. As of
the date hereof, there has been no material adverse change in the financial
statements of the Guarantor from the unaudited financial statements referred to
in the preceding sentence.

        (c)  The assumptions used in preparing the Projections were made in good
faith and are reasonable as of the date of such Projections and as of the date
hereof.

        (d)  Since December 31, 2000, there has been no development or condition
that has had, or could reasonably be expected to result in, a Material Adverse
Effect (assuming that the transactions contemplated by the Other NEG Guarantees
shall have occurred).

        3.05.    Litigation.    Except as set forth on Schedule 3.05, there is
no action, suit or proceeding pending against, or to the Actual Knowledge of the
Guarantor threatened against or affecting, the Guarantor or any of its
Subsidiaries (other than Unrestricted Subsidiaries) before any court or
arbitrator or any governmental body, agency or official in which an adverse
decision is reasonably likely to result in a Material Adverse Effect or call
into question the enforceability of this Guarantee and Agreement.

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        3.06.    Federal Reserve Regulations.    (a) Neither the Guarantor nor
any of its Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending, credit for the purpose of purchasing
or carrying Margin Stock.

        (b)  Not more than 25% of the value of the assets of the Guarantor is
represented by Margin Stock.

        3.07.    Investment Company Act; Public Utility Holding Company
Act.    (a) Neither the Guarantor nor any of its Subsidiaries is an "investment
company" as defined in, or subject to regulation under, the Investment Company
Act of 1940.

        (b)  The Guarantor is not a "holding company" but is a "subsidiary
company" and an "affiliate" of a "holding company", the Parent, that is exempt
from all provisions, except Section 9(a)(2), of the Public Utility Holding
Company Act of 1935, as amended, and the execution, delivery and performance by
the Guarantor of this Guarantee and Agreement and its obligations hereunder do
not violate any provision of such Act or any rule or regulation thereunder.

        3.08.    No Material Misstatements.    The reports, financial statements
and other written information furnished by or on behalf of the Guarantor to the
Security Agent or any Creditor pursuant to or in connection with this Guarantee
and Agreement do not contain, when taken as a whole, any untrue statement of a
material fact and do not omit, when taken as a whole, to state any fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading in any material respect.

        3.09.    Taxes.    The Guarantor has filed or caused to be filed all
Federal and material state and local tax returns which to its Actual Knowledge
are required to be filed by it, and has paid or caused to be paid all material
taxes shown to be due and payable on such returns or on any assessments received
by it, other than any taxes or assessments the validity of which is being
contested in good faith by appropriate proceedings and with respect to which
appropriate accounting reserves have to the extent required by GAAP been set
aside. Each Subsidiary of the Guarantor (other than any Unrestricted Subsidiary)
has filed or caused to be filed all Federal and material state and local tax
returns which to the Actual Knowledge of the Guarantor or such Subsidiary are
required to be filed by such Subsidiary, and has paid or caused to be paid all
material taxes shown to be due and payable on such returns or on any assessments
received by it, other than the taxes the failure of which to pay or file a
return with respect thereto is not reasonably likely to result in a Material
Adverse Effect.

        3.10.    Employee Benefit Plans.    With respect to each Plan, the
Guarantor and its ERISA Affiliates are in compliance in all material respects
with the applicable provisions of ERISA and the Code and the final regulations
and published interpretations thereunder. No ERISA Event has occurred that alone
or together with any other ERISA Event has resulted or is reasonably likely to
result in a Material Adverse Effect.

        3.11.    Governmental Approval; Compliance with Law and
Contracts.    Each of the Guarantor and each of its Subsidiaries (other than
Unrestricted Subsidiaries) is in compliance with (a) and has obtained each
Governmental Approval applicable to it in respect of this Guarantee and
Agreement, the conduct of its business and the ownership of its property, each
of which (i) is in full force and effect, (ii) is sufficient for its purpose
without any material restraint or adverse condition and (iii) is not subject to
any waiting period, further action on the part of any Governmental Authority or
other Person, or stay or injunction, (b) all applicable laws relating to its
business and (c) each indenture, agreement or other instrument to which it is a
party or by which it or any of its property is or may be bound that is material
to the conduct of its business, except in each such case for noncompliances
which, and Governmental Approvals the failure to possess which, are not, singly
or in the aggregate, reasonably likely to result in a Material Adverse Effect.

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        3.12.    Environmental Matters.    Except as set forth in Schedule 3.12
or as set forth in or contemplated by the financial statements or other reports
of the type referred to in Section 3.04 hereof and which have been delivered to
the Administrative Agent on or prior to the date hereof, the Guarantor and each
of its Subsidiaries (other than Unrestricted Subsidiaries) have complied in all
material respects with all Federal, state, local and other statutes, ordinances,
orders, judgments, rulings and regulations relating to environmental pollution
or to environmental or nuclear regulation or control, except to the extent that
failure to so comply is not reasonably likely to result in a Material Adverse
Effect. Except as set forth in or contemplated by such financial statements or
other reports, neither the Guarantor nor any of its Subsidiaries (other than
Unrestricted Subsidiaries) has received notice of any material failure so to
comply, except where such failure is not reasonably likely to result in a
Material Adverse Effect. Except as set forth in or contemplated by such
financial statements or other reports, no facilities of the Guarantor or any of
its Subsidiaries (other than Unrestricted Subsidiaries) are used to manage any
hazardous wastes, hazardous substances, hazardous materials, toxic substances,
toxic pollutants or substances similarly denominated, as those terms or similar
terms are used in the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Hazardous Materials
Transportation Act, the Toxic Substance Control Act, the Clean Air Act, the
Clean Water Act or any other applicable law relating to environmental pollution,
or any nuclear fuel or other radioactive materials, in violation of any law or
any regulations promulgated pursuant thereto, except to the extent that such
violations, individually or in the aggregate, are not reasonably likely to
result in a Material Adverse Effect. Except as set forth in or contemplated by
such financial statements or other reports, the Guarantor is aware of no events,
conditions or circumstances involving environmental pollution or contamination
that are reasonably likely to result in a Material Adverse Effect.

        3.13.    Ranking.    Under applicable laws in force on the date hereof,
the claims and rights of the Security Agent under this Guarantee and Agreement
in respect of the Guaranteed Obligations shall not be subordinate to, and shall
rank at least pari passu in all respects with, the claims and rights of any
other holders of unsecured Indebtedness of the Guarantor.

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        3.14.    Unrestricted Subsidiaries.    All Unrestricted Subsidiaries
designated as such on the date hereof are identified on Schedule 3.14.

        3.15.    Separateness from PG&E.    (a) The Guarantor has operated as a
business entity separate and distinct in all relevant respects from PG&E Corp.
and PG&E such that the Guarantor believes there exists no reasonable basis for a
substantive consolidation of NEG LLC with either PG&E Corp. or PG&E in the event
of a bankruptcy proceeding with respect to either of such Persons.

        (b)  Any transfer of assets or funds from PG&E Corp. or PG&E (either
directly or through PG&E Corp.) to the Guarantor during the period from the date
of the Guarantor's incorporation on December 18, 1998 until the date hereof
(i) was for reasonably equivalent value, (ii) was received by the Guarantor in
good faith and for value and (iii) was made without intent to hinder, delay or
defraud creditors of the transferor.

SECTION IV COVENANTS

        The Guarantor covenants and agrees with the Security Agent and the
Creditors that, from and after the date of this Guarantee and Agreement until
the Guaranteed Obligations and the Commitments shall have terminated:

        4.01.    Maintenance of Ownership.    The Guarantor shall continue
(x) to own at least 50% of the equity ownership interests of, and (y) control
the management and operations of, each of its Restricted Subsidiaries (except
for certain Restricted Subsidiaries listed on Schedule 4.01); provided that
(I) the Guarantor will in any event continue to own at least 80% of the equity
ownership interests of ET Holdings and GTN, and (II) the Guarantor will continue
to own (i) prior to the PG&E Gen Credit Agreement Refinancing Date, 100% of the
equity ownership interests of PG&E Gen; and (ii) thereafter, at least 80% of the
equity ownership interests of PG&E Gen; provided, further, that the Guarantor
may wind up, dissolve or liquidate any Restricted Subsidiary (other than PG&E
Gen, ET Holdings and GTN) without complying with the foregoing, so long as
assets thereof are transferred or otherwise conveyed to another Restricted
Subsidiary or the Guarantor.

        4.02.    Existence.    The Guarantor will, and will cause each of its
Subsidiaries (other than Unrestricted Subsidiaries) to, do or cause to be done
all things necessary to preserve and keep in full force and effect its legal
existence and all rights, licenses, permits, franchises and authorizations
necessary or desirable in the normal conduct of its business, except as
otherwise permitted pursuant to Sections 4.01 (including Schedule 4.01) and
4.09, and in the case of any such Subsidiaries, except as such failure to so
preserve or to keep its legal existence and such rights, licenses, permits,
franchises or authorizations in full force and effect is not reasonably likely
to result in a Material Adverse Effect.

        4.03.    Compliance with Law; Business and Properties.    The Guarantor
will, and will cause each of its Restricted Subsidiaries to, comply with all
applicable material laws, rules, regulations and orders of any Governmental
Authority, whether now in effect or hereafter enacted, except where the validity
or applicability of such laws, rules, regulations or orders is being contested
by appropriate proceedings in good faith or where such non-compliance is not
reasonably likely to result in a Material Adverse Effect; comply with the terms
of each indenture, agreement or other instrument to which it is a party and
enforce all of its rights thereunder, except to the extent that noncompliance or
failure to enforce is not reasonably likely to cause a Material Adverse Effect;
and at all times maintain and preserve all property material to the conduct of
its business and keep such property in good repair, working order and condition
and from time to time make, or cause to be made, all needful and proper repairs,
renewals, additions, improvements and replacements thereto necessary in order
that the business carried on in connection therewith may be properly conducted
at all times, except where the failure to take any such actions is not
reasonably likely to result in a Material Adverse Effect.

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        4.04.    Financial Statements, Reports, Etc.    The Guarantor will
furnish to the Security Agent, which will promptly forward the same to each
Lender:

        (a)  as soon as available and in any event within 120 days after the end
of each fiscal year of the Guarantor, a consolidated balance sheet of the
Guarantor and its Consolidated Subsidiaries as of the end of such fiscal year
and the related consolidated statements of income, retained earnings and cash
flows for such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, to the extent available, all reported on
by an independent public accountant of nationally recognized standing;

        (b)  as soon as available and in any event within 45 days after the end
of each of the first three quarters of each fiscal year of the Guarantor a
consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as
of the end of such quarter and the related consolidated statements of income for
such quarter and for the portion of the Guarantor's fiscal year ended at the end
of such quarter, and the related consolidated statement of cash flows for such
quarter and for the portion of the Guarantor's fiscal year ended at the end of
such quarter, in each case setting forth comparative figures for the previous
dates and periods, to the extent available, all certified (subject to normal
year-end adjustments) as to fairness of presentation, GAAP and consistency by a
Financial Officer of the Guarantor;

        (c)  simultaneously with any delivery of each set of financial
statements referred to in paragraphs (a) and (b) above, (i) an unconsolidated
balance sheet of the Guarantor and the related unconsolidated statements of
income, retained earnings and cash flows as of the same date and for the same
periods applicable to the statements delivered pursuant to paragraph (a) or
(b) above, as applicable, all certified (subject to normal year-end adjustments
in the case of quarterly statements) as to fairness of presentation by a
Financial Officer of the Guarantor and (ii) a certificate of a Financial Officer
of the Guarantor (A) setting forth in reasonable detail the calculations
required to establish whether the Guarantor was in compliance with the
requirements of Section 4.15 on the date of such financial statements, and
schedules setting forth all Indebtedness described in Section 4.12(o) that was
incurred during the applicable period and (B) stating whether any NEG Trigger
Event or Incipient NEG Trigger Event exists on the date of such certificate and,
if any NEG Trigger Event or Incipient NEG Trigger Event then exists, setting
forth the details thereof and the action which the Guarantor is taking or
proposes to take with respect thereto;

        (d)  simultaneously with the delivery of each set of financial
statements referred to in paragraph (a) above, a statement of the firm of
independent public accountants which reported on such statements confirming the
calculations set forth in the Financial Officer's certificate delivered
simultaneously therewith pursuant to subsection (c) above;

        (e)  promptly upon a Responsible Officer of the Guarantor obtaining
Actual Knowledge of the occurrence of any NEG Trigger Event or Incipient NEG
Trigger Event, a certificate of a Financial Officer of the Guarantor setting
forth the details thereof and the action which the Guarantor is taking or
proposes to take with respect thereto;

        (f)    on or prior to the date of incurrence of any Indebtedness
pursuant to Section 4.12(c) or (l) or the date of any Distribution pursuant to
Section 4.14, (i) a certificate of a Financial Officer of the Guarantor setting
forth in reasonable detail the calculations demonstrating compliance by the
Guarantor with the applicable financial tests, together with the pro forma
calculations referred to in the applicable Section, and copies of all financial
statements and other supporting documents and reports, if any, upon which the
Guarantor relied in making such calculations, and (ii) with respect to
Section 4.12(c) and (l) only, written evidence of the confirmation of the rating
agency ratings, to the extent such confirmation is required under Section 4.12
(c) or (l), as the case may be;

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        (g)  (i) on or prior to the date hereof, copies of the PG&E Gen Credit
Agreements, ET Credit Agreements, GTN Credit Agreements, and USGenNE Credit
Agreements, in each case accompanied by a certificate of a Responsible Officer
of the Guarantor stating that such copies are true and complete, and
(ii) promptly upon any refinancing of the loans under any such facility, copies
of the refinancing documents, accompanied by a certificate of a Responsible
Officer of the Guarantor stating that such copies are true and complete; and

        (h)  on each date extensions of credit are to be made pursuant to the
Participation Agreement and on or prior to the proposed Conversion Date, a
certificate to the effect that the representations and warranties made by the
Guarantor and contained in Section III hereof are true and correct in all
material respects as of such date, except to the extent made with respect to an
earlier date, in which case such representations and warranties shall have been
true and correct in all material respects as of such earlier date.

        4.05.    Insurance.    The Guarantor will, and will cause each of its
Subsidiaries (other than Unrestricted Subsidiaries) to, maintain such insurance
or self insurance, to such extent and against such risks, including fire and
other risks insured against by extended coverage, as is customary with companies
similarly situated and in the same or similar businesses except, in the case of
any such Subsidiaries, where such failure to so maintain is not reasonably
likely to result in a Material Adverse Effect.

        4.06.    Taxes, Etc.    The Guarantor will, and will cause each of its
Subsidiaries (other than Unrestricted Subsidiaries) to, pay and discharge
promptly when due all material taxes, assessments and governmental charges
imposed upon it or upon its income or profits or in respect of its property, in
each case before the same shall become delinquent or in default and before
penalties accrue thereon, unless and to the extent that the same are being
contested in good faith by appropriate proceedings and adequate reserves with
respect thereto shall, to the extent required by GAAP, have been set aside
except, in the case of any such Subsidiaries, where such failure to so pay or
discharge is not reasonably likely to result in a Material Adverse Effect.

        4.07.    Maintaining Records; Access to Properties and
Inspections.    The Guarantor will, and will cause each of its Restricted
Subsidiaries to, maintain financial records in accordance with GAAP and, upon
reasonable notice and at reasonable times, permit authorized representatives
designated by the Administrative Agent or the Security Agent to visit and
inspect its properties, books and records and to discuss its affairs, finances
and condition with its officers.

        4.08.    Risk Management Procedures.    The Guarantor will, and will
cause each of its Restricted Subsidiaries to, maintain in effect prudent risk
management procedures with respect to Trading Arrangements and Swaps.

        4.09.    Merger.    The Guarantor will not consolidate or merge with or
into any Person, or sell, lease or otherwise transfer, in a single transaction
or in a series of transactions, all or substantially all of its assets to any
Person or Persons, unless (i) the surviving Person or transferee is formed under
the laws of a State of the United States of America and assumes or is
responsible by operation of law for all the Guaranteed Obligations and (ii) no
NEG Trigger Event, Incipient NEG Trigger Event or NEG Downgrade Event shall have
occurred or be continuing at the time of or after giving effect to such
consolidation or merger or transfer.

        4.10.    Investments.    The Guarantor will not make any Investment, or
permit any of its Restricted Subsidiaries to make any Investment, except:

        (a)  Investments in any Restricted Subsidiary, Investment Vehicle or
Asset Company (or any Person that will become a Restricted Subsidiary,
Investment Vehicle or Asset Company, as the case may be, upon the making of such
Investment); or

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        (b)  Investments (not otherwise permitted under this Section 4.10)
existing on the date of execution of Guarantee and Agreement which are
identified on a Schedule 4.10; or

        (c)  Investments permitted to be incurred as Indebtedness under
Section 4.12; or

        (d)  (i) Investments made by any Restricted Subsidiary in the Guarantor
or any Restricted Subsidiary in connection with the Guarantor's cash management
program or (ii) Investments in Cash Equivalents; or

        (e)  Investments constituting "Equity Funding Arrangements" permitted
hereunder; or

        (f)    Investments otherwise made by the Guarantor and its Restricted
Subsidiaries in the ordinary course of business as conducted by the Guarantor or
its Restricted Subsidiaries or by other Persons in the energy trading, energy
services, power generation, electric transmission or gas transmission and
storage businesses (including technologies related to such businesses); or

        (g)  Investments in connection with obligations in support of Trading
Arrangements; or

        (h)  Investments in any Unrestricted Subsidiary with amounts which would
otherwise be available for distribution in accordance with Section 4.14.

        4.11.    Liens.    The Guarantor will not create or assume or permit to
exist any Lien, or permit any Restricted Subsidiary, Investment Vehicle or Asset
Company to, create or assume or permit to exist any Lien, in respect of any of
its property or assets of any kind (real or personal, tangible or intangible),
except:

        (a)  Liens granted pursuant to Lease Obligations described in clause (i)
of the definition of "Lease Obligations" and permitted by Section 4.12; or

        (b)  Liens on cash collateral securing Equity Funding Arrangements,
Credit Support Arrangements, Investments or Indebtedness permitted hereunder; or

        (c)  Liens in favor of the administrative agent under the PG&E Gen
Credit Agreement on funds in the "Cash Collateral Account" and on the "Cash
Collateral Account" to secure the reimbursement obligations of PG&E Gen in
respect of letters of credit as provided for in the PG&E Gen Credit Agreement;
or

        (d)  Liens existing on the assets of any Person at the time such Person
becomes a Subsidiary of the Guarantor; or

        (e)  Liens on the equity or ownership interests of any Asset Company or
any Investment Vehicle which owns such Asset Company and Liens on any Equity
Funding Arrangements securing the applicable Project Financing Facility; or

        (f)    Liens on any of the assets of any Asset Company or Investment
Vehicle securing or in connection with the applicable Project Financing
Facility; or

        (g)  Liens on any asset of the Guarantor or any Restricted Subsidiary
incurred or assumed for the purpose of financing all or any part of the cost of
acquiring, constructing or improving such asset, provided that such Lien
attaches contemporaneously with, or within 12 months of, the purchase,
construction or improvement of such asset; or

        (h)  Liens with respect to the assets of and membership interests or
other equity interests in ET Holdings and its Subsidiaries to secure the NEG/ET
Letter of Credit Facilities; or

        (i)    Other Liens (not otherwise permitted under this Section 4.11)
existing as of the date of this Guarantee and Agreement and identified on
Schedule 4.11; or

        (j)    Permitted Encumbrances; or

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        (k)  without limiting the ability to incur Liens under the other
subsections of this Section 4.11, extensions or renewals of any Lien otherwise
permitted to be incurred under this Section 4.11 securing Indebtedness in an
amount not exceeding the principal amount of, and accrued interest on, the
Indebtedness secured by such Lien as so extended or renewed at the time of such
extension or renewal; provided that such Lien shall apply only to the same
property theretofore subject to the same and fixed improvements constructed
thereon.

        4.12.    Indebtedness.    The Guarantor will not incur, create, assume
or permit to exist Indebtedness, or permit any Restricted Subsidiary, Investment
Vehicle or Asset Company to, incur, create, assume or permit to exist
Indebtedness, except:

        (a)  Indebtedness under (i) the USGenNE Credit Agreements, the GTN
Credit Agreements, the ET Credit Agreements and NEG/ET Letter of Credit
Facilities (the "Refinanceable Facilities") and (ii) the PG&E Gen Credit
Agreements and the other credit facilities entered into by the Guarantor or any
Restricted Subsidiary prior to the date of this Guarantee and Agreement and
identified on Schedule 4.12(a); provided, that this subsection (a) shall not be
deemed to permit an amendment to the facilities referred to in this subsection
(a) which has the effect of increasing the available commitments thereunder or,
in the case of the PG&E Gen Credit Agreements, extending the maturity of the
loans thereunder; or

        (b)  Lease Obligations (1) under leases for any office buildings in
which the Guarantor or any of its Subsidiaries has or will have offices;
(2) under leases for any equipment not to exceed $10,000,000 in the aggregate
outstanding at any time; or (3) described in clause (i) of the definition
thereof of the Guarantor and its Restricted Subsidiaries if, immediately after
the incurrence of any such Lease Obligation, the outstanding aggregate principal
amount of all such Lease Obligations (other than those Lease Obligations
incurred under subsections (c), (j), (l) and (q) below) would not exceed 2% of
Consolidated Tangible Net Assets; or

        (c)  Indebtedness of (i) any Asset Company under any Project Financing
Facility or (ii) any Investment Vehicle under any Project Financing Facility;
provided, that if any Asset Company owned (directly or indirectly) by such
Investment Vehicle has incurred any Indebtedness under a Project Financing
Facility, then such Investment Vehicle may only incur Indebtedness under a
Project Financing Facility if (I)(x) after giving effect to such Indebtedness,
the Ratio of Cash Flow to Fixed Charges of the Guarantor would not be less than
2.0:1.0, calculated on a pro forma basis to include such Indebtedness and
related cash flows, (y) the Guarantor's senior unsecured long-term debt is, at
the time of such incurrence, rated at least BBB by S&P and Baa2 by Moody's (or
if ratings of such debt have not been issued by such rating agencies, such debt
is impliedly rated by an issuer rating or indicative rating of at least BBB by
S&P and Baa2 by Moody's), and (z) the Guarantor obtains a reaffirmation of such
ratings from S&P and Moody's (taking into account the Indebtedness to be
incurred by such Investment Vehicle under this Section 4.12(c)) or (II) such
Investment Vehicle owns only one Asset Company and such Indebtedness is incurred
in connection with a Project Financing Facility and the proceeds thereof are
promptly invested in such Asset Company; or

        (d)  Trading Arrangements and Credit Support Arrangements, to the extent
such arrangements constitute Indebtedness; or

        (e)  Indebtedness with respect to any securitization, receivables
financing or similar transaction entered into by ET Holdings, GTN, USGenNE or
any of their respective Subsidiaries; or

        (f)    Indebtedness not otherwise permitted under this Section 4.12,
existing on the date of this Guarantee and Agreement and set forth on
Schedule 4.12(f); or

        (g)  Indebtedness under any Swap; or

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        (h)  Permitted Subordinated Indebtedness; or

        (i)    Indebtedness between any of the Guarantor, any Restricted
Subsidiary, Investment Vehicle, any Asset Company or any Indebtedness under any
short-term overdraft lines of credit or similar arrangements entered into in the
ordinary course of business, in each case associated with the Guarantor's cash
management program; or

        (j)    Indebtedness attributable to any Permitted Sale-Leaseback
Transactions; or

        (k)  Any Guaranty constituting Indebtedness of the Guarantor or any
Restricted Subsidiary, Investment Vehicle or Asset Company under clause (ix) of
the definition of "Indebtedness" to the extent that the obligations covered by
such Guaranty are not reasonably quantifiable under GAAP; or

        (l)    other Indebtedness of the Guarantor or any Restricted Subsidiary
(other than PG&E Gen) incurred after the date of this Guarantee and Agreement,
provided that (i) after giving effect to any such Indebtedness, the Ratio of
Cash Flow to Fixed Charges of the Guarantor would not be less than 2.0:1.0
(calculated on a pro forma basis as of the end of the most recent fiscal quarter
with respect to which financial statements of the Guarantor are available and
assuming for such purpose that such Indebtedness was incurred one year prior to
the end of such fiscal quarter and taking into account any related cash flows)
and (ii) if such Indebtedness would constitute Indebtedness of a Restricted
Subsidiary, no Asset Company, Investment Vehicle or Restricted Subsidiary owned
directly or indirectly by such Restricted Subsidiary has Indebtedness
outstanding which would otherwise be permitted under Section 4.12(a), (b)(3),
(c), (h), (j), (l), (o) or (p); provided, further, that clause (ii) of this
Section 4.12(l) will not be applicable if the Guarantor obtains a reaffirmation
of the rating of its senior unsecured long-term debt of at least BBB by S&P and
Baa2 by Moody's (or if ratings of such debt have not been issued by such rating
agencies, such debt is impliedly rated by an issuer rating or indicative rating
of at least BBB by S&P and Baa2 by Moody's) after taking into account the
Indebtedness to be incurred by such Restricted Subsidiary and related cash
flows; or

        (m)  Indebtedness of the Guarantor or any Restricted Subsidiary in
respect of letters of credit or surety, performance or bid bonds used in the
ordinary course of business not in excess of $25,000,000 in the aggregate
outstanding at any time; or

        (n)  Indebtedness constituting intercompany loans (1) between the
Guarantor and its Restricted Subsidiaries or between such Restricted
Subsidiaries or (2) made by the Guarantor, any Restricted Subsidiary, any
Investment Vehicle or any Asset Company to any Investment Vehicle or any Asset
Company or (3) made by any Investment Vehicle to the Guarantor, any Restricted
Subsidiary, or any other Investment Vehicle; or

        (o)  Equity Funding Arrangements; or

        (p)  without limiting the ability to incur Indebtedness under the other
subsections of this Section 4.12, any refinancing of any Indebtedness permitted
under Section 4.12(f) and under the Refinanceable Facilities, provided that
either (i) (x) the average life of any refinanced Indebtedness shall not be less
than the average life of the Indebtedness so refinanced (plus fees and expenses,
including any premium or defeasance costs, of such refinancing), taking into
account the prepayment or repayment of a portion of any such Indebtedness, and
(y) the principal amount of the refinanced Indebtedness shall not exceed the
principal amount plus accrued interest thereon of the Indebtedness so
refinanced, or (ii) the Guarantor shall demonstrate pro forma compliance with
the financial ratio described in Section 4.12(l) above; or

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        (q)  Indebtedness of any Subsidiary of the Guarantor existing at the
time such Person becomes a Subsidiary of the Guarantor (except for any such
Indebtedness of such Subsidiary incurred in contemplation of or to finance the
acquisition of such Subsidiary); or

        (r)  Indebtedness of the Guarantor incurred in connection with a
refinancing of any Indebtedness of PG&E Gen under the PG&E Gen Credit Agreements
in an aggregate principal amount not to exceed $1,250,000,000.

        4.13.    Transactions with Affiliates.    The Guarantor will not enter
into, or permit any Restricted Subsidiary, Investment Vehicle or Asset Company
to enter into, any transaction with any Affiliate of the Guarantor (other than
the Guarantor, any Subsidiary of the Guarantor, any Investment Vehicle and any
Asset Company), except:

        (a)  transactions with such Affiliates upon fair and reasonable terms
which are no less favorable to the Guarantor than would be obtained in a
comparable arm's length transaction with a Person not an Affiliate of the
Guarantor;

        (b)  management, operating, sharing or other similar services
arrangements between and among the Guarantor, its Subsidiaries and its other
Affiliates either existing on the date hereof and described on Schedule 4.13 or
entered into after the date hereof on commercially reasonable terms;

        (c)  tax sharing arrangements between the Guarantor and PG&E Corp.
approximating the tax position that the Guarantor would be in if it were not
part of PG&E Corp.'s consolidated group, as determined by the management of the
Guarantor in its reasonable business judgment or such other arrangements as may
be approved by the Lenders prior to the date hereof; or

        (d)  paying or declaring any Distribution to the extent permitted under
Section 4.14.

        The provisions of this Section 4.13 shall not apply to (i) transactions
between the Guarantor or any of its Subsidiaries, on the one hand, and any
employee of the Guarantor or any of its Subsidiaries, on the other hand, that
are approved by the Board of Directors of the Guarantor or any committee of the
Board of Directors and (ii) the payment of reasonable and customary regular fees
to directors of the Guarantor or any Subsidiary of the Guarantor.

        4.14.    Distributions.    The Guarantor will not declare or make any
Distribution if (a) an NEG Trigger Event, Incipient NEG Trigger Event or NEG
Downgrade Event has occurred and is continuing or shall occur after giving
effect to such Distribution, (b) the Ratio of Cash Flow to Fixed Charges of the
Guarantor determined as of the end of the immediately preceding fiscal quarter
was not at least 2.0:1.0 or (c) the Guarantor fails to satisfy the requirements
of the test set forth in Section 4.15(b), or the Guarantor fails to have a
Consolidated Net Worth of at least $2.15 billion, in each case calculated on a
pro forma basis as of the end of the most recent fiscal period with respect to
which financial statements of the Guarantor are available (assuming such
Distribution and all material events with respect to the Guarantor and its
Subsidiaries which occurred after the end of such fiscal period had occurred on
the last day of such fiscal period); provided that the Guarantor may declare and
make Distributions of assets of or equity ownership interests in any
Unrestricted Subsidiary at any time without complying with the foregoing.

        4.15.    Financial Covenants:    (a) The Guarantor shall not, as of the
end of each fiscal quarter, permit the Ratio of Cash Flow to Fixed Charges to be
less than 1.5:1.0.

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        (b)  The Guarantor shall not, as of the end of each fiscal quarter,
permit the Ratio of Debt to Capitalization to be greater than 0.6:1.0.

        (c)  The Guarantor shall not, at the end of each fiscal quarter, permit
(i) Consolidated Net Worth to be less than the Minimum Consolidated Net Worth
and (ii) Non-Trading Consolidated Net Worth to be less than the Minimum
Non-Trading Consolidated Net Worth.

        4.16.    Separateness from PG&E Corp.    The Guarantor shall
(i) maintain adequate capital in light of the business in which it is engaged;
(ii) maintain books and corporate records separate from PG&E Corp. and PG&E;
(iii) not commingle assets with PG&E Corp. or PG&E; and (iv) conduct business in
its own name and hold itself out as separate from PG&E Corp. and PG&E. The
Guarantor shall promptly notify the Security Agent upon a Responsible Officer of
the Guarantor obtaining Actual Knowledge that a creditor of PG&E Corp. or of
PG&E has made a claim or filing in writing seeking the substantive consolidation
of NEG LLC in any bankruptcy proceeding of PG&E Corp. or of PG&E.

        4.17.    PG&E Gen Credit Agreement Covenants.    Prior to the PG&E Gen
Credit Agreement Refinancing Date, the Guarantor will not permit PG&E Gen to
default in any material respect in the due observance or performance of its
covenants under Sections 5.08, 5.11, 5.12, 5.13 and 5.14 of the $1.1 Billion
PG&E Gen Credit Agreement.

        4.18.    Audited 2000 Financial Statements.    The audited financial
statements for the fiscal year ended December 31, 2000 to be delivered by the
Guarantor pursuant to Section 4.04(a) shall not reflect any material adverse
change from the unaudited financial statements for the same period referred to
in Section 3.04(b).

SECTION V NEG TRIGGER EVENTS

        5.01.    NEG Trigger Events.    The following shall constitute NEG
Trigger Events:

        (a)  any Event of Default; or

        (b)  any representation or warranty made or deemed made by (1) the
Guarantor in or in connection with the execution and delivery of this Guarantee
and Agreement, or (2) NEG LLC in the Letter Agreement, shall prove to have been
false or misleading in any material respect when so made, deemed made or
furnished; or

        (c)  the Guarantor shall default in any material respect in the due
observance or performance of any agreement contained in Section 4.01,
Section 4.09, Section 4.14 or Section 4.15; or

        (d)  (1) the Guarantor shall default in any material respect in the due
observance or performance of any covenant, condition or agreement contained in
this Guarantee and Agreement (other than those specified in 5.01(c) above), or
(2) NEG LLC shall default in any material respect in the due observance or
performance of any covenant, condition or agreement contained in the Letter
Agreement, and in each case, such default shall continue unremedied for a period
of 30 days after notice thereof from the Security Agent; or

        (e)  the Guarantor or any Restricted Subsidiary shall default in respect
of any Indebtedness or default in its obligations to make payments when due
under any Equity Funding Arrangements which at the time have an aggregate
principal amount outstanding or, in the case of Equity Funding Arrangements, due
and unpaid, in excess of $50,000,000, and as a result thereof such Indebtedness
shall have been accelerated or otherwise be or become due or subject to
prepayment in full prior to its stated maturity; or

        (f)    an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i) relief
in respect of the Guarantor or any Restricted Subsidiary or of a substantial
part of the property or assets of the Guarantor or any Restricted

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Subsidiary under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law, (ii) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Guarantor or
any Restricted Subsidiary or (other than in connection with any proceeding
relating solely to one or more Unrestricted Subsidiaries, Investment Vehicles or
Project Companies of the Guarantor) for a substantial part of the property or
assets of the Guarantor or any Restricted Subsidiary or (iii) the winding up or
liquidation of the Guarantor or any Restricted Subsidiary; and such proceeding
or petition shall continue undismissed for 60 days or an order or decree
approving or ordering any of the foregoing shall be entered; or

        (g)  the Guarantor or any Restricted Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking relief under Title 11 of
the United States Code, as now constituted or hereafter amended, or any other
Federal or state bankruptcy, insolvency, receivership or similar law,
(ii) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or the filing of any petition described in
Section 5.01(f) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official for
the Guarantor or any Restricted Subsidiary (other than in connection with any
proceeding relating solely to one or more Unrestricted Subsidiaries, Investment
Vehicles or Project Companies of the Guarantor) for a substantial part of the
property or assets of the Guarantor or any Restricted Subsidiary, (iv) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (v) make a general assignment for the benefit of creditors, or
(vi) take any corporate action for the purpose of effecting any of the
foregoing, become unable, admit in writing its inability, or fail generally, to
pay its debts as they become due; or

        (h)  one or more final judgments for the payment of money in an
aggregate amount in excess of $50,000,000 (exclusive of amounts covered by
insurance) shall be rendered against the Guarantor or any Restricted Subsidiary
and such judgment or order shall remain undischarged, unbonded or unstayed for a
period of 60 days; or

        (i)    an ERISA Event shall have occurred that, either alone or in
combination with other ERISA Events that shall have occurred, is reasonably
likely to result in a Material Adverse Effect.

SECTION VI MISCELLANEOUS

        6.01.    Amendments.    No provision of this Guarantee and Agreement may
be amended or waived except in accordance with the Collateral Agency and
Intercreditor Agreement.

        6.02.    Successors and Assigns.    This Guarantee shall bind and
benefit the successors and permitted assigns of Guarantor and Security Agent and
inure to the benefit of the Creditors and their successors and permitted
assigns. This Guarantee shall not be deemed to benefit any Person except
Security Agent and the Creditors and their successors and permitted assigns.

        6.03.    GOVERNING LAW.    THIS GUARANTEE SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
THE GUARANTOR IRREVOCABLY SUBMITS, FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION RELATING TO THIS GUARANTEE, OR FOR RECOGNITION AND ENFORCEMENT OF ANY
JUDGMENT IN RESPECT HEREOF OR THEREOF, TO THE NON-EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK.

        6.04.    No Waiver, Cumulative Remedies.    (a) No failure to exercise,
nor any delay in exercising, on the part of the Security Agent or any Lender,
any right, power or privilege hereunder shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Security Agent or any Creditor of any
right or remedy hereunder on any one occasion shall not be

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construed as a bar to any right or remedy that the Security Agent or such
Creditor would otherwise have on any future occasion.

        (b)  The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.

        6.05.    Authority and Rights of Security Agent.    The Guarantor
acknowledges that the rights and responsibilities of the Security Agent under
this Guarantee and Agreement with respect to any action taken by the Security
Agent or the exercise or non-exercise by the Security Agent of any option,
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Guarantee and Agreement shall, as between the
Security Agent and the Creditors, be governed by the Operative Documents and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Security Agent and the Guarantor, the Security Agent
shall be conclusively presumed to be acting with full and valid authority so to
act or refrain from acting, and the Guarantor shall not be under any obligation,
or entitlement, to make any inquiry respecting such authority. The Security
Agent shall be afforded the rights, privileges and immunities set forth in
Section 3 of the Collateral Agency and Intercreditor Agreement as if fully set
forth herein.

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        IN WITNESS WHEREOF, the parties hereto have caused this Guarantee and
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.

    PG&E NATIONAL ENERGY GROUP, INC.
 
 
By:
       

--------------------------------------------------------------------------------

Name:
Title:

Agreed and Accepted:    
CITIBANK, N.A., NOT IN ITS INDIVIDUAL CAPACITY BUT SOLELY IN ITS CAPACITY AS
SECURITY AGENT, FOR THE BENEFIT OF THE CREDITORS
 
 
By:
 
 
   

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Name:
Title:
   

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Schedule 1.01A

Existing Sale/Leaseback Transactions

        Facility Lease Agreement, dated as of November 30, 1998, between Bear
Swamp Generating Trust No. 1 and USGen New England, Inc.

        Lease, dated as of May 12, 1988, by and between General Electric
Corporation and Altresco Pittsfield, Inc.

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SCHEDULE 1.01B

TERMS AND CONDITIONS OF SUBORDINATION
FOR INDEBTEDNESS OF GUARANTOR TO AFFILIATES

        All Permitted Subordinated Indebtedness (as defined in the Guarantee and
Agreement to which this Schedule 1.01B is attached) incurred by PG&E National
Energy Group, Inc., a Delaware corporation (the "Guarantor"), owing to any
Affiliate (as defined in the Guarantee and Agreement) of the Guarantor shall be
subject to the following terms and conditions, which shall be incorporated in a
written agreement (the "Agreement") between the Guarantor and any Affiliate to
which any such Indebtedness is owed.

        Section 1.01.    Subordination of Liabilities.    The Guarantor, for
itself, its successors and assigns, covenants and agrees and each holder of the
indebtedness evidenced by [DESCRIBE INDEBTEDNESS DOCUMENTATION] (the
"Subordinated Indebtedness") by its acceptance thereof likewise covenants and
agrees that the payment of the principal of, and interest on, and all other
amounts owing in respect of, the Subordinated Indebtedness is hereby expressly
subordinated, to the extent and in the manner hereinafter set forth, to the
prior payment in full in cash or discharge in full of Senior Indebtedness (as
defined in Section 1.08) in cash. The subordination provisions set forth herein
shall constitute a continuing offer to all persons who, in reliance upon such
provisions, become holders of, or continue to hold, Senior Indebtedness, and
such provisions are made for the benefit of the holders of Senior Indebtedness,
and such holders are hereby made obligees hereunder to the same extent as if
their names were written herein as such, and they and/or each of them may
proceed to enforce such provisions.

        Section 1.02.    Guarantor Not to Make Payments with Respect to
Subordinated Indebtedness in Certain Circumstances.    (a) Upon the maturity of
any Senior Indebtedness (including interest thereon or fees or any other amounts
owing in respect thereof), whether at stated maturity, by acceleration or
otherwise, all principal thereof and premium, if any, and interest thereon or
fees or any other amounts owing in respect thereof, in each case to the extent
due and owing at such time, shall first be paid in full in cash or discharge in
full, or such payment duly provided for in cash or in a manner satisfactory to
the holder or holders of such Senior Indebtedness, before any payment is made on
account of the principal of (including installments thereof), or interest on, or
any amount otherwise owing in respect of, the Subordinated Indebtedness. Each
holder of the Subordinated Indebtedness hereby agrees that, so long as an Event
of Default (as defined below), or event that with notice or lapse of time or
both would constitute an Event of Default, in respect of any Senior Indebtedness
exists, it will not ask, demand, sue for, or otherwise take, accept or receive,
any amounts owing in respect of the Subordinated Indebtedness. As used herein,
the term "Event of Default" shall mean any NEG Trigger Event (as defined below)
or any Event of Default, under and as defined in, the relevant documentation
governing any Senior Indebtedness, and in any event shall include any payment
default with respect to any Senior Indebtedness.

        (b)  In the event that notwithstanding the provisions of the preceding
subsection (a) of this Section 1.02, the Guarantor shall make any payment on
account of the principal of, or interest on, or amounts otherwise owing in
respect of, the Subordinated Indebtedness at a time when payment is not
permitted by said subsection (a), such payment shall be held by the holder of
the Subordinated Indebtedness, in trust for the benefit of, and shall be paid
forthwith over and delivered to, the holders of Senior Indebtedness or their
representative or representatives under the agreements pursuant to which the
Senior Indebtedness may have been issued, as their respective interests may
appear, for application pro rata to the payment of all Senior Indebtedness
remaining unpaid to the extent necessary to pay all Senior Indebtedness in full
in cash in accordance with the terms of such Senior Indebtedness, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Indebtedness. Without in any way modifying the subordination provisions set
forth herein or affecting the subordination effected hereby, the Guarantor shall
give the holder of the Subordinated

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Indebtedness prompt written notice of any maturity of Senior Indebtedness after
which such Senior Indebtedness remains unsatisfied.

        Section 1.03.    Subordinated Indebtedness Subordinated to Prior Payment
of all Senior Indebtedness on Dissolution, Liquidation or Reorganization of
Guarantor.    Upon any distribution of assets of the Guarantor upon any
dissolution, winding up, liquidation or reorganization of the Guarantor (whether
in bankruptcy, insolvency or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise):

        (a)  the holders of all Senior Indebtedness shall first be entitled to
receive payment in full in cash or in a manner satisfactory to the holder or
holders of such Senior Indebtedness of the principal thereof, premium, if any,
and interest (including, without limitation, all interest accruing after the
commencement of any bankruptcy, insolvency, receivership or similar proceeding
at the rate provided in the governing documentation whether or not such interest
is an allowed claim in such proceeding) and all other amounts due thereon before
the holder of the Subordinated Indebtedness is entitled to receive any payment
on account of the principal of or interest on or any other amount owing in
respect of the Subordinated Indebtedness,

        (b)  any payment or distribution of assets of the Guarantor of any kind
or character, whether in cash, property or securities to which the holder of the
Subordinated Indebtedness would be entitled except for the subordination
provisions set forth herein, shall be paid by the liquidating trustee or agent
or other person making such payment or distribution, whether a trustee or agent,
directly to the holders of Senior Indebtedness or their representative or
representatives under the agreements pursuant to which the Senior Indebtedness
may have been issued, to the extent necessary to make payment in full of all
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Indebtedness; and

        (c)  in the event that, notwithstanding the foregoing provisions of this
Section 1.03, any payment or distribution of assets of the Guarantor of any kind
or character, whether in cash, property or securities, shall be received by the
holder of the Subordinated Indebtedness on account of principal of, or interest
or other amounts due on, the Subordinated Indebtedness before all Senior
Indebtedness is paid in full in cash or in a manner satisfactory to the holder
or holders of such Senior Indebtedness or otherwise discharged in full, or
effective provisions made for its payment, such payment or distribution shall be
received and held in trust for and shall be paid over to the holders of the
Senior Indebtedness remaining unpaid or unprovided for or their representative
or representatives under the agreements pursuant to which the Senior
Indebtedness may have been issued, for application to the payment of such Senior
Indebtedness until all such Senior Indebtedness shall have been paid in full in
cash or in a manner satisfactory to the holder or holders of such Senior
Indebtedness or otherwise discharged in full, after giving effect to any
concurrent payment or distribution to the holders of such Senior Indebtedness.

        Without in any way modifying the subordination provisions set forth
herein or affecting the subordination effected hereby, the Guarantor shall give
prompt written notice to the holder of the Subordinated Indebtedness of any
dissolution, winding up, liquidation or reorganization of the Guarantor (whether
in bankruptcy, insolvency or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise).

        Section 1.04.    Furtherance of Subordination.    Each holder of the
Subordinated Indebtedness agrees as follows:

        (a)  If any proceeding referred to in Section 1.03 above is commenced by
or against the Guarantor:

          (i)  the Security Agent (as defined in the Guarantee and Agreement
referred to in Section 1.08 below), acting on behalf of each holder of the
Senior Indebtedness, is hereby irrevocably authorized and empowered (in its own
name or in the name of the holder of the Subordinated Indebtedness or
otherwise), but shall have no obligation, to demand, sue for, collect and
receive every payment or distribution referred to in Section 1.03(b) and give

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acquittance therefor and to file claims and proofs of claim and take such other
action (including, without limitation, voting the claims arising under the
Subordinated Indebtedness or enforcing any security interest or other lien
securing payment of the Subordinated Indebtedness) as it may deem necessary or
advisable for the exercise or enforcement of or causing the enforcement of any
of the rights or interests of the holders of the Senior Indebtedness hereunder;
and

        (ii)  each holder of the Subordinated Indebtedness shall duly and
promptly take such action as the holders of the Senior Indebtedness may request
(A) to collect the Subordinated Indebtedness for the account of the holders of
the Senior Indebtedness and to file appropriate claims or proofs of claim in
respect of the Subordinated Indebtedness, (B) to execute and deliver to the
holders of the Senior Indebtedness such powers of attorney, assignments or other
instruments as the holders of the Senior Indebtedness may request in order to
enable the holders of the Senior Indebtedness to enforce any and all claims with
respect to, and any security interests and other liens securing payment of, the
Subordinated Indebtedness, and (C) to collect and receive any and all payments
or distributions that may be payable or deliverable upon or with respect to the
Subordinated Indebtedness.

        (iii)  The holders of the Senior Indebtedness are hereby authorized to
demand specific performance of this Agreement, whether or not the Guarantor
shall have complied with any of the provisions hereof applicable to it, at any
time when the holder of the Subordinated Indebtedness shall have failed to
comply with any of the provisions of this Agreement applicable to it. The holder
of the Subordinated Indebtedness hereby irrevocably waives any defense based on
the adequacy of a remedy at law that might be asserted as a bar to such remedy
of specific performance.

        Section 1.05.    Subrogation.    Subject to the prior payment in cash in
full or discharge in full of all Senior Indebtedness in cash, the holder of the
Subordinated Indebtedness shall be subrogated to the rights of the holders of
Senior Indebtedness to receive payments or distributions of assets of the
Guarantor applicable to the Senior Indebtedness until all amounts owing in
respect of the Subordinated Indebtedness shall be paid or discharged in full,
and for the purpose of such subrogation no payments or distributions to the
holders of the Senior Indebtedness by or on behalf of the Guarantor or by or on
behalf of the holder of the Subordinated Indebtedness by virtue of the
subordination provisions set forth herein that otherwise would have been made to
the holder of the Subordinated Indebtedness, shall be deemed to be payment by
the Guarantor to or on account of the Senior Indebtedness, it being understood
that the subordination provisions set forth herein are and are intended solely
for the purpose of defining the relative rights of the holder of the
Subordinated Indebtedness, on the one hand, and the holders of the Senior
Indebtedness, on the other hand.

        Section 1.06.    Obligation of the Guarantor Unconditional.    Nothing
contained in the subordination provisions set forth herein or in the documents
evidencing the Subordinated Indebtedness is intended to or shall impair, as
between the Guarantor and the holder of the Subordinated Indebtedness, the
obligation of the Guarantor, which is absolute and unconditional, to pay to the
holder of the Subordinated Indebtedness the principal of and interest on the
Subordinated Indebtedness as and when the same shall become due and payable in
accordance with its terms, or is intended to or shall affect the relative rights
of the holder of the Subordinated Indebtedness and creditors of the Guarantor
other than the holders of the Senior Indebtedness, nor shall anything herein or
therein prevent the holder of the Subordinated Indebtedness from exercising all
remedies otherwise permitted by applicable law, subject to the rights, if any,
under the subordination provisions set forth herein of the holders of Senior
Indebtedness in respect of cash, property, or securities of the Guarantor
received upon the exercise of any such remedy. Upon any distribution of assets
of the Guarantor referred to herein, the holder of the Subordinated Indebtedness
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending, or a certificate of the liquidating
trustee or agent or other person making any distribution to the holder of the
Subordinated Indebtedness, for the purpose of ascertaining the persons entitled
to participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the

--------------------------------------------------------------------------------

Guarantor, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or hereto.

        Section 1.07.    Subordination Rights Not Impaired by Acts or Omissions
of Guarantor or Holders of Senior Indebtedness.    (b) No rights of any present
or future holders of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by an act or
failure to act on the part of the Guarantor or by any act or failure to act in
good faith by any such holder, or by any noncompliance by the Guarantor with the
terms and provisions of the Subordinated Indebtedness, regardless of any
knowledge thereof which any such holder may have or be otherwise charged with.
The holders of the Senior Indebtedness may, without in any way affecting the
obligations of the holder of the Subordinated Indebtedness with respect thereto,
at any time or from time to time and in their absolute discretion, change the
manner, place or terms of payment of, change or extend the time of payment of,
or renew or alter, any Senior Indebtedness, or amend, modify or supplement any
agreement or instrument governing or evidencing such Senior Indebtedness or any
other document referred to therein, or exercise or refrain from exercising any
other of their rights under the Senior Indebtedness including, without
limitation, the waiver of a default thereunder and the release of any collateral
securing such Senior Indebtedness, all without notice to or consent from the
holder of the Subordinated Indebtedness.

        Section 1.08.    Senior Indebtedness.    (a) The term "Senior
Indebtedness" shall mean all Obligations (as defined below) of the Guarantor
under the Guarantee and Agreement (as defined below).

        (c)  As used in this Agreement, the terms set forth below shall have the
respective meanings provided below:

        "Guarantee and Agreement" shall mean the Guarantee and Agreement, dated
as of April 6, 2001, by the Guarantor, in favor of Citibank, N.A., as Security
Agent (in such capacity, the "Security Agent") for the Creditors, as same may be
amended, modified, extended, renewed, restated or supplemented from time to
time, and including any agreement extending the maturity of, refinancing or
restructuring all or any portion of, or increasing the Obligations under such
agreement or of any successor agreements.

        "NEG Trigger Event" shall have the meaning assigned to such term in the
Guarantee and Agreement.

        "Obligations" shall mean the Guaranteed Obligations (as defined in the
Guarantee and Agreement) and all other payment obligations of the Guarantor
under the Guarantee and Agreement.

--------------------------------------------------------------------------------

SCHEDULE 1.01C

TERMS AND CONDITIONS OF SUBORDINATION
FOR INDEBTEDNESS OF GUARANTOR TO NON-AFFILIATES

        All Permitted Subordinated Indebtedness (as defined in the Guarantee and
Agreement to which this Schedule 1.01C is attached) incurred by PG&E National
Energy Group, Inc., a Delaware corporation (the "Guarantor"), owing to any
person other than an Affiliate (as defined in the Guarantee and Agreement) of
the Guarantor shall be evidenced by a promissory note and shall have the
following subordination provisions attached as Annex A thereto or incorporated
within the text thereof (mutatis mutandis), and shall include in the text of
such promissory note the language: "THE INDEBTEDNESS EVIDENCED BY THIS NOTE IS
SUBORDINATE AND JUNIOR IN RIGHT OF PAYMENT TO ALL SENIOR INDEBTEDNESS (AS
DEFINED IN ANNEX A HERETO) TO THE EXTENT PROVIDED IN ANNEX A."

ANNEX A

        Section 1.01.    Subordination of Liabilities.    The Guarantor for
itself, its successors and assigns, covenants and agrees and each holder of the
promissory note to which this Annex A is attached (the "Note") by its acceptance
thereof likewise covenants and agrees that the payment of the principal of, and
interest on, and all other amounts owing in respect of, the Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
to the prior payment in full in cash or discharge in full of the Senior
Indebtedness (as defined in Section 1.08) in cash. The provisions of this Annex
A shall constitute a continuing offer to all persons who, in reliance upon such
provisions, become holders of, or continue to hold, Senior Indebtedness, and
such provisions are made for the benefit of the holders of Senior Indebtedness,
and such holders are hereby made obligees hereunder to the same extent as if
their names were written herein as such, and they and/or each of them may
proceed to enforce such provisions.

        Section 1.02.    Guarantor Not to Make Payments with Respect to Notes in
Certain Circumstances.    

        (a)  Upon the maturity of any Senior Indebtedness (including interest
thereon or fees or any other amounts owing in respect thereof), whether at
stated maturity, by acceleration or otherwise, all principal thereof and
premium, if any, and interest thereon or fees or any other amounts owing in
respect thereof, in each case to the extent due and owing at such time, shall
first be paid in full in cash or discharged in full, or such payment duly
provided for in cash or in a manner satisfactory to the holder or holders of
such Senior Indebtedness, before any payment is made on account of the principal
of (including installments thereof), or interest on, or any amount otherwise
owing in respect of, the Note. Each holder of the Note hereby agrees that, so
long as an Event of Default (as defined below), or event that with notice or
lapse of time or both would constitute an Event of Default, in respect of any
Senior Indebtedness exists, it will not ask, demand, sue for, or otherwise take,
accept or receive, any amounts owing in respect of the Note. As used herein, the
term "Event of Default" shall mean any NEG Trigger Event or any Event of
Default, under and as defined in, the relevant documentation governing any
Senior Indebtedness, and, in any event shall include any payment default with
respect to any Senior Indebtedness.

        (b)  In the event that notwithstanding the provisions of the preceding
subsection (a) of this Section 1.02, the Guarantor shall make any payment on
account of the principal of, or interest on, or amounts otherwise owing in
respect of, the Note at a time when payment is not permitted by said subsection
(a), such payment shall be held by the holder of the Note, in trust for the
benefit of, and shall be paid forthwith over and delivered to, the holders of
Senior Indebtedness or their representative or representatives under the
agreements pursuant to which the Senior Indebtedness may have been issued, as
their respective interests may appear, for application pro rata, to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness in full in cash in accordance with the term of such Senior
Indebtedness, after giving effect to any concurrent payment or distribution to
or for the holders of Senior Indebtedness.

--------------------------------------------------------------------------------

Without in any way modifying the provisions of this Annex A or affecting the
subordination effected hereby, the Guarantor shall give the holder of the Note
prompt written notice of any maturity of Senior Indebtedness after which such
Senior Indebtedness remains unsatisfied.

        Section 1.03.    Note Subordinated to Prior Payment of all Senior
Indebtedness on Dissolution, Liquidation or Reorganization of Guarantor.    Upon
any distribution of assets of the Guarantor upon any dissolution, winding up,
liquidation or reorganization of the Guarantor (whether in bankruptcy,
insolvency or receivership proceedings or upon an assignment for the benefit of
creditors or otherwise):

        (a)  the holders of all Senior Indebtedness shall first be entitled to
receive payment in full in cash or in a manner satisfactory to the holder or
holders of such Senior Indebtedness of the principal thereof, premium, if any,
and interest (including, without limitation, all interest accruing after the
commencement of any bankruptcy, insolvency, receivership or similar proceeding
at the rate provided in the governing documentation whether or not such interest
is an allowed claim in such proceeding) and all other amounts due thereon before
the holder of the Note is entitled to receive any payment on account of the
principal of or interest on or any other amount owing in respect of the Note;

        (b)  any payment or distribution of assets of the Guarantor of any kind
or character, whether in cash, property or securities to which the holder of the
Note would be entitled except for the provisions of this Annex A shall be paid
by the liquidating trustee or agent or other person making such payment or
distribution, whether a trustee or agent; directly to the holders of Senior
Indebtedness or their representative or representatives under the agreements
pursuant to which the Senior Indebtedness may have been issued, to the extent
necessary to make payment in full of all Senior Indebtedness remaining unpaid,
after giving effect to any concurrent payment or distribution to the holders of
such Senior Indebtedness; and

        (c)  in the event that, notwithstanding the foregoing provisions of this
Section 1.03, any payment or distribution of assets of the Guarantor of any kind
or character, whether in cash, property or securities, shall be received by the
holder of the Note on account of principal of, or interest or other amounts due
on, the Note before all Senior Indebtedness is paid in full in cash or in a
manner satisfactory to the holder or holders of such Senior Indebtedness or
otherwise discharged in full, or effective provisions made for its payment, such
payment or distribution shall be received and held in trust for and shall be
paid over to the holders of the Senior Indebtedness remaining unpaid or
unprovided for or their representative or representatives under the agreements
pursuant to which the Senior Indebtedness may have been issued, for application
to the payment of such Senior Indebtedness until all such Senior Indebtedness
shall have been paid in full in cash or in a manner satisfactory to the holder
or holders of such Senior Indebtedness or otherwise discharged in full, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Indebtedness.

        Without in any way modifying the provisions of this Annex A or affecting
the subordination effected hereby, the Guarantor shall give prompt written
notice to the holder of the Note of any dissolution, winding up, liquidation or
reorganization of the Guarantor (whether in bankruptcy, insolvency or
receivership proceedings or upon an assignment for the benefit of creditors or
otherwise).

        Section 1.04.    In Furtherance of Subordination.    Each holder of the
Note agrees as follows:

        (a)  If any proceeding referred to in Section 1.03 above is commenced by
or against the Guarantor

          (i)  the Security Agent (as defined in the Guarantee and Agreement
referred to in Section 1.08 below), acting on behalf of each holder of the
Senior Indebtedness, is hereby irrevocably authorized and empowered (in its own
name or in the name of the holder of the Note or otherwise), but shall have no
obligation, to demand, sue for, collect and receive every payment or
distribution referred to in Section 1.03(b) and give acquittance therefor and to
file claims and proofs of claim and take such other action (including, without
limitation, voting the claims arising under the Note or enforcing any security
interest or other lien securing payment

--------------------------------------------------------------------------------

of the Note) as it may deem necessary or advisable for the exercise or
enforcement of or causing the enforcement of any of the rights or interests of
the holders of the Senior Indebtedness hereunder; and

        (ii)  The holders of the Senior Indebtedness are hereby authorized to
demand specific performance of this Note, whether or not the Guarantor shall
have complied with any of the provisions hereof applicable to it, at any time
when the holder of the Note shall have failed to comply with any of the
provisions of this Note applicable to it. The holder of the Note hereby
irrevocably waives any defense based on the adequacy of a remedy at law that
might be asserted as a bar to such remedy of specific performance.

        Section 1.05.    Subrogation.    Subject to the prior payment in cash in
full or discharge in full of all Senior Indebtedness in cash, the holder of the
Note shall be subrogated to the rights of the holders of Senior Indebtedness to
receive payments or distributions of assets of the Guarantor applicable to the
Senior Indebtedness until all amounts owing on the Note shall be paid or
discharged in full, and for the purpose of such subrogation no payments or
distributions to the holders of the Senior Indebtedness by or on behalf of the
Guarantor or by or on behalf of the holder of the Note by virtue of this Annex A
which otherwise would have been made to the holder of the Note, shall be deemed
to be payment by the Guarantor to or on account of the Senior Indebtedness, it
being understood that the provisions of this Annex A are and are intended solely
for the purpose of defining the relative rights of the holder of the Note, on
the one hand, and the holders of the Senior Indebtedness, on the other hand.

        Section 1.06.    Obligation of the Guarantor Unconditional.    Nothing
contained in this Annex A or in the Note is intended to or shall impair, as
between the Guarantor and the holder of the Note, the obligation of the
Guarantor, which is absolute and unconditional, to pay to the holder of the Note
the principal of and interest on the Note as and when the same shall become due
and payable in accordance with its terms, or is intended to or shall affect the
relative rights of the holder of the Note and creditors of the Guarantor other
than the holders of the Senior Indebtedness, nor shall anything herein or
therein prevent the holder of the Note from exercising all remedies otherwise
permitted by applicable law, subject to the rights, if any, under this Annex A
of the holders of Senior Indebtedness in respect of cash, property, or
securities of the Guarantor received upon the exercise of any such remedy. Upon
any distribution of assets of the Guarantor referred to in this Annex A, the
holder of the Note shall be entitled to rely upon any order or decree made by
any court of competent jurisdiction in which such dissolution, winding up,
liquidation or reorganization proceedings are pending, or a certificate of the
liquidating trustee or agent or other person making any distribution to the
holder of the Note, for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Guarantor, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Annex A.

        Section 1.07.    Subrogation Rights Not Impaired by Acts or Omissions of
Guarantor or Holders of Senior Indebtedness.    No rights of any present or
future holders of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by an act or
failure to act on the part of the Guarantor or by any act or failure to act in
good faith by any such holder, or by any noncompliance by the Guarantor with the
terms and provisions of the Note, regardless of any knowledge thereof which any
such holder may have or be otherwise charged with. The holders of the Senior
Indebtedness may, without in any way affecting the obligations of the holder of
the Note with respect thereto, at any time or from time to time and in their
absolute discretion, change the manner, place or terms of payment of, change or
extend the time of payment of, or renew or alter, any Senior Indebtedness, or
amend, modify or supplement any agreement or instrument governing or evidencing
such Senior Indebtedness or any other document referred to therein, or exercise
or refrain from exercising any other of their rights under the Senior
Indebtedness including, without limitation, the waiver of a default thereunder
and the release of any collateral securing such Senior Indebtedness, all without
notice to or consent from the holder of the Note.

--------------------------------------------------------------------------------

        Section 1.08.    Senior Indebtedness.    (a) The term "Senior
Indebtedness" shall mean all Obligations (as defined below) of the Guarantor
under the Guarantee and Agreement (as defined below).

        (b)  As used in this Annex A, the terms set forth below shall have the
respective meanings provided below:

        "Guarantee and Agreement" shall mean the Guarantee and Agreement, dated
as of April 6, 2001, by the Guarantor, in favor of Citibank, N.A., as Security
Agent (in such capacity, the "Security Agent") for the Creditors, as same may be
amended, modified, extended, renewed, restated or supplemented from time to
time, and including any agreement extending the maturity of, refinancing or
restructuring all or any portion of, or increasing the Obligations under such
agreement or of any successor agreements.

        "NEG Trigger Event" shall have the meaning assigned to such term in the
Guarantee and Agreement.

        "Obligations" shall mean the Guaranteed Obligations (as defined in the
Guarantee and Agreement) and all other payment obligations of the Guarantor
under the Guarantee and Agreement.

--------------------------------------------------------------------------------

Schedule 3.05

Litigation

        None.

--------------------------------------------------------------------------------

Schedule 3.12

Environmental Matters

        The Brayton Point and Salem Harbor generating stations, located in
Massachusetts, have received requests from the U.S. Environmental Protection
Agency ("EPA") pursuant to Section 114 of the Clean Air Act seeking detailed
operating and maintenance histories. In addition, the Commonwealth of
Massachusetts is considering the adoption of regulations requiring additional
air emissions reductions from electric generating facilities located there,
including both Brayton Point and Salem Harbor, and various citizens' groups have
from time to time raised concerns about air emissions from these facilities.

        The Brayton Point station is currently operating pursuant to a
memorandum of understanding regarding its cooling water systems, pending
issuance of a new NPDES permit to be issued under the Clean Water Act. The Rhode
Island Department of Environmental Management and various citizens groups have
alleged a connection between declining fish populations in Mt. Hope Bay and
thermal discharges from the Brayton Point cooling system. They have asked that
the EPA commence an enforcement action, which as of this date EPA has declined
to do.

        In April 2000, an environmental group served notice of its intent to
file a citizens' suit under the Resource Conservation and Recovery Act, as a
result of the handling, storage, treatment and disposal of wastes at the Brayton
Point and Salem Harbor generating stations. In September 2000, an agreement was
signed with this group and the Massachusetts Department of Environmental
Protection resolving the issue and implementation of the agreement is underway.

        As of the date hereof, Guarantor does not believe these matters will
have a Material Adverse Effect and accordingly they are being discussed herein
for disclosure purposes only.

--------------------------------------------------------------------------------

Schedule 3.14

Unrestricted Subsidiaries

Alhambra Pacific Joint Venture
Barakat & Chamberlin, Inc.
BPS I, Inc.
Citrus Generating Company, L.P.
Conaway Conservancy Group Joint Venture
Coopers Hawk Power Corporation
Creston Financial Group, Inc.
DPR, Inc.
Eucalyptus Power Corporation
Fellows Generating Company, L.P.
Gannet Power Corporation
Gator Generating Company, L.P.
Gilia Enterprises
Heron Power Corporation
J. Makowski Associates, Inc.
Loon Power Corporation
Marengo Ranch Joint Venture
Mason Generating Company
McSweeney Ranch Joint Venture
Merlin Power Corporation
Oat Creek Associates Joint Venture
Okeelanta Power, L.P.
Pelican Power Corporation
PG&E Australia
PG&E Corporation Australia Pty Ltd.
PG&E Corporation Australian Holdings Pty Ltd.
PG&E Energy Services Ventures, Inc.
PG&E Energy Trading Australia Pty Ltd.
PG&E Gas Transmission Australia Pty Ld.
PG&E Gas Transmission Bundaberg Pty Ltd.
PG&E Gas Transmission Queensland Pty Ltd.
PG&E Gas Transmission Unit Holdings Pty Ltd.
PG&E Generating New England, Inc.
PG&E Generating New England, L.L.C.
PG&E International Development Holdings, LLC
PG&E Management Services Company
PG&E Overseas, Inc.
PG&E Overseas, Ltd.
PG&E Pacific I, Ltd.
PG&E Pacific II, Ltd.
PTP Services, LLC
Quantum Ventures
Rancho Murieta Joint Venture
Real Estate Energy Solutions, Inc.
Rocksavage Services I, Inc.
The Conaway Ranch Company
Valley Real Estate, Inc.

50

--------------------------------------------------------------------------------

Schedule 4.01

Certain Restricted Subsidiaries not Subject to Section 4.01 or 4.02

First Massachusetts Land Company, LLC
J. Makowski Pittsfield, Inc.
J. Makowski Services, Inc.
JMCS I Management, Inc.
Pacific Gas Transmission Company
Pacific Gas Transmission International, Inc.
PG&E National Energy Group Company
PG&E International, Inc.
PG&E Operating Services Company
PG&E Operating Services Holdings, Inc.
PG&E Overseas Holdings I, Ltd.
PG&E Overseas Holdings II, Ltd.
USGen Fuel Services, Inc.
USGen Holdings, Inc.
USGen Services Company, LLC
USOSC Holdings, Inc.

--------------------------------------------------------------------------------

Schedule 4.10

Other Existing Investments

        PG&E Gas Transmission, Northwest Corporation holds a 50 percent interest
in Stanfield Hub Services, LLC.

        PG&E Gas Transmission, Northwest Corporation holds a note receivable
from PG&E Corporation of $75,000,000.

        PG&E Gas Transmission Corporation holds 242,410 shares of common stock
of Aerie Networks, Inc. Paperwork is under way to complete the planned transfer
of those shares to GTN Holdings, LLC.

        PG&E Energy Trading—Gas Corporation holds a 40.6 percent membership
interest in True Quote LLC.

--------------------------------------------------------------------------------

Schedule 4.11

Other Existing Liens

        None.

--------------------------------------------------------------------------------

Schedule 4.12(a)

Indebtedness under Certain Credit Agreements

        None.

--------------------------------------------------------------------------------

Schedule 4.12(f)

Other Existing Indebtedness

        None.

--------------------------------------------------------------------------------

Schedule 4.13

Descriptions of Existing Management, Operation, Sharing
and Similar Arrangements with Affiliates

Document Name

--------------------------------------------------------------------------------

  Document Date

--------------------------------------------------------------------------------

Continuing Services Agreement between PG&E Generating Company LLC and Pacific
Gas & Electric Company   10/15/99 Restated Continuing Services Agreement between
PG&E Generating Company and Pacific Gas & Electric Company   10/15/99 Restated
Continuing Services Agreement between Pacific Gas & Electric Company and PG&E
Energy Trading—Gas Corporation   10/15/99 Restated Continuing Services Agreement
between Pacific Gas & Electric Company and PG&E Energy Trading—Power, L.P.  
10/15/99 Restated Continuing Services Agreement between Pacific Gas & Electric
Company and PG&E Gas Transmission, Northwest Corporation   10/15/99 Continuing
Services Agreement between Pacific Gas & Electric Company and PG&E National
Energy Group, Inc.   8/7/00 Restated Continuing Services Agreement between
Pacific Gas & Electric Company and PG&E Shareholdings, Inc.   10/15/99
Promissory Note by Attala Power Corporation in favor of PG&E Corporation, as
amended by Amendment No. 1 dated April 6, 2001   9/28/00 Promissory Note by PG&E
Corporation in favor of PG&E Gas Transmission, Northwest Corporation   10/26/00

--------------------------------------------------------------------------------

Exhibit A

Form of Payment Demand

[Date]

PG&E National Energy Group, Inc.
7500 Old Georgetown Road, 13th floor
Bethesda, MD 20814

Attention: General Counsel

        Re: La Paloma—NEG Guarantee

Ladies and Gentlemen:

        Reference is made to (i) the Participation Agreement, March 7, 2000,
among La Paloma Generating Company, LLC (the "Company"), La Paloma Generating
Trust Ltd., Wilmington Trust Company, the Lenders party thereto, the Tranche A
Banks party thereto, the Investors party thereto and Citibank, N.A., as
administrative agent and security agent, as amended by the Omnibus Restructuring
Agreement, dated as of April 6, 2001, among PG&E Corporation, PG&E National
Energy Group, Inc. (the "Guarantor"), PG&E Generating Company, LLC, La Paloma
Generating Company, LLC, La Paloma Generating Trust Ltd., Wilmington Trust
Company, the Lenders party thereto, the Tranche A Banks party thereto, the
Investors party thereto, Citibank, N.A. and the other parties thereto (the
"Participation Agreement") and (ii) the Guarantee and Agreement, dated as of
April 6, 2001, made by the Guarantor in favor of Citibank, N.A., as Security
Agent, for the benefit of the Lenders (the "Guarantee and Agreement").

        Unless otherwise defined herein, terms defined in the Guarantee and
Agreement shall have their defined meanings when used herein.

        [An Event of Default has occurred and is continuing. Pursuant to
Section 2.01(b) of the Guarantee and Agreement, the Security Agent hereby
demands payment from the Guarantor, within 5 Business Days from receipt hereof,
of the Guaranteed Obligations consisting of the following:

(a)$[                        ] of principal amount of Tranche A Loans,

(b)$[                        ] of interest on such principal amount of Tranche A
Loans;

(c)$[                        ] of all other payment obligations and liabilities
of the Company; and

(d)interest on the sum of all amounts under clauses (a), (b) and (c) above,
accruing at the Overdue Rate from [date amounts became due] until such amounts
are paid in full.

provided, that the amount payable by the Guarantor on account of this payment
demand shall not exceed the Maximum Guarantee Amount.](1)

        [An NEG Trigger Event has occurred and is continuing. Pursuant to
Section 2.01(c) of the Guarantee and Agreement, the Security Agent hereby
demands payment from the Guarantor, within 5 Business Days from receipt hereof,
of the Guarantee Draw Amount in the amount of $[                        ].] (2)

        [An Event of Default has occurred and is continuing and a Security Agent
has made a Payment Demand pursuant to Section 2.01(c) of the Guarantee and
Agreement. Pursuant to Section 2.01(d) of the Guarantee and Agreement, the
Security Agent hereby demands payment from the Guarantor, within 5 Business Days
from receipt hereof, of $[                        ] (such amount being equal to
the Maximum Guarantee Amount less the amount previously paid by the Guarantor
pursuant to such prior

--------------------------------------------------------------------------------

payment demand), plus interest thereon accruing at the Overdue Rate until such
amount is paid in full.](3)

    Very truly yours,
 
 
CITIBANK, N.A., as Security Agent
 
 
By:
 
         

--------------------------------------------------------------------------------

Name:
Title:

--------------------------------------------------------------------------------

(1)This option will apply if demand is pursuant to Section 2.01(b) of the
Guarantee and Agreement.

(2)This option will apply if demand is pursuant to Section 2.01(c) of the
Guarantee and Agreement.

(3)This option will apply if demand is pursuant to Section 2.01(d) of the
Guarantee and Agreement.

2

--------------------------------------------------------------------------------

QuickLinks

Exhibit 10.17

Schedule 1.01A

SCHEDULE 1.01B

SCHEDULE 1.01C

Schedule 3.05

Schedule 3.12

Schedule 3.14

Schedule 4.01

Schedule 4.10

Schedule 4.11

Schedule 4.12(a)

Schedule 4.12(f)

Schedule 4.13

Exhibit A