GUARANTEE AGREEMENT


                                     Between



                       SOUTHWESTERN ELECTRIC POWER COMPANY
                                 (as Guarantor)



                                       and



                              The Bank of New York
                             (as Guarantee Trustee)



                                   dated as of




                                   May 1, 1997









<PAGE>
                                 






                                TABLE OF CONTENTS


                                                                            Page
                                    ARTICLE I
                                   DEFINITIONS

SECTION 101.     Definitions...................................................1

                                   ARTICLE II
                               TRUST INDENTURE ACT

SECTION 201.     Trust Indenture Act; Application..............................5
SECTION 202.     List of Holders...............................................5
SECTION 203.     Reports by the Guarantee Trustee..............................5
SECTION 204.     Periodic Reports to Guarantee Trustee.........................5
SECTION 205.     Evidence of Compliance with Conditions Precedent..............6
SECTION 206.     Events of Default; Waiver.....................................6
SECTION 207.     Event of Default; Notice......................................6
SECTION 208.     Conflicting Interests.........................................6

                                   ARTICLE III
               POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

SECTION 301.     Powers and Duties of the Guarantee Trustee....................7
SECTION 302.     Certain Rights of Guarantee Trustee...........................8
SECTION 303.     Indemnity....................................................10

                                   ARTICLE IV
                                GUARANTEE TRUSTEE

SECTION 401.     Guarantee Trustee; Eligibility...............................10
SECTION 402.     Appointment, Removal and Resignation of the 
                 Guarantee Trustee............................................11

                                    ARTICLE V
                                    GUARANTEE

SECTION 501.     Guarantee....................................................11
SECTION 502.     Waiver of Notice and Demand..................................12
SECTION 503.     Obligations Not Affected.....................................12
SECTION 504.     Rights of Holders............................................13
SECTION 505.     Guarantee of Payment.........................................13
SECTION 506.     Subrogation..................................................13
SECTION 507.     Independent Obligations......................................13

                                   ARTICLE VI
                           COVENANTS AND SUBORDINATION

SECTION 601.     Subordination................................................14
SECTION 602.     Pari Passu Guarantees........................................14

                                   ARTICLE VII
                                   TERMINATION

SECTION 701.     Termination..................................................14

                                  ARTICLE VIII
                                  MISCELLANEOUS

SECTION 801.     Successors and Assigns.......................................14
SECTION 802.     Amendments...................................................15
SECTION 803.     Notices......................................................15
SECTION 804.     Benefit......................................................16
SECTION 805.     Interpretation...............................................16
SECTION 806.     Governing Law................................................17




<PAGE>

                                      

                             CROSS-REFERENCE TABLE*


Section of                                                          Section of
Trust Indenture Act                                                 Guarantee
of 1939, as amended                                                 Agreement

310(a)..........................................................   401(a)
310(b)..........................................................   401(c), 208
310(c)..........................................................   Inapplicable
311(a)..........................................................   202(b)
311(b)..........................................................   202(b)
311(c)..........................................................   Inapplicable
312(a)..........................................................   202(a)
312(b)..........................................................   202(b)
313.............................................................   203
314(a)..........................................................   204
314(b)..........................................................   Inapplicable
314(c)..........................................................   205
314(d)..........................................................   Inapplicable
314(e)..........................................................   101, 205, 302
314(f)..........................................................   201, 302
315(a)..........................................................   301(d)
315(b)..........................................................   207
315(c)..........................................................   301
315(d)..........................................................   301(d)
316(a)..........................................................   101, 206, 504
316(b)..........................................................   503
316(c)..........................................................   802
317(a)..........................................................   Inapplicable
317(b)..........................................................   Inapplicable
318(a)..........................................................   201(b)
318(b)..........................................................   201
318(c)..........................................................   201(b)


*        This  Cross-Reference  Table does not constitute  part of the Guarantee
         Agreement and shall not affect the  interpretation  of any of its terms
         or provisions.

<PAGE>

                               GUARANTEE AGREEMENT


                  This GUARANTEE AGREEMENT, dated as of May 1, 1997, is executed
and delivered by  Southwestern  Electric Power Company,  a Delaware  corporation
(the  "Guarantor"),  and The Bank of New York,  a New York  banking  corporation
organized  under the laws of the State of New York,  as trustee (the  "Guarantee
Trustee"),  for the benefit of the Holders (as defined herein) from time to time
of the Preferred  Securities (as defined herein) of SWEPCO Capital I, a Delaware
statutory business trust (the "Issuer").

                  WHEREAS,  pursuant to an Amended and Restated Trust  Agreement
(the "Trust Agreement"), dated as of May 1, 1997 among the Issuer Trustees named
therein,  the  Guarantor,  as  Depositor,  and the Holders  from time to time of
undivided  beneficial  interests  in the  assets of the  Issuer,  the  Issuer is
issuing   4,400,000  of  its  7.875%   Cumulative   Quarterly  Income  Preferred
Securities,  Series A (liquidation  preference $25 per preferred  security) (the
"Preferred Securities") representing preferred undivided beneficial interests in
the assets of the Issuer and having the terms set forth in the Trust Agreement;

                  WHEREAS, the Preferred Securities will be issued by the Issuer
and the proceeds  thereof,  together  with the proceeds from the issuance of the
Issuer's  Common  Securities  (as defined  below),  will be used to purchase the
Debentures  (as defined in the Trust  Agreement) of the Guarantor  which will be
deposited  with The Bank of New  York,  as  Property  Trustee  under  the  Trust
Agreement, as trust assets; and

                  WHEREAS,  as incentive  for the Holders to purchase  Preferred
Securities,  the Guarantor desires  irrevocably and unconditionally to agree, to
the extent set forth herein,  to pay to the Holders of the Preferred  Securities
the Guarantee Payments (as defined herein) and to make certain other payments on
the terms and conditions set forth herein.

                  NOW,  THEREFORE,  in  consideration  of the  purchase  by each
Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall
benefit the  Guarantor,  the  Guarantor  executes  and delivers  this  Guarantee
Agreement  for the  benefit of the  Holders  from time to time of the  Preferred
Securities.


                                    ARTICLE I
                                   DEFINITIONS

                  SECTION 101.    Definitions.

                  As used in this Guarantee Agreement, the terms set forth below
shall,  unless the context  otherwise  requires,  have the  following  meanings.
Capitalized  or otherwise  defined terms used but not otherwise  defined  herein
shall have the  meanings  assigned  to such terms in the Trust  Agreement  as in
effect on the date hereof.

                  "Affiliate"  of any  specified  Person  means any other Person
directly or indirectly  controlling or controlled by or under direct or indirect
common control with such specified Person, provided,  however, that an Affiliate
of the Guarantor shall not be deemed to include the Issuer.  For the purposes of
this definition,  "control" when used with respect to any specified Person means
the power to direct the  management  and  policies of such  Person,  directly or
indirectly,  whether through the ownership of voting securities,  by contract or
otherwise;   and  the  terms   "controlling"   and  "controlled"  have  meanings
correlative to the foregoing.

                  "Common  Securities" means the securities  representing common
undivided beneficial interests in the assets of the Issuer.

                  "Debt" means, with respect to any Person,  whether recourse is
to all or a portion of the assets of such Person and whether or not  contingent,
(i) every obligation of such Person for money borrowed; (ii) every obligation of
such Person evidenced by bonds, debentures,  notes or other similar instruments,
including  obligations  incurred in connection with the acquisition of property,
assets or businesses;  (iii) every reimbursement  obligation of such Person with
respect to letters of credit,  bankers' acceptances or similar facilities issued
for the account of such Person;  (iv) every  obligation of such Person issued or
assumed as the deferred  purchase  price of property or services (but  excluding
trade accounts payable or accrued  liabilities arising in the ordinary course of
business);  (v) every  capital lease  obligation of such Person;  and (vi) every
obligation of the type referred to in clauses (i) through (v) of another  Person
and all dividends of another Person the payment of which,  in either case,  such
Person has guaranteed or is responsible  or liable,  directly or indirectly,  as
obligor or otherwise.

                  "Event of Default"  means a default by the Guarantor on any of
its  payment or other  obligations  under this  Guarantee  Agreement;  provided,
however,  that,  except  with  respect to a default in payment of any  Guarantee
Payments, the Guarantor shall have received notice of default and shall not have
cured such default within 60 days after receipt of such notice.

                  "Guarantee   Payments"   means  the   following   payments  or
distributions, without duplication, with respect to the Preferred Securities, to
the extent not paid or made by or on behalf of the Issuer:  (i) any  accumulated
and unpaid Distributions (as defined in the Trust Agreement) required to be paid
on the Preferred  Securities,  to the extent the Issuer shall have funds on hand
available  therefor  at such time,  (ii) the  redemption  price,  including  all
accrued and unpaid  Distributions  to the date of  redemption  (the  "Redemption
Price"),  with respect to the Preferred  Securities called for redemption by the
Issuer to the extent the Issuer shall have funds on hand  available  therefor at
the date of redemption,  and (iii) upon a voluntary or involuntary  termination,
winding-up or liquidation of the Issuer,  unless  Debentures are  distributed to
the Holders,  the lesser of (a) the aggregate of the  liquidation  preference of
$25 per Preferred  Security plus  accumulated  and unpaid  Distributions  on the
Preferred  Securities to the date of payment to the extent the Issuer shall have
funds on hand  available to make such payment at such time and (b) the amount of
assets  of the  Issuer  remaining  available  for  distribution  to  Holders  in
liquidation of the Issuer (in either case, the "Liquidation Distribution").

                  "Guarantee  Trustee"  means  The  Bank  of New  York,  until a
Successor Guarantee Trustee has been appointed and has accepted such appointment
pursuant to the terms of this Guarantee Agreement and thereafter means each such
Successor Guarantee Trustee.

                  "Holder"  means any  holder,  as  registered  on the books and
records of the Issuer, of any Preferred Securities;  provided,  however, that in
determining  whether  the  holders  of the  requisite  percentage  of  Preferred
Securities have given any request, notice, consent or waiver hereunder, "Holder"
shall not include the Guarantor,  the Guarantee  Trustee or any Affiliate of the
Guarantor or the Guarantee Trustee.

                  "Indenture"  means  the  Indenture  dated  as of May  1,  1997
relating to Junior Subordinated Debentures of the Guarantor, as supplemented and
amended between the Guarantor and The Bank of New York, as trustee.

                  "List of Holders" has the meaning specified in Section 202(a).

                  "Majority  in   liquidation   preference   of  the   Preferred
Securities" means,  except as provided by the Trust Indenture Act, a vote by the
Holder(s),  voting  separately as a class,  of more than 50% of the  liquidation
preference of all then outstanding Preferred Securities issued by the Issuer.

                  "Officer's  Certificate"  means, with respect to any Person, a
certificate signed by the Chairman,  President,  General Manager, the Treasurer,
an Assistant Treasurer, the Controller,  the Secretary or an Assistant Secretary
of  such  Person,  and  delivered  to  the  Guarantee  Trustee.   Any  Officer's
Certificate  delivered  with respect to compliance  with a condition or covenant
provided for in this Guarantee Agreement shall include:

                  (a)   a  statement  that the  officer  signing  the  Officer's
         Certificate has read the covenant or condition and the definitions
         relating thereto;

                  (b)   a  brief  statement  of  the  nature  and  scope of  the
         examination or investigation undertaken by the officer in rendering the
         Officer's Certificate;

                  (c) a statement that such officer has made such examination or
         investigation  as, in such  officer's  opinion,  is necessary to enable
         such  officer to express an informed  opinion as to whether or not such
         covenant or condition has been complied with; and

                  (d) a statement as to whether, in the opinion of such officer,
         such condition or covenant has been complied with.

                  "Person"  means  a legal  person,  including  any  individual,
corporation,  estate,  partnership,  joint  venture,  association,  joint  stock
company,  limited  liability  company,  trust,  unincorporated  association,  or
government or any agency or political  subdivision  thereof, or any other entity
of whatever nature.

                  "Responsible  Officer"  means,  with respect to the  Guarantee
Trustee,  any Senior Vice  President,  any Vice  President,  any Assistant  Vice
President,  the Secretary, any Assistant Secretary, the Treasurer, any Assistant
Treasurer,  any Trust Officer or Assistant Trust Officer or any other officer of
the Corporate Trust Department of the Guarantee Trustee  customarily  performing
functions similar to those performed by any of the above designated officers and
also means,  with  respect to a particular  corporate  trust  matter,  any other
officer to whom such matter is referred  because of that officer's  knowledge of
and familiarity with the particular subject.

                  "Senior  Indebtedness" means the principal of, and premium, if
any, and interest on and any other payment due pursuant to any of the following,
whether  outstanding  at the date of execution of this  Guarantee or  thereafter
incurred, created or assumed: (a) all indebtedness of the Guarantor evidenced by
notes,  debentures,  bonds or other  securities sold by the Guarantor for money,
(b) all  indebtedness of others of the kinds  described in the preceding  clause
(a)  assumed  by or  guaranteed  in any  manner  by the  Guarantor  or in effect
guaranteed  by the  Guarantor  through an agreement to purchase,  contingent  or
otherwise,  (c) all renewals,  extensions or refundings of  indebtedness  of the
kinds  described  in either  of the  preceding  clauses  (a) and (b) and (d) any
payment of money relating to any lease which is capitalized on the balance sheet
or  consolidated  balance  sheet,  as the  case  may be,  of the  Guarantor,  in
accordance with generally accepted accounting  principles as in effect from time
to time, unless, in the case of any particular indebtedness, renewal, extension,
refunding or lease payment,  the  instrument  creating or evidencing the same or
the  assumption  or  guarantee  of  the  same   expressly   provides  that  such
indebtedness,  renewal, extension, refunding or lease payment is not superior in
right  of  payment  to or  is  pari  passu  with  this  Guarantee.  Such  Senior
Indebtedness  shall  continue  to be Senior  Indebtedness  and  entitled  to the
benefits  of the  subordination  provisions  set  forth  in  Article  VI of this
Guarantee  irrespective of any amendment,  modification or waiver of any term of
such Senior Indebtedness.

                  "Successor  Guarantee  Trustee"  means a  successor  Guarantee
Trustee  possessing the qualifications to act as Guarantee Trustee under Section
401.

                  "Trust  Indenture Act" means  the Trust Indenture Act of 1939,
as amended.


                                   ARTICLE II
                               TRUST INDENTURE ACT

                  SECTION 201.  Trust Indenture Act; Application.

         (a)      This  Guarantee  Agreement is subject to the provisions of the
                  Trust  Indenture  Act  that  are  required  to be part of this
                  Guarantee  Agreement and shall, to the extent  applicable,  be
                  governed by such provisions.

         (b)      If and to the  extent  that any  provision  of this  Guarantee
                  Agreement  limits,  qualifies  or  conflicts  with the  duties
                  imposed  by  Sections  310 to  317,  inclusive,  of the  Trust
                  Indenture Act, such imposed duties shall control.

                  SECTION 202.  List of Holders.

         (a)      The  Guarantor  shall  furnish or cause to be furnished to the
                  Guarantee  Trustee (a)  semiannually,  on or before January 15
                  and  July  15 of  each  year,  a  list,  in  such  form as the
                  Guarantee  Trustee may  reasonably  require,  of the names and
                  addresses of the Holders  ("List of Holders") as of a date not
                  more than 15 days prior to the  delivery  thereof,  and (b) at
                  such  other  times as the  Guarantee  Trustee  may  request in
                  writing,  within 30 days after the receipt by the Guarantor of
                  any such request, a List of Holders as of a date not more than
                  15 days prior to the time such list is furnished, in each case
                  to the extent such information is in the possession or control
                  of the Guarantor and is not identical to a previously supplied
                  list of  Holders or has not  otherwise  been  received  by the
                  Guarantee  Trustee  in its  capacity  as such.  The  Guarantee
                  Trustee may destroy any List of Holders previously given to it
                  on receipt of a new List of Holders.

         (b)      The Guarantee  Trustee shall comply with its obligations under
                  Section 311(a), Section 311(b) and Section 312(b) of the Trust
                  Indenture Act.

                  SECTION 203.  Reports by the Guarantee Trustee.

                  Not later than November 1 of each year, commencing November 1,
1997,  the  Guarantee  Trustee  shall provide to the Holders such reports as are
required by Section 313 of the Trust  Indenture  Act, if any, in the form and in
the manner  provided by Section 313 of the Trust  Indenture  Act. The  Guarantee
Trustee shall also comply with the  requirements  of Section 313(d) of the Trust
Indenture Act.

                  SECTION 204.  Periodic Reports to Guarantee Trustee.

                  The  Guarantor  shall provide to the  Guarantee  Trustee,  the
Securities and Exchange  Commission and the Holders such documents,  reports and
information,  if any, as required by Section 314 of the Trust  Indenture Act and
the compliance certificate required by Section 314 of the Trust Indenture Act in
the form,  in the manner and at the times  required  by Section 314 of the Trust
Indenture Act.

                  SECTION 205.  Evidence of Compliance with Conditions 
Precedent.

                  The  Guarantor  shall  provide to the  Guarantee  Trustee such
evidence of compliance with such conditions  precedent,  if any, provided for in
this Guarantee  Agreement that relate to any of the matters set forth in Section
314(c) of the Trust  Indenture Act. Any  certificate  or opinion  required to be
given by an officer pursuant to Section 314(c)(1) may be given in the form of an
Officer's Certificate.

                  SECTION 206.  Events of Default: Waiver.

                  The Holders of a Majority  in  liquidation  preference  of the
Preferred  Securities  may, by vote,  on behalf of the  Holders,  waive any past
Event of  Default  and its  consequences.  Upon such  waiver,  any such Event of
Default shall cease to exist,  and any Event of Default arising  therefrom shall
be deemed to have been cured, for every purpose of this Guarantee Agreement, but
no such  waiver  shall  extend to any  subsequent  or other  default or Event of
Default or impair any right consequent thereon.

                  SECTION 207.  Event of Default; Notice.

         (a)      The  Guarantee  Trustee  shall,   within  90  days  after  the
                  occurrence  of an Event of Default,  transmit  by mail,  first
                  class postage prepaid,  to the Holders,  notices of all Events
                  of  Default  known  to  the  Guarantee  Trustee,  unless  such
                  defaults  have been cured  before  the giving of such  notice,
                  provided, that, except in the case of a default in the payment
                  of  a  Guarantee  Payment,  the  Guarantee  Trustee  shall  be
                  protected  in  withholding  such  notice if and so long as the
                  Board  of  Directors,  the  executive  committee  or  a  trust
                  committee  of  directors  and/or  Responsible  Officers of the
                  Guarantee   Trustee   in  good  faith   determines   that  the
                  withholding of such notice is in the interests of the Holders.
         (b)      The Guarantee Trustee shall not be deemed to have knowledge of
                  any Event of Default  unless the Guarantee  Trustee shall have
                  received written notice, or a Responsible Officer charged with
                  the  administration of the Trust Agreement shall have obtained
                  written notice, of such Event of Default.

                  SECTION 208.   Conflicting Interests.

                  The  Trust  Agreement  shall  be  deemed  to  be  specifically
described  in this  Guarantee  Agreement  for the  purposes of clause (i) of the
first proviso contained in Section 310(b) of the Trust Indenture Act.


                                   ARTICLE III
               POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

                  SECTION 301.  Powers and Duties of the Guarantee Trustee.

         (a)      This  Guarantee  Agreement  shall  be  held  by the  Guarantee
                  Trustee  for the  benefit of the  Holders,  and the  Guarantee
                  Trustee  shall not transfer  this  Guarantee  Agreement to any
                  Person except a Holder  exercising his or her rights  pursuant
                  to Section  504(iv)  or to a  Successor  Guarantee  Trustee on
                  acceptance  by  such  Successor   Guarantee   Trustee  of  its
                  appointment to act as Successor Guarantee Trustee.  The right,
                  title   and   interest   of  the   Guarantee   Trustee   shall
                  automatically vest in any Successor  Guarantee  Trustee,  upon
                  acceptance  by  such  Successor   Guarantee   Trustee  of  its
                  appointment hereunder, and such vesting and cessation of title
                  shall be effective whether or not conveyancing  documents have
                  been executed and  delivered  pursuant to the  appointment  of
                  such Successor Guarantee Trustee.

         (b)      If an Event of Default has  occurred  and is  continuing,  the
                  Guarantee  Trustee shall enforce this Guarantee  Agreement for
                  the benefit of the Holders.

         (c)      The Guarantee  Trustee,  before the occurrence of any Event of
                  Default and after the curing of all Events of Default that may
                  have occurred,  shall undertake to perform only such duties as
                  are specifically set forth in this Guarantee Agreement, and no
                  implied covenants shall be read into this Guarantee  Agreement
                  against the Guarantee Trustee. In case an Event of Default has
                  occurred  (that  has not been  cured  or  waived  pursuant  to
                  Section 206), the Guarantee Trustee shall exercise such of the
                  rights and powers  vested in it by this  Guarantee  Agreement,
                  and use the  same  degree  of care and  skill in its  exercise
                  thereof,  as a prudent  person would exercise or use under the
                  circumstances in the conduct of his or her own affairs.

         (d)      No provision of this Guarantee Agreement shall be construed to
                  relieve the  Guarantee  Trustee from  liability for failure to
                  act or willful misconduct, except that:

                  (i) prior to the  occurrence of any Event of Default and after
the curing or waiving of all such Events of Default that may have occurred:

                  (A) the duties and obligations of the Guarantee  Trustee shall
         be  determined  solely  by the  express  provisions  of this  Guarantee
         Agreement, and the Guarantee Trustee shall not be liable except for the
         performance  of such duties and  obligations  as are  specifically  set
         forth in this Guarantee Agreement; and

                  (B) in the  absence of bad faith on the part of the  Guarantee
         Trustee,  the Guarantee Trustee may conclusively  rely, as to the truth
         of  the  statements  and  the  correctness  of the  opinions  expressed
         therein,  upon any certificates or opinions  furnished to the Guarantee
         Trustee and conforming to the requirements of this Guarantee Agreement;
         but in the  case  of any  such  certificates  or  opinions  that by any
         provision  hereof  or of  the  Trust  Indenture  Act  are  specifically
         required  to be  furnished  to the  Guarantee  Trustee,  the  Guarantee
         Trustee shall be under a duty to examine the same to determine  whether
         or not they conform to the requirements of this Guarantee Agreement;

                  (ii) the  Guarantee  Trustee shall not be liable for any error
of  judgment  made in good  faith  by a  Responsible  Officer  of the  Guarantee
Trustee,  unless it shall be proved that the Guarantee  Trustee was negligent in
ascertaining the pertinent facts upon which such judgment was made;

                  (iii) the  Guarantee  Trustee shall not be liable with respect
to any action  taken or  omitted  to be taken by it in good faith in  accordance
with the  direction  of the Holders of not less than a Majority  in  liquidation
preference of the Preferred Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee,  or
exercising any trust or power  conferred  upon the Guarantee  Trustee under this
Guarantee Agreement; and

                  (iv) no provision of this  Guarantee  Agreement  shall require
the  Guarantee  Trustee  to  expend  or risk its own  funds or  otherwise  incur
personal  financial  liability in the performance of any of its duties or in the
exercise of any of its rights or powers,  if the  Guarantee  Trustee  shall have
reasonable  grounds for believing  that the repayment of such funds or liability
is not reasonably  assured to it under the terms of this Guarantee  Agreement or
adequate  indemnity against such risk or liability is not reasonably  assured to
it.

                  SECTION 302.  Certain Rights of Guarantee Trustee.

                  (a)  Subject to the provisions of Section 301:

                           (i)  The  Guarantee  Trustee may  rely and  shall  be
fully  protected  in acting  or  refraining  from  acting  upon any  resolution,
certificate, statement, instrument, opinion, report, notice, request, direction,
consent,  order, bond, debenture,  note, other evidence of indebtedness or other
paper or  document  reasonably  believed  by it to be  genuine  and to have been
signed, sent or presented by the proper party or parties.

                           (ii)  Any  direction   or   act   of  the   Guarantor
contemplated by this Guarantee  Agreement shall be sufficiently  evidenced by an
Officer's Certificate unless otherwise prescribed herein.

                           (iii)  Whenever,   in  the  administration   of  this
Guarantee Agreement, the Guarantee Trustee shall deem it desirable that a matter
be proved or established before taking, suffering or omitting to take any action
hereunder,  the Guarantee Trustee (unless other evidence is herein  specifically
prescribed) may, in the absence of bad faith on its part,  request and rely upon
an Officer's  Certificate which, upon receipt of such request from the Guarantee
Trustee, shall be promptly delivered by the Guarantor.

                           (iv)  The  Guarantee  Trustee  may consult with legal
counsel of its choice,  and the written  advice or opinion of such legal counsel
with  respect to legal  matters  shall be full and  complete  authorization  and
protection in respect of any action taken, suffered or omitted to be taken by it
hereunder  in good faith and in  accordance  with such advice or  opinion.  Such
legal counsel may be legal counsel to the Guarantor or any of its Affiliates and
may be one of its employees.  The Guarantee  Trustee shall have the right at any
time  to seek  instructions  concerning  the  administration  of this  Guarantee
Agreement from any court of competent jurisdiction.

                           (v)  The   Guarantee  Trustee  shall  be   under   no
obligation  to  exercise  any of the  rights  or  powers  vested  in it by  this
Guarantee  Agreement  at the request or  direction  of any  Holder,  unless such
Holder shall have provided to the Guarantee  Trustee such adequate  security and
indemnity as would satisfy a reasonable  person in the position of the Guarantee
Trustee,  against the costs,  expenses (including  attorneys' fees and expenses)
and  liabilities  that might be incurred by it in complying with such request or
direction,  including  such  reasonable  advances  as  may be  requested  by the
Guarantee  Trustee;  provided that nothing  contained in this Section  302(a)(v)
shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event
of Default,  of its obligation to exercise the rights and powers vested in it by
this Guarantee Agreement.
                           (vi)  The  Guarantee  Trustee  shall not  be bound to
make any  investigation  into the facts or  matters  stated  in any  resolution,
certificate, statement, instrument, opinion, report, notice, request, direction,
consent,  order, bond, debenture,  note, other evidence of indebtedness or other
paper or document,  but the Guarantee Trustee, in its discretion,  may make such
further inquiry or investigation into such facts or matters as it may see fit.

                           (vii)  The  Guarantee  Trustee may execute any of the
trusts or powers hereunder or perform any duties hereunder either directly or by
or through  its agents or  attorneys,  and the  Guarantee  Trustee  shall not be
responsible  for any  misconduct  or negligence on the part of any such agent or
attorney appointed with due care by it hereunder.

                           (viii)  Whenever  in   the  administration   of  this
Guarantee  Agreement  the  Guarantee  Trustee shall deem it desirable to receive
instructions  with respect to enforcing  any remedy or right or taking any other
action hereunder,  the Guarantee  Trustee (A) may request  instructions from the
Holders,  (B) may  refrain  from  enforcing  such remedy or right or taking such
other action until such instructions are received, and (C) shall be protected in
acting in accordance with such instructions.

                  (b) No provision of this Guarantee  Agreement  shall be deemed
to impose any duty or obligation on the Guarantee  Trustee to perform any act or
acts or exercise any right, power, duty or obligation conferred or imposed on it
in any  jurisdiction  in which it shall be  illegal,  or in which the  Guarantee
Trustee shall be unqualified or incompetent in accordance  with  applicable law,
to perform any such act or acts or to exercise  any such right,  power,  duty or
obligation.  No permissive power or authority available to the Guarantee Trustee
shall  be  construed  to be a duty to act in  accordance  with  such  power  and
authority.

                  SECTION 303.  Indemnity.

                  The Guarantor  agrees to indemnify the Guarantee  Trustee for,
and to hold it harmless against, any loss, liability or expense incurred without
negligence or bad faith on the part of the Guarantee Trustee,  arising out of or
in connection with the acceptance or administration of this Guarantee Agreement,
including  the costs and  expenses  of  defending  itself  against  any claim or
liability in connection with the exercise or performance of any of its powers or
duties  hereunder.  The  Guarantee  Trustee  will not claim or exact any lien or
charge on any Guarantee  Payments as a result of any amount due to it under this
Guarantee Agreement.


                                   ARTICLE IV
                                GUARANTEE TRUSTEE

                  SECTION 401.  Guarantee Trustee; Eligibility.

                  (a)  There  shall at  all times be  a Guarantee  Trustee which
shall:

                           (i)  not be an Affiliate of the Guarantor; and

                           (ii)  be  a Person  that is eligible  pursuant to the
Trust Indenture Act to act as such and has a combined  capital and surplus of at
least  $50,000,000,  and shall be a  corporation  meeting  the  requirements  of
Section  310 (a) of the  Trust  Indenture  Act.  If such  corporation  publishes
reports of condition at least annually,  pursuant to law or to the  requirements
of the  supervising  or  examining  authority,  then,  for the  purposes of this
Section and to the extent  permitted  by the Trust  Indenture  Act, the combined
capital  and  surplus  of such  corporation  shall be deemed to be its  combined
capital  and  surplus as set forth in its most  recent  report of  condition  so
published.

                  (b) If at any time the  Guarantee  Trustee  shall  cease to be
eligible to so act under Section 401(a), the Guarantee Trustee shall immediately
resign in the manner and with the effect set out in Section 402(c).

                  (c)  If  the  Guarantee  Trustee  has  or  shall  acquire  any
"conflicting  interest"  within  the  meaning  of  Section  310(b)  of the Trust
Indenture Act, the Guarantee  Trustee and Guarantor shall in all respects comply
with the provisions of Section 310(b) of the Trust Indenture Act.

                  SECTION 402.  Appointment,  Removal  and  Resignation  of  the
Guarantee Trustee.

                  (a) Subject to Section  402(b),  the Guarantee  Trustee may be
appointed or removed without cause at any time by the Guarantor.

                  (b)  The  Guarantee  Trustee  shall  not be  removed  until  a
Successor Guarantee Trustee has been appointed and has accepted such appointment
by written instrument executed by such Successor Guarantee Trustee and delivered
to the Guarantor.

                  (c) The  Guarantee  Trustee  appointed  hereunder  shall  hold
office until a Successor  Guarantee  Trustee shall have been  appointed or until
its  removal or  resignation.  The  Guarantee  Trustee  may resign  from  office
(without  need for prior or subsequent  accounting)  by an instrument in writing
executed  by  the  Guarantee  Trustee  and  delivered  to the  Guarantor,  which
resignation  shall not take effect until a Successor  Guarantee Trustee has been
appointed and has accepted such appointment by instrument in writing executed by
such  Successor  Guarantee  Trustee  and  delivered  to the  Guarantor  and  the
resigning Guarantee Trustee.

                  (d)  If  no  Successor   Guarantee  Trustee  shall  have  been
appointed  and  accepted  appointment  as provided in this Section 402 within 60
days after  delivery to the  Guarantor  of an  instrument  of  resignation,  the
resigning Guarantee Trustee may petition,  at the expense of the Guarantor,  any
court  of  competent  jurisdiction  for  appointment  of a  Successor  Guarantee
Trustee. Such court may thereupon,  after prescribing such notice, if any, as it
may deem proper, appoint a Successor Guarantee Trustee.


                                    ARTICLE V
                                    GUARANTEE

                  SECTION 501.  Guarantee.

                  The Guarantor irrevocably and unconditionally agrees to pay in
full to the Holders  the  Guarantee  Payments  (without  duplication  of amounts
theretofore paid by or on behalf of the Issuer),  as and when due, regardless of
any  defense,  right of  set-off  or  counterclaim  which the Issuer may have or
assert. The Guarantor's  obligation to make a Guarantee Payment may be satisfied
by direct payment of the required  amounts by the Guarantor to the Holders or by
causing the Issuer to pay such amounts to the Holders.

                  SECTION 502.   Waiver of Notice and Demand.

                  The  Guarantor  hereby  waives  notice  of  acceptance  of the
Guarantee  Agreement  and of any  liability  to which it  applies  or may apply,
presentment, demand for payment, any right to require a proceeding first against
the Guarantee Trustee,  Issuer or any other Person before proceeding against the
Guarantor,  protest,  notice  of  nonpayment,  notice  of  dishonor,  notice  of
redemption and all other notices and demands.

                  SECTION 503.  Obligations Not Affected.

                  The  obligations,  covenants,  agreements  and  duties  of the
Guarantor under this Guarantee Agreement shall in no way be affected or impaired
by reason of the happening from time to time of any of the following:

                  (a) the release or waiver,  by operation of law or  otherwise,
of the  performance  or  observance  by the  Issuer of any  express  or  implied
agreement,  covenant,  term or condition relating to the Preferred Securities to
be performed or observed by the Issuer;

                  (b) the extension of time for the payment by the Issuer of all
or any portion of the Distributions (other than an extension of time for payment
of Distributions  that results from the extension of any interest payment period
on  the  Debentures  as  so  provided  in  the  Indenture),   Redemption  Price,
Liquidation  Distribution  or any  other  sums  payable  under  the terms of the
Preferred  Securities or the extension of time for the  performance of any other
obligation  under,  arising  out  of,  or  in  connection  with,  the  Preferred
Securities;

                  (c) any failure,  omission,  delay or lack of diligence on the
part of the Holders to enforce, assert or exercise any right,  privilege,  power
or remedy  conferred  on the  Holders  pursuant  to the  terms of the  Preferred
Securities,  or any  action on the part of the  Issuer  granting  indulgence  or
extension of any kind;

                  (d) the  voluntary or  involuntary  liquidation,  dissolution,
sale of any collateral, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors,  reorganization,  arrangement, composition or readjustment
of debt of, or other  similar  proceedings  affecting,  the Issuer or any of the
assets of the Issuer;

                  (e)  any  invalidity  of,  or  defect  or  deficiency  in, the
Preferred Securities;

                  (f)  the settlement or compromise of any obligation guaranteed
hereby or hereby incurred; or

                  (g) any other  circumstance  whatsoever  that might  otherwise
constitute  a legal or equitable  discharge or defense of a guarantor,  it being
the intent of this Section 503 that the  obligations of the Guarantor  hereunder
shall be absolute and unconditional under any and all circumstances.

                  There shall be no obligation of the Holders to give notice to,
or obtain the consent of, the Guarantor  with respect to the happening of any of
the foregoing.

                  SECTION 504.  Rights of Holders.

                  The Guarantor expressly  acknowledges that: (i) this Guarantee
Agreement  will be  deposited  with  the  Guarantee  Trustee  to be held for the
benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this
Guarantee Agreement on behalf of the Holders; (iii) the Holders of a Majority in
liquidation  preference of the Preferred Securities have the right to direct the
time,  method and place of conducting any proceeding for any remedy available to
the Guarantee  Trustee in respect of this Guarantee  Agreement or exercising any
trust or power  conferred  upon  the  Guarantee  Trustee  under  this  Guarantee
Agreement; and (iv) any Holder may institute a legal proceeding directly against
the  Guarantor to enforce its rights  under this  Guarantee  Agreement,  without
first instituting a legal proceeding against the Guarantee  Trustee,  the Issuer
or any other Person.

                  SECTION 505.  Guarantee of Payment.

                  This  Guarantee  Agreement  creates a guarantee of payment and
not of  collection.  This Guarantee  Agreement will not be discharged  except by
payment  of the  Guarantee  Payments  in full  (without  duplication  of amounts
theretofore paid by the Issuer) or upon distribution of Debentures to Holders as
provided in the Trust Agreement.

                  SECTION 506.  Subrogation.

                  The  Guarantor  shall be  subrogated to all (if any) rights of
the Holders  against the Issuer in respect of any amounts paid to the Holders by
the Guarantor  under this Guarantee  Agreement and shall have the right to waive
payment by the Issuer  pursuant  to Section  501;  provided,  however,  that the
Guarantor  shall not (except to the extent  required by mandatory  provisions of
law) be entitled to enforce or exercise  any rights  which it may acquire by way
of subrogation or any indemnity,  reimbursement or other agreement, in all cases
as a result of payment under this  Guarantee  Agreement,  if, at the time of any
such payment, any amounts are due and unpaid under this Guarantee Agreement.  If
any  amount  shall  be paid  to the  Guarantor  in  violation  of the  preceding
sentence,  the Guarantor agrees to hold such amount in trust for the Holders and
to pay over such amount to the Holders.

                  SECTION 507.   Independent Obligations.

                  The Guarantor  acknowledges that its obligations hereunder are
independent  of the  obligations  of the Issuer  with  respect to the  Preferred
Securities  and that the  Guarantor  shall be liable as principal  and as debtor
hereunder to make  Guarantee  Payments  pursuant to the terms of this  Guarantee
Agreement notwithstanding the occurrence of any event referred to in subsections
(a) through (g), inclusive, of Section 503 hereof.


                                   ARTICLE VI
                           COVENANTS AND SUBORDINATION

                  SECTION 601.   Subordination.

                  This  Guarantee   Agreement   will   constitute  an  unsecured
obligation  of the Guarantor  and will rank  subordinate  and junior in right of
payment to all Senior Indebtedness of the Guarantor.

                  SECTION 602.   Pari Passu Guarantees.

                  This  Guarantee  Agreement  shall  rank  pari  passu  with any
similar Guarantee Agreements issued by the Guarantor on behalf of the holders of
Preferred Securities issued by SWEPCO Capital I.


                                   ARTICLE VII
                                   TERMINATION

                  SECTION 701.  Termination.

                  This Guarantee  Agreement shall terminate and be of no further
force and effect upon (i) full payment of the Redemption  Price of all Preferred
Securities,  (ii) the  distribution of Debentures to the Holders in exchange for
all of the Preferred  Securities or (iii) full payment of the amounts payable in
accordance   with  the  Trust   Agreement   upon   liquidation  of  the  Issuer.
Notwithstanding  the  foregoing,  this  Guarantee  Agreement will continue to be
effective or will be  reinstated,  as the case may be, if at any time any Holder
must restore  payment of any sums paid with respect to Preferred  Securities  or
this Guarantee Agreement.


                                  ARTICLE VIII
                                  MISCELLANEOUS

                  SECTION 801.   Successors and Assigns.

                  All  guarantees  and  agreements  contained in this  Guarantee
Agreement  shall  bind  the  successors,   assigns,   receivers,   trustees  and
representatives  of the  Guarantor and shall inure to the benefit of the Holders
of the  Preferred  Securities  then  outstanding.  Except in  connection  with a
consolidation,  merger or sale involving the Guarantor  that is permitted  under
Article  Ten of the  Indenture  and  pursuant  to which the  assignee  agrees in
writing to perform the Guarantor's  obligations  hereunder,  the Guarantor shall
not assign its obligations hereunder.

                  SECTION 802.  Amendments.

                  Except  with  respect to any  changes  which do not  adversely
affect  the  rights of the  Holders in any  material  respect  (in which case no
consent of the Holders will be required),  this Guarantee  Agreement may only be
amended  with the prior  approval  of the Holders of not less than a Majority in
liquidation preference of the Preferred Securities. The provisions of Article VI
of the Trust  Agreement  concerning  meetings of the Holders  shall apply to the
giving of such approval.

                  SECTION 803.   Notices.

                  Any  notice,   request  or  other  communication  required  or
permitted to be given  hereunder  shall be in writing,  duly signed by the party
giving such notice,  and delivered,  telecopied or mailed by first class mail as
follows:

                           (a)  if  given  to the  Guarantor, to the address set
forth  below or  such other addressas  the Guarantor  may give  notice of to the
Holders:

                           Southwestern Electric and Power Company
                           c/o Central and South West Corporation
                           1616 Woodall Rodgers Freeway
                           Dallas, Texas  75202

                           Facsimile No:  (214) 777-1223
                           Attention:  Director, Finance

                           (b)  if given to the Issuer, in care of the Guarantee
Trustee, at the Issuer's (and the Guarantee Trustee's)  address set forth  below
or such other address as the Guarantee Trustee on behalf of the  Issuer may give
notice to the Holders:

                           SWEPCO Capital I
                           c/o Central and South West Corporation
                           1616 Woodall Rodgers Freeway
                           Dallas, Texas  75202

                           Facsimile No:  (214) 777-1223
                           Attention:  Director, Finance
                           with a copy to:

                           The Bank of New York
                           101 Barclay Street
                           21 West
                           New York, NY 10286
                           Facsimile No:  (212) 815-5915
                           Attention:  Corporate Trust Trustee Administration

                           (c)  if given to any Holder, at the address set forth
on the books and records of the Issuer.

                  All notices  hereunder shall be deemed to have been given when
received in person,  telecopied with receipt confirmed, or mailed by first class
mail,  postage  prepaid,  except  that if a notice or other  document is refused
delivery or cannot be delivered  because of a changed address of which no notice
was given,  such notice or other document shall be deemed to have been delivered
on the date of such refusal or inability to deliver.

                  SECTION 804.   Benefit.

                  This  Guarantee  Agreement  is solely  for the  benefit of the
Holders and is not separately transferable from the Preferred Securities.

                  SECTION 805.   Interpretation.

                  In this  Guarantee  Agreement,  unless the  context  otherwise
requires:

                  (a) capitalized terms used in this Guarantee Agreement but not
defined in the preamble hereto have the respective  meanings assigned to them in
Section 101;

                  (b)   a term  defined anywhere in this Guarantee Agreement has
the same meaning throughout;

                  (c) all  references  to "the  Guarantee  Agreement"  or  "this
Guarantee  Agreement" are to this Guarantee Agreement as modified,  supplemented
or amended from time to time;

                  (d) all references in this Guarantee Agreement to Articles and
Sections  are to  Articles  and  Sections  of this  Guarantee  Agreement  unless
otherwise specified;

                  (e) a term  defined  in the Trust  Indenture  Act has the same
meaning when used in this Guarantee  Agreement unless otherwise  defined in this
Guarantee Agreement or unless the context otherwise requires;

                  (f)  a reference  to the singular includes the plural and vice
versa; and

                  (g) the  masculine,  feminine  or neuter  genders  used herein
shall include the masculine, feminine and neuter genders.

                  SECTION 806.  GOVERNING LAW.

                  THIS  GUARANTEE  AGREEMENT  SHALL BE GOVERNED BY AND CONSTRUED
AND  INTERPRETED  IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

                  This instrument may be executed in any number of counterparts,
each of which  so  executed  shall be  deemed  to be an  original,  but all such
counterparts shall together constitute but one and the same instrument.


<PAGE>


                  THIS  GUARANTEE  AGREEMENT  is executed as of the day and year
first above written.

                                     SOUTHWESTERN ELECTRIC POWER COMPANY


                                     By:
                                      Name: Wendy G. Hargus
                                      Title: Treasurer
                                                
                                     THE BANK OF NEW YORK,  as Guarantee Trustee
       

                                     By:
                                      Name:
                                      Title:

                                      THE BANK OF NEW YORK, as Guarantee Trustee


                                            By:
                                                Name:
                                                Title: