Exhibit (10)(i)82)
------------------------------------------------------------------------------

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






                         NEW YORK STATE ENERGY RESEARCH


                            AND DEVELOPMENT AUTHORITY


                                       AND


                  CENTRAL HUDSON GAS & ELECTRIC CORPORATION


------------------------------------------------------------------------------
                             PARTICIPATION AGREEMENT
------------------------------------------------------------------------------
                          Dated as of December 1, 1998









                                 - relating to -
                    Pollution Control Refunding Revenue Bonds
       (Central Hudson Gas & Electric Corporation Project), 1998 Series A
                                TABLE OF CONTENTS
                                Table of Contents
                                                                            Page

                                    ARTICLE I
      DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE AND DURATION OF
                             PARTICIPATION AGREEMENT

SECTION 1.01. Definitions; Rules of Construction.............................2
SECTION 1.02. Effective Date of Participation Agreement; Duration of
               Participation Agreement.......................................2

                                   ARTICLE II
                                 REPRESENTATIONS

SECTION 2.01. Representations and Warranties by the Authority................3
SECTION 2.02. Representations and Warranties by the Company..................3

                                       i
<PAGE>

                                   ARTICLE III
                         THE PROJECT; ISSUANCE OF BONDS

SECTION 3.01. The Project....................................................4
SECTION 3.02. Sale of Bonds and Deposit of Proceeds; Liability Under
               Bonds.........................................................4
SECTION 3.03. No Interest in Project Conferred...............................5
SECTION 3.04. Operation, Maintenance and Repair..............................5
SECTION 3.05. Agreement not to Exercise Option to Convert to Fixed Rate
               Absent Specified Rating.......................................5
SECTION 3.06. Securities Depository..........................................5
SECTION 3.07. Investments Under the Indenture................................5

                                   ARTICLE IV
           COMPANY NOTE AND PAYMENTS; CREDIT AND LIQUIDITY SUPPORT

SECTION 4.01. Execution and Delivery of Company Note to Trustee..............6
SECTION 4.02. Redemption of Bonds............................................6
SECTION 4.03. Obligation for Payment Absolute; Deficiencies..................6
SECTION 4.04. Administration Fees; Expenses, Etc.............................6
SECTION 4.05. Compensation of Fiduciaries, Remarketing Agents and
               Indexing Agents...............................................7
SECTION 4.06. Project Not Security for Bonds.................................7
SECTION 4.07. Payment of Taxes and Assessments; No Liens or Charges..........7
SECTION 4.08. Indemnification of Authority, Fiduciaries, Remarketing
               Agents and Indexing Agents....................................8
SECTION 4.09. Company to Pay Attorneys' Fees and Disbursements...............8
SECTION 4.10. No Abatement of Administration Fees and Other Charges..........8
SECTION 4.11. Payment to Tender Agent........................................9
SECTION 4.12. Support Facilities.............................................9


                                       ii
<PAGE>


                                    ARTICLE V
                                SPECIAL COVENANTS

SECTION 5.01. No Warranty as to Suitability of Project.......................9
SECTION 5.02. Authority's Rights to Inspect Project and Plans and
               Specifications................................................9
SECTION 5.03. Company Consent to Amendment of Indenture......................9
SECTION 5.04. Tax Covenant...................................................9
SECTION 5.05. Company Agrees to Perform Obligations Imposed by
               Indenture....................................................10
SECTION 5.06. Maintenance of Office or Agency of Company....................10
SECTION 5.07. Further Assurances............................................10
SECTION 5.08. Payment of Taxes and Other Charges............................10
SECTION 5.09. Maintenance of Properties.....................................10
SECTION 5.10. Insurance.....................................................11
SECTION 5.11. Proper Books of Record and Account............................11
SECTION 5.12. Certificates as to Defaults...................................11
SECTION 5.13. Company Not to Permit Hindrance or Delay of Payment of
               Company Note.................................................11
SECTION 5.14. Consolidation, Merger or Sale of Assets.......................11
SECTION 5.15. Financial Statements of Company...............................12
SECTION 5.16. Compliance with Laws..........................................12

                                   ARTICLE VI
                          DEFAULTS BY COMPANY; REMEDIES

SECTION 6.01. Events of Default; Acceleration...............................13
SECTION 6.02. Certain Events of Default; Authority or Trustee May Take
               Certain Actions..............................................14
SECTION 6.03. Judicial Proceedings by Trustee...............................15

                                   ARTICLE VII
                                  MISCELLANEOUS

SECTION 7.01. Disposition of Amounts After Payment of Bonds.................15
SECTION 7.02. Notices.......................................................15
SECTION 7.03. Successors and Assigns........................................15
SECTION 7.04. References to the Liquidity Facility..........................16
SECTION 7.05. Amendment of Participation Agreement..........................16
SECTION 7.06. Assignment and Transfer.......................................16
SECTION 7.07. Participation Agreement Supersedes Any Prior Agreements.......17
SECTION 7.08. Counterparts..................................................17
SECTION 7.09. Severability..................................................17
SECTION 7.10. New York Law To Govern........................................17

EXHIBIT A: FORM OF PROMISSORY NOTE.........................................A-1

                                       iii
<PAGE>

      This  PARTICIPATION  AGREEMENT,  dated as of December 1, 1998, between NEW
YORK STATE ENERGY  RESEARCH AND  DEVELOPMENT  AUTHORITY,  a body  corporate  and
politic,  constituting a public benefit  corporation,  established  and existing
under and by virtue of the laws of the State of New York (the "Authority"),  and
CENTRAL  HUDSON GAS & ELECTRIC  CORPORATION,  a corporation  duly  organized and
existing and qualified to do business as a public  utility under the laws of the
State of New York (the "Company"),

                            W I T N E S S E T H :

      WHEREAS,  pursuant to a special act of the Legislature of the State of New
York (Title 9 of Article 8 of the Public  Authorities  Law of New York,  as from
time to time amended and  supplemented,  herein called the "Act"),  the New York
State Energy  Research and  Development  Authority  (the  "Authority")  has been
established  as a body  corporate  and politic,  constituting  a public  benefit
corporation;

      WHEREAS,  pursuant to the Act, the Authority is empowered to contract with
any power  company to  participate  in the  incorporation  of  features in power
plants and the  construction of associated  facilities to the extent required by
the public interest in development,  health, recreation, safety, conservation of
natural resources, and aesthetics;

      WHEREAS,  pursuant to the Act, the  Authority is also  empowered to extend
credit  and make loans from bond  proceeds  to any person for the  construction,
acquisition,  and  installation  of, or for the  reimbursement to any person for
costs in connection with, any special energy project, including, but not limited
to, any land,  works,  system,  building or other  improvement  and all real and
personal  properties  of any  nature or any  interest  in any of them  which are
suitable for or related to the furnishing, generation, or production of energy;

      WHEREAS,  the Authority is also  authorized  under the Act to borrow money
and  issue its  negotiable  bonds and notes to  provide  sufficient  moneys  for
achieving  its  corporate  purposes,  including  the  refunding  of  outstanding
obligations of the Authority;

      WHEREAS,  the Authority is also authorized under the Act to enter into any
contracts  and to  execute  all  instruments  necessary  or  convenient  for the
exercise of its corporate powers and the fulfillment of its corporate purposes;

      WHEREAS, the Company is a public utility corporation doing business in the
State of New York and operates power plants in the State of New York;

      WHEREAS,  the Company has requested that the Authority issue bonds for the
purpose of refunding the Pollution  Control  Revenue Bonds (Central Hudson Gas &
Electric Corporation  Projects),  Series C (the "Prior Bonds"), of the Authority
which were  issued to finance a portion of the cost of  construction  of certain
pollution  control and other  facilities at Nine Mile Point Nuclear Station Unit
No. 2 generating station located in Oswego, New York;

      WHEREAS,  the Authority proposes to issue such bonds and make the proceeds
thereof available to the Company to refund the Prior Bonds;

      WHEREAS,  simultaneously with the issuance and delivery of such bonds, the
Company will deliver a promissory  note dated the date of issuance of such bonds
as evidence of its obligation to repay the advance of the proceeds of the bonds;
and

                                       1
<PAGE>



      WHEREAS, the Authority,  pursuant to Resolution No. 922, adopted September
28, 1998, has determined to issue its Pollution  Control Refunding Revenue Bonds
(Central  Hudson  Gas &  Electric  Corporation  Project),  1998  Series A, in an
aggregate  principal  amount of $16,700,000  (the  "Bonds"),  for the purpose of
refunding  the Prior Bonds,  all such Bonds to be issued under and secured by an
Indenture of Trust dated as of December 1, 1998,  between the  Authority and The
Chase Manhattan Bank, as Trustee (the "Indenture");

      NOW, THEREFORE, for and in consideration of the premises and of the mutual
covenants  and  agreements  hereinafter  set forth,  it is hereby  agreed by and
between the parties as follows:

                                    ARTICLE I
               DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE
                     AND DURATION OF PARTICIPATION AGREEMENT

     SECTION  1.01.  Definitions;  Rules of  Construction.  Unless  the  context
otherwise  indicates,  terms  defined  in the  Indenture  are used  herein as so
defined; and:

     (a) Words importing the singular number shall include the plural number and
vice versa;

     (b) All references herein to particular articles or sections are references
to articles or sections of this Participation Agreement;

     (c) The  captions  and  headings  herein  are  solely  for  convenience  of
reference and shall not  constitute a part of this  Participation  Agreement nor
shall they affect its meaning, construction or effect;

     (d) The terms "hereby," "hereof,"  "hereto," "herein,"  "hereunder" and any
similar  terms,  as  used  in  this  Participation  Agreement,   refer  to  this
Participation  Agreement in its entirety  and not to the  particular  article or
section  of this  Participation  Agreement  in which they  appear,  and the term
"hereafter" means after, and the term "heretofore"  means before,  the effective
date of this Participation Agreement; and

     (e) In the event that there is any conflict  between the provisions of this
Participation  Agreement  and  those of the  Indenture,  the  provisions  of the
Indenture shall govern the disposition of such conflict.

     SECTION  1.02.  Effective  Date of  Participation  Agreement;  Duration  of
Participation  Agreement.  This  Participation  Agreement shall become effective
upon its  execution and  delivery,  and shall  continue in full force and effect
until the principal  of, and premium,  if any, and interest on, the Company Note
and Bonds have been fully paid (or  provision for their payment has been made in
accordance  with the  provisions  of the  Indenture)  and all sums to which  the
Authority or the Fiduciaries are entitled hereunder have been fully paid.

                                   ARTICLE II
                                 REPRESENTATIONS

     SECTION  2.01.   Representations  and  Warranties  by  the  Authority.  The
Authority represents and warrants as follows:

     (a) The Authority is a body  corporate and politic,  constituting  a public
benefit corporation, established and existing under the laws of the State of New
York;

                                       2
<PAGE>


     (b) The  Authority has full power and authority to execute and deliver this
Participation  Agreement,  the Indenture and the Tax Regulatory Agreement and to
consummate the transactions  contemplated  hereby and thereby and to perform its
obligations hereunder and thereunder;

     (c) The Authority is not in default under any of the  provisions of the
laws of the State of New York which  would  affect its  existence  or its powers
referred to in the preceding paragraph (b);

     (d) The Authority has determined that its participation in the financing of
the Project, as contemplated by this Participation  Agreement,  is in the public
interest;

     (e) The  Authority has duly  authorized  the execution and delivery of this
Participation  Agreement, the Indenture and the Tax Regulatory Agreement and the
execution and delivery of the other  documents  incidental to this  transaction,
and all necessary  authorizations therefor or in connection with the performance
by the Authority of its  obligations  hereunder or thereunder have been obtained
and are in full force and effect; and

     (f) The  execution  and  delivery by the  Authority  of this  Participation
Agreement,  the Indenture and the Tax Regulatory  Agreement and the consummation
of the  transactions  herein  or  therein  contemplated  will  not  violate  any
indenture, mortgage, loan agreement or other contract or instrument to which the
Authority is a party or by which it is bound or, to the best of the  Authority's
knowledge,  any judgment,  decree, order, statute, rule or regulation applicable
to the Authority.

     SECTION 2.02.  Representations  and Warranties by the Company.  The Company
represents and warrants as follows:

     (a) The Company is a  corporation  duly  incorporated  and in good standing
under the laws of the State of New York,  is duly  qualified  and  authorized to
engage in  business as a public  utility in the State of New York,  has power to
enter into, execute and deliver this Participation Agreement, the Tax Regulatory
Agreement  and the  Company  Note  by  proper  corporate  action  and  has  duly
authorized the execution and delivery by it of this Participation Agreement, the
Tax Regulatory Agreement and the Company Note;

     (b) The  execution  and  delivery  by the  Company  of  this  Participation
Agreement,   the  Tax  Regulatory   Agreement  and  the  Company  Note  and  the
consummation  of the  transactions  herein  contemplated do not conflict with or
constitute  a  breach  of  or a  default  under  the  Company's  Certificate  of
Incorporation,  By-Laws or any  indenture,  mortgage,  loan  agreement  or other
contract or  instrument  to which the Company is a party or by which it is bound
or,  to the  best of the  Company's  knowledge,  any  judgment,  decree,  order,
statute, rule or regulation applicable to the Company;

     (c) This  Participation  Agreement,  the Tax  Regulatory  Agreement and the
Company Note constitute  valid and legally  binding  obligations of the Company,
enforceable  against  the Company in  accordance  with their  respective  terms,
except as the right of  indemnity  hereunder  may be  limited by  principles  of
public policy and except as enforcement may be limited by applicable bankruptcy,
insolvency,  moratorium,  reorganization  or other laws,  judicial  decisions or
principles  of equity  relating to or 

                                       3
<PAGE>

affecting the enforcement of creditors' rights or contractual obligations 
generally (regardless of whether enforceability is considered in a proceeding in
equity or at law);

     (d) The  issuance  and  delivery by the Company of the Company  Note in the
manner and for the  purposes  herein set forth have been duly  authorized  by an
order of the Public Service Commission of the State of New York;

     (e) No  additional  authorizations  for or approvals of the  execution  and
delivery  by the Company of this  Participation  Agreement,  the Tax  Regulatory
Agreement  and the  Company  Note need be obtained by the Company or if any such
authorization or approval is necessary it has been obtained; and

     (f) The  representations  of the  Company  set forth in the Tax  Regulatory
Agreement are hereby incorporated by reference as though fully set forth herein.

                                   ARTICLE III
                         THE PROJECT; ISSUANCE OF BONDS

     SECTION  3.01.  The  Project.  The Company  represents  that the Project is
complete. The Project belongs to and is the property of the Company. In order to
effectuate the purposes of this Participation  Agreement, the Company will do or
cause to be done all  things  requisite  or proper  for the  fulfillment  of the
obligations of the Company under this Participation Agreement.

     SECTION 3.02. Sale of Bonds and Deposit of Proceeds; Liability Under Bonds.
1. In order to refund the Prior Bonds,  the  Authority,  as soon as  practicable
after the execution of this Participation Agreement will issue, sell and deliver
the Bonds to the  Underwriters  thereof,  all pursuant to and as provided in the
Bond Purchase  Agreement for the Bonds among the Authority,  the Company and the
Underwriters  and will  deposit the  proceeds of such sale of the Bonds with the
Trustee in the Proceeds Fund.

     2. The Bonds shall not be general  obligations of the Authority,  and shall
not  constitute an  indebtedness  of, or a charge against the general credit of,
the  Authority or give rise to any  pecuniary  liability of the  Authority.  The
liability  of the  Authority  under the Bonds shall be  enforceable  only to the
extent provided in the Indenture, and the Bonds shall be payable solely from the
Company Note  Payments,  any payments by the Company under  Section 4.11,  funds
paid under the Support  Facilities and any other funds held by the Trustee under
the  Indenture or the Tender Agent under the Bond Purchase  Trust  Agreement and
available  for such  payment.  The Bonds shall not be a debt of the State of New
York, and the State of New York shall not be liable thereon.

     SECTION 3.03. No Interest in Project  Conferred.  Neither the Authority nor
the Trustee  shall be  entitled to any  interest in the Project by reason of the
advance of Bond proceeds pursuant to this Participation Agreement.

     SECTION  3.04.  Operation,  Maintenance  and Repair.  The Authority and the
Company  recognize  that the  Project  constitutes  integrated  portions  of the
electric energy and production  facilities of the Company and its co-tenants and
that  it is  not  feasible  to  administer  the  Project  separately  from  such
facilities.  The  Company  shall  operate the Project or cause the Project to be
operated (with such changes,  improvements  or additions as the Company may deem
desirable) as part of such  facilities  for the joint useful life of the Project
and such facilities,  shall maintain and 

                                       4
<PAGE>

repair the Project or cause the Project to be  maintained  and  repaired in
conformity with the Company's and its co-tenants'  normal maintenance and repair
programs  for such  facilities  and shall  proceed in good faith to maintain the
availability of the Project for use as an authorized  project under the Act; but
the Company and its co-tenants shall have no obligation to operate,  maintain or
repair or cause to be  operated,  maintained,  or  repaired,  or proceed in good
faith to maintain  the  availability  of the  Project  for use as an  authorized
project  under the Act with  respect  to, any element or item of the Project the
operation,  maintenance,  or repair of which  becomes  uneconomic to the Company
because of damage or destruction or obsolescence (including physical, functional
and economic  obsolescence),  or change in government standards and regulations,
or the  termination of the operation of the portion of such  facilities to which
the element or item of the Project is an adjunct, or the sale, transfer or other
disposition by the Company of its interest in such facilities.

     SECTION  3.05.  Agreement  not to Exercise  Option to Convert to Fixed Rate
Absent  Specified  Rating.  The  Company  agrees not to direct that a Fixed Rate
become  effective  pursuant to Section 4.02 of the Indenture  unless the Company
shall have  delivered to the Authority  evidence  satisfactory  to the Authority
that upon  conversion  to a Fixed Rate the Bonds are  expected to be rated in at
least the third highest rating category  (without regard to gradations  therein)
of Moody's or S&P,  currently  "A" in the case of Moody's and "A" in the case of
S&P.

     SECTION 3.06.  Securities  Depository.  The Company  acknowledges  that the
Authority and the Trustee, at the request of the Company,  have arranged for the
initial  deposit of the Bonds with The  Depository  Trust Company  ("DTC") which
will act as  Securities  Depository  in order to  effectuate  a  book-entry-only
system  and  that  this  system  may  be  discontinued   or,  if   discontinued,
reinstituted (with DTC or another Securities  Depository) in accordance with the
Indenture. The Company agrees to take all actions necessary, and to refrain from
taking  actions  contrary  to  the  effectuation  of  a  book-entry-only  system
established  pursuant to the Indenture and any arrangements among the Authority,
the Trustee and any Securities  Depository.  The Authority  shall not enter into
any  written  agreements  with  a  Securities  Depository  without  receipt  and
acceptance of such agreements by the Company.

     SECTION 3.07.  Investments Under the Indenture.  Any money held in any fund
under the  Indenture  shall be invested  and  reinvested  as provided in the Tax
Regulatory Agreement and Article IX of the Indenture.

                                   ARTICLE IV
             COMPANY NOTE AND PAYMENTS; CREDIT AND LIQUIDITY SUPPORT

     SECTION  4.01.  Execution  and  Delivery  of Company  Note to  Trustee.  1.
Concurrently  with  the  authentication  by  the  Trustee  and  delivery  by the
Authority of the Bonds and in order to evidence the obligation of the Company to
the  Authority to repay the advance of the proceeds of the Bonds,  the Authority
hereby  directs the  Company,  and the  Company  hereby  agrees,  to execute and
deliver to the  Trustee  its  Company  Note and to duly and  punctually  pay the
principal of,  premium,  if any, and interest on, the Company Note at the place,
the  times  and in the  manner  provided  therein.  The  Company  Note  shall be
substantially in the form attached hereto as Exhibit A.

      2. The  obligation of the Company to make any payment of principal of, and
premium, if any, and interest on, the Company Note shall be deemed satisfied and
discharged by

                                       5
<PAGE>

and to the extent of a corresponding  payment made by a Liquidity  Provider
(other than as Purchase Price), but not by any payment under the Policy.

     SECTION 4.02.  Redemption of Bonds.  Whenever Bonds are redeemable in whole
or in part,  the Authority  will redeem the same at the written  direction of an
Authorized  Corporation  Representative given in accordance with Section 5.01 of
the Indenture. Expenses in connection with the redemption of Bonds shall be paid
by the Company.

     SECTION 4.03.  Obligation for Payment Absolute;  Deficiencies.  The Company
agrees that its  obligation to make the Company Note Payments and payments under
Section  4.11 at the times and in the amounts  provided in the Company  Note and
this  Participation  Agreement shall be absolute,  irrevocable and unconditional
and shall not be subject to any  defense  (other  than  payment) or any right of
set-off,   counterclaim  or  recoupment  for  any  reason,  including,   without
limitation,  the unenforceability (because of judicial decision or otherwise) or
the impossibility of performance of the Company Note obligations,  or any breach
by  the  Authority  of  any  obligation  to  the  Company,  whether  under  this
Participation Agreement or otherwise, or inaccuracy of any representation by the
Authority  to the Company  under this  Participation  Agreement  or in any other
instrument, or any indebtedness or liability at any time owing to the Company by
the  Authority,  or the  destruction by fire or other casualty of the Project or
any portion  thereof,  or the taking of title  thereto or the use thereof by the
exercise  of the  power  of  eminent  domain.  If for any  reason  Company  Note
Payments,  together with other money held by the Trustee and then  available for
such  purpose  (including  money  paid by a  Liquidity  Provider  other  than as
Purchase Price),  would not be sufficient to make the corresponding  payments of
principal of, and premium, if any, and interest on, the Bonds when such payments
are due, the Company will pay the amounts  required from time to time to make up
any such  deficiency.  If for any reason  payments under Section 4.11,  together
with other money held by the Trustee and the Tender Agent and then available for
such purpose  (including  money paid by the  Liquidity  Provider),  would not be
sufficient to make the corresponding payments of the Purchase Price of the Bonds
when such payments are due, the Company will pay the amounts  required from time
to time to make up any such deficiency.

     SECTION  4.04.  Administration  Fees;  Expenses,  Etc. In order to defray a
portion  of  the  expenses   incurred  by  the  Authority  in   conducting   and
administering  its programs for the acquisition  and  construction of facilities
for the furnishing of  electricity,  special energy projects and the development
of advanced  technologies,  the Company  shall pay to the  Authority  an initial
Administration  Fee in the amount of  $41,750 on the date of the  authentication
and  delivery  of the Bonds and an annual  Administration  Fee in the  amount of
$2,210 on December 1 of each year commencing  December 1, 1999,  until the Bonds
are no longer  outstanding.  In addition,  the Company shall pay to the State of
New York with  respect  to the  Bonds a bond  issuance  charge in the  amount of
$46,760 on the date of authentication and delivery of the Bonds.

      In addition to such Administration Fees, the Company will pay or reimburse
the Authority upon its request for all reasonable  expenses,  disbursements  and
advances  incurred or made by the Authority  (including  printing  costs and the
reasonable fees,  expenses and disbursements of its counsel and bond counsel) in
connection with this Participation  Agreement, the Indenture, the Tax Regulatory
Agreement  or any  transaction  or  event  contemplated  by  this  Participation
Agreement, the Tax Regulatory Agreement or the Indenture.

                                       6
<PAGE>

     SECTION 4.05. Compensation of Fiduciaries,  Remarketing Agents and Indexing
Agents. The Company agrees:

            (1) to pay to the  Trustee  from  time  to  time  upon  its  request
      reasonable  compensation  for all services  rendered by it in any capacity
      under  the  Indenture  (which  compensation  shall not be  limited  by any
      provision of law in regard to the  compensation of a trustee of an express
      trust);

            (2) except as so otherwise  expressly  provided herein, to reimburse
      the Trustee upon its request for all  reasonable  expenses,  disbursements
      and advances incurred by it in any capacity under the Indenture (including
      the  reasonable  compensation  and the expenses and  disbursements  of its
      agents and counsel),  except any such expense,  disbursement or advance as
      may be attributable to its negligence or bad faith;

            (3) to pay to the Fiduciaries,  other than the Trustee, from time to
      time upon their request, reasonable compensation for all services rendered
      by them  under the  Indenture  and  reimburse  them for  their  reasonable
      expenses incurred under the Indenture (including  reasonable  compensation
      and expenses and  disbursements  of their agents and counsel),  except any
      such expense as may be attributable to their negligence or bad faith; and

            (4) to pay to the  Remarketing  Agents and the Indexing Agents their
      reasonable  fees and expenses as and when the same become due,  except any
      such expense as may be  attributable  to such  person's  negligence or bad
      faith.

     SECTION 4.06. Project Not Security for Bonds. It is expressly recognized by
the  parties  hereto that  neither  the  Project  nor any other  property of the
Company will constitute any part of the security for the Bonds.

     SECTION 4.07.  Payment of Taxes and Assessments;  No Liens or Charges.  The
Company will (a) pay, when the same shall become due, all taxes and assessments,
including income, profits,  property or excise taxes, if any, or other municipal
or governmental charges,  imposed,  levied or assessed by the Federal,  state or
any municipal  government  upon the Authority or any Fiduciary in respect of any
payments  (other than  payments made pursuant to Sections 4.04 and 4.05) made or
to be made pursuant to this Participation  Agreement or the Company Note and (b)
pay or cause to be discharged,  within 60 days after the same shall accrue,  any
lien or charge upon any such payment made or to be made under this Participation
Agreement,  provided  that the Company shall not be required to pay any such tax
or assessment so long as (i) the Company at its expense contests, by appropriate
legal  proceedings  conducted in good faith and with due diligence,  the amount,
validity  or  application  of any such  tax,  assessment  or  charge,  (ii) such
proceedings shall have the effect of suspending the collection  thereof from the
Authority or such Fiduciary,  and (iii) the Company shall indemnify and hold the
Authority and each Fiduciary harmless from any losses, costs, charges,  expenses
(including  reasonable   attorneys'  fees  and  disbursements),   judgments  and
liabilities  arising  in  respect  of such tax,  assessment  or  charge  and the
nonpayment thereof.

     SECTION 4.08. Indemnification of Authority, Fiduciaries, Remarketing Agents
and Indexing Agents.  Any obligation of the Authority  created by or arising out
of this Participation  Agreement shall be a limited obligation of the Authority,
payable solely from the Company Note

                                       7
<PAGE>

Payments,  any payments by the Company under Section 4.11, funds paid under
the  Support  Facilities  and any  other  funds  held by the  Trustee  under the
Indenture  and  available  for  such  payment,   and  shall  not  constitute  an
indebtedness  of or a charge  against the general  credit of the  Authority  and
shall not  constitute or give rise to any pecuniary  liability of the Authority;
nevertheless, if the Authority shall incur any such pecuniary liability, then in
such event the Company shall indemnify and hold the Authority harmless by reason
thereof.  The Company releases the Authority,  the Fiduciaries,  the Remarketing
Agents and the Indexing Agents from, agrees that the Authority, the Fiduciaries,
the  Remarketing  Agents and the  Indexing  Agents  shall not be liable for, and
agrees to indemnify and hold the Authority,  the  Fiduciaries,  the  Remarketing
Agents and the Indexing  Agents  harmless  from,  any  liability for any loss or
damage  to  property  or any  injury  to or  death  of any  person  that  may be
occasioned by any cause whatsoever  arising out of the construction or operation
of the Project.  The Company  agrees to indemnify  and hold the  Authority,  its
members, officers and employees, the Fiduciaries, the Remarketing Agents and the
Indexing Agents harmless from any losses,  costs,  charges,  expenses (including
reasonable  attorneys'  fees  and  disbursements),   judgments  and  liabilities
incurred by it or them, as the case may be, in connection  with any claims made,
or any action, suit or proceeding  instituted or threatened,  in connection with
the transactions contemplated by this Participation Agreement, the Bond Purchase
Trust Agreement,  any Remarketing  Agreement or the Indenture (i) so long as, in
the case of the Authority,  its members,  officers and employees, it or they, as
the  case  may be,  have  acted in good  faith  to  carry  out the  transactions
contemplated by this Participation  Agreement,  the Remarketing  Agreement,  the
Bond Purchase Trust Agreement and the Indenture and (ii) so long as, in the case
of the Fiduciaries,  the Indexing Agents and the Remarketing  Agents, it or they
shall not have acted  negligently,  in bad faith or with willful  misconduct  in
carrying out the transactions  contemplated by this Participation Agreement, the
Remarketing Agreement, the Bond Purchase Trust Agreement and the Indenture.

     SECTION 4.09.  Company to Pay  Attorneys'  Fees and  Disbursements.  If the
Company  shall  default  under  any  of the  provisions  of  this  Participation
Agreement  and the  Authority  or the  Trustee  or both  of  them  shall  employ
attorneys or incur other  expenses for the collection of payments due under this
Participation  Agreement or for the  enforcement of performance or observance of
any  obligation  or  agreement  on the  part of the  Company  contained  in this
Participation  Agreement,  the Company  will on demand  therefor  reimburse  the
reasonable  fees of such attorneys and such other  reasonable  disbursements  so
incurred.

     SECTION 4.10. No Abatement of Administration  Fees and Other Charges. It is
understood  and  agreed  that,  so long as any Bonds are  outstanding  under the
Indenture,  Administration  Fees and  other  charges  payable  to the  Authority
pursuant to this  Participation  Agreement  shall  continue to be payable at the
times and in the amounts herein  specified,  whether or not the Project,  or any
portion thereof,  shall have been destroyed by fire or other casualty,  or title
thereto or the use thereof shall have been taken by the exercise of the power of
eminent domain, and that there shall be no abatement of any such  Administration
Fees and other charges by reason thereof.

     SECTION  4.11.  Payment to Tender  Agent.  The Company shall timely pay, or
cause to be paid,  to the Tender Agent  amounts  equal to the amounts to be paid
pursuant  to Article V of the  Indenture  in respect of Bonds duly  tendered  or
deemed tendered for purchase; but the obligation of the Company to make any such
payment shall be deemed satisfied to the extent of any money available  pursuant
to a Liquidity Facility or from the proceeds of remarketing.

                                       8
<PAGE>

     SECTION 4.12. Support  Facilities.  The Company has obtained the Policy and
the Surety  Bond.  At all times on or prior to the Fixed Rate  Conversion  Date,
except during any period when all the Bonds then  outstanding are held by or for
the account of the Company,  a Liquidity  Facility  meeting the  requirements of
this  Section  4.12  shall be in  effect  and,  in the event  that an  Alternate
Liquidity  Facility  is to replace a Liquidity  Facility,  the  requirements  of
Section 6.02 of the  Indenture  with regard to such  Liquidity  Facility will be
fulfilled. A Liquidity Facility shall expire no earlier than the earliest of (1)
its stated  expiration  date, which shall be no earlier than the second business
day after  the next  succeeding  date when  Bonds are  subject  to  optional  or
mandatory  tender for purchase not less than six months from its effective date,
(2) when all  available  amounts  have been drawn,  (3) the second  business day
following  the Fixed Rate  Conversion  Date,  (4) on the  effective  date of any
Alternate   Liquidity  Facility  that  replaces  the  then  effective  Liquidity
Facility, (5) the earliest date on which no Bonds are outstanding and (6) twelve
days after the Trustee  receives  notice from the Liquidity  Provider that it is
terminating  the  Liquidity  Facility  and  directing  the  Trustee  to  cause a
mandatory tender and purchase of the Bonds.

                                   ARTICLE V
                                SPECIAL COVENANTS

     SECTION 5.01. No Warranty as to Suitability of Project. The Authority makes
no  warranty,  either  express or  implied,  with  respect to actual or designed
capacity of the Project,  as to the  suitability of the Project for the purposes
specified in this Participation  Agreement,  as to the condition of the Project,
or as to the suitability of the Project for the Company's purposes or needs.

     SECTION  5.02.   Authority's  Rights  to  Inspect  Project  and  Plans  and
Specifications.  The Authority  shall have the right at all reasonable  times to
examine and inspect the Project  and, to the extent  reasonably  available,  the
plans  and  specifications  therefor  and such  other  information  and  records
relating  to the  Project  as may  be  reasonably  necessary  to  establish  the
qualification  of the Project for financing  under the Act and  compliance  with
this Participation Agreement.

     SECTION  5.03.  Company  Consent to Amendment of  Indenture.  The Authority
shall  not  enter  into  any  indenture  supplemental  to or  amendatory  of the
Indenture without the prior consent of the Company as evidenced by a certificate
in writing signed by an Authorized Corporation Representative.

     SECTION 5.04. Tax Covenant. Notwithstanding any other provision hereof, the
Company  covenants  and agrees that it will not take or  authorize or permit any
action to be taken  with  respect  to the  Project,  or the  proceeds  of Bonds,
including  any  amounts  treated  as  proceeds  of the Bonds for any  purpose of
Section  103 of the Code,  which  will  result in the loss of the  exclusion  of
interest on the Bonds from gross income for Federal  income tax  purposes  under
Section 103 of the Code  (except  for any Bond during any period  while any such
Bond is held by a person  referred  to in  Section  147(a)  of the  Code).  This
provision  shall  control  in case of  conflict  or  ambiguity  with  any  other
provision of this Participation  Agreement.  In furtherance of such covenant and
agreement,  the Authority  and the Company have entered into the Tax  Regulatory
Agreement and the Company  hereby agrees to comply with the  provisions  thereof
insofar as the Tax Regulatory Agreement relates to the Bonds.

                                       9
<PAGE>

     SECTION 5.05. Company Agrees to Perform  Obligations  Imposed by Indenture.
The Company  agrees to perform such  obligations as may be required of it by the
provisions of the Indenture.

     SECTION 5.06.  Maintenance of Office or Agency of Company. The Company will
at all times keep in Poughkeepsie, New York, or another location in the State of
New York,  an office or agency where  notices and demands to or upon the Company
with respect to the Company Note and this Participation Agreement may be served,
and  will,  from  time to time,  give  written  notice  to the  Trustee  and the
Authority  of the  location of such  office or agency;  and, in case the Company
shall  fail so to do,  notices  may be  served  and  demands  may be made at the
principal office of the Trustee.

     SECTION 5.07. Further  Assurances.  Upon request of the Trustee in writing,
the Company will make,  execute,  acknowledge and deliver,  or cause to be made,
executed,  acknowledged  and delivered,  to the Trustee any and all such further
acts,  instruments or assurances as may be reasonably  required for effectuating
the intention of this Participation Agreement and the Company Note.

     SECTION 5.08. Payment of Taxes and Other Charges. The Company will promptly
pay and discharge,  or cause to be paid and  discharged,  as the same become due
and payable,  any and all taxes, rates,  levies,  assessments,  and governmental
liens, claims and other charges at any time lawfully imposed or accruing upon or
against the Company or upon or against its  properties or any part  thereof,  or
upon the  income  derived  therefrom  or from  the  operations  of the  Company,
provided that the Company shall not be required to pay or discharge, or cause to
be paid or discharged, any such obligation,  tax, rate, levy, assessment,  lien,
claim  or  other  charge  so long  as in good  faith  and by  appropriate  legal
proceedings the validity thereof shall be contested.

     SECTION 5.09. Maintenance of Properties. The Company will at all times make
or cause to be made such expenditures for repairs,  maintenance and renewals, or
otherwise,  as shall be  necessary to maintain  its  properties  in good repair,
working  order and  condition  as an  operating  system or systems to the extent
necessary to meet the Company's  obligations under the Public Service Law of the
State of New York and this  Participation  Agreement;  provided,  however,  that
nothing herein  contained shall be construed to prevent the Company from ceasing
to own or operate any of its plants or any other  property,  if, in the judgment
of the Company, it is advisable not to own or operate the same and the ownership
or operation  thereof  shall not be essential to the  maintenance  and continued
operation of the rest of the operating system or systems, and the security under
the Indenture afforded by the Company Note will not be substantially impaired by
the termination of such operation.

     SECTION  5.10.  Insurance.  The Company  will keep or cause to be kept such
parts  of  its  properties  as,  in the  opinion  of an  Authorized  Corporation
Representative  (who shall for this  purpose be a  professional  experienced  in
corporate  risk  management  or a  licensed  professional  engineer),  are of an
insurable  nature,  insured against loss or damage by fire or other  casualties,
the risk of which is customarily insured against by companies similarly situated
and operating like properties,  to the extent that property of similar character
is  customarily  insured  against by such  companies,  either  (a) by  reputable
insurers  or (b) in whole or in part in the form of  reserves  or of one or more
insurance   funds   created  by  the  Company,   whether  alone  or  with  other
corporations.

                                       10
<PAGE>

     SECTION 5.11.  Proper Books of Record and Account.  The Company will at all
times  keep or cause to be kept  proper  books of record and  account,  in which
full, true and correct entry will be made of all dealings,  business and affairs
of the Company,  including  proper and  complete  entries to capital or property
accounts  covering  property  worn  out,  obsolete,  abandoned  or sold,  all in
accordance with the requirements of any system of accounting or keeping accounts
or the rules,  regulations or orders prescribed by a regulatory  commission with
jurisdiction  over the rates of the Company  giving rise to more than 50% of the
Company's  gross  revenues,  or if  there  are no such  requirements  or  rules,
regulations or orders,  then in compliance  with generally  accepted  accounting
principles.  

     SECTION 5.12.  Certificates as to Defaults. The Company shall file with the
Trustee,  on or before  November  1 of each  year,  a  certificate  signed by an
Authorized  Corporation   Representative  stating  that,  to  the  best  of  his
knowledge, information and belief, the Company has kept, observed, performed and
fulfilled each and every one of its covenants and obligations  contained in this
Participation  Agreement  and in the  Company  Note  and,  to  the  best  of his
knowledge,  information  and  belief,  there  does not exist at the date of such
certificate any default by the Company under this Participation Agreement or any
event of default  hereunder  or other event  which,  with notice or the lapse of
time specified in Section 6.01, or both, would become an event of default or, if
any such  default or event of default or other event shall so exist,  specifying
the same and the nature and status thereof.

     SECTION  5.13.  Company  Not to Permit  Hindrance  or Delay of  Payment  of
Company Note. The Company will not  voluntarily  do, suffer or permit any act or
thing intended to hinder or delay the payment of the  indebtedness  evidenced by
the Company Note.

     SECTION 5.14. Consolidation, Merger or Sale of Assets. (a) The Company will
not  consolidate  with or  permit  itself  to be  merged  into  any  individual,
corporation,  partnership,  joint venture,  trust,  limited liability company or
corporation,   unincorporated   organization  or  government  or  any  political
subdivision   thereof,   or  any   department,   agency   authority   or   other
instrumentality  of any  government or political  subdivision  thereof  (each, a
"Person") or Persons or convey,  transfer,  lease or otherwise dispose of all or
substantially  all of its properties and assets (any such conveyance,  transfer,
lease or other  disposition,  a  "Transfer"),  except in the manner and upon the
terms and conditions set forth in this Section 5.14.

     (b) Nothing  contained in this  Participation  Agreement shall prevent (and
this  Participation  Agreement shall be construed as permitting and authorizing)
any lawful  consolidation or merger of the Company with or into any other Person
lawfully  authorized to acquire and operate the properties of the Company,  or a
series of consolidations or mergers, or successive consolidations or mergers, in
which the  Company  or its  successor  or  successors  shall be a party,  or any
Transfer  to a Person  lawfully  authorized  to acquire  and  operate  the same;
provided that upon any consolidation,  merger or Transfer,  the Person formed by
such  consolidation,  or into  which  such  merger may be made if other than the
Corporation,  or the Person that is a transferee in a Transfer shall execute and
deliver to the  Trustee an  instrument,  in form  satisfactory  to the  Trustee,
whereby such Person shall effectually assume the due and punctual payment of the
principal of, and premium,  if any, and interest on, the Company Note  according
to its  tenor  and  the due  and  punctual  performance  and  observance  of all
covenants  and  agreements  to be  performed  by the  Company  pursuant  to this
Participation Agreement, the Tax Regulatory Agreement and the Company Note; and,
thereupon,  the  Company  shall be  released  

                                       11
<PAGE>

from its obligations under this  Participation  Agreement and under the Tax
Regulatory Agreement and the Company Note.

     (c) Every such successor  Person (or transferee  Person under Section 7.06)
shall  possess,  and may exercise,  from time to time,  each and every right and
power of the Company hereunder and under the Note, in its name or otherwise; and
any act,  proceeding,  resolution  or  certificate  by any of the  terms of this
Participation  Agreement,  the Tax  Regulatory  Agreement  and the Company  Note
required  or  provided  to be done,  taken and  performed  or made,  executed or
verified by any board or officer of the Company shall and may be done, taken and
performed  or made,  executed  or  verified  with like  force and  effect by the
corresponding board or officer of any such successor Person.

      (d) If  consolidation,  merger  or  sale  or  other  Transfer  is  made as
permitted by this Section, the provisions of this Section shall continue in full
force and effect and no further consolidation,  merger or Transfer shall be made
except in compliance with the provisions of this Section.

     SECTION 5.15.  Financial Statements of Company. So long as the Company is a
publicly-owned  corporation,  it shall (a)  furnish the Trustee and Ambac with a
copy of its annual report to shareholders for each year, beginning with the year
1998, on or before March 31 of the subsequent  year or as soon  thereafter as it
is reasonably  available,  and (b) furnish to the Trustee,  to Ambac, and to any
owner of the  Bonds  if  requested  in  writing  by such  owner,  all  financial
statements  which it sends to its  shareholders  generally.  While the Municipal
Bond  Insurance  Policy is in effect,  the Company  shall  furnish to Ambac such
additional information it may reasonably request. To the extent that the Company
has entered into a continuing  disclosure  undertaking  pursuant to Rule 15c2-12
under the Securities Exchange Act as in effect on the date of this Participation
Agreement or any successor thereto (the "Rule") with respect to the Bonds, Ambac
shall be  included  as party to  receive  notices  of all  material  events  (as
described in paragraph (b)(5)(i)(C) of the Rule).

     SECTION  5.16.  Compliance  with Laws.  The Company  agrees to use its best
efforts to comply in all material  respects with all applicable  laws, rules and
regulations and orders of any governmental authority,  non-compliance with which
would  materially   adversely  affect  the  Company's  ability  to  perform  its
obligations hereunder or under the Tax Regulatory Agreement or the Company Note,
except laws, rules, regulations or orders being contested in good faith or laws,
rules,  regulations  or orders for which the Company  has applied for  variances
from or exceptions to.

                                   ARTICLE VI
                          DEFAULTS BY COMPANY; REMEDIES

     SECTION 6.01. Events of Default;  Acceleration.  In case one or more of the
following  events of default (each,  an "event of default")  shall have occurred
and be continuing:

     (a) failure by the  Company to pay when due any amount  required to be paid
under this  Participation  Agreement or the Company Note, which failure causes a
default  in the  payment  when  due  of the  interest  on any of the  Bonds  and
continuance of such default for five Business Days;

                                       12
<PAGE>


     (b) failure by the  Company to pay when due any amount  required to be paid
under this  Participation  Agreement or the Company Note, which failure causes a
default in the payment when due of the principal of, or premium,  if any, on any
of the Bonds;  provided  that,  with respect to any payment of principal  of, or
premium,  if any,  payable on Bonds called for  redemption,  such failure by the
Company shall continue for five Business Days; or

     (c)  failure  by the  Company to pay when due any amount  required to be
paid under Section 4.11,  which failure causes a default in the payment when due
of any amount payable pursuant to Article V of the Indenture;

     (d) failure on the part of the Company duly to observe or perform any other
of the  covenants  or  agreements  on the part of the Company  contained in this
Participation  Agreement  (other than failure to pay amounts required to be paid
under Sections 4.04,  4.05, 4.07, 4.08, 4.09 or 4.10) or in the Company Note for
a period of 90 days  after  the date on which  written  notice of such  failure,
requiring  the Company to remedy the same,  shall have been given to the Company
by the  Authority or the Trustee,  provided,  however,  that, if such failure is
such  that it  cannot be  corrected  within  such  90-day  period,  it shall not
constitute  an event of  default  if  corrective  action  is  instituted  by the
Corporation  within such 90-day period and diligently pursued until such failure
is corrected; or

     (e) an Act of Bankruptcy relating to the Company;

then,  and in any such event,  the Trustee  with the consent of Ambac,  may, and
upon the  written  request of Ambac or the  owners of at least 25% in  aggregate
principal  amount of the Bonds then outstanding with the consent of Ambac shall,
by notice in writing to the Company and Ambac and provided  that the default has
not  theretofore  been cured,  declare  the  Company  Note to be due and payable
immediately,  and upon any such  declaration  the same shall become and shall be
immediately due and payable,  anything contained in this Participation Agreement
or in the Company Note to the contrary notwithstanding. Any amounts collected by
the Trustee pursuant to action taken under this Section 6.01 shall be applied in
accordance with the Indenture.  In addition, if at any time the principal of the
Bonds shall have been declared to be due and payable by acceleration pursuant to
the terms of the  Indenture,  the  Company  Note shall  thereupon  become and be
immediately  due and payable,  subject to such  declaration  with respect to the
Bonds being rescinded or annulled pursuant to the Indenture.

      The right or  obligation  of the Trustee to make any such  declaration  as
aforesaid,  however,  is  subject  to the  condition  that if, at any time after
declaration,  but before all the Bonds shall have  matured by their  terms,  the
principal  of,  premium,  if any,  and interest on, the Company Note which shall
have become due and payable  otherwise than by such  declaration,  and all other
sums payable  hereunder,  except the  principal of, and interest on, the Company
Note which  shall have become due and  payable by such  declaration,  shall have
been paid or provision satisfactory to the Trustee shall have been made for such
payment,  and the  reasonable  expenses  of the Trustee and of the owners of the
Bonds  incurred  pursuant  to the  Indenture  shall  have been  paid,  including
reasonable  attorneys'  fees paid or incurred,  and all defaults  hereunder  and
under the Bonds or under the  Indenture,  except as to the payment of  principal
and interest due and payable solely by reason of such declaration, shall be made
good or be secured to the satisfaction of the Trustee or provision deemed by the
Trustee to be adequate shall be made therefor,  then and in every such

                                       13
<PAGE>


case the owners of a majority in  aggregate  principal  amount of the Bonds then
outstanding,  by written  notice to the Authority and to the Trustee,  may
rescind  such  declaration  and annul such default in its  entirety,  or, if the
Trustee shall have acted in the absence of a written request of the owners of at
least 25% in aggregate  principal amount of the outstanding  Bonds, and if there
shall not have been  theretofore  delivered to the Trustee written  direction to
the contrary by the owners of at least 25% in aggregate  principal amount of the
outstanding  Bonds,  then any such declaration  shall ipso facto be deemed to be
rescinded and any such default and its  consequences  shall ipso facto be deemed
to be annulled,  but no such  rescission and annulment shall extend to or affect
any  subsequent  default  or impair  or  exhaust  any right or power  consequent
thereon.

     Anything in this Participation  Agreement to the contrary  notwithstanding,
upon the  occurrence and  continuance of an event of default as defined  herein,
Ambac  Assurance (if not in default) shall be entitled to control and direct the
enforcement of all rights and remedies granted to the Bondholders or the Trustee
for  the  benefit  of  the  Bondholders  under  this  Participation   Agreement,
including,  without limitation: (i) the right to accelerate the principal of the
Company Note as described in this Participation Agreement, and (ii) the right to
rescind any  declaration  of  acceleration,  and Ambac  Assurance  shall also be
entitled to approve all waivers of events of default.

     In case the Trustee  shall have  proceeded  to enforce any right under this
Participation Agreement or the Company Note and such proceedings shall have been
discontinued or abandoned for any reason or shall have been determined adversely
to the Trustee,  then and in every such case the Company,  the Authority and the
Trustee  shall be restored  respectively  to their former  positions  and rights
hereunder, and all rights, remedies and powers of the Company, the Authority and
the Trustee shall continue as though no such proceedings had been taken.

     In the event of any Act of Bankruptcy, reorganization or liquidation, Ambac
Assurance  shall  have the right to vote on behalf of all  Bondholders  absent a
default by Ambac Assurance under the Policy.

     SECTION  6.02.  Certain  Events of Default;  Authority  or Trustee May Take
Certain  Actions.  In case the  Company  shall  have  failed to comply  with its
obligations under Article III or under Sections 4.04, 4.08, 4.09, 4. 10 or 5.16,
which event shall have continued for a period of 90 days after the date on which
written notice of such failure,  requiring the Company to remedy the same, shall
have been given to the Company by the Authority or the Trustee, the Authority or
the Trustee may take whatever action at law or in equity as may appear necessary
or  desirable  to  enforce  performance  or  observance  of any  obligations  or
agreements  of the Company  under said Article or Sections.  In case the Company
shall have failed to comply with its obligations under Section 4.05, which event
shall have  continued  for a period of 90 days  after the date on which  written
notice of such  failure,  requiring  the Company to remedy the same,  shall have
been given to the Company by the Trustee,  the Trustee may take whatever  action
at law or in equity as may  appear  necessary  or  desirable  to the  Trustee to
enforce  performance  or  observance  of any  obligations  or  agreements of the
Company under said Section.

     SECTION 6.03.  Judicial  Proceedings  by Trustee.  Upon the  occurrence and
continuance of an event of default (as defined in Section 6.01) the Trustee may,
and  upon the  written  request  of the  owners  of at  least 25 % in  aggregate
principal  amount of the Bonds then  outstanding  and  receipt by the Trustee of
indemnity  satisfactory to it shall, institute any actions or proceedings at law
or in  equity  for the  collection  of any  amounts  then due and  unpaid on the
Company  Note,

                                       14
<PAGE>

and may  prosecute  any such  action or  proceeding  to  judgment  or final
decree,  and may  collect in the manner  provided  by law the money  adjudged or
decreed to be payable.

                                   ARTICLE VII
                                  MISCELLANEOUS

     SECTION 7.01.  Disposition  of Amounts After Payment of Bonds.  Any amounts
determined  by the  Trustee  to be  remaining  in the  funds  created  under the
Indenture  after payment in full, or provision for payment in full, of principal
of, and premium,  if any, and interest on, all of the Bonds,  in accordance with
the  provisions  of the  Indenture,  and  payment of all the fees,  charges  and
expenses of the  Authority,  the  Fiduciaries,  the  Remarketing  Agents and the
Indexing  Agents  in  accordance  with  the  Indenture  and  this  Participation
Agreement  and any amounts  required to be paid to the United  States of America
pursuant to the Tax  Regulatory  Agreement,  shall  belong to and be paid to the
Company.

     SECTION  7.02.  Notices.  All  notices,  certificates,  requests  or  other
communications  between the Authority,  the Company and the Trustee  required or
permitted to be given under this Participation  Agreement or under the Indenture
(except as otherwise  provided therein) shall be sufficiently given and shall be
deemed  given when  delivered  or mailed by first class mail,  postage  prepaid,
addressed  as  follows:  if to the  Authority,  at  Corporate  Plaza  West,  286
Washington Avenue Extension, Albany, New York 12203, Attention: President; if to
the Company, at 284 South Avenue, Poughkeepsie, New York 12601-4879,  Attention:
Treasurer;  if to the Trustee,  at 450 West 33rd Street,  New York,  N.Y. 10001,
Attention:  Global Trust Services;  if to the Remarketing  Agent, at the address
set forth in the Remarketing  Agreement;  and if to the Tender Agent or Ambac to
the addresses set forth for such persons in Section  17.09 of the  Indenture.  A
duplicate copy of each notice, certificate, request or other communication given
hereunder  to the  Authority,  Ambac,  the Company or the Trustee  shall also be
given to the others.  The Company,  Ambac, the Authority and the Trustee may, by
notice given  hereunder,  designate any further or different  addresses to which
subsequent  notices,  certificates,  requests or other  communications  shall be
sent.

     SECTION 7.03.  Successors and Assigns.  This Participation  Agreement shall
inure to the benefit of and shall be binding  upon the  Authority,  the Company,
the Fiduciaries,  all providers of Support  Facilities,  the Remarketing Agents,
the Indexing Agents and their respective  successors and assigns.  To the extent
that this  Participation  Agreement confers upon or gives or grants to Ambac any
right, remedy or claim under or by reason of this Participation Agreement, Ambac
(if not in default under the Policy) is hereby explicitly  recognized as being a
third-party beneficiary hereunder and may enforce any such right remedy or claim
conferred,  given or granted hereunder.  Nothing in this Participation Agreement
expressed or implied is intended or shall be  construed  to confer  upon,  or to
give or grant to, any Person,  other than the Authority,  the  Fiduciaries,  the
providers of Support  Facilities,  the Remarketing  Agents, the Indexing Agents,
the Company and the Bondholders,  any right,  remedy or claim under or by reason
of this  Participation  Agreement  or any  covenant,  condition  or  stipulation
hereof,  and  all  covenants,  stipulations,  promises  and  agreements  in this
Participation  Agreement  contained by and on behalf of the Company shall be for
the sole and exclusive benefit of the Authority, the Fiduciaries,  all providers
of Support  Facilities,  the Remarketing  Agents,  the Indexing Agents,  and the
Bondholders.

                                       15
<PAGE>


     SECTION 7.04. References to the Liquidity Facility.  After establishment of
a Fixed Rate for the Bonds and upon  receipt by the  Trustee of notice  from the
Liquidity  Provider  that all amounts  payable to the  Liquidity  Provider  with
respect to the Liquidity  Facility have been  received,  all  references in this
Participation  Agreement to the  Liquidity  Facility or the  Liquidity  Provider
shall be ineffective.

     SECTION 7.05.  Amendment of  Participation  Agreement.  This  Participation
Agreement may not be amended  except by an  instrument in writing  signed by the
parties hereto and upon  compliance  with the applicable  provisions of Sections
14.06,  14.07 and 14.08 of the  Indenture.  Subject to the provisions of Section
14.06 of the Indenture,  any provision of this Participation Agreement expressly
recognizing  or granting  rights in or to Ambac  Assurance may not be amended in
any manner which  affects the rights of Ambac  Assurance  hereunder  without the
prior written consent of Ambac Assurance.

     SECTION  7.06.  Assignment  and Transfer.  The  Authority  shall assign its
rights under and interest in this Participation Agreement (except the rights and
interest of the Authority under Article III and Sections 4.04,  4.08, 4.09, 4.10
and 5.16, clause (a) of this Section 7.06, and insofar as the obligations of the
Company  under  Section  4.07 relate to taxes and  assessments  imposed upon the
Authority  and  not the  Fiduciaries,  Section  4.07  thereof),  subject  to the
provisions of this Participation Agreement relating to the amendment thereof, to
the Trustee pursuant to the Indenture,  as security for payment of the principal
of, and premium,  if any, and interest on, the Bonds.  In addition,  the Trustee
shall have the same  power as the  Authority  to  enforce  from time to time the
rights of the Authority  set forth in Article III and Section  5.16,  subject to
the provisions of this Participation Agreement relating to the amendment hereof.
Except as provided in this Section 7.06,  the Authority  will not sell,  assign,
transfer,  convey or  otherwise  dispose of its  interest in this  Participation
Agreement during the term of this Participation Agreement.

     The Company may convey, transfer, lease or otherwise dispose of the Project
and be released from its obligations under this Participation Agreement, the Tax
Regulatory  Agreement and the Company Note, in a transaction not  constituting a
Transfer as defined in Section 5.14(a), subject to the following:

     (a) The Authority shall have consented to the conveyance,  transfer,  lease
or  other  disposition  upon  receipt  of legal  opinions  and  other  documents
satisfactory to it under the circumstances.

     (b) The Person  that is a  transferee  of the  Project  shall  execute  and
deliver to the  Trustee an  instrument,  in form  satisfactory  to the  Trustee,
whereby such Person shall effectually assume the due and punctual payment of the
principal of, and premium,  if any, and interest on, the Company Note  according
to its  tenor  and  the due  and  punctual  performance  and  observance  of all
covenants  and  agreements  to be  performed  by the  Company  pursuant  to this
Participation Agreement, the Tax Regulatory Agreement and the Company Note.

     (c) If a disposition  is made as permitted by this Section,  the provisions
of this Section and Section 5.14 shall  continue in full force and effect and no
further  disposition  shall be made except in compliance  with the provisions of
this Section or Section 5.14.

                                       16
<PAGE>

     SECTION 7.07. Participation Agreement Supersedes Any Prior Agreements. This
Participation  Agreement and the related  documents  identified herein supersede
any other  prior  agreements  or  understandings,  written or oral,  between the
parties with respect to the transactions contemplated hereby.

     SECTION 7.08. Counterparts. This Participation Agreement may be executed in
any number of  counterparts,  each of which when so executed and delivered shall
be an original,  but such counterparts shall together constitute but one and the
same Participation Agreement.

     SECTION  7.09.  Severability.  If any clause,  provision or section of this
Participation  Agreement is held illegal,  invalid or unenforceable by any court
or  administrative  body,  such  Participation  Agreement shall be construed and
enforced as if such  illegal or invalid or  unenforceable  clause,  provision or
section had not been  contained  in this  Participation  Agreement.  In case any
agreement or obligation contained in this Participation  Agreement shall be held
to be in violation of law, then such agreement or obligation  shall be deemed to
be the agreement or obligation of the Authority or the Company,  as the case may
be, to the full extent permitted by law.

     SECTION 7.10. NEW YORK LAW TO GOVERN.  THE DOMESTIC LAW OF THE STATE OF NEW
YORK SHALL GOVERN THE CONSTRUCTION OF THIS PARTICIPATION AGREEMENT.


                                       17
<PAGE>


     IN WITNESS  WHEREOF,  the parties  hereto  have  caused this  Participation
Agreement to be duly executed as of the day and year first written above.

                                            NEW YORK STATE ENERGY RESEARCH
                                            AND DEVELOPMENT AUTHORITY


                                            By:  /s/ Paul J. Ganci
                                                _____________________ 
                                                      President

(SEAL)

ATTEST:

Vice President and Secretary


                                            CENTRAL HUDSON GAS & ELECTRIC
                                            CORPORATION


                                            By:    /s/ Steven V. Lant
                                                 _______________________
                                                 Chief Financial Officer,
                                                 Treasurer and Secretary


(SEAL)

ATTEST:

 /s/ William P. Reilly
_______________________
Assistant Secretary




                                       18
<PAGE>

                                    EXHIBIT A


                     (To Participation Agreement dated as of
                       December 1, 1998, between New York
                      State Energy Research and Development
            Authority and Central Hudson Gas & Electric Corporation)


                    CENTRAL HUDSON GAS & ELECTRIC CORPORATION


                                   $16,700,000

                                 PROMISSORY NOTE
                                       FOR
                    POLLUTION CONTROL REFUNDING REVENUE BONDS
       (CENTRAL HUDSON GAS & ELECTRIC CORPORATION PROJECT), 1998 SERIES A


     Central  Hudson  Gas & Electric  Corporation  (the  "Company"),  a New York
corporation,  for value received, hereby promises to pay, on or before the dates
set forth below,  the amounts set forth below,  to The Chase Manhattan Bank, New
York,  New York,  as trustee or its  successor  or  successors  as trustee  (the
"Trustee")  under the Trust Indenture dated as of December 1, 1998,  between the
New York State Energy Research and Development  Authority (the  "Authority"),  a
body  corporate  and  politic,   constituting  a  public  benefit   corporation,
established  and  existing  under  and by virtue of the laws of the State of New
York,  and  the  Trustee.  Such  Trust  Indenture,  as  it  may  be  amended  or
supplemented  from  time to time,  is  herein  called  the  "Indenture."  Unless
otherwise defined herein,  the terms used in this promissory note (the " Company
Note ") which are  defined  in  Section  1.01 of the  Indenture  shall  have the
meanings,  respectively,  herein which such terms are given in said Section 1.01
of the Indenture.

     This  Company  Note is issued  pursuant to the  Participation  Agreement in
order to evidence the  obligation  of the Company to the  Authority to repay the
advance of the  proceeds  of the Bonds.  In  accordance  with the  Participation
Agreement,  the Authority has  authorized and directed the Company to issue this
Company  Note payable to the order of the Trustee as security for the payment of
principal  of,  premium,  if any,  and  interest  on, the Bonds.  The rights and
interest of the Authority under the  Participation  Agreement (except the rights
and interest of the Authority under Article III and Sections 4.04,  4.08,  4.09,
4.10  and  5.16  thereof,  clause  (a)  of  Section  7.06,  and  insofar  as the
obligations  of the Company under  Section 4.07 relate to taxes and  assessments
imposed upon the  Authority  and not the  Fiduciaries,  Section  4.07  thereof),
subject  to  the  provisions  of the  Participation  Agreement  relating  to the
amendment thereof,  have been assigned to the Trustee pursuant to the Indenture.
In  addition,  the  Authority  has  granted  the  Trustee  the same power as the
Authority to enforce from time to time the rights of the  Authority set forth in
said  Article  III  and  Section  5.16,   subject  to  the   provisions  of  the
Participation  Agreement  relating to the amendment  thereof.  All of the terms,
conditions and provisions of the 

                                      A-1
<PAGE>

Participation Agreement are, by this reference thereto, incorporated herein as
part of this Company Note.

     This Company Note shall be payable as to  principal,  premium,  if any, and
interest as follows:

     (a) On or before each Interest Payment Date, commencing June 1, 1999, a sum
which together with other money then available for such purpose in the Bond Fund
will  enable the  Trustee to pay the  interest  on the Bonds  coming due on such
date;

     (b) On or before any redemption date for the Bonds (other than a redemption
date pursuant to Section 5.06 of the Indenture), a sum which together with other
money then  available  for such purpose in the Bond Fund will enable the Trustee
to pay the principal of, premium, if any, and interest on the Bonds which are to
be redeemed on such date; and

     (c) On or before December 1, 2028, a sum which together with other money
then  available for such purpose in the Bond Fund will enable the Trustee to pay
the outstanding principal amount of the Bonds;

provided  that,  if the Bonds  are  redeemed  pursuant  to  Section  5.06 of the
Indenture,  the amounts that would  otherwise  have been payable on this Company
Note if not for such  redemption,  shall continue to be payable at the times and
in the amounts  set forth  above as if such  redemption  had not  occurred;  and
provided further that if the Bonds are redeemed  pursuant to Section 5.06 of the
Indenture the Company shall have the right at any time thereafter to prepay this
Company  Note by paying the amount due on this  Company Note at the time of such
prepayment  together with unpaid  interest  accrued  thereon to the date of such
prepayment.

      The  obligation  of the Company to make any payment of  principal  of, and
premium,  if any, and  interest on, this Company Note shall be deemed  satisfied
and  discharged to the extent of the  corresponding  payment made by a Liquidity
Provider (other than as Purchase Price).

      All payments of principal  of, and premium,  if any, and interest on, this
Company Note shall be made by wire transfer in  immediately  available  funds to
the Trustee at its corporate trust office,  450 West 33rd Street, New York, N.Y.
10001,  ABA  Routing  Number:  F021000021,  to Account  No.  323-332749;  Attn.:
NYSERDA/Central Hudson 1998 Series A, or to such different address or account as
the  Trustee  may from time to time  designate,  on or before each date on which
such principal,  premium, if any, or interest is due in such coin or currency of
the United States of America as at the time of payment shall be legal tender for
the payment of public and private debts.

      The  Company  has agreed in the  Participation  Agreement  that if for any
reason Company Note Payments, together with other moneys held by the Trustee and
then available for such purpose  (including  money paid by a Liquidity  Provider
(other  than  as  Purchase  Price)),   would  not  be  sufficient  to  make  the
corresponding  payments of principal  of, and premium,  if any, and

                                      A-2
<PAGE>

interest on, the Bonds when such payments are due, the Company will pay the
amounts required from time to time to make up any such deficiency.

      In the event that payment has been made in respect of the principal of and
premium,  if any, and interest on, all of the Bonds,  or provision  therefor has
been made in  accordance  with the  Indenture,  then this  Company Note shall be
deemed paid in full and shall be cancelled and returned to the Company; provided
that  this  Company  Note  shall  not be  deemed  paid in full if the  Bonds are
redeemed pursuant to Section 5.06 of the Indenture.

      No  reference  herein to the  Participation  Agreement  shall  impair  the
obligation  of the Company to pay the  principal  of and  premium,  if any,  and
interest on this  Company  Note at the time and place and in the amounts  herein
prescribed,  which obligation is absolute,  irrevocable and unconditional and is
not  subject  to any  defense  (other  than  payment)  or any right of  set-off,
counterclaim or recoupment for any reason,  including,  without limitation,  any
breach by the  Authority of any  obligation  to the Company,  whether  under the
Participation Agreement or otherwise, or inaccuracy of any representation by the
Authority to the Company under the Participation  Agreement, or any indebtedness
or liability at any time owing to the Company by the Authority or any failure to
complete the Project or the destruction by fire or other casualty of the Project
or any portion thereof, or the taking of title thereto or the use thereof by the
exercise of the power of eminent domain.

      In  case of an  event  of  default  (as  defined  in  Section  6.01 of the
Participation  Agreement),  the principal of and interest to the date of payment
of this Company Note may be declared  immediately due and payable as provided in
the Participation  Agreement.  In addition,  if at any time the principal of the
Bonds shall have been declared to be due and payable by acceleration pursuant to
the terms of the  Indenture,  this  Company Note shall  thereupon  become and be
immediately  due and payable,  subject to such  declaration  with respect to the
Bonds being annulled pursuant to the Indenture.

      This Company Note may not be amended  except by an  instrument  in writing
signed by the Company,  by the  Authority  and by the Trustee,  on behalf of the
owners of the Bonds, in the manner and subject to the conditions provided in the
Indenture.

      This Company Note may not be  transferred  by the Trustee except to effect
an assignment to a successor  Trustee under the Indenture or pursuant to Section
5.06 of the Indenture.

      THIS COMPANY NOTE SHALL BE GOVERNED BY AND  CONSTRUED IN  ACCORDANCE  WITH
THE DOMESTIC LAW OF THE STATE OF NEW YORK.

      Presentment,  demand,  protest and notice of dishonor are hereby expressly
waived.


                                      A-3
<PAGE>


             IN WITNESS WHEREOF,  the Company has caused this Company Note to be
duly executed and delivered as of December 1, 1998.

                                          CENTRAL HUDSON GAS & ELECTRIC
                                          CORPORATION



                                          By:    /s/ Steven V. Lant
                                               ________________________________
(SEAL)                                            Chief Financial Officer,
                                                  Treasurer and Secretary



ATTEST:


/s/ William P. Reilly
____________________________
Assistant Secretary