Guarantee Agreement

                                     between

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                 (as Guarantor)

                                       and

                            FIRST UNION NATIONAL BANK
                             (as Guarantee Trustee)


                                   Dated as of


                              ---------- --, -----

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
ARTICLE I DEFINITIONS..........................................................1
         Section 1.01.              Definitions................................1
ARTICLE II TRUST INDENTURE ACT.................................................3
         Section 2.01.              Trust Indenture Act; Application...........3
         Section 2.02.              List of Holders............................4
         Section 2.03.              Reports by the Guarantee Trustee...........4
         Section 2.04.              Periodic Reports to Guarantee Trustee......4
         Section 2.05.              Evidence of Compliance with Conditions
                                      Precedent................................4
         Section 2.06.              Events of Default; Waiver..................5
         Section 2.07.              Event of Default; Notice...................5
ARTICLE III POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE.................5
         Section 3.01.              Powers and Duties of the Guarantee
                                      Trustee..................................5
         Section 3.02.              Certain Rights of Guarantee Trustee........7
         Section 3.03.              Indemnity..................................8
ARTICLE IV GUARANTEE TRUSTEE...................................................8
         Section 4.01.              Guarantee Trustee; Eligibility.............8
         Section 4.02.              Appointment, Removal and Resignation
                                      of the Guarantee Trustee.................9
ARTICLE V GUARANTEE............................................................9
         Section 5.01.              Guarantee..................................9
         Section 5.02.              Waiver of Notice and Demand...............10
         Section 5.03.              Obligations Not Affected..................10
         Section 5.04.              Rights of Holders.........................11
         Section 5.05.              Guarantee of Payment......................11
         Section 5.06.              Subrogation...............................11
         Section 5.07.              Independent Obligations...................11
ARTICLE VI COVENANTS AND SUBORDINATION........................................12
         Section 6.01.              Subordination.............................12
         Section 6.02.              Pari Passu Guarantees.....................12
ARTICLE VII TERMINATION.......................................................12
         Section 7.01.              Termination...............................12
ARTICLE VIII MISCELLANEOUS....................................................12
         Section 8.01.              Successors and Assigns....................12
         Section 8.02.              Amendments................................12
         Section 8.03.              Notices...................................13
         Section 8.04.              Benefit...................................14
         Section 8.05.              Interpretation............................14
         Section 8.06.              Governing Law.............................14



<PAGE>

                             CROSS-REFERENCE TABLE*

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

310(a)                                                                 4.01(a)
310(b)                                                           4.01(c), 2.08
310(c)                                                            Inapplicable
311(a)                                                                 2.02(b)
311(b)                                                                 2.02(b)
311(c)                                                            Inapplicable
312(a)                                                                 2.02(a)
312(b)                                                                 2.02(b)
313                                                                       2.03
314(a)                                                                    2.04
314(b)                                                            Inapplicable
314(c)                                                                    2.05
314(d)                                                            Inapplicable
314(e)                                                        1.01, 2.05, 3.02
314(f)                                                              2.01, 3.02
315(a)                                                                 3.01(d)
315(b)                                                                    2.07
315(c)                                                                    3.01
315(d)                                                                 3.01(d)
316(a)                                                        1.01, 2.06, 5.04
316(b)                                                                    5.03
316(c)                                                                    8.02
317(a)                                                            Inapplicable
317(b)                                                            Inapplicable
318(a)                                                                 2.01(b)
318(b)                                                                    2.01
318(c)                                                                 2.01(a)

------------
*     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.

                                      (ii)
<PAGE>

                                                                     Exhibit 4-9


                               GUARANTEE AGREEMENT


      This  GUARANTEE  AGREEMENT,  dated as of _______ __, ____, is executed and
delivered by Public Service Electric and Gas Company,  a New Jersey  corporation
(the "Guarantor"),  to First Union National Bank, a national banking association
duly organized and existing  under the laws of the United States of America,  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
PSE&G Capital Trust IV, a Delaware statutory business trust (the "Issuer").

      WHEREAS,  pursuant to an Amended and Restated  Trust  Agreement  for PSE&G
Capital Trust IV (the "Trust Agreement"), dated as of _______ __, ____ among the
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 $________ aggregate  liquidation amount of its ___% Cumulative
Quarterly Income Preferred  Securities,  Series _ (liquidation  amount of $_____
per preferred  security) (the  "Preferred  Securities")  representing  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 sale by the Issuer of its
Common  Securities  will be used to purchase the  Debentures  (as defined in the
Trust  Agreement)  of the  Guarantor  which will be  deposited  with First Union
National Bank, as Property Trustee under the Trust Agreement,  as Trust Property
(as defined in the Trust Agreement); 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 1.01.  Definitions.  As used in this Guarantee Agreement,  each of
the terms set forth below shall, unless the context otherwise requires, have the
following  meaning.  Each  capitalized  or  otherwise  defined term used but not
otherwise  defined  herein shall have the meaning  assigned to such terms in the
Trust Agreement as in effect on the date hereof.

<PAGE>

      "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.  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 undivided beneficial
interests in the assets of the Issuer and having the rights provided therefor in
the Trust Agreement.

      "Event of Default"  means a default by the Guarantor on any of its payment
or other obligations under this Guarantee Agreement;  provided, that except with
respect to a default resulting from a failure to pay any Guarantee Payment,  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  (as
defined  in the Trust  Agreement),  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  required to be paid on the
Preferred  Securities,  to the  extent the  Issuer  shall  have funds  available
therefor,  (ii) the  redemption  price,  including  all  accumulated  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  available  therefor,  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  amount of $_____ 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  available  therefor  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 First Union  National  Bank,  until a Successor
Guarantee  Trustee (as defined  below) 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 a Person in whose name a Preferred  Security is registered
in the Securities Register;  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 June 1, 1996,  between Public
Service  Electric  and Gas  Company and First Union  National  Bank,  as trustee
thereunder.

      "List of Holders" has the meaning specified in Section 2.02(a).


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<PAGE>

      "Majority in liquidation amount of the Preferred Securities" means, except
as provided by the Trust Indenture Act, a vote by the Holders,  of more than 50%
of the aggregate liquidation amount of all then outstanding Preferred Securities
issued by the Issuer.

      "Officers'  Certificate" means a certificate  signed by the Chairman,  the
President,  any Vice  President,  the Treasurer,  any Assistant  Treasurer,  the
Secretary or any Assistant Secretary of the Guarantor.

      "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association,  joint-stock company, trust, unincorporated
organization,  government or any agency or political  subdivision thereof or any
other entity.

      "Responsible  Officer" means, with respect to the Guarantee  Trustee,  any
Vice  President,  any Assistant Vice  President,  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  Senior  Indebtedness  as  defined  in  the
Indenture.

      "Successor   Guarantee  Trustee"  means  a  successor   Guarantee  Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.01.

      "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed;  provided,  however,  that in
the event the Trust  Indenture  Act of 1939 is amended  after such date,  "Trust
Indenture Act" means, to the extent  required by any such  amendment,  the Trust
Indenture Act of 1939, as so amended.

                                   ARTICLE II
                               TRUST INDENTURE ACT

Section 2.01.     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.


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<PAGE>

   Section 2.02. List of Holders.

            (a) The  Guarantor  shall  furnish or cause to be  furnished  to the
Guarantee Trustee (i) 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 (ii) 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
Sections 311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act.

      Section 2.03. Reports by the Guarantee  Trustee.  Within 60 days after May
31 of each year, 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 2.04.  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 and manner and at the times
required by Section 314 of the Trust Indenture Act.

      Section  2.05.  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. Each Officers'  Certificate and Opinion of Counsel delivered with
respect  to  compliance  with a  condition  or  covenant  provided  for in  this
Guarantee Agreement shall include:

            (a) a statement that each officer signing the Officers'  Certificate
or Opinion of Counsel has read the  covenant  or  condition  and the  definition
relating thereto;

            (b) a brief  statement of the nature and scope of the examination or
investigation  undertaken by each officer in rendering the Officers' Certificate
or Opinion of Counsel and upon which the statements contained therein are based;

            (c) a statement that each 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


                                       4
<PAGE>

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

Section 2.06. Events of Default; Waiver. The Holders of a Majority in
liquidation amount 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 therefrom.

Section 2.07.     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.

                                  ARTICLE III
                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

Section 3.01. 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  5.04(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.


                                       5
<PAGE>

            (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  and is  continuing  (and has not been cured or waived  pursuant to
Section  2.06),  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 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 its own negligent  action,  its
own negligent failure to act or its own 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 a Majority in  liquidation  amount 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


                                       6
<PAGE>

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 reasonable  indemnity against such risk or liability
is not reasonably assured to it.

Section 3.02.     Certain Rights of Guarantee Trustee

            (a) Subject to the provisions of Section 3.01:

                  (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 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  Officers'
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 Officers'  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, and
the written  advice or Opinion of 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 reasonable 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;  provided  that,  nothing
contained in this  Section  3.02(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


                                       7
<PAGE>

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 3.03.  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 willful  misconduct 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 4.01. 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
fifty million U.S. dollars ($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


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<PAGE>

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 4.01(a),  the Guarantee Trustee shall immediately resign
in the manner and with the effect set out in Section 4.02(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.  In  determining  whether  the
Guarantee  Trustee has a  "conflicting  interest"  within the meaning of Section
310(b)(1) of the Trust Indenture Act, the provisions contained in the proviso to
Section  310(b)(1)  of the  Trust  Indenture  Act  and the  Guarantee  Trustee's
Statement of Eligibility on Form T-1 shall be deemed incorporated herein.

Section 4.02. Appointment, Removal and Resignation of the Guarantee Trustee.

            (a)  Subject  to  Section  4.02(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 new,  eligible
guarantee trustee has been appointed (a "Successor  Guarantee  Trustee") and has
accepted such  appointment and assumed the applicable  obligations  hereunder by
written instrument executed by such Successor Guarantee Trustee and delivered to
the Guarantor.

            (c) 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  4.02 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 5.01.  Guarantee.  The Guarantor  irrevocably and  unconditionally
agrees to pay in full to the Holders of the Outstanding Preferred Securities the
Guarantee  Payments  (without  duplication of amounts  theretofore paid by or on
behalf  of the  Issuer  pursuant  to the  Trust


                                       9
<PAGE>

Agreement  or by the  Guarantor  pursuant  to the  Indenture),  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 5.02.  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,  the 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  5.03.  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 an Extension  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,  termination,  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 detect or  deficiency  in, the Preferred
Securities;

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

            (g)  to  the  extent  permitted  by  law,  any  other   circumstance
whatsoever  that might  otherwise  constitute a legal or equitable  discharge or
defense  of a  guarantor,  it being


                                       10
<PAGE>

the intent of this Section 5.03 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 5.04. 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  amount 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
exercise  or  direct  the  exercise  of any  trust or power  conferred  upon the
Guarantee  Trustee  under this  Guarantee  Agreement;  and (iv) if the Guarantee
Trustee has failed to enforce this Guarantee  Agreement as above  provided,  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 5.05.  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 5.06.  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  5.01;  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 5.07. 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 5.03 hereof.


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<PAGE>

                                   ARTICLE VI
                           COVENANTS AND SUBORDINATION


      Section 6.01.  Subordination.  This Guarantee Agreement will constitute an
unsecured  obligation of the Guarantor and will rank  subordinate  and junior in
right of payment to all general liabilities of the Guarantor.

      Section 6.02. 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 Cumulative Quarterly Income Preferred Securities issued
by PSE&G Capital Trust I, PSE&G Capital Trust II and PSE&G Capital Trust III and
on behalf of the  holders  of the 9-3/8%  Cumulative  Monthly  Income  Preferred
Securities,  Series A and the 8% Cumulative Monthly Income Preferred Securities,
Series B issued by Public Service Electric and Gas Capital, L.P.

                                  ARTICLE VII
                                   TERMINATION

      Section 7.01. Termination. This Guarantee Agreement shall terminate and be
of no  further  force and  effect  upon (i) full  payment  by the  Issuer or the
Guarantor,  as the  case  may be,  of the  Redemption  Price  for all  Preferred
Securities, (ii) the distribution of the Debentures to the Holders in accordance
with Article VIII of the Trust Agreement upon liquidation of the Issuer or (iii)
full payment by the Issuer or the Guarantor,  as the case may be, 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  8.01.  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.  The
Guarantor  may not  consolidate  with or merge  with or into,  or sell,  convey,
transfer or lease its properties and assets as an entirety or  substantially  as
an entirety  (either in one  transaction  or a series of  transactions)  to, any
Person unless permitted under Article Five of the Indenture.  In connection with
a consolidation,  merger or sale involving the Guarantor that is permitted under
Article  Five  of  the  Indenture  the  Person  formed  by  or  surviving   such
consolidation  or merger or to which such sale,  conveyance,  transfer  or lease
shall have been made, if other than the Guarantor, shall expressly assume all of
the obligations of the Guarantor hereunder and under the Trust Agreement.

      Section 8.02. 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


                                       12
<PAGE>

Holders  of a  Majority  in  liquidation  amount  of  the  Preferred  Securities
(excluding  any  Preferred  Securities  held by the  Guarantor  or an  affiliate
thereof).  The  provisions  of  Article  VI of the  Trust  Agreement  concerning
meetings of the Holders shall apply to the giving of such approval.

      Section 8.03. Notices. Any notice, request or other communication required
or permitted to be given hereunder shall be in writing and delivered, telecopied
or mailed by first class mail, postage prepaid, as follows:

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

            Public Service Electric and Gas Company
            80 Park Plaza
            P.O. Box 570
            Newark, NJ  07101
            Facsimile No:  973-242-1651
            Attention:  Treasurer

            (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:

            PSE&G Capital Trust IV
            80 Park Plaza
            Newark, NJ  07101
            Facsimile No:  973-242-1651
            Attention:  Treasurer

            with a copy to:

            First Union National Bank
            21 South Street
            Morristown, NJ  07960
            Facsimile No:  973-682-4531
            Attention:  Corporate Trust Department

            (c) if  given  to  any  Holder,  at the  address  set  forth  in the
Securities Register.

      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.


                                       13
<PAGE>

      Section 8.04. Benefit.  This Guarantee Agreement is solely for the benefit
of the Holders and is not separately transferable from the Preferred Securities.

      Section 8.05.  Interpretation.  In this  Guarantee  Agreement,  unless the
context otherwise requires:

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

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

            (c) 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;

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

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

      Section 8.06. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND  INTERPRETED  IN ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW
JERSEY AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW JERSEY
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.


                                       14
<PAGE>

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

                                   PUBLIC SERVICE ELECTRIC AND GAS COMPANY, as
                                   Guarantor


                                   By:
                                      ----------------------------------------
                                        Name:
                                        Title:


                                   FIRST UNION NATIONAL BANK,
                                   as  Guarantee Trustee


                                   By:
                                      ----------------------------------------
                                        Name:
                                        Title:

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