<PAGE>

                                                                   EXHIBIT 10.19

                                    SECOND
                             AMENDED AND RESTATED
                  WHOLESALE STANDARD OFFER SERVICE AGREEMENT






                           WHOLESALE STANDARD OFFER
                               SERVICE AGREEMENT


                                    between


                       THE NARRAGANSETT ELECTRIC COMPANY



                                      and

                            USGEN NEW ENGLAND, INC.





Dated as of September 1, 1998
<PAGE>

                               Table of Contents

<TABLE>
<S>                                                                               <C>
ARTICLE 1.  BASIC UNDERSTANDING..................................................  1

ARTICLE 2.  DEFINITIONS..........................................................  2

ARTICLE 3.  TERM AND REGULATORY APPROVAL.........................................  5
   3.1  Term.....................................................................  5
   3.2  Obtaining and Maintaining Required Permits...............................  5

ARTICLE 4.  SALE AND PURCHASE....................................................  5
   4.1  Wholesale Standard Offer Service.........................................  5
   4.2  Dispatchable Load Credits................................................  6

ARTICLE 5.  PRICE AND BILLING....................................................  6
   5.1  Price....................................................................  6
   5.2  Payment..................................................................  7
   5.3  Taxes, Fees and Levies...................................................  9

ARTICLE 6.  DELIVERY, LOSSES, AND DETERMINATION AND REPORTING OF HOURLY LOADS....  9
   6.1  Delivery.................................................................  9
   6.2  Losses...................................................................  9
   6.3  Determination and Reporting of Hourly Loads.............................. 10

ARTICLE 7.  DEFAULT AND TERMINATION.............................................. 11
   7.1  Material Breach and Termination.......................................... 11

ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES............................... 12
   8.1  Notices.................................................................. 12
   8.2  Authority of Representative.............................................. 13

ARTICLE 9.  LIABILITY, INDEMNIFICATION AND RELATIONSHIP OF PARTIES............... 13
   9.1  Limitation on Consequential, Incidental and Indirect Damages............. 13
   9.2  Recovery of Direct Damages Permitted..................................... 13
   9.3  Indemnification.......................................................... 14
   9.4  Independent Contractor Status............................................ 15

ARTICLE 10. ASSIGNMENT........................................................... 15
   10.1 Assignment............................................................... 15
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                          <C>
ARTICLE 11. FORCE MAJEURE...................................................  16
   11.1 Force Majeure Standard..............................................  16
   11.2 Force Majeure Definition............................................  16
   11.3 Obligation to Diligently Cure Force Majeure.........................  16

ARTICLE 12. WAIVERS.........................................................  17

ARTICLE 13. REGULATION......................................................  17
   13.1 Laws and Regulations................................................  17
   13.2 NEPOOL Requirements.................................................  17

ARTICLE 14. INTERPRETATION, DISPUTE RESOLUTION..............................  18
   14.1 Interpretation......................................................  18
   14.2 Dispute Resolution..................................................  18

ARTICLE 15. SEVERABILITY....................................................  18

ARTICLE 16. MODIFICATIONS...................................................  18

ARTICLE 17. SUPERSESSION....................................................  19

ARTICLE 18. COUNTERPARTS....................................................  19

ARTICLE 19. HEADINGS........................................................  19

Appendix A. Standard Offer Fuel Adjustment Provision........................ A-1

Appendix B. Estimation of Supplier Hourly Loads............................. B-1

Appendix C. Arbitration Agreement........................................... C-1
</TABLE>

                                      ii
<PAGE>

                     SECOND AMENDED AND RESTATED WHOLESALE
                       STANDARD OFFER SERVICE AGREEMENT

     This SECOND AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT
("Agreement") is dated as of September 1, 1998 and is by and between THE
NARRAGANSETT ELECTRIC COMPANY, a Rhode Island corporation ("NECO"), and USGen
New England, Inc., a Delaware corporation ("Seller"), and amends and restates
and supersedes in its entirety the Amended and Restated Wholesale Standard
Offer Service Agreement dated as of October 29, 1997 between NECO and Seller.
This Agreement provides for the purchase by NECO and the sale by Seller of
Wholesale Standard Offer Service, as defined in this Agreement.

                       ARTICLE 1. BASIC UNDERSTANDINGS

     NECO purchases all of its requirements of electricity for resale to its
retail electric customers from its affiliate, New England Power Company ("NEP").

     NEP, NECO and other parties have entered into an agreement in settlement of
regulatory proceedings before the Federal Energy Regulatory Commission (the
"Rhode Island Restructuring Agreement") that, among other things, implements
certain requirements of the Rhode Island Utility Restructuring Act of 1996 (the
"Act"), permits NECO to terminate wholesale purchases from NEP, permits current
retail customers of NECO to purchase electricity from other suppliers on and
after a date defined therein as the "Retail Access Date," or, for a limited
time, to purchase Standard Offer Service from NECO, obligates NEP to supply
NECO with power sufficient to meet the latter's obligations to supply Standard
Offer Service, and obligates NEP to transfer its interests in the electric
generating business to another party or parties.

     NEP, NECO, and Seller have entered an agreement under which Seller will
acquire certain NEP and NECO generating assets.

     NEP and Seller desire that Seller shall supply electric capacity and
energy to NECO to fulfill a portion of NEP's power supply obligations under the
Rhode Island Restructuring Agreement.

     Under the Rhode Island Restructuring Agreement, NECO is obligated to
afford wholesale power suppliers other than NEP the opportunity to commit to
supply NECO with power sufficient to meet NECO's obligation to supply retail
Standard Offer Service after the Retail Access Date.
<PAGE>

     This Agreement sets forth the terms under which Seller will supply
Wholesale Standard Offer Service to NECO, for a period beginning on the
Closing Date, to enable NECO to meet the needs of its retail customers for
electricity, including all or a portion of the needs of customers receiving
retail Standard Offer Service after the Retail Access Date.

                            ARTICLE 2. DEFINITIONS

     The following words and terms shall be understood to have the following
meanings when used in this Agreement, or in any associated documents entered
into in conjunction with this Agreement. In addition, except as otherwise
expressly provided, where terms used in this Agreement are defined in the NEPOOL
Agreement and not otherwise defined herein, such definitions are expressly
incorporated into this Agreement by reference.

Affiliate of NECO - Any company that is a subsidiary of New England Electric
-----------------
System and its successors.

Closing Date - The date upon which the Seller acquires ownership of generating
------------
assets it purchases from NEP.

Commission or FERC - The Federal Energy Regulatory Commission or such successor
------------------
federal regulatory agency as may have jurisdiction over this Agreement.

Contract Termination Date - The date established by the Rhode Island
-------------------------
Restructuring Agreement when the respective obligations of NEP and NECO under
NEP's FERC Electric Tariff, Original Volume No. 1, to sell and purchase
wholesale electric requirements service shall cease. The Contract Termination
Date occurred on January 1, 1998.

GWh - Gigawatt hour.
---

ISO - The Independent System Operator to be established in accordance with the
---
NEPOOL Agreement and the Interim Independent System Operator Agreement as
amended, superseded or restated from time to time.

kWh - Kilowatt- hour.
---

MECO - Massachusetts Electric Company.
----

MECO Wholesale Standard Offer Service Agreement - The Wholesale Standard Offer
-----------------------------------------------
Service Agreement of even date herewith between MECO and the Seller.

NECO's Service Territory - The geographic area in which NECO provided electric
------------------------
service to retail customers on August 6, 1996.

                                       2
<PAGE>

NECO's System - The electrical system of NECO and/or the electrical system of
-------------
any Affiliate of NECO.

MMBtu - Million British thermal units.
-----

NEP - New England Power Company, an Affiliate of NECO.
---

NEPEX - The New England Power Exchange.
-----

NEPOOL - The New England Power Pool.
------

NEPOOL Agreement - The New England Power Pool Agreement dated as of September
----------------
1, 1971, as amended and as may be amended or restated from time to time.

Price - The price set forth in SECTION 5.1, below.
-----

Prime Rate - The prime (or comparable) rate announced from time to time as its
----------
prime rate by the Bank of Boston or its successor, which rate may differ from
the rate offered to its more substantial and creditworthy customers.

PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL
---
Agreement.

Retail Access Date - The date so defined under the Rhode Island Restructuring
------------------
Agreement. The Retail Access Date occurred on January 1, 1998.

Rhode Island Restructuring Agreement - The Offer of Settlement dated May 30,
------------------------------------
1997, entered into by and among the RIPUC, the Rhode Island Division of Public
Utilities and Carriers, NECO, and NEP, as amended and accepted or approved by
the FERC.

RIPUC - The Rhode Island Public Utilities Commission.
-----

Standard Offer Auction - The solicitation by NECO of offers from wholesale power
----------------------
suppliers, including, at their option, NEP and Seller, of electric energy and
associated capacity and ancillary services necessary to meet the needs of
ultimate customers of NECO eligible for and accepting retail Standard Offer
Service on or after the Retail Access Date, and any wholesale electric supply
contracts resulting from that solicitation. The solicitation and any contract(s)
entered into as a result thereof shall not be on terms that are materially
different from those described by MECO in the Massachusetts Restructuring
Agreement (as defined in the MECO Wholesale Standard Offer Service Agreement),
the RFQ dated April 3, 1997, and the letter to potential asset purchasers dated
June 16, 1997, or result in a material adverse impact on Seller. NECO shall not,
without Seller's consent, conduct the Standard Offer Auction more than once or
more than six (6) months prior to the Retail Access Date, which date shall be
as reasonably determined by NECO.

                                       3
<PAGE>

Standard Offer Service - The electric service provided by NECO pursuant to the
----------------------
Rhode Island Restructuring Agreement: (i) to retail customers in NECO's Service
Territory during the period, if any, during the term of this Agreement
preceding the Retail Access Date: and (ii) to NECO's retail customers on the
Retail Access Date that do not elect to obtain their electric supply from an
alternative supplier on or after the Retail Access Date through December 31,
2009.

Wholesale Access Date - The date so defined under the Rhode Island
---------------------
Restructuring Agreement, as the date on which NECO in its sole discretion
decides to terminate its purchase from NEP of wholesale requirements service
pursuant to NEP's FERC Electric Tariff, Original Volume No. 1, by providing the
Commission and the Signatories to the Rhode Island Restructuring Agreement with
90 days advance notice in writing, said date not to be earlier than January 1,
1998.

Wholesale Standard Offer Service - The generation and delivery, to any location
--------------------------------
on the NEPOOL PTF system or NECO's system, of the portion of the electric
capacity, energy and ancillary services required by NECO to meet the needs of
NECO's ultimate customers taking Standard Offer Service, excluding, after the
Retail Access Date, any portion of such requirements that NECO has contracted
to obtain through the Standard Offer Auction, determined in accordance with
ARTICLE 4. Seller, as the supplier of Wholesale Standard Offer Service capacity
and energy, will be responsible for all present, or future requirements and
associated costs for installed capability, operable capability, energy,
operating reserves, and automatic generation control, including tie benefit
payments, losses and any congestion charges associated with Seller's supply of
Wholesale Standard Offer Service and any other requirements imposed by NEPOOL or
the ISO, as they may be in effect from time to time. To the extent that any
NEPOOL, ISO or any successor entity expenses or uplift costs are allocated to
wholesale suppliers, the portion of such costs associated with Seller's
supply of Standard Offer Service will also be the responsibility of Seller. To
the extent any costs contemplated by this paragraph are applicable to NECO and
recoverable by NECO from its customers, NECO shall be responsible for such
costs.

                    ARTICLE 3. TERM AND REGULATORY APPROVAL

3.1  Term
     ----

     The term of this Agreement shall begin at at 12:01 am on the Closing Date
and continue until the earlier of: (a) 11:59 p.m. on December 31, 2009; or (b)
the first date that NECO has no requirements for electric capacity and energy to
supply Standard Offer Service that are not satisfied by contracts resulting from
the Standard Offer Auction.

                                       4
<PAGE>

3.2  Obtaining and Maintaining Required Permits
     ------------------------------------------

     (a)  Performance under this Agreement is conditioned upon both Parties
securing and maintaining such federal, state or local approvals, grants or
permits as may be necessary for the sale and purchase of Wholesale Standard
Offer Service, which shall not include any approvals, grants, or permits
necessary for the operation of any particular generating facility. Each Party
shall use reasonable efforts to acquire and maintain such approvals, grants or
permits. If the acquisition or maintenance of a particular approval, grant, or
permit requires a modification to this Agreement, then the Parties agree to
negotiate in good-faith to reach a mutually agreeable modification of the
Agreement. The Parties are not required to reach such a mutually acceptable
modification.

     (b)  Seller will file this Agreement with FERC (and any other regulatory
agency as may have jurisdiction over the Agreement) in accordance with the
provisions of applicable laws, rules and regulations. Seller will be responsible
for any filing fees for filing this Agreement with FERC (and any other
regulatory agency as may have jurisdiction over the Agreement) and for any
regulatory assessments associated with sales under this Agreement. FERC approval
of this Agreement shall be a condition to the obligations of the Parties
hereunder.

                         ARTICLE 4. SALE AND PURCHASE

4.1  Wholesale Standard Offer Service
     --------------------------------

     Seller shall sell and deliver to the Delivery Points, as defined in ARTICLE
6, SECTION 6.1, and NECO shall purchase 90.78% of NECO's requirements for
Wholesale Standard Offer Service. NECO's requirements for Wholesale Standard
Offer Service shall be determined on the basis of ARTICLE 6, SECTION 6.3, below,
and the price for such sale and purchase shall be as set forth in ARTICLE 5,
SECTION 5.1, below.

4.2  Dispatchable Load Credits
     -------------------------

     Seller shall have the right, but not the obligation, to elect to purchase a
portion of the peak load reduction credits, if any, as provided for in NEPOOL
Criteria, Rules and Standards No. 16, associated with NECO's retail customers
which are taking Standard Offer Service and which are taking service under
NECO's Cooperative Interruptible Service Provision (as defined in NECO's tariffs
on file with RIPUC) ("Dispatchable Load Credits"), during the period commencing
at 0001 hours on the Closing Date and ending at 2400 hours on October 31, 1998
(the "Option Period"). Seller may purchase such credits for any, all, or any
combination of calendar months during the Option Period.

                                       5


<PAGE>

     In order to receive such credits, Seller shall provide NECO with written
notice of such election at least seven days prior to the requested start date.
Such notice shall include: (i) the requested start date, which shall be the
first day of a calendar month, (ii) the requested end date, which shall be the
last day of a calendar month, and (iii) the fixed amount per month of
Dispatchable Load Credits (the "Seller's Election"), which shall not exceed
90.78% of the minimum load reduction actually experienced by NECO during the
most recent 12 month period, excluding for such period months in which
interruptions occurred ("Load Reductions").

     In the event Seller does not provide a timely notice of election for any
month, Seller's election for such month will be presumed to be zero (0)
kilowatts.

     NECO will provide Seller during each month of this Agreement with a report
on (i) the quantity of Load Reductions for the preceding month and (ii) the
number of customers (and associated nominal interruptible load), if any, which
ceased taking service under NECO's Cooperative Interruptible Service Provision
during the preceding month.


                         ARTICLE 5. PRICE AND BILLING

5.1  Price
     -----

     (a)  For each kilowatt hour of Wholesale Standard Offer Service that Seller
delivers to the Delivery Points, in accordance with ARTICLE 6, SECTION 6.3,
below, NECO shall pay Seller a price equal to the following amounts for each
period during the term of this Agreement:


               ---------------------------------------------
                    Period            Price in Cents per
                                             kWh
               ---------------------------------------------
                     1998                 3.2 Cents
               ---------------------------------------------
                     1999                 3.5 Cents
               ---------------------------------------------
                     2000                 3.8 Cents
               ---------------------------------------------
                     2001                 3.8 Cents
               ---------------------------------------------
                     2002                 4.2 Cents
               ---------------------------------------------
                     2003                 4.7 Cents
               ---------------------------------------------
                     2004                 5.1 Cents
               ---------------------------------------------
                     2005                 5.5 Cents
               ---------------------------------------------

                                       6
<PAGE>

               ---------------------------------------------
                     2006                 5.9 Cents
               ---------------------------------------------
                     2007                 6.3 Cents
               ---------------------------------------------
                     2008                 6.7 Cents
               ---------------------------------------------
                     2009                 7.1 Cents
               ---------------------------------------------

     In addition, in the event of increases in the market price of No. 6
residual fuel oil (1% sulphur) and natural gas after 1999 as described in
Appendix A, NECO shall pay Seller additional amounts in accordance with the
Standard Offer Fuel Adjustment Provision, described in Appendix A, attached and
incorporated herein by reference.

     (b)  For any month in which Seller elects to receive Dispatchable Load
Credits, in accordance with ARTICLE 4, SECTION 4.2, for each kilowatt of
Seller's Election, NECO shall be entitled to a reduction in the amount owed to
Seller by NECO pursuant to paragraph (a) above at a value calculated pursuant to
the second paragraph of ARTICLE 5, SECTION 5.2, using the following rates
("Option Price"):

          ---------------------------------------------------------------------
                Month Of Transfer                        Option Price in
                                                       Dollars per KW Month
          ---------------------------------------------------------------------
            January, February, July, Au-                        $3.125
                  gust, September,
                      December
          ---------------------------------------------------------------------
            March, April, May, June,                            $1.875
               October, November
          ---------------------------------------------------------------------

5.2  Payment
     -------

     (a)  On or before the tenth (10th) day of each month during the term of
this Agreement, NECO shall: (i) calculate the amount due and payable to Seller
pursuant to this ARTICLE 5 with respect to the preceding month; and (ii) advise
Seller of the schedule upon which it shall pay the amount so calculated, which
schedule shall comply with paragraph (b), below.

     The amount payable shall be calculated by (i) multiplying the Price
specified in the first paragraph of ARTICLE 5, SECTION 5.1, above, for the
applicable Contract Period by the quantity of Wholesale Standard Offer Service
delivered by Seller to the Delivery Points for NECO's Standard Offer Service
customers in the month, as determined in accordance with ARTICLE 6, SECTION 6.3,
below and then subtracting the result obtained by (ii) multiplying the Option
Price specified in the second paragraph of ARTICLE 5, SECTION 5.1, above, for

                                       7
<PAGE>

the applicable month by the Seller's Election for the applicable month, as
determined and certified as true and accurate, by Seller.

     Because quantities determined under SECTION 6.3 are estimated, subject to a
reconciliation process described in SECTION 6.3(d), quantities used in
calculations under this paragraph (a) shall be subject to adjustment, whether
positive or negative, in subsequent months' calculations, to reflect that
reconciliation process, and any adjusted quantities shall be applied to the
Price applicable during the month of the calculation being adjusted. Additional
amounts due Seller, if any, from the Standard Offer Fuel Adjustment Provision
shall be added to such amount.

     (b) NECO shall pay Seller any amounts due and payable on or before the
twenty-fifth (25th) day after the date a calculation is made pursuant to
paragraph (a), provided that, if and to the extent NECO pays Seller any portion
of the amount due and payable before the twenty-fifth (25th) day after a
calculation is made, it shall be entitled, without interest or penalty, to defer
payment of an equal portion of the amount due and payable for that month by the
lesser of: (i) the same number of days that the early payment preceded the
twenty-fifth day after the calculation; and (ii) twenty-five (25) days. If all
or any part of any amount due and payable pursuant to paragraph (a) shall remain
unpaid thereafter, interest shall thereafter accrue and be payable to Seller on
such unpaid amount at a rate per annum equal to two percent (2%) above the
Prime Rate in effect on the date of such bill; provided, however, if the amount
                                               --------  -------
due and payable is disputed, interest shall accrue and be payable to Seller on
the unpaid amount finally determined to be due and payable at a rate per annum
equal to the Prime Rate in effect on the date of the calculation pursuant to
paragraph (a): and provided, further, no interest shall accrue in favor of
               ------------  -------
Seller or NECO on amounts that are added to or credited against a calculation
due to the adjustment of estimated quantities in accordance with paragraph (a)
and ARTICLE 6, SECTION 6.3.

     (c) With respect to reconciliation adjustments pursuant to SECTION 6.3(d)
or any error in a calculation (whether the amount is paid to not), any
overpayment, underpayment, or reconciliation adjustment will be refunded or paid
up, as appropriate. Interest shall accrue from the date of the error or
adjustment on the unpaid or overpaid amount finally determined to be due and
shall be calculated pursuant to Section 35.19a of the Commission regulations.

5.3  Taxes, Fees and Levies
     ----------------------

     Seller shall be obligated to pay all present and future taxes, fees and
levies which may be assessed upon Seller by any entity upon the purchase or
sale of electricity covered by the Agreement. To the extent such taxes, fees,
and levies are allowed to be, and are actually, recoverable by NECO from its
customers, NECO shall reimburse Seller for such taxes, fees, and levies paid by
Seller. It is expressly agreed that Seller shall not be responsible for, and
shall be held harmless from, the Rhode Island Tax on gross receipts or earnings
(Public

                                       8
<PAGE>

Service Corporation Tax, Chapter 44-13 of the Rhode Island General Laws, as
amended or superseded).


              ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND
                           REPORTING OF HOURLY LOADS

6.1  Delivery
     --------

     All electricity shall be delivered to NECO in the form of three-phase
sixty-hertz alternating current at any location on the NEPOOL PTF system or
NECO's System ("Delivery Points"). Title shall pass to NECO at the Delivery
Point and Seller shall incur no expense or risk beyond the Delivery Point other
than those described in SECTION 6.2. If the NEPOOL control area experiences
congestion, Seller will be responsible for any congestion costs incurred in
delivering power across the PTF system to NECO to the extent such costs are
imposed by NEPOOL or the ISO on suppliers. Seller shall be responsible for all
transmission and distribution costs associated with the use of transmission
systems outside of NEPOOL and any local point to point charges and distribution
charges needed to deliver the power to the NEPOOL PTF.

6.2  Losses
     ------
     Seller shall be responsible for all transmission and distribution losses
associated with the delivery of electricity supplied under this Agreement to
the meters of ultimate customers of NECO receiving retail Standard Offer
Service, provided, however, that losses do not include service to unmetered
facilities for which estimates of kWh use are available and provided, further,
that Seller shall not be responsible for unmetered use or consumption of
electricity by NECO's Affiliates. Seller shall provide NECO at the Delivery
Points with additional quantities of electricity and ancillary services to
cover such losses, but Seller shall not be entitled to payment under ARTICLE 5
of this Agreement for such additional quantity. The quantities required for this
purpose in each hour of a billing period shall be determined in accordance with
NEPOOL's, NEP's and NECO's filed procedures for loss determination.

6.3  Determination and Reporting of Hourly Loads
     -------------------------------------------

    (a) To meet its NEPOOL obligations, Seller, or a NEPOOL member having an
own-load dispatch or settlement account with the NEPOOL billing system with
whom Seller has a load inclusion agreement, must report to NEPOOL or the ISO the
Standard Offer Service load for which Seller is providing Wholesale Standard
Offer Service pursuant to this Agreement, including losses. To accomplish this,
NECO will estimate its total hourly Standard Offer Service load based upon
average load profiles developed for each NECO customer class and NECO's actual
total hourly load. Appendix B, attached and incorporated herein by reference,
provides a general description of the estimation process that NECO will
initially employ (the "Estimation Process"). NECO reserves the right, subject
to the approval of appropriate

                                       9
<PAGE>

regulatory authorities having jurisdiction to modify the Estimation Process in
the future, provided that any such modification be designed to improve the
accuracy of its results, and provided further that NECO shall consult with
Seller and other similarly situated sellers to the maximum extent permitted by
any applicable standards of conduct. NECO will report to NEPOOL, on behalf of
Seller or such other NEPOOL member, Seller's hourly Standard Offer Service load,
which shall equal the portion of NECO's estimated total Standard Offer Service
hourly load for which Seller is responsible for supplying Wholesale Standard
Offer Service under this Agreement.

     (b)  NECO will report to NEPOOL or the IS0 Seller's hourly adjusted
Standard Offer Service loads by 1:00 p.m. of the second following business day.
This adjusted load should be added by NEPOOL or the IS0 to the other NEPOOL load
of Seller or such other NEPOOL member.

     (c)  At the end of each month, NECO shall aggregate Seller's hourly loads
for the month as determined by the Estimation Process. For purposes of SECTION
5.1, above, the result of the Estimation Process, less losses to the Standard
Offer Service customers' meters determined as specified in ARTICLE 6 SECTION
5.2, above, will be deemed to be the quantity of Wholesale Standard Offer
Service delivered by Seller to the Delivery Points in a month.

     (d)  To refine the estimates of Seller's monthly Standard Offer Service
load developed by the Estimation Process, a monthly calculation will be
performed to reconcile the original estimate of Seller's Standard Offer Service
loads to actual customer usage based on meter reads. NECO will apply any
resulting billing adjustment (debit or credit) to Seller's account no later than
the last day of the third month following the billing month. Appendix B,
attached and incorporated herein by reference, also provides a general
description of this reconciliation process.


                      ARTICLE 7. DEFAULT AND TERMINATION

7.1 Material Breach and Termination
    -------------------------------

     (a)  (i)  If NECO fails in any material respect to comply with observe or
               perform any covenant, warranty or obligation under this Agreement
               (except due to causes excused by force majeure or attributable to
                                                -------------
               to Seller's wrongful act or wrongful failure to act); and

          (ii) After receipt of written notice from Seller such failure
               continues for the Cure Period (as defined below), or, if such
               failure cannot be reasonably cured within the Cure Period, such
               further period as shall reasonably be required to effect such
               cure (except in the case of a payment default), provided that
               NECO commences within the Cure Period to effect such

                                      10
<PAGE>

                   cure and at all times thereafter proceeds diligently to
                   complete such cure as quickly as possible; then

             (iii) Seller shall have the right to terminate this Agreement,
                   subject to paragraph (c) below. For purposes of this Section
                   7.1(a), the Cure Period shall mean five days in the case of a
                   failure by NECO to fulfill its payment obligations pursuant
                   to Section 5.2 and forty-five (45) days in the case of a
                   failure by NECO to comply with, observe or perform any other
                   covenant, warranty or obligation under this Agreement. If an
                   unexcused failure to pay continues for fifteen (15) days,
                   Seller shall have the right to suspend service until payment
                   is made in full and appropriate security is posted for future
                   payments or to terminate this Agreement.

     (b)     (i)   If Seller fails in any material respect to comply with,
                   observe, or perform any covenant, warranty or obligation
                   under this Agreement (except due to causes excused by force
                                                                         -----
                   majeure or attributable to NECO's wrongful act or wrongful
                   -------
                   failure to act); and

             (ii)  After receipt of written notice from NECO such failure
                   continues for a period of forty-five (45) days or, if such
                   failure cannot be reasonably cured within such forty-five
                   (45) day period, such further period as shall reasonably be
                   required to effect such cure, provided that Seller commences
                   within such forty-five (45) day period to effect such cure
                   and at all times thereafter proceeds diligently to complete
                   such cure as quickly as possible; then

             (iii) NECO shall have the right to terminate this Agreement,
                   subject to paragraph (c) below.

     (c)     Any termination arising out of the exercise of the termination
rights specified in paragraphs (a) or (b) above (with the exception of
termination for a payment default) may not take effect unless and until an
arbitrator (pursuant to ARTICLE 14, SECTION 14.2 of this Agreement) has made a
ruling that the exercise of such termination right was valid. The fact that one
party alleged to be in material breach of this Agreement ("Alleged Breaching
Party') complies with the request of the other to cure an alleged material
breach shall not be considered by the arbitrator as an admission against the
Alleged Breaching Party or evidence that such party was or was not in material
breach.

     (d)     Nothing in this SECTION 7.1 shall be construed to limit the right
of any party to seek any remedies for damages, as limited by ARTICLE 9 of this
Agreement, even if a cure of an alleged breach is made within the periods of
time specified for curing any such breach stated above. The provisions of this
SECTION 7.1 are intended only to provide the exclusive process through which one
party may exercise and effectuate its right to terminate this Agreement as a
result of a material breach of this Agreement.

                                      11
<PAGE>

              ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES

8.1 Notices
    -------

     Any notice, demand, or request required or authorized by this Agreement to
be given by one party to another party shall be in writing. It shall either be
sent by facsimile (confirmed by telephone), overnight courier, personally
delivered and acknowledged in writing or by registered or certified mail,
(return receipt requested) postage prepaid, to the representative of the other
party designated in this ARTICLE 8. Any such notice, demand, or request shall be
deemed to be given (i) when sent by facsimile confirmed by telephone, (ii) when
actually received if delivered by courier or personal deliver or (iii) three (3)
days after deposit in the United States mail, if sent by first class mail.

     Notices and other communications by Seller to NECO shall be addressed to:

                      The Narragansett Electric Company
                      c/o New England Power Service Company
                      25 Research Drive
                      Westborough, MA 01582
                      Attention: Michael J. Hager
                      Fax: (508) 389-2463

     Notices and other communications by NECO to Seller shall be addressed to:

                      USGen New England, Inc.
                      7500 Old Georgetown Road, 13th Floor
                      Bethesda, MD 20814
                      Attention: Stephen A. Herman
                      Fax: (301) 718-6913

     Any party may change its representative by written notice to the others.

8.2 Authority of Representative
    ---------------------------

     The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall
have full authority to act for their respective principals in all technical
matters relating to the performance of this Agreement. They shall not, however,
have the authority to amend, modify, or waive any provision of this Agreement
unless they are authorized officers of their respective entities.

                                      12
<PAGE>

                   ARTICLE 9. LIABILITY, INDEMNIFICATION, AND
                            RELATIONSHIP OF PARTIES

9.1 Limitation on Consequential, Incidental and Indirect Damages
    ------------------------------------------------------------

     To the fullest extent permissible by law, neither NECO nor Seller, nor
their respective officers, directors, agents, employees, parent or affiliates,
successor or assigns, or their respective officers, directors, agents, or
employees, successors, or assigns, shall be liable to the other party or its
parent, subsidiaries, affiliates, officers, directors, agents, employees,
successors or assigns, for claims, suits, actions or causes of action for
incidental, indirect, special, punitive, multiple or consequential damages
(including attorney's fees or litigation costs) connected with or resulting from
performance or non-performance of this Agreement, or any actions undertaken in
connection with or related to this Agreement, including without limitation any
such damages which are based upon causes of action for breach of contract, tort
(including negligence and misrepresentation), breach of warranty, strict
liability, Rhode Island Gen. Laws Title 6, c. 13.1, statute, operation of law,
or any other theory of recovery. The provisions of this SECTION 9.1 shall apply
regardless of fault and shall survive termination, cancellation, suspension,
completion or expiration of this Agreement.

9.2 Recovery of Direct Damages Permitted
    ------------------------------------

     Notwithstanding the provisions of ARTICLE 9, SECTION 9.1, subject to the
duty to mitigate damages as provided under common law of damages recovery, both
NECO and Seller shall be entitled to recover their actual, direct damages (i)
incurred as a result of the other party's breach of this Agreement or (ii)
incurred as a result of any other claim arising out of any action undertaken in
connection with or related to this Agreement. For purposes of avoiding any
disputes about the difference between direct damages and consequential damages,
the parties agree as follows:

     (a)  (1)  To the extent that NECO is found to be in breach of this
               Agreement or liable under another cause of action; and

          (2)  as a result of such breach or event giving rise to the cause of
               action, Seller suffers loss of profits that Seller reasonably
               expected to have received from NECO under this Agreement had NECO
               performed under this Agreement; then

          (3)  Seller shall be entitled to recover any lost profits that Seller
               can demonstrate it lost or will lose as a result of NECO's
               breach, subject to the duty to mitigate.

     (b)  (1)  To the extent that Seller fails to provide NECO Wholesale
               Standard Offer Service Power under the terms of this Agreement;
               and

                                      13
<PAGE>

          (2)  as a result, Seller is found to be in material breach of this
               Agreement or liable under another cause of action; and

          (3)  subject to the duty to mitigate, NECO purchases (as a result of
               Seller's failure) power from a third party at a price that is
               higher than what NECO would have paid under the terms of this
               Agreement, NECO may recover the difference between the price NECO
               paid to such third party and the price it would have paid had
               Seller performed; provided, however, Seller shall not be liable
                                 --------  -------
               to NECO for lost profits associated with any expected revenue
               streams from the sale of power to third parties or lost profits
               from any other contracts or sales.

     (c)  Except as provided in paragraphs (a) and (b) above, neither NECO nor
Seller shall be liable to the other for lost profits arising out of performance,
or non-performance of this Agreement, whether such lost profits may be
categorized as direct, incidental, indirect, or consequential damages and
irrespective of whether such claims are based upon warranty, tort, strict
liability, contract, statute (including R.I. G.L. Title 6, c. 13.1), operation
of law or otherwise.

9.3 Indemnification
    ---------------

     (a)  Seller agrees to defend, indemnify and save NECO, its officers,
directors, employees, agents, successors, assigns, and Affiliates and their
officers, directors, employees, and agents harmless from and against any and all
claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by Seller, its officers, directors,
employees, agents or affiliates or caused by or sustained on its facilities,
except to the extent caused by an act of negligence or willful misconduct by an
officer, director, agent, employee or Affiliate of NECO or their successors or
assigns.

     (b)  NECO agrees to defend, indemnify and save Seller, its officers,
directors, employees, agents, successors, assigns, and affiliates and their
officers, directors, employees, and agents harmless from and against any and all
claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by NECO, its officers, directors,
employees, agents or affiliates or caused by or sustained on its facilities,
except to the extent caused by an act of negligence or willful misconduct by an
officer, director, agent, employee or Affiliate of Seller or their successors or
assigns.

     (c)  If any party intends to seek indemnification under this ARTICLE from
the other party with respect to any action or claim, the party seeking
indemnification shall give the other party notice of such claim or action within
fifteen (15) days of the commencement of, or actual knowledge of, such claim or
action. Such party seeking indemnification shall have the right, at its sole
cost and expense, to participate in the defense of any such claim or action. The
party seeking indemnification shall not compromise or settle any such claim or
action without the prior consent of the other party, which consent shall not be
unreasonably withheld.

                                      14
<PAGE>

9.4     Independent Contractor Status
        -----------------------------

        Nothing in this Agreement shall be construed as creating any
relationship between NECO and Seller other than that of independent contractors
for the sale and purchase of electricity provided as Wholesale Standard Offer
Service.


                            ARTICLE 10. ASSIGNMENT

10.1    Assignment
        ----------

        This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto,
including by operation of law without the prior written consent of the other
party, nor is this Agreement intended to confer upon any other Person except the
parties hereto any rights or remedies hereunder. Notwithstanding the foregoing,
(i) NECO may, without Seller's prior written consent, (A) assign all or a
portion of its rights and obligations under this Agreement to any Affiliate of
NECO or (B) assign its rights and obligations hereunder, or transfer such rights
and obligations by operation of law, to any corporation or other entity with
which or into which NECO shall merge or consolidate or to which NECO shall
transfer all or substantially all of its assets, provided that such Affiliate or
other entity agrees to be bound by the terms thereof; provided, in either case,
that the assignee or transferor shall have senior securities rated investment,
grade or better; (ii) the Seller may assign all of its rights and obligations
hereunder to any wholly owned Subsidiary (direct or indirect) of PG&E
Corporation and upon NECO's receipt of notice from Seller of any such
assignment, the Seller will be released from all liabilities and obligations,
hereunder, accrued and unaccrued, such assignee will be deemed to have assumed,
ratified, agreed to be bound by and perform all such liabilities and
obligations, and all references herein to "Seller" shall thereafter be deemed
references to such assignee, in each case without the necessity for further act
or evidence by the parties hereto or such assignee; provided, however, that no
such assignment and assumption shall release the Buyer from its liabilities and
obligations hereunder unless the assignee shall have acquired all or
substantially all of the Buyer's assets; provided, further, however,
that no such assignment and assumption shall relieve or in any way discharge
PG&E Corporation from the performance of its duties and obligations under the
Guaranty dated as of the date of this Agreement executed by PG&E Corporation,
and (iii) the Seller or its permitted assignee may assign, transfer, pledge or
otherwise dispose of its rights and interests hereunder to a trustee or lending
institution(s) for the purposes of financing or refinancing the Purchased
Assets, including upon or pursuant to the exercise of remedies under such
financing or refinancing, or by way of assignment, transfers, conveyances or
dispositions in lieu thereof; provided, however, that no such assignment or
disposition shall relieve or in any way discharge the Seller or such assignee
from the performance of its duties and obligations under this Agreement. NECO
agrees to execute and deliver such documents as may be reasonably necessary to
accomplish any such assignment, transfer, conveyance, pledge or

                                      15
<PAGE>

disposition of rights hereunder so long as NECO's rights under this Agreement
are not thereby altered, amended, diminished or otherwise impaired.


                           ARTICLE 11. FORCE MAJEURE

11.1    Force Majeure Standard
        ----------------------

        The parties shall be excused from performing their respective
obligations hereunder and shall not be liable in damages or otherwise, if and
only to the extent that they are unable to so perform or are prevented from
performing by an event of force majeure.
                          -------------

11.2    Force Majeure Definition
        ------------------------

        An event of force majeure includes, without limitation, storm, flood,
                    -------------
lightning, drought, earthquake, fire, explosion, equipment failure, civil
disturbance, labor dispute, act of God or the public enemy, action of a court or
public authority, or any other cause beyond a party's control, but only if and
to the extent that the event directly affects the availability of the
transmission or distribution facilities of NEPOOL, NECO or an Affiliate
necessary to deliver Wholesale Standard Offer Service to NECC's customers.
Events affecting the availability or cost of operating any generating facility
shall not be events of force majeure.
                       -------------

11.3    Obligation to Diligently Cure Force Majeure
        -------------------------------------------

        If any party shall rely on the occurrence of an event or condition
described in ARTICLE 11, SECTION 11.2, above, as a basis for being excused from
performance of its obligations under this Agreement, then the party relying on
the event or condition shall:

              a.  provide written notice to the other parties promptly but in no
                  event later than 5 days of the occurrence of the event or
                  condition giving an estimation of its expected duration and
                  the probable impact on the performance of its obligations
                  hereunder;

              b.  exercise all reasonable efforts to continue to perform its
                  obligations hereunder;

              c.  expeditiously take reasonable action to correct or cure the
                  event or condition excusing performance; provided that
                                                           -------- ----
                  settlement of strikes or other labor disputes will be
                  completely within the sole discretion of the party affected by
                  such strike or labor dispute;

              d.  exercise all reasonable efforts to mitigate or limit damages
                  to the other parties to the extent such action will not
                  adversely affect its own interests; and

                                      16
<PAGE>

              e.  provide prompt notice to the other parties of the cessation of
                  the event or condition giving rise to its excuse from
                  performance.

                              ARTICLE 12. WAIVERS

        The failure of either party to insist in any one or more instance upon
strict performance of any of the provisions of this Agreement or to take
advantage of any of its rights under this Agreement shall not be construed as a
general waiver of any such provision or the relinquishment of any such right,
but the same shall continue and remain in full force and effect, except with
respect to the particular instance or instances.


                            ARTICLE 13. REGULATION

13.1    Laws and Regulations
        --------------------

        This Agreement and all rights, obligations, and performances of the
parties hereunder, are subject to all applicable Federal and state laws, and to
all duly promulgated orders and other duly authorized action of governmental
authority having jurisdiction.

13.2    NEPOOL Requirements
        -------------------

        This Agreement must comply with all NEPOOL Criteria, Rules, and Standard
Operating Procedures ("Rules"). If, during the term of this Agreement, the
NEPOOL Agreement is terminated or amended in a manner that would eliminate or
materially alter a Rule affecting a right or obligation of a party hereunder, or
if such a Rule is eliminated or materially altered by NEPOOL, the parties agree
to negotiate in good faith in an attempt to amend this Agreement to incorporate
a replacement Rule ("Replacement Rule"). The intent of the parties is that any
such Replacement Rule reflect, as closely as possible, the intent and substance
of the Rule being replaced as such Rule was in effect prior to such termination
or amendment of the NEPOOL Agreement or elimination or alteration of the Rule.
If the parties are unable to reach agreement on such an amendment, the parties
agree to submit the matter to arbitration under the terms of Appendix C,
attached and incorporated herein by reference, and to seek a resolution of the
matter consistent with the above stated intent.


                ARTICLE 14. INTERPRETATION, DISPUTE RESOLUTION

14.1    Interpretation
        --------------

        The interpretation and performance of this Agreement shall be in
accordance with and controlled by the laws of The State of Rhode Island.

                                      17
<PAGE>

14.2    Dispute Resolution
        ------------------

        All disputes between NECO and Seller arising out of or relating to this
Agreement which are defined as "Arbitrable Claims" in SECTION 2 of Appendix C,
attached and incorporated herein by reference, shall be resolved by binding
arbitration and be governed by the terms of such Arbitration Agreement. Any
arbitration of an Arbitrable Claim that is substantially related to an
arbitrable claim under a Wholesale Standard Offer Service Agreement among
Seller, Massachusetts Electric Company, and Nantucket Electric Company shall be
conducted jointly with the arbitration of the latter claim, before the same
panel of arbitrators, with NECO, Massachusetts Electric Company, and Nantucket
Electric Company jointly exercising their rights regarding the selection of
arbitrators. Any decisions of the arbitrators shall be final and binding upon
the parties.


                           ARTICLE 15. SEVERABILITY

        If any provision or provisions of this Agreement shall be held invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.


                           ARTICLE 16. MODIFICATIONS

        No modification to this Agreement will be binding on any party unless it
is in writing and signed by all parties.


                           ARTICLE 17. SUPERSESSION

        This Agreement constitutes the entire agreement between the parties
 relating to the subject matter hereof and its execution supersedes any other
 agreements, written or oral, between the parties concerning such subject
 matter.


                           ARTICLE 18. COUNTERPARTS

        This Agreement may be executed in any number of counterparts, and each
 executed counterpart shall have the same force and effect as an original
 instrument.


                             ARTICLE 19. HEADINGS

        Article and Section headings used throughout this Agreement are for the
 convenience of the parties only and are not to be construed as part of this
 Agreement.

                                      18
<PAGE>

        IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on their behalf as of the date first
above written.

                                           THE NARRAGANSETT ELECTRIC
                                           COMPANY


                                           By: /s/ Michael E. Jesanis
                                              ------------------------------
                                                   Michael E. Jesanis

                                           Its:  Vice President
                                               -----------------------------

                                           USGEN NEW ENGLAND, INC.


                                           By: /s/ James V. Mahoney
                                              ------------------------------
                                                   James V. Mahoney

                                           Its:  Senior Vice President
                                               -----------------------------
<PAGE>

                          Appendix A. Standard Offer
                           Fuel Adjustment Provision

     In the event of substantial increases in the market prices of No. 6
residual fuel oil (1% sulphur) and natural gas after 1999, NECO will pay
additional amounts to Seller in accordance with this Standard Offer Fuel
Adjustment Provision, which is calculated as follows:

     The Stipulated Price that is in effect for a given billing month is
multiplied by a "Fuel Adjustment" that is set equal to 1.0 and thus has no
impact on the rate paid unless the "Market Gas Price" plus "Market Oil Price"
                                                      ----
for the billing month exceeds the "Fuel Trigger Point" then in effect, where:

          The Stipulated Price is the following predetermined, flat
          --------------------
          rate, for energy consumed at the customer meter point:

                Calendar Year             Price per Kilowatt hour
                -------------             -----------------------

                     1998                        3.2 cents
                     1999                        3.5 cents
                     2000                        3.8 cents
                     2001                        3.8 cents
                     2002                        4.2 cents
                     2003                        4.7 cents
                     2004                        5.1 cents
                     2005                        5.5 cents
                     2006                        5.9 cents
                     2007                        6.3 cents
                     2008                        6.7 cents
                     2009                        7.1 cents

     Seller will be paid the difference between the Stipulated Price as
adjusted in accordance with this Standard Offer Fuel Adjustment Provision and
the Stipulated Price for each kilowatt-hour it provides in the applicable month.

     Market Gas Price is the average of the values of "Gas Index" for the most
     ----------------
recent available twelve months, where:

          Gas Index is the average of the daily settlement prices for
          ---------
          the last three days that the NYMEX Contract (as defined
          below) for the month of delivery trades as reported in the
          "Wall Street Journal", expressed in dollars per MMBtu. NYMEX
          Contract shall mean the New York Mercantile Exchange Natural
          Gas Futures Contract as approved by the Commodity Futures
          Trading Commission for the purchase and sale of natural gas
          at Henry Hub;

                                      A-1
<PAGE>

     Market Oil Price is the average of the values of "Oil Index" for the most
     ----------------
recent available twelve months, where:

          Oil Index is the average for the month of the daily low
          ---------
          quotations for cargo delivery of 1.0% sulphur No. 6 residual
          fuel oil into New York harbor, as reported in "Patt's
          Oilgram U.S. Marketscan" in dollars per barrel and converted
          to dollars per MMBtu by dividing by 6.3; and

     If the indices referred to above should become obsolete or no longer
suitable, NECO shall file alternate indices with the RIPUC.

     Fuel Trigger Point is the following amounts, expressed in dollars per
     ------------------
MMBtu, applicable for all months in the specified calendar year:

                    2000                        $ 5.35/MMBtu
                    2001                        $ 5.35
                    2002                        $ 6.09
                    2003                        $ 7.01
                    2004                        $ 7.74
                    2005                        $ 8.48
                    2006                        $ 9.22
                    2007                        $ 9.95
                    2008                        $10.69
                    2009                        $11.42

     In the event that the Fuel Trigger Point is exceeded, the Fuel Adjustment
value for the billing month is determined based according to the following
formula:

     Fuel =     (Market Gas Price + $.60/MMBtu)+(Market Oil Price +$.04/MMBtu)
 Adjustment     --------------------------------------------------------------
                              Fuel Trigger Point+$.60+$.04/MMBtu

     Where:

          Market Gas Price, Market Oil Price and Fuel Trigger Point
          are as defined above. The values of $.60 and $.04/MMBtu
          represent for gas and oil respectively, estimated basis
          differentials or market costs of transportation from the
          point where the index is calculated to a proxy power plant
          in the New England market.

     For example if at a point in the year 2002 the Market Gas Price
and Market Oil Price total $6.50 ($3.50/MMBtu plus $3.00/MMBtu
respectively), the Fuel Trigger Point of 6.09 would be exceeded. In
this case the Fuel Adjustment value would be:

                                 A-2
<PAGE>

                  ($3.50+$.60/MMBtu)+($3.00+$.04/MMBtu) = 1.0609
                  -------------------------------------
                          $6.09+$.60+$.04/MMBtu

The Stipulated Price is increased by this Fuel Adjustment factor for the billing
month, becoming 4.4548(cents)/kWh (4.2 x 1.0609).

     In subsequent months the same comparisons are made and, if applicable, a
Fuel Adjustment determined.

                                      A-3
<PAGE>

                Appendix B. Estimation of Supplier Hourly Loads

Overview

     Generating units operated by suppliers are dispatched by the power pool to
meet the region's electrical requirements reliably, and at the lowest possible
cost. As a result, a supplier's electricity production may not match the demand
of its customers. In each hour some suppliers with low cost production units are
net sellers of electricity to the pool, while other suppliers are purchasing
power from the pool to meet the demand of their customers. To determine the
extent to which suppliers are net buyers or sellers on an hourly basis, it is
necessary to estimate the hourly aggregate demand for all of the customers
served by each supplier ("own-load"). NECO will estimate Seller's Wholesale
Standard Offer Service "own-load" within NECO's service territory and report the
hourly results to NEPOOL or the ISO on a daily basis.

     The estimation process is a cost effective approach to producing results
that are reliable, unbiased and reasonably accurate. The hourly load estimates
will be based on rate class load profiles which will be developed from
statistically designed samples. Each day, the class load shapes will be scaled
to the population of customers served by each supplier. In cases where
telemetered data on individual customers are available, they will be used in
place of the estimated shapes. On a monthly basis, the estimates will be
refined by incorporating actual usage data obtained from meter readings. In
both processes, the sum of all suppliers' estimated loads will match the total
load delivered into the distribution system. A description of the estimation
process follows.

Daily Estimation of Suppliers' Own Load

     The daily process estimates the hourly load for each supplier for the
previous day. There are five components in this process:

     .     Select a proxy date from the previous year with characteristics which
           best match the day for which the hourly demand estimates are being
           produced. Extract class load shapes for the selected proxy date from
           the load research data base.

     .     Scale the class load shapes appropriately for each individual
           customer based on the usage level of the customer relative to the
           class average usage level.

     .     Calculate a factor for each customer which reflects their relative
           usage level and includes an adjustment for losses ("load adjustment
           factor"). Aggregate the load adjustment factors across the customers
           served by each supplier in each class.

                                      B-1
<PAGE>

     .     Produce a preliminary estimate of each supplier's hourly loads by
           combining the proxy day class load shapes with the supplier's total
           load adjustment factors. Aggregate the loads across the classes for
           each supplier.

     .     Adjust the preliminary hourly supplier estimates so that their sum is
           equal to NECO's actual hourly metered loads (as metered at the point
           of delivery to the distribution system) by allocating any
           differences to suppliers in proportion to their estimated load.

Monthly Reconciliation Process

     The monthly process will improve the estimates of supplier loads by
incorporating the most recent customer usage information, which will be
available after the monthly meter readings are processed. A comparison will be
made between customers' estimated and actual usage, by billing cycle, then
summed across billing cycles for each supplier. The ratio between the actual
kWh and the estimated kWh reflects the kWh amount for which the supplier may
have been overcharged or undercharged by NEPOOL or the ISO during the month.
This ratio will be used to develop a kWh adjustment amount for each supplier
for the calendar month. The sum of the adjustments will be zero because the
total kWh will still be constrained to equal NECO's actual hourly metered loads
during the month.

                                      B-2
<PAGE>

                       Appendix C. Arbitration Agreement

                            ARBITRATION AGREEMENT
                            ---------------------


     This Arbitration Agreement, dated as of September 1, 1998, is entered into
between The Narragansett Electric Company, a Rhode Island corporation ("NECO")
and USGen New England, Inc., a Delaware corporation ("Seller"). Reference is
made to that certain Second Amended and Restated Wholesale Standard Offer
Service Agreement dated as of September 1, 1998 (the "Service Agreement")
between NECO and Seller. Unless otherwise specified or apparent from the
context of this Arbitration Agreement, the term "Party" shall mean either NECO
or Seller, or both of them.

     WHEREAS, NECO and Seller wish to avoid the burden, time, and expense of
court proceedings with respect to any disputes that may arise from or relate to
the Service Agreement, and to submit such disputes to mandatory binding
arbitration if they cannot first be resolved through negotiation and mediation.

     NOW, THEREFORE, NECO and SELLER AGREE AS FOLLOWS:

1.   Mediation
     ---------

     Before resorting to mediation or arbitration under this Arbitration
Agreement, the Parties will try to resolve promptly through negotiation any
Arbitrable claim, as defined below. If the Arbitrable Claim has not been
resolved through negotiation within ten (10) days after the existence of the
Arbitrable Claim has been brought to the attention of the other Party in a
writing, any Party may request in writing to resolve the Arbitrable Claim
through mediation conducted by a mediator selected by agreement of the Parties.
The mediation procedure shall be determined by the Parties in consultation with
the mediator. Any medication pursuant hereto shall be kept confidential. The
fees and expenses of the mediator shall be borne equally by the Parties. If the
Parties are unable to agree upon the identity of a mediator or a mediation
procedure within ten (10) days after a Party has requested mediation in writing
or if the Arbitrable Claim has not been resolved to the satisfaction of either
NECO or Seller within forty (40) days after the Parties have selected a mediator
and agreed upon a mediation procedure, either Party may invoke arbitration
pursuant to the following sections by notifying the other Party of such
selection in writing consistent with Section 3(c), below.

2.   Mandatory Arbitration
     ---------------------

     (a)  Except as provided in paragraph (b) of this Section 2 and in
Section 8, below, any case, controversy or claim arising out of or relating to
the Service Agreement, its breach, or any other disputes arising out of the
business relationship created by the Service Agreement, of whatever nature,
including but not limited to any claim based in contract, in law, in equity,
any statute, regulation, or theory of law now in existence or which may come
into

                                      C-1
<PAGE>

existence in the future, whether known or unknown, including without limitation,
claims based upon deceit, fraudulent inducement, misrepresentation, 18 U.S.C
(S)(S)1962 and 1964 (RICO), and R.I. G.L. Title 6, c. 13.1, the federal and
state antitrust laws (collectively, the "Arbitrable Claims"), which cannot be
resolved by negotiation or mediation, as provided in Section 1 above, shall be
submitted to mandatory, binding, and final arbitration in accordance with
procedures set forth in this Agreement, which shall constitute the exclusive
remedy for any and all Arbitrable Claims.

     (b)  Notwithstanding paragraph (a) above, physical accidents or events
giving rise to negligence or intentional tort claims for the recovery of
property damages and/or damages for personal injury and failure to make payments
due under Section 5.2 of the Service Agreement shall not be considered
"Arbitrable Claims." However disputes regarding the interpretation or scope of
any indemnification clauses in the Service Agreement shall be subject to
arbitration, even if the dispute relates to whether one Party must indemnify the
other for property damages and/or damages for personal injury, the recovery of
which was or will be determined in a court of law.

     (c)  Each Party agrees that it will not attempt to circumvent this
Arbitration Agreement by coordinating or cooperating with their respective
parent companies of affiliates or guarantors in the filing of a legal action in
the name of any of the parent companies or affiliates or guarantors of the
Parties to this Arbitration Agreement regarding claims that otherwise are
subject to this Arbitration Agreement. Any Party failing to comply with this
provision shall indemnify the other Party against, and hold the other harmless
from, the costs (including reasonable litigation costs) incurred by the other in
defending any and all claims brought by a parent company or affiliate or
guarantor of the other in a court of law regarding claims that otherwise would
be Arbitrable Claims under this Arbitration Agreement.

3.   Selection and Qualification of Arbitrators
     ------------------------------------------

     (a)  Any arbitration shall be conducted by a panel of three neutral
arbitrators, consisting of (i) a practicing lawyer admitted to practice in the
Commonwealth of Massachusetts; (ii) a person with professional experience in and
substantial knowledge of the power generation industry in any one or more of the
New England States, who may be, but need not be a lawyer, and (iii) a person
with professional experience in and substantial knowledge of power markets in
any one or more of the New England States, who may, but need not be, a lawyer
(collectively, the "Arbitration Panel"). For purposes of this Arbitration
Agreement, an arbitrator or candidate shall be considered "neutral" only if the
arbitrator or candidate has not previously served as an arbitrator for a Party
or one of its affiliates or guarantors and is not a present or former lawyer,
employee or consultant of a Party or any of its affiliates or guarantors.

     (b)  Any Party entitled to commence arbitration hereunder shall do
so by serving a written Notice of Arbitration briefly describing the Arbitrable
Claims and the Agreements

                                      C-2
<PAGE>

under which they are brought. Service of such Notice of Arbitration shall be
complete upon receipt by the person designated for each party at the addresses
specified in Section 12 below.

     (c)  Within twenty (20) days after service of a Notice of Arbitration, each
Party shall serve upon the other Party a list of seven neutral candidates for
each of the three panel members described in subparagraph (a) above.

     (d)  Within twenty (20) days after service of the lists referred to in
subparagraph (c), NECO and Seller shall then strike from the other's lists any
two candidates from each of the lists, for any reason whatsoever. For the
remaining candidates each Party shall rank each candidate on its three lists
from one to five and shall do the same for the other Party's lists.

     (e)  The candidates in each of the three categories with the lowest total
score shall be invited to serve as panel members. In the event that the
candidate in any of the three categories with the lowest total score is unable
or unwilling to serve, or has a potential conflict of interest not consented to
by each Party, then the candidate with the next lowest score in that category
shall be invited to serve, subject to full disclosure by each candidate of, and
consent by each Party to any potential conflicts of interests. This process
shall be repeated until a full arbitration Panel is selected or the list of
candidates for that category is exhausted. If the list of candidates for a
category is exhausted the Parties shall exchange a new list of candidates for
that category and the procedures set forth above shall be repeated a second
time.

     (f)  If the parties cannot select a full Arbitration Panel in accordance
with these procedures than any Party may request that a court of competent
jurisdiction appoint the remaining members subject to their qualifications,
willingness and ability to serve as provided above.

     (g)  The American Arbitration Association shall be appointed to facilitate
and administer the parties' compliance with the procedures set forth above.

4.   Time Schedule
     -------------

     The Arbitration shall be conducted as expeditiously as possible. The
Arbitration Panel shall schedule a pre-hearing conference and hearings as it
deems advisable and shall use its best efforts to schedule consecutive days of
hearings. Hearings shall be limited to a total of ten (10) days. The Arbitration
Panel shall issue its final decision and award within thirty (30) days of the
close of the hearings, which shall be accompanied by a written, reasoned
opinion.

5.   Remedies
     --------

     (a)  The Arbitration Panel shall not award punitive or multiple damages or
any other damages not measured by the prevailing Party's actual damages - except
that the Arbitration Panel, in its sole discretion, may shift all or a portion
of the costs of the Arbitration to any Party.

                                      C-3
<PAGE>

     (b)  Any award of damages by the Arbitration Panel shall be determined,
limited and controlled by the damages limitation clauses of the Service
Agreement applicable to the dispute before the Arbitration Panel.

     (c)  The Arbitration Panel may, in its discretion, award pre-award and
post-award interest on any damages award; provided, however, that the rate of
pre-award or post-award interest shall not exceed a rate equal to the rate
provided for post-judgment interest by 28 U.S.C.(S) 1961 as published from time
to time by the Administrative Office of the United States Courts based on the
equivalent coupon issue yield for auctions of 52-week Treasury bills.

6.   Confidentiality
     ---------------

     The existence, contents, or results of any mediation or arbitration
hereunder may not be disclosed without the prior written consent of both
Parties; provided, however, either Party may make disclosures as may be
necessary to fulfill regulatory obligations to any regulatory bodies having
jurisdiction, and may inform their lenders, affiliates, auditors and insurers,
as necessary, under pledge of confidentiality and can consult with experts as
required in connection with the arbitration under pledge of confidentiality. If
any Party seeks preliminary injunctive relief from any court to preserve the
status quo or avoid irreparable harm pending mediation or arbitration, the
Parties agree to use best efforts to keep the court proceedings confidential, to
the maximum extent permitted by law.

7.   FERC Jurisdiction over Certain Disputes
     ---------------------------------------

     (a)  Nothing in this Arbitration Agreement shall preclude, or be construed
to preclude, any Party from filing a petition or complaint with the Federal
Energy Regulatory Commission ("FERC") with respect to any Arbitrable Claim. In
such case, the other Party may request FERC to reject or to waive jurisdiction.
If the FERC rejects or waives jurisdiction, with respect to all or a portion of
the claim, the portion of the claim not so accepted by FERC shall be resolved
through arbitration, as provided in this Arbitration Agreement. To the extent
that FERC asserts or accepts jurisdiction over the claim, the decision, finding
of fact, or order of FERC shall be final and binding, and any arbitration
proceedings that may have commenced prior to the assertion or acceptance of
jurisdiction by FERC shall be stayed, pending the outcome of the FERC
proceedings.

     (b)  The Arbitration Panel shall have no authority to modify, and shall be
conclusively bound by, any decision, finding of fact, or order of FERC. However,
to the extent that a decision finding of fact, or order of FERC does not provide
a final or complete remedy to the Party seeking relief, such Party may proceed
to arbitration under this Arbitration Agreement to secure such remedy, subject
to the FERC decision, finding or order.

                                      C-4
<PAGE>

8.   Preliminary Injunctive Relief
     -----------------------------

     Nothing in this Arbitration Agreement shall preclude, or be construed to
preclude, the resort by either Party to a court of competent jurisdiction solely
for the purposes of securing a temporary or preliminary injunction to preserve
the status quo or avoid irreparable harm pending mediation or arbitration
pursuant to this Arbitration Agreement.

9.   Governing Law
     -------------

     This Arbitration Agreement shall be construed, enforced in accordance with,
and governed by, the laws of the State of Rhode Island.

10.  Location of Arbitration
     -----------------------

     Any arbitration hereunder shall be conducted in Boston, Massachusetts.

11.  Severability
     -----------

     If any section, subsection, sentence, or clause of this Arbitration
Agreement is adjudged illegal, invalid, or unenforceable, such illegality,
invalidity, or enforceability shall not affect the legality, validity, or
enforceability of the Arbitration Agreement as a whole or of any section,
subsection, sentence or clause hereof not so adjudged.

12.  Notices
     -------

     Any notices required to be given pursuant to this Arbitration Agreement
shall be in writing and sent to the receiving party by (i) certified mail,
return receipt requested, (ii) overnight delivery service, or (iii) facsimile
transmission (confirmed by telephone), addressed to the receiving party at the
address shown below or such other address as a party may subsequently designate
in writing. Any such notice shall be deemed to be given (i) three days after
deposit in the United States mail, if sent by mail, (ii) when actually received
if sent by overnight delivery service, or (iii) when sent, if sent by facsimile
and confirmed by telephone.

     If to NECO:  The Narragansett Electric Company
                  25 Research Drive
                  Westborough, Massachusetts 01582
                  Attention: General Counsel
                  Facsimile: (508) 389-2463

     If to Seller USGen New England, Inc.
                  7500 Old Georgetown Road, 13th floor
                  Bethesda, MD 20814
                  Attention: Stephen A. Herman, Esq.
                  Facsimile: (301) 718-6913

                                      C-5
<PAGE>

     In addition, the parties shall send copies of any notices required by the
terms of any of the Agreements, in accordance with the terms of each Agreement.

     IN WITNESS WHEREOF, each Party has caused its duly authorized officers to
execute this Arbitration Agreement on the dates set forth below.

                                             THE NARRAGANSETT ELECTRIC COMPANY


                                             BY: /s/ Michael E. Jeranis
                                                ------------------------------


                                             Its Vice President
                                                ------------------------------



                                             USGEN NEW ENGLAND, INC.


                                             BY: /s/ James V. Mahoney
                                                ------------------------------


                                             Its Senior Vice President
                                                 -----------------------------