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                                                                    Exhibit 10.5
                                                                  EXECUTION COPY

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                           DEVELOPMENT AND OPERATIONS
                               SERVICES AGREEMENT

                                     between

                             AES SAYREVILLE, L.L.C.

                                       and

                               AES RED OAK, L.L.C.

                            Dated as of March 1, 2000

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       830 MW (Net) Gas-Fired Combined Cycle Electric Generating Facility
               Borough of Sayreville, Middlesex County, New Jersey


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                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                                PAGE


<S>                                                                                                              <C>
ARTICLE I DEFINITIONS.............................................................................................1

   SECTION 1.1       DEFINITIONS..................................................................................1

ARTICLE II DEVELOPMENT AND CONSTRUCTION MANAGEMENT................................................................4

   SECTION 2.1       DEVELOPMENT AND CONSTRUCTION MANAGEMENT SERVICES.............................................4
   SECTION 2.2       PAYMENT FOR DEVELOPMENT AND CONSTRUCTION MANAGEMENT SERVICES.................................4

ARTICLE III OPERATION AND MAINTENANCE.............................................................................5

   SECTION 3.1       OPERATING AND MAINTENANCE PERSONNEL AND OTHER SERVICES.......................................5
   SECTION 3.2       PAYMENT FOR OPERATING AND MAINTENANCE SERVICES...............................................5

ARTICLE IV PAYMENT OF FEES........................................................................................7

   SECTION 4.1       PAYMENT OF FEES..............................................................................7

ARTICLE V TERM, TERMINATION AND RELATIONSHIP OF PARTIES...........................................................8

   SECTION 5.1       TERM.........................................................................................8
   SECTION 5.2       TERMINATION..................................................................................8

ARTICLE VI REPRESENTATIONS AND WARRANTIES.........................................................................8

   SECTION 6.1       REPRESENTATIONS AND WARRANTIES OF THE OPERATOR...............................................8
   SECTION 6.2       REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................9

ARTICLE VII ARBITRATION...........................................................................................9

   SECTION 7.1       ARBITRATION..................................................................................9

ARTICLE VIII LIMITATIONS OF LIABILITY............................................................................10

   SECTION 8.1       NO CONSEQUENTIAL DAMAGES....................................................................10
   SECTION 8.2       LIMITATION OF OPERATOR'S LIABILITY..........................................................10

ARTICLE IX FORCE MAJEURE.........................................................................................10

   SECTION 9.1       FORCE MAJEURE...............................................................................10

ARTICLE X INDEMNIFICATION........................................................................................11

   SECTION 10.1      INDEMNIFICATION.............................................................................11

ARTICLE XI MISCELLANEOUS.........................................................................................11

   SECTION 11.1      FURTHER ASSURANCES..........................................................................11
   SECTION 11.2      ENTIRE AGREEMENT............................................................................11
   SECTION 11.3      COUNTERPARTS................................................................................12
   SECTION 11.4      GOVERNING LAW...............................................................................12
   SECTION 11.5      ASSIGNABILITY...............................................................................12
   SECTION 11.6      BINDING EFFECT..............................................................................12
   SECTION 11.7      HEADINGS....................................................................................12
   SECTION 11.8      NOTICES.....................................................................................12
   SECTION 11.9      AMENDMENT...................................................................................13
   SECTION 11.10     NO IMPLIED WAIVER...........................................................................13
   SECTION 11.11     OVERDUE OBLIGATIONS TO BEAR INTEREST........................................................13
   SECTION 11.12     INDEPENDENT CONTRACTOR......................................................................13
   SECTION 11.13     ACCESS......................................................................................13
</TABLE>

                                       1
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                  DEVELOPMENT AND OPERATIONS SERVICES AGREEMENT

         DEVELOPMENT AND OPERATIONS SERVICES AGREEMENT (this "AGREEMENT"), dated
as of March 1, 2000, by and between AES SAYREVILLE, L.L.C. a Delaware limited
liability company (the "OPERATOR"), and AES RED OAK, L.L.C, a Delaware limited
liability company (the "COMPANY") (the Company and Operator, each a "PARTY", and
collectively, the "PARTIES").


                              W I T N E S S E T H:

         WHEREAS, the Company has been organized to develop, construct, own,
operate and maintain the Facility located at the Facility Site;

         WHEREAS, the Company desires that the Operator provide certain
personnel and support services required by the Company for the development and
construction management of the Facility and for operation and maintenance of the
Facility after completion of such development and construction; and

         WHEREAS, the Operator desires to provide such personnel and support
services in accordance with the terms hereof.

         NOW, THEREFORE, in consideration of the agreements and covenants
hereinafter set forth, and intending to be legally bound hereby, the Parties
hereto covenant and agree as follows:

                                   ARTICLE I

                                   DEFINITIONS

SECTION 1.1       DEFINITIONS.

         Capitalized terms not otherwise defined herein shall have the meanings
specified in the Indenture (as defined below). For the purposes of this
Agreement, the rules of construction set forth in the Indenture shall apply as
if such rules were set forth herein. The following terms shall have the meanings
specified below:

         "AES DIRECT COSTS" shall have the meaning specified in the Services
Agreement.

         "AES DIRECT LABOR COSTS" shall have the meaning specified in the
Services Agreement.

         "AES OVERHEAD" shall have the meaning specified in the Services
Agreement.

         "ANNUAL ADJUSTMENT DATE" means each January 1st occurring after the
date hereof.

         "ANNUAL REVISION DATE" means each March 1st occurring after the date
hereof.

         "CAPITAL CONTRIBUTIONS" means the contributions by the Manager to the
Company required pursuant to the LLC Agreement.

                                       1
<PAGE>

         "COMMERCIAL OPERATION DATE" has the meaning specified in the Power
Purchase Agreement.

         "COMPANY" has the meaning specified in the preamble to this Agreement.

         "DIRECT COSTS" means expenditures for all goods and services which, in
the opinion of the Operator, are necessary for the operation, maintenance and
management of the Facility or the performance by the Operator of its obligations
under this Agreement, including but not limited to goods and services (i)
necessary to operate the Facility and all associated facilities and equipment
and (ii) necessary to maintain, repair, replace and otherwise keep the Facility
and all associated facilities and equipment in good and serviceable working
order. Such goods and services shall include without limitation raw materials to
operate the boiler, pollution control equipment and other equipment, including
limestone, magnesium oxide, ammonia, urea, sand and any other additives as
appropriate; utilities, including natural gas, oil, electricity, raw water,
potable water, industrial waste water discharge, sanitary sewer and waste
disposal; transportation charges, including demurrage, for fuel, raw materials,
waste, personnel, equipment, and other items; contract maintenance services,
including electrical, mechanical, civil, chemical and instrumentation and
control; outside shops, warehousing and storage; expendable supplies, including
chemicals, resins, abrasives, lab supplies, protective clothing, paper products,
rags, rope, wire, glue, caulking, soaps, paint, primer and painting supplies,
clean-up supplies and equipment, lubricants and solvents; shop tools and
equipment; equipment rental and leasing; spare and replacement parts, repair and
replacement items and material and upgrading equipment and material;
communications, including telephone, facsimile transmission, postage, express
mail and parcel delivery; office furniture, supplies and equipment, computers
and computer equipment, and reproduction equipment, services and supplies;
mobile equipment and vehicles; insurance premiums; contract employee charges;
community relations programs and expenses; recruiting and training costs,
including advertising, physicals, recruiter fees and the like; professional
services, including legal, accounting, engineering, management and other; safety
arid employee relations expenses (awards, picnics, bonuses, etc.); travel and
business entertainment; taxes (such as sales, property, value added and gross
receipts taxes but excluding taxes based solely on income); and Direct Labor
Costs. Direct Costs shall include but not be duplicative of AES Direct Costs.

         "DIRECT LABOR COSTS" means all labor costs of the Operator, including
but not limited to salaries, wages, overtime pay, shift differentials, fringe
benefits, profit sharing and pension, holiday pay, vacation pay, bonuses,
termination payments, travel and other similar costs of the Operator personnel
primarily engaged in activities at the Site pursuant to this Agreement. Direct
Labor Costs shall not include (i) labor costs related to Operator personnel who
are not primarily located at the Site or (ii) labor costs related to activities
unrelated to the Operator's performance of this Agreement which are undertaken
by Operator personnel who are primarily engaged in activities at the Site.
Direct Labor Costs shall include, but not be duplicative of, AES Direct Labor
Costs.

         "EFFECTIVE DATE" means the date of this Agreement.

         "ELECTRIC DELIVERY POINT" has the meaning specified in the Power
Purchase Agreement.

                                       2
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         "FINANCING PARTIES" means the Trustee, acting on behalf of the
Bondholders, and any and all other lenders providing the construction or
long-term financing or any refinancing of the Facility pursuant to the Financing
Documents, and any trustee or agent acting in their behalf, including the
Collateral Agent. The term "FINANCING PARTIES" shall not include the Company,
any Affiliate of the Company or any Affiliate of any Partner.

         "FORCE MAJEURE EVENT" shall have the meaning set forth in Section 9.1.

         "INDENTURE" means the Trust Indenture, dated as of March 1, 2000, among
the Company, the Trustee and the Depositary Bank.

         "LLC AGREEMENT" means the Limited Liability Company Agreement of AES
Red Oak, L.L.C., dated as of November 23, 1999, as such agreement may be
amended, modified or supplemented from time to time.

         "MANAGEMENT FEE"' means the monthly fee described in Section
2.2(a)(ii).

         "MANAGER" means AES Red Oak, Inc., the owner of all of the membership
interests in the Company and the Manager of the Company pursuant to the LLC
Agreement.

         "OPERATING AND MAINTENANCE FEE" means the monthly fee described in
Section 3.2(a)(ii).

         "OPERATIONS" means any transaction in the ordinary course of the
Company's business, but does not include the making of Capital Contributions to
the Company or a Capital Event.

         "OPERATOR" has the meaning specified in the preamble to this Agreement.

         "OPERATOR COSTS" means all Direct Costs and Overhead.

         "OPERATOR FEES" means, collectively, the Management Fee and the
Operating and Maintenance Fee.

         "OVERHEAD" means (to the extent not included in Direct Costs) the
Operator's cost of and any expenses related to employee relations, financial
controls, data processing, management and administration, and other similar
services required for performance by the Operator of its obligations under this
Agreement, including labor costs of the Operator's overhead personnel, if any;
PROVIDED, that all Overhead hereunder shall be allocated on a reasonable basis
to services rendered by Operator in the performance of its obligations under
this Agreement. Overhead shall include but not be duplicative of AES Overhead.
Notwithstanding anything herein to the contrary, from and after the Commercial
Operation Date through the remaining term of this Agreement, Overhead payable
under Sections 2.2 and 3.2 with respect to any period shall be deemed in the
aggregate to equal [45%]of Direct Labor Costs for such period.

         "PRIME-BASED RATE" means the interest rate equal to the sum of (i) the
prime commercial lending rate announced by Citibank NA as in effect from time to
time, and (ii) two (2) percentage points, provided that such interest rate shall
in no event be greater than the maximum interest rate permitted by applicable
law.

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         "UNPAID FEE AMOUNT" shall have the meaning set forth in Section 4.1.

                                   ARTICLE II

                     DEVELOPMENT AND CONSTRUCTION MANAGEMENT

         SECTION 2.1      DEVELOPMENT AND CONSTRUCTION MANAGEMENT SERVICES.

         The Parties acknowledge that, under the Financing Documents and the
Project Contracts, the Company has certain obligations to develop and construct
the Facility. In order to assist the Company in the performance of such
obligations, but subject to Section 2.2(b), the Operator shall from the date
hereof until the Commercial Operation Date (i) supervise and manage the
development of the Facility, and the design, engineering and construction of the
Facility in accordance with (a) generally accepted engineering practices, (b)
generally accepted construction procedures, (c) the plans and standards set
forth in the EPC Contract, (d) the requirements of the Power Purchase Agreement
and (e) applicable law; (ii) exercise all rights of the Company under the EPC
Contract and any other contracts for the construction of the interconnection or
other facilities related to the Facility (including, but not limited to,
operational responsibilities arising prior to the Commercial Operation Date);
and (iii) use commercially reasonable efforts to provide the services and
perform the obligations the Company is then obligated to provide and perform
under the EPC Contract and to procure or provide any goods and services
necessary for the completion of the Facility for which provision is not made in
the EPC Contract.

         SECTION 2.2      PAYMENT FOR DEVELOPMENT AND CONSTRUCTION MANAGEMENT
                          SERVICES.

         (a) On the tenth (10th) Business Day of each calendar month following
the date of this Agreement, the Company, upon receipt of an invoice, shall pay
in arrears to the Operator, in consideration for the services provided in the
previous month and described in Section 2.1, as follows:

            (i)   Until the first calendar month following the Commercial
         Operation Date, all Operator Costs after the Effective Date up to said
         calendar month, to the extent the Operator has not been previously paid
         therefor and to the extent it submits cost substantiation therefor, it
         being understood that payment of certain cost items included in
         Operator Costs may be made by the Collateral Agent pursuant to the
         Financing Documents; and

            (ii)  A Management Fee of [$125,000] for each calendar month (or a
         pro rata portion of such fee for any portion of each calendar month)
         from the Effective Date through the Commercial Operation Date (at which
         date such fee shall cease) for services rendered during such calendar
         month (or portion thereof).

         (b) The Operator may suspend the performance of its obligations
hereunder during such time as any amount payable pursuant to Sections 2.2(a)(i)
or (ii) is more than 60 days past due; PROVIDED, HOWEVER, that the Operator
shall not so suspend performance of its obligations hereunder if the amount
payable that is more than 60 days past due hereunder is subject to a good

                                       4
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faith dispute by the Company as to whether the cost in question was in fact
incurred by the Operator.

                                  ARTICLE III

                            OPERATION AND MAINTENANCE

         SECTION 3.1      OPERATING AND MAINTENANCE PERSONNEL AND OTHER
                          SERVICES.

         The Parties acknowledge that, under the Financing Documents and the
Project Contracts, the Company has certain obligations to maintain and operate
the Facility and in order to assist the Company therewith, but subject to
Section 3.2(c), the Operator shall provide operating personnel and other support
services necessary for the Company to perform its obligations arising out of or
in connection with, the ownership, management, maintenance and operation of the
Facility, including without limitation the following obligations:

(a) Operating and maintaining the Facility in accordance with the Power Purchase
Agreement, the Financing Documents and the practices, standards and procedures
customary in the independent power industry with respect to natural gas-fired
combined cycle electric generating facilities;

(b) Obtaining and maintaining insurance as required under the Financing
Documents and the Project Contracts, without limiting the rights of each of the
Company and the Operator to provide independently for its own additional
insurance coverage;

(c) Maintaining full and complete records of accounts and of technical
operations of the Facility and preparing all reports, statements, data and
information that may be required from time to time under the Financing
Documents, the Project Contracts or by any federal, state, or local governmental
authorities, and retaining records relating to a given year during the term
hereof, other than those records which are necessary to provide a history of the
operation and maintenance of the Facility (which the Operator agrees to retain
for the full term of this Agreement), for a period of at least three years after
the end of such year;

(d) Opening and maintaining bank accounts and performing cash management
functions in connection with the operation of the Facility, including, subject
to the provisions of the Financing Documents, the receipt of revenues generated
by the Company and the payment of all costs, expenses, rentals and taxes
incurred by the Company;

(e)      Preparing all federal, state and local tax returns of the Company; and

(f) Inspecting and testing metering devices used to measure and record natural
gas delivered to the Facility pursuant to the Power Purchase Agreement and
electricity delivered to the Electric Delivery Point pursuant to the Power
Purchase Agreement.

         SECTION 3.2      PAYMENT FOR OPERATING AND MAINTENANCE SERVICES.

             (a)  (i)    On the tenth (10th) Business Day of each calendar month
         following the Commercial Operation Date through the remaining term of
         this Agreement, the

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         Company shall pay in arrears to the Operator, in consideration for the
         services provided in the previous month and described in Section 3.1,
         all Operator Costs incurred prior to and after the Commercial Operation
         Date up to said calendar month to the extent the Operator has not been
         previously paid therefor and to the extent it submits cost
         substantiation therefor, it being understood that payment of certain
         cost items included in Operator Costs may be made by the Collateral
         Agent directly pursuant to the Financing Documents; and

                  (ii)   On each Bond Payment Date commencing with the first
         Bond Payment Date after the Commercial Operation Date, and through the
         remaining term of this Agreement, the Company shall pay in arrears to
         the Operator, in consideration for the services provided in the
         most recent quarter and described in Section 3.1, a quarterly
         Operating and Maintenance Fee of $375,000, as adjusted pursuant to
         Section 3.2(b), (or a pro rata portion of such fee for any portion of
         each calendar quarter) for services rendered during such calendar
         quarter (or portion thereof); PROVIDED, HOWEVER, the Operating and
         Maintenance Fee shall be payable to the Company only to the extent
         that funds are available for such payment pursuant to the Collateral
         Agency Agreement and in accordance with Section 4.1.

             (b) (i)    Effective on each Annual Adjustment Date, the Operating
         and Maintenance Fee shall be adjusted in accordance with the following
         formula:

                  AOMF = [$375,000] x                  EGDP
                                             --------------------------
                                                     O&M Base GDP

         WHERE:

         AOMF = The adjusted Operating and Maintenance Fee.

         EGDP =         The Manager's good faith estimate of the GDPIPD for the
                        calendar quarter immediately preceding such Annual
                        Adjustment Date.

         O&M Base GDP = The GDPIPD for the first quarter 2000.

             (ii)      Effective on each Annual Revision Date, the Operating and
Maintenance Fee for the calendar year in which such calculation is made shall be
recalculated in accordance with the following formula:

                 RAOMF = [$375,000] x                  AGDP
                                             --------------------------
                                                     O&M Base GDP

         WHERE:

         RAOMF =        The readjusted Operating and Maintenance Fee.

         AGDP =         The actual GDPIPD for the calendar quarter immediately
                        preceding such Annual Adjustment Date.

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<PAGE>

         O&M Base GDP = The GDPIDP for the first quarter 2000.

             (iii)      The Operating and Maintenance Fee payable pursuant to
         Section 3.2(a)(ii) for the first calendar quarter of each calendar
         year shall be calculated in accordance with Section 3.2(b)(i). The
         Operating and Maintenance Fee payable pursuant to Section 3.2(a)(ii)
         for each quarter of each calendar year commencing with the second
         quarter of such calendar year shall be calculated in accordance with
         the formula set forth in this Section 3.2(b)(ii) and the quarterly
         amounts to be paid to the Operator by the Company over the remainder of
         such calendar year shall be equitably adjusted by an allocation
         thereover of the amount equal to the difference between (x) the sum of
         the quarterly fee calculated pursuant to Section 3.2(b)(i) and payable
         in accordance with the first sentence of this Section 3.2(b)(iii) for
         the first quarter of such calendar year and (y) the quarterly fee that
         would have been payable for the first quarter of such calendar year if
         such quarterly fee had been calculated pursuant to Section 3.2(b)(ii).

         (c) The Operator may suspend performance of its obligations during such
time as any amount payable pursuant to Section 3.2(a)(i) is more than 60 days
past due; PROVIDED, HOWEVER, that the Operator shall not so suspend performance
of its obligations hereunder if the amount payable that is more than 60 days
past due hereunder is subject to a good faith dispute by the Company as to
whether the cost in question was in fact incurred by the Operator.

         (d) The Operator may suspend the performance of its obligations
hereunder during such time as any amount payable pursuant to Section 3.2(a)(ii)
is past due for more than 60 days; PROVIDED, HOWEVER, that the Operator shall
not so suspend performance of its obligations if the amount payable pursuant to
Section 3.2(a)(ii) is past due as a result of the application of Section 4.1 of
this Agreement and the provisions of the Collateral Agency Agreement.

                                   ARTICLE IV

                                 PAYMENT OF FEES

         SECTION 4.1    PAYMENT OF FEES.

         Notwithstanding anything to the contrary contained herein, the
Operating and Maintenance Fee payable pursuant to Section 3.2(a)(ii) shall be
payable by the Company if and to the extent that funds are available in the
Revenue Account for such payment after giving effect to the transfers and
payments (other than payment of such Operating and Maintenance Fee) specified in
paragraphs FIRST through FIFTH of Section 3.10(b) of the Collateral Agency
Agreement. In the event that the Company is at any time unable to make payment
of the Operating and Maintenance Fee due pursuant to Section 3.2(a)(ii) because
of the unavailability of funds under the Collateral Agency Agreement, such
unpaid Operating and Maintenance Fee shall accumulate and shall accrue interest
at the Prime-Based Rate (or, if lower, the maximum rate permitted by applicable
law), compounded annually (the "UNPAID FEE AMOUNT"). Until such time as the
Unpaid Fee Amount equals zero, if any amount of funds are available therefor
pursuant to Section 3.10(b) of the Collateral Agency Agreement, the Company
shall, after payment of the current quarter's Operating and Maintenance Fee on a
Bond Payment Date, pay

                                       7
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to the Operator, on such Bond Payment Date (but only to the extent that funds
are available therefor pursuant to the Collateral Agency Agreement and this
Section 4.1), an amount equal to the lesser of such available funds and the
Unpaid Fee Amount.

                                  ARTICLE V

                 TERM, TERMINATION AND RELATIONSHIP OF PARTIES

         SECTION 5.1      TERM.

         The term of this Agreement shall commence as of the Effective Date and,
except as otherwise provided herein, shall terminate upon the earlier of (i) the
last day of the month in which the thirty-second anniversary of the Effective
Date occurs, (ii) the date which is sixty (60) days after receipt by Operator of
a notice from the Collateral Agent specifying that (a) a Trigger Event under the
Collateral Agency Agreement has occurred and the Collateral Agent, any Financing
Party or any agent, assignee or designee thereof has commenced the exercise of
remedies in respect of such Trigger Event and (b) the Collateral Agent has been
devoted by the Required Senior Partner to terminate this Agreement, and (iii)
the date specified by mutual written agreement of the Parties hereto.

         SECTION 5.2      TERMINATION.

         This Agreement may be terminated by either Party upon the failure of
the other Party to perform any of its material obligations hereunder; PROVIDED,
that the Party seeking to terminate this Agreement under this Section 5.2 has
given the breaching Party 120 days' prior written notice of such breach, and
such breach has not been remedied within such 120-day period. Furthermore, this
Agreement may be terminated upon written notice by either Party upon the
bankruptcy, reorganization, dissolution or liquidation of the other Party. Upon
termination of this Agreement pursuant to this Section 5.2, the Operator agrees
to provide to the Company originals or copies of all records retained by the
Operator in accordance with Section 3.1(c) pertaining to the services rendered
by the Operator hereunder up to and including the date of such termination.

                                   ARTICLE VI

                         REPRESENTATIONS AND WARRANTIES

         SECTION 6.1      REPRESENTATIONS AND WARRANTIES OF THE OPERATOR.

         Operator represents and warrants as follows:

         (a)     It is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware and is
duly qualified to do business and is in good standing in the State of New
Jersey;

         (b)     It has taken all necessary corporate action to authorize the
execution, delivery and performance of this Agreement, which action has not been
superseded or terminated, and this Agreement constitutes the legal, valid and
binding obligation of the Operator, enforceable

                                       8
<PAGE>

against the Operator in accordance with the terms hereof, except as the
enforceability hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other such laws affecting the rights of
creditors generally or by general equitable principles;

         (c)     The execution, delivery and performance of this Agreement do
not violate (i) the Operator's certificate of formation or Limited Liability
Company Agreement or any resolution of its members, (ii) any contract to which
it is a party or (iii) any law, rule, regulation, order, writ, judgment,
injunction, decree or determination binding upon the Operator or any of its
properties; and

         (d)     No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body (other than
those which have been obtained) are required for the due execution, delivery and
performance by the Operator of this Agreement.

         SECTION 6.2      REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

         The Company represents and warrants as follows:

         (a)     It is a limited liability company duly organized and validly
existing and in good standing under the laws of the State of Delaware and is
duly qualified to do business and is in good standing in the State of New
Jersey;

         (b)     It has taken all necessary Company action to authorize the
execution, delivery and performance of this Agreement, which action has not been
superseded or terminated, and this Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with the terms hereof, except as the enforceability hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other such laws
affecting the rights of creditors generally or by general equitable principles;

         (c)     The execution, delivery and performance of this Agreement do
not violate (i) the Company's certificate of formation or Limited Liability
Company Agreement or any rules of any committee charged thereunder with the
governance of its affairs, (ii) any contract to which it is a party or (iii) any
law, rule, regulation, order, writ, judgment, injunction, decree or
determination binding upon the Company or any of its properties; and

         (d)     No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body (other
than those which have been obtained) are required for the due execution,
delivery and performance by the Company of this Agreement.

                                   ARTICLE VII

                                   ARBITRATION

SECTION 7.1       ARBITRATION.

         In the event of a dispute between the Parties under this Agreement,
such dispute shall be submitted to a single arbitrator pursuant to the
commercial arbitration rules of the American Arbitration Association, and the
Parties shall proceed diligently so that the arbitrator shall render

                                       9
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a decision within 90 days from the filing of a demand for arbitration. This
Agreement shall not be terminated on the basis of any disputed matter until the
arbitrator has rendered his decision. Such arbitration shall be conducted in
Washington, D.C., unless a related arbitration shall be contemplated under the
provisions of any of the Financing Documents or Project Contracts, in which
event arbitration hereunder shall be conducted where such related arbitration is
conducted and, whenever expedient, shall be consolidated with such related
arbitration.

                                   ARTICLE VIII

                            LIMITATIONS OF LIABILITY

         SECTION 8.1      NO CONSEQUENTIAL DAMAGES.

         Neither Party shall be liable to the other for any indirect, special,
incidental or consequential damages arising from or connected with its
performance hereunder or any breach of its obligations hereunder.

         SECTION 8.2      LIMITATION OF OPERATOR'S LIABILITY.

         The total aggregate liability of the Operator to the Company for all
liability, including without limitation the Operator's indemnity obligations
hereunder, arising out of or in connection with the performance of services
under this Agreement in any calendar year shall not exceed the amount of the
Operator Fees earned and paid for that calendar year.

                                   ARTICLE IX

                                  FORCE MAJEURE

         SECTION 9.1      FORCE MAJEURE.

         Notwithstanding any other provision of this Agreement to the contrary,
if the performance of the obligations of either Party under this Agreement, or
the fulfillment of any of the conditions hereof, shall be wholly or partially
prevented by any act or event beyond the reasonable control of the Party
alleging disability to perform obligations or fulfill conditions under this
Agreement, including without limitation, an act of God, nuclear emergency,
explosion, fire, epidemic, landslide, lightning, earthquake, flood or similar
cataclysmic occurrence, an act of public enemy, war, blockade, insurrection,
riot, civil disturbance, sabotage, unavailability of labor, fuel, power or raw
materials, strike, lockout or other labor disturbance, restrictions or
restraints imposed by law or by rule, regulation, or order of governmental
authorities, whether federal, state, or local, delays or interruptions in
transportation and interruption or loss of utilities ("FORCE MAJEURE EVENT"),
the Party alleging inability to perform obligations or fulfill conditions
hereunder shall be excused from whatever performance is affected by the Force
Majeure Event to the extent so affected; PROVIDED, HOWEVER, that (i) economic
hardship shall not constitute a Force Majeure Event and (ii) no obligations of
either Party which arose before the Force Majeure Event causing the suspension
of performance and no payment obligations of either Party shall be excused as a
result of the Force Majeure Event. In the event that a Force Majeure Event
occurs:

                                       10
<PAGE>

     (a)   the non-performing Party shall give the other Party prompt written
notice describing the particulars of the Force Majeure Event, including but not
limited to the nature of the occurrence and its expected duration, and shall
continue to furnish timely regular reports with respect thereto during the
period of the Force Majeure Event;

     (b)   the suspension of performance shall be of no greater scope and of
no longer duration than is required by the Force Majeure Event; and

     (c)   the non-performing Party shall use its best efforts to remedy its
inability to perform.

                                   ARTICLE X

                                 INDEMNIFICATION

         SECTION 10.1     INDEMNIFICATION.

         Each Party shall indemnify, defend and hold the other Party and its
successors, assigns and agents harmless from and against all damages, losses or
expenses of every kind or character suffered or paid as a result of any and all
claims, demands, suits, penalties, causes of action, proceedings, judgments,
administrative and judicial orders and liabilities (including reasonable counsel
fees incurred in any litigation or otherwise) assessed, incurred or sustained by
or against such other Party and its successors, assigns and agents to the extent
arising out of any negligence or willful misconduct by the indemnifying Party in
performing its obligations hereunder.

                                   ARTICLE XI

                                  MISCELLANEOUS

         SECTION 11.1     FURTHER ASSURANCES.

         If either Party reasonably determines or is reasonably advised that any
further instruments (including without limitation a consent to assignment for
the benefit of the Financing Parties or any similar documents) or actions are
necessary or desirable to carry out the terms of this Agreement, the other Party
shall execute and deliver all such instruments and perform all such actions
reasonably necessary and proper to carry out the terms of this Agreement.

         SECTION 11.2     ENTIRE AGREEMENT.

         This Agreement contains the entire agreement between the Parties with
respect to the subject matter hereof and supersedes all prior agreements,
negotiations and understandings. Neither of the Parties shall be bound by or be
deemed to have made any representations, warranties or commitments except those
contained herein.

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<PAGE>

         SECTION 11.3     COUNTERPARTS.

         This Agreement may be executed in any number of counterparts and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute one agreement.

         SECTION 11.4     GOVERNING LAW.

         This Agreement shall be construed in accordance with and governed by
the laws of the State of New York, without regard to principles of conflicts of
laws.

         SECTION 11.5     ASSIGNABILITY.

         Neither this Agreement, nor the respective rights, obligations and
duties of either Party hereunder are assignable by such Party without the prior
written consent of the non-assigning Party, and any assignment without such
written consent shall be void, except (i) that the Operator may engage agents or
subcontractors to provide the services described herein, and may enter into the
Services Agreement, (ii) the Operator may assign any and all of its rights to
payments made, due or to become due hereunder, and (iii) the Company may assign
its rights and obligations hereunder to the Financing Parties pursuant to the
Financing Documents.

         SECTION 11.6     BINDING EFFECT.

         This Agreement shall be binding upon and shall inure to the benefit of
the Parties hereto and their respective successors and permitted assigns. This
Agreement is not made for the benefit of any person or entity not a Party
hereto, and nothing in this Agreement shall be construed as giving any person or
entity, other than the Parties hereto and their respective successors and
permitted assigns, any right, remedy or claim under or in respect of this
Agreement or any provision hereof.

         SECTION 11.7     HEADINGS.

         The headings used in this Agreement are for convenience only and shall
not affect the construction of any of the terms of this Agreement.

         SECTION 11.8     NOTICES.

         All notices or other communications which are required or permitted
hereunder shall be in writing and shall be deemed sufficiently given (i) upon
delivery, if delivered personally, (ii) five days after deposit in a U.S. Postal
Office mail box, (iii) the day it is received, if it is delivered by overnight
courier or (iv) upon the effective sending of electronic transmission,
facsimile, telex or telegram, to the addresses set forth below or such other
address as the addressee may have specified in a notice duly given to sender as
provided herein:

                                       12
<PAGE>

         If to the Operator:

                  AES Sayreville, L.L.C.
                  1001 N. 19th Street
                  Arlington, VA  22209
                  Attention:        Patricia L. Rollin, Vice President
                  (Telephone):      703-358-0538
                  (Facsimile):      703-528-4510

         If to the Company:

                  AES Red Oak, L.L.C
                  1001 North 19th Street
                  Arlington, VA  22209
                  Attention:        Project Manager
                  (Telephone):      703-525-1315
                  (Facsimile):      703-528-4510

         SECTION 11.9     AMENDMENT.

         Neither Party hereto shall be bound by any termination, amendment,
supplement, waiver or modification of any term hereof unless such Party shall
have consented thereto in writing. This Agreement may not be amended, modified
or supplemented without the consent of the Financing Parties to the extent such
consent is required under the Financing Documents.

         SECTION 11.10    NO IMPLIED WAIVER.

         No delay or failure on the part of either Party in exercising any
rights hereunder, and no partial or single exercise thereof, shall constitute a
waiver of such rights or of any other rights hereunder.

         SECTION 11.11    OVERDUE OBLIGATIONS TO BEAR INTEREST.

         Except as provided in Section 4.1, all amounts due hereunder, whether
as damages, credits, revenue or reimbursements, that are not paid when due shall
bear interest at the Prime-Based Rate or, if lower, the maximum interest rate
permitted by law, on the amount outstanding from time to time, on the basis of a
365-day year and the actual number of days elapsed.

         SECTION 11.12    INDEPENDENT CONTRACTOR.

         The Operator shall at all times act as and be deemed an independent
contractor and shall not act as nor be deemed to be an agent, servant or
employee of the Company.

         SECTION 11.13    ACCESS.

         The Company and its representatives shall have the right at all times
to visit and inspect the Facility and the Site, and shall have the right, upon
reasonable notice and at reasonable times, to take visitors onto the Site and
into the Facility; PROVIDED, HOWEVER, that such visits shall be

                                       13
<PAGE>

conducted in a manner so as to minimize interference with the Operator's
performance hereunder and to be in accordance with reasonable rules and
procedures prescribed by the Operator for such visits; and PROVIDED, FURTHER,
that the Company and its representatives and invitees shall have the right to
enter the Facility and the Site without notice or obligation to minimize
interference with the Operator's performance in the event of an emergency,
including fire, vandalism or other threats to public health or safety. During
the term of this Agreement, the Company shall provide the Operator and its
agents, employees, subcontractors and consultants full and free access at all
times to the Facility to the extent required to perform the services required by
this Agreement.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       14
<PAGE>

         IN WITNESS WHEREOF, each of the Parties hereto, intending to be legally
bound, has caused this Agreement to be duly executed on its behalf on the date
first above written.

                                AES SAYREVILLE, L.L.C.

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

                                AES RED OAK, L.L.C.

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