<PAGE>
 
Exhibit 10.96

December 18, 1998

Buzzard Power Corporation
c/o Scrubgrass Generating Company

RE:  OTC NOx Budget Allowance Stream Purchase

Attn: Martin Kreft

This letter shall confirm the agreement reached between PG&E Energy Trading --
Power, L.P. ("PGET") and Buzzard Power Corporation ("Buzzard") regarding the
transaction set forth below (the "Transaction").

Seller:                Buzzard

Buyer:                 PGET

Introduction:          Seller currently leases an electric generating facility
                       (the "Facility") in the state of Pennsylvania from
                       Scrubgrass Generating Company, L.P. ("SGC"). Buyer wishes
                       to purchase Nitrogen Oxide Ozone Transport Region Budget
                       Allowances for the years 1999-2002 ("Allowances" or "NOx
                       Allowances") certified by the Environmental Protection
                       Agency and the Pennsylvania Department of Environmental
                       Protection (the "Regional Authorities") from Seller, and
                       Seller wishes to sell such Allowances.

Contract Quantity:     182 tons per year of Allowances for the years 1999
                       through 2002, totaling 728 tons of Allowances, the
                       ("Contract Quantity").
<TABLE>
<CAPTION>
 
Purchase Price:                                    Purchase Price
                                                    (per ton of
                              Allowance Year         Allowances)
                              --------------         -----------
                              <S>                    <C>
                                   1999                 $3,500
                                   2000                 $2,168
                                   2001                 $2,168
                                   2002                 $2,168
</TABLE>

Initial Delivery:      Within five (5) business days following the 1999
                       allocation of Allowances (the "Initial Allocation") to
                       Seller's National Allowance Tracking System ("NATS")
                       account (expected early Q1 1999), Seller shall file all
                       documents required to transfer the Initial Allocation of
                       Allowances from Seller's NOx account to Buyer's NOx
                       account with the Regional Authority, with copies of all
                       documents sent to Buyer at the time of submission
                       thereof. In particular, Seller shall execute a NOx Budget
                       Program Allowance Transfer Form (the "ATF") and deliver
                       such form to the Regional Authority to transfer the
                       Initial Allocation of Allowances. Seller shall notify
                       Buyer when transfer of the Initial Allocation of
                       Allowances is posted on the NATS on the Internet. The
                       effective date of the transfer of the Initial Allocation
                       of Allowances (the "Initial Transfer") shall be the date
                       the transfer is posted on the NATS indicating the Initial
                       Allocation of Allowances appear in Buyer's NOx account;
                       provided, however, if Buyer has not established a NATS
                       account on or before the date that Seller files the ATF
                       for the transfer of the Initial Allocation of Allowances
                       with the Regional Authority, the Initial Transfer shall
                       be deemed to have been effective on the date that is five
                       business days after the submission of such ATF.

Initial Payment:       Within ten (10) business days following the Initial
                       Transfer Buyer shall pay to Seller an amount equal to the
                       Price multiplied by the 1999 Contract Quantity (182 tons
                       per year x 1 year x $3,500 per ton, totaling $637,000).
 
Final Delivery:        Seller and Buyer expect that the Allowances for years
                       2000 through 2002 will be allocated by the Regional
                       Authority to the NATS in late 1999 or early 2000 (the
                       "Final
                    
<PAGE>
 
                       Allocation"). On or before the later of (i) five (5)
                       business days of Final Allocation, or (ii) December 29,
                       1999, Seller shall file all documents required to
                       transfer the Final Allocation of Allowances from Seller's
                       NOx account to Buyer's NOx account with the Regional
                       Authority, with copies of all documents sent to Buyer at
                       the time of submission thereof. The effective date of the
                       transfer of the Final Allocation (the "Final Transfer")
                       shall be the date this transfer is posted on the NATS
                       indicating the Final Allocation of Allowances appear in
                       Buyer's NOx account; provided, however, if Buyer has not
                       established a NATS account on or before the date that
                       Seller files the ATF for the transfer of the Final
                       Allocation of Allowances with the Regional Authority, the
                       Final Transfer shall be deemed to have been effective on
                       the date that is five business days after the submission
                       of such ATF.

Final Payment:         Within ten (10) business days following the Final
                       Transfer, Buyer shall pay to Seller an amount equal to
                       the Price multiplied by the 2000, 2001 and 2002 Contract
                       Quantity (182 tons per year x 3 years x $2,168 per ton,
                       totaling $1,183,728). If the Regional Authority allocates
                       the Allowances for 2000, 2001 and 2002 at a later
                       date(s), payment(s) for these allocations shall occur
                       within ten (10) business days of transfer to the Buyer's
                       NATS account.

Service Charges:       Seller shall pay to Buyer a fee of $40 per ton.  This fee
                       shall be deducted from the Initial and Final Payments.
 
Payments:              Buyer shall pay to Seller all payments due hereunder by
                       wire transfer of immediately available funds (U.S.
                       Dollars) to the account identified below:

                                 Bankers Trust Company N.Y.
                                 Corporate Trust Agency Group
                                 ABA  021001033
                                 Credit Account: 01419647
                                 Ref: Venango (Scrubgrass) Operating - A/C

                       All overdue payments shall bear interest from, and
                       including, the due date to, but excluding, the date of
                       payment at a rate equal to two percent (2%) over the per
                       annum rate of interest equal to the prime lending rate as
                       may from time to time be published in the Wall Street
                       Journal under "Money Rates"; provided, the interest rate
                       shall never exceed the maximum rate permitted by
                       applicable law.

Taxes:                 Each party shall be responsible for any taxes or other
                       fees associated with its respective purchase and sale of
                       the Allowances hereunder.

Liability Limitation:  FOR BREACH OF ANY PROVISION OF THIS AGREEMENT, THE
                       OBLIGOR'S LIABILITY, SHALL BE LIMITED TO DIRECT ACTUAL
                       DAMAGES ONLY. SUCH DIRECT ACTUAL DAMAGES SHALL BE THE
                       SOLE AND EXCLUSIVE REMEDY HEREUNDER, AND ALL OTHER
                       REMEDIES OR DAMAGES ARE WAIVED. IN NO EVENT SHALL EITHER
                       PARTY BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE,
                       EXEMPLARY, OR INDIRECT DAMAGES, IN TORT, CONTRACT OR
                       OTHERWISE. THIS LIMITATION SURVIVES EXPIRATION OR
                       TERMINATION OF THIS AGREEMENT.

Event of Default:      If an Event of Default (as defined below) occurs with
                       respect to either party (the "Affected Party"), the other
                       party (the "Notifying Party") may: (i) upon two business
                       days' written notice to the Affected Party, terminate
                       this Agreement (provided, however, that upon the
                       occurrence of any Event of Default listed in clause (d)
                       of its definition, this Agreement shall automatically be
                       deemed terminated, without notice, immediately prior to
                       such event), (ii) withhold any payments due in respect of
                       this Agreement to the extent of its damages (see "Buyer's
                       Liability" and "Seller's Liability" below), and/or (iii)
                       exercise such other remedies as may be available at law
                       or in equity.
<PAGE>
 
                       "Event of Default" means, with respect to either party:

                       (a) The failure by the Affected Party to make, when due,
                       any payment required under this Agreement if such failure
                       is not remedied within five business days after written
                       notice of such failure is received by the Affected Party;
                       or

                       (b) The Affected Party fails to perform any covenant or
                       agreement set forth in this Agreement (including its
                       obligations to make any payment)in any material respect,
                       and such failure is not cured within five (5) business
                       days after written notice thereof is received by the
                       Affected Party;

                       (c) The Affected Party:

                             (i) applies for or consents to the appointment of,
                       or the taking of possession by, a receiver, custodian,
                       trustee or liquidator of itself or a substantial part of
                       its property;

                             (ii) makes a general assignment for the benefit of
                       its creditors;

                             (iii) files a petition or otherwise commences,
                       authorizes, or acquiesces in the commencement of a
                       proceeding or cause under any bankruptcy or similar law
                       for the protection of creditors, or has such petition
                       filed against it and such proceeding remains undismissed
                       for thirty (30) days;

                             (iv) otherwise becomes bankrupt or insolvent
                       (however evidenced); or

                             (v) admits in writing its inability to pay its
                       debts as they fall due.

Buyer's Liability:     In the event of a Buyer's Event of Default and Seller's
                       resulting election to terminate this Agreement, then
                       Buyer shall be obligated to pay Seller direct damages for
                       any Allowances that have been transferred to Seller an
                       amount equal to the price for such Allowances set forth
                       in this Agreement, and direct damages for any Allowances
                       that have not been transferred to Seller an amount equal
                       to the difference between the price for such Allowances
                       set forth in this Agreement and the amount that Seller is
                       able to sell such Allowances for to a third party. If
                       Buyer has not paid such amount to Seller within two (2)
                       business days after the Event of Default, Buyer shall
                       file an ATF with the Regional Authority to transfer to
                       Seller such Allowances as have been previously
                       transferred by Seller to Buyer and not paid for by 
                       Buyer.

Seller's Liability:    In the event of a Seller's Event of Default and Buyer's
                       resulting election to terminate this Agreement, Seller
                       shall pay Buyer direct damages equal to the cost to Buyer
                       of purchasing Allowances (including transaction costs)
                       equivalent to all remaining Allowances to be delivered
                       under this Agreement, less the cost Buyer would have had
                       to pay Seller for the same number of Allowances. For
                       purposes of this section, Buyer shall identify the cost
                       of purchasing from the market within 10 business days of
                       Seller's failure to deliver.

Force Majeure:         Neither party shall be considered to be in default in the
                       performance of any obligations in this Agreement when a
                       failure of performance is due to an event of Force
                       Majeure. The term "Force Majeure" means any event that is
                       beyond the reasonable control of the party affected,
                       including, without limitation: flood, earthquake,
                       tornado, storm, fire, civil disobedience, labor disputes,
                       labor or material shortage, sabotage, restraint by court
                       order or public authority, and the action or failure to
                       act of a governmental authority, including, without
                       limitation, the failure of the Regional Authorities to
                       certify the Allowances or transfer the Allowances. No
                       party shall be relieved of its obligation to perform if
                       such failure is due to causes arising out of its own
                       negligence or due to removable or remediable causes which
                       it failed to remove or remedy within a reasonable time
                       period. Either party rendered unable to fulfill any of
                       its obligations under this Agreement by 
<PAGE>
 
                       reason of an event of Force Majeure shall give prompt
                       written notice of such fact to the other party and shall
                       exercise due diligence to remove such inability with all
                       reasonable dispatch.

Assignment:            Neither party shall assign this Agreement or its rights
                       hereunder without the prior written consent of the other
                       party. Upon any assignment made in compliance with this
                       Section, this Agreement shall inure to and be binding
                       upon the successors and assigns of the assigning party.
                       Notwithstanding the foregoing, Seller may transfer,
                       pledge or assign this Agreement to SGC pursuant to the
                       terms of the lease for the Facility and either party may,
                       without the need for consent from the other party (and
                       without relieving itself from liability hereunder), (a)
                       transfer, pledge or assign this Agreement as security for
                       any financing with financial institutions; (b) transfer
                       or assign this Agreement to an affiliate of such party
                       provided that such assignee has substantially equivalent
                       financial capability to the assignor; or (c) transfer or
                       assign this Agreement to any person or entity succeeding
                       to all or substantially all of the assets of such
                       assignor; provided, however, in the case of any
                       assignment pursuant to subparagraphs (b) and (c), that
                       any such assignee shall agree to be bound by the terms
                       and conditions thereof.

Notices:               All notices, certificates, or other communications
                       hereunder shall be in writing. All written notices are
                       deemed sufficiently given when mailed by United States
                       registered or certified mail, postage prepaid, return
                       receipt requested ("Mailed"), or hand-delivered, or sent
                       by facsimile transmission with the original document
                       Mailed to confirm or by recognized overnight courier
                       service, addressed as follows:

                              To Buyer:
                              PG&E Energy Trading - Power, L.P.
                              Attn: Authorized Emissions Account Representative
                              7500 Old Georgetown Road, Bethesda, MD 20814
                              Telephone No.: 301-280-6600
                              Fax No.:301-280-6601
 
                              To Seller:
                              Buzzard Power Corporation
                              c/o Scrubgrass Generating Plant
                              P.O. Box 39, Kennerdell, PA  16374
                              Attn:  Project Director
                              Telephone No.: 814-385-6661
                              Fax No.: 814-385-6704

                              with a copy to:

                              Scrubgrass Generating Company, L.P.
                              7500 Old Georgetown Road, 13th Floor
                              Bethesda, MD, 20814
                              Attn: General Counsel

Governing Law:   THIS AGREEMENT IS GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
                 THE LAWS OF THE STATE OF PENNSYLVANIA.

Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Buzzard by returning an executed copy of this
Transaction Letter via facsimile to PGET at (301) 280-6601.  Your response
should reflect the appropriate party in your organization who has the authority
to enter into the Transaction.

PG&E ENERGY TRADING -- POWER, L.P.

By:  PG&E Energy Trading - Power Holdings Corporation,
           its sole general partner
<PAGE>
 
By:  /s/ Sarah M. Barpoulis
    -------------------------------------------------                          
    Sarah M. Barpoulis, Senior Vice President

ACCEPTED AND AGREED:

BUZZARD POWER CORPORATION

By:  /s/ William D. Linehan
    -------------------------------------------------         
    William D. Linehan, Chief Financial Officer

ACKNOWLEDGED AND AGREED TO:

SCRUBGRASS GENERATING COMPANY, L.P

By:  /s/Gary Weidinger 
    -------------------------------------------------            
    Gary Weidinger, Senior Vice President
<PAGE>
 
January 13, 1999

Buzzard Power Corporation
c/o Scrubgrass Generating Company


RE:  NOx Early Reduction Credit (OTC Budget Allowance) Purchase


Attn:  Martin Kreft


This  letter shall confirm the agreement reached between PG&E Energy Trading -
Power, L.P. ("PGET")  and Buzzard Power Corporation ("Buzzard") regarding the
transaction set forth below (the "Transaction).


Seller:             Buzzard

Buyer:              PGET


Trade Date:         January 4, 1999


Introduction:       Seller currently leases an electric generating facility (the
"Facility") in the state of Pennsylvania from Scrubgrass Generating Company,
L.P. ("SGC").  Buyer wishes to purchase Nitrogen Oxide Ozone Transport Region
Early Reduction Credits usable as NOx Budget Allowances for the year 1999
("Al1owances" or NOx Allowances") certified by the Environmental Protection
Agency and the Pennsylvania  Department  of  Environmental  Protection  (the
"Regional Authorities") from Seller, and Seller wishes to sell such Allowances.

Special Condition:  If the Regional Authorities fail to certify the Allowances
on or prior to October 1, 1999, or a mutually agreed upon extension date, this
Transaction shall terminate.

Contract Quantity:  25 tons of Allowances ("Contract Quantity").


Purchase Price:     $3,955 per Allowance

Delivery:           Within five (5) business days following the 1999
allocation of Allowances (the "Allocation") to Seller's National Allowance
Tracking System ("NATS") account, Seller shall file all documents required to
transfer the Allowances from Seller's NOx account to Buyer's NOx account with
the Regional Authority, with copies of all documents sent to Buyer at the time
of submission thereof. In particular, Seller shall execute a NOx Budget Program
Allowance Transfer Form (the "ATF") and deliver such form to the Regional
Authority to transfer the Allowances. Seller shall notify Buyer when transfer of
the Allowances is posted on the NATS on the Internet. The effective date of the
transfer of Allowances (the "Transfer") shall be the date the transfer is posted
on the NATS indicating the Allowances appear in Buyer's NOx account; provided,
however, if Buyer has not established a NATS account on or before the date that
Seller files the ATF for the transfer of Allowances with the Regional Authority,
the Transfer shall be deemed to have been effective on the date that is five
business days after the submission of such ATF.

Payment:            Within ten (10) business days following the transfer of
Allowances into Buyer's name, Buyer shall pay to Seller an amount equal to the
Purchase Price multiplied by the Contract Quantity (25 tons x $3,955 per ton,
totaling $98,875).

                    Buyer shall pay to Seller all payments due hereunder by wire
transfer of immediately available funds (U.S. Dollars) to the account identified
below:


                               Bankers Trust Company N.Y
                               Corporate Trust Agency Group
                               ABA 021001033
<PAGE>
                               Credit Account: 01419647
                               Ref:  Venango (Scrubgrass) Operating -- A/C


                    All overdue payments shall bear interest from, and
including, the due date to, but excluding, the date of payment at a rate equal
to two percent (2%) over the per annum rate of interest equal to the prime
lending rate as may from time to time be published in the Wall Street Journal
under "Money Rates"; provided, the interest rate shall never exceed the maximum
rate permitted by applicable law.

Taxes:              Each party shall be responsible for any taxes or other fees
associated with its respective purchase and sale of the Allowances hereunder.

Liability Limitation:  FOR BREACH OF ANY PROVISION OF THIS AGREEMENT, THE
OBLIGOR'S LIABILITY, SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY. SUCH
DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY HEREUNDER, AND ALL
OTHER REMEDIES OR DAMAGES ARE WAIVED. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, IN TORT
CONTRACT OR OTHERWISE. THIS  LIMITATION  SURVIVES  EXPIRATION  OR TERMINATION
OF THIS AGREEMENT.

Warranties:         Seller hereby warrants that, subject to the terms hereof
upon transfer to Buyer, Seller shall convey the Allowances to Buyer free from
all liens and defects of title. SELLER EXPRESSLY NEGATES ANY OTHER
REPRESENTATION OR WARRANTY, WRITTEN OR ORAL, EXPRESS OR IMPLIED. INCLUDING
WITHOUT LIMITATION, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO CONFORMITY TO
MODELS OR SAMPLES, OR MERCHANTABILITY. This section survives expiration or
termination of this Agreement.

Event of Default:   If an Event of Default (as defined below) occurs with 
respect to either party (the "Affected Party"), the other party (the "Notifying
Party") may: (i) upon two business days' written notice to the Affected Party,
terminate this Agreement (provided, however, that upon the occurrence of any
Event of Default listed in clause (d) of its definition, this Agreement shall
automatically be deemed terminated, without notice, immediately prior to such
event), (ii) withhold any payments due in respect of this Agreement to the
extent of its damages (see "Buyer's Liability" and "Seller's Liability" below),
and/or (iii) exercise such other remedies as may be available at law or in
equity.

"Event of Default" means, with respect to either party (the "Affected Party"):

(a)   The failure by the Affected Party to make, when due, any payment required
under this Agreement if such failure is not remedied within five business days
after written notice of such failure is given to the Affected Party; or

(b)   Any representation or warranty made by the Affected Party in this
Agreement proves to have been false or misleading in any material respect when
made;

(c)   The Affected Party fails to perform any covenant or agreement set forth in
this Agreement (including its obligations to make any payment). and such failure
is not cured within five (5) business days after written notice thereof to the
Affected Party;

(d)   The Affected Party:

                    (i)   makes an assignment or any general arrangements for
               the benefit of creditors;

                    (ii)  files a petition or otherwise commences, authorizes,
               or acquiesces in the commencement of a proceeding or cause under
               any bankruptcy or similar law for the protection of creditors, or
               has such petition filed against it and such proceeding remains
               undismissed for thirty (30) days;

                    (iii) otherwise becomes bankrupt or insolvent (however
               evidenced); or
<PAGE>
 
                    (iv) is unable to pay its debts as they fall due.

Buyer's Liability:  In the event of a Buyer's Event of Default and Seller's
resulting election to terminate this Agreement, then Buyer shall be obligated to
pay Seller direct damages for any Allowances that have been transferred to Buyer
an amount equal to the price for such Allowances set forth in this Agreement,
and direct damages for any Allowances that have not been transferred to Buyer an
amount equal to the difference between the price for such Allowances set forth
in this Agreement and the amount that Seller is able to sell such Allowances for
to a third party. If Buyer has not paid such amount to Seller within two (2)
business days after the identification of the price, Buyer shall file an ATF
with the Regional Authority to transfer to Seller such Allowances as have been
previously transferred by Seller to Buyer and not paid for by Buyer. For
purposes of this section, Seller shall identify the cost of selling to the
market within 10 business days of Buyer's Event of Default.

Seller's Liability: In the event of a Seller's Event of Default and Buyer's
resulting election to terminate this Agreement, Seller shall pay Buyer direct
damages equal to the cost to Buyer of purchasing Allowances (including
transaction costs) equivalent to all remaining Allowances to be delivered under
this Agreement less the cost Buyer would have had to pay Seller for the same
number of Allowances within two (2) business days of the Buyer's identification
of the price.  For purposes of this section, Buyer shall identify the cost of
purchasing from the market within 10 business days of Seller's failure to
deliver.

Force Majeure:      Neither party shall be considered to be in default in the
performance of any obligations in this Agreement when a failure of performance
is due to an event of Force Majeure. The term "Force Majeure" means any event
that is beyond the reasonable control of the party affected, including, without
limitation: flood, earthquake, tornado, storm, fire, civil disobedience, labor
disputes, labor or material shortage, sabotage, restraint by court order or
public authority, and the action or failure to act of a governmental authority,
including, without limitation, the failure of the Regional Authorities to
certify the Allowances or transfer the Allowances. No party shall be relieved of
its obligation to perform if such failure is due to causes arising out of its
own negligence or due to removable or remediable causes which it failed to
remove or remedy within a reasonable time period. Either party rendered unable
to fulfill any of its obligations under this Agreement by reason of an event of
Force Majeure shall give prompt written notice of such fact to the other party
and shall exercise due diligence to remove such inability with all reasonable
dispatch.

Assignment:         Neither party shall assign this Agreement or its rights
hereunder without the prior written consent of the other party. Upon any
assignment made in compliance with this Section, this Agreement shall inure to
and be binding upon the successors and assigns of the assigning party. Not
withstanding the foregoing, Seller may transfer, pledge or assign this Agreement
to SGC pursuant to the terms of the lease for the Facility and either party may,
without the need for consent from the other party (and without relieving itself
from liability hereunder), (a) transfer, pledge or assign this Agreement as
security for any financing with financial institutions; (b) transfer or assign
this Agreement to an affiliate of such party provided that such assignee has
substantially equivalent financial capability to the assignor; or (c) transfer
or assign this Agreement to any person or entity succeeding to all or
substantially all of the assets of such assignor; provided, however, in the case
of any assignment pursuant to subparagraphs (b) and (c), that any such assignee
shall agree to be bound by the terms and conditions thereof.

Notices:            All notices, certificates, or other communications hereunder
shall be in writing. All written notices are deemed sufficiently given when
mailed by United States registered or certified mail, postage prepaid, return
receipt requested ("Mailed"), or hand-delivered, or sent by facsimile
transmission with the original document Mailed to confirm or by recognized
overnight courier service, addressed as follows:


                          To Buyer:
                          PG&E Energy Trading - Power, L.P.
                          Attn:  Authorized Emissions Account Representative
                          7500 Old Georgetown Road, Bethesda, MD 20814
                          Telephone No.: 301-280-6600
                          Fax No: 301-280-6601
<PAGE>
 
                          To Seller:
                          Buzzard Power Corporation
                          c/o Scrubgrass Generating Plant
                          P.O. Box 39, Kennerdell, PA 16374
                          Attn:  Project Director
                          Telephone No.: 814-385-6661
                          Fax No: 814-385-6704

                          with a copy to:

                          Scrubgrass Generating Company, L.P.
                          7500 Old Georgetown Road, 13th Floor
                          Bethesda, MD, 20814
                          Attn:  General Counsel

Governing Law:  THIS  AGREEMENT  IS  GOVERNED  BY  AND  CONSTRUED  IN ACCORDANCE
WITH THE LAWS OF THE STATE OF PENNSYLVANIA.

Confidentiality:  Neither party shall publish, disclose, or otherwise divulge
Confidential Information to any person, at any time during or after the term of
this Agreement. without the other party's prior express written consent:
provided that the terms of this transaction may be disclosed to governmental
agencies with jurisdiction over this matter without prior consent.  Each party
may permit knowledge of and access to the Confidential Information only to those
of its affiliates, attorneys. accountants, representatives, agents, lenders,
lessors, board members, officers and employees who have a need to know,  For
purposes of this Agreement. "Confidential Information" shall mean non-public,
confidential or proprietary information that is designated by the disclosing
party as confidential. The term "Confidential Information" does not include any
information which (i) at the time of disclosure or thereafter is generally
available to the public (other than as a result of a disclosure by any Party in
violation of this Agreement), (ii) was available to any Party on a non-
confidential basis from  a source other than the Party hereto providing the
Confidential Information, provided that such source is not and was not known by
the recipient Party to be bound by a confidentiality agreement that was
applicable to the Confidential Information or (iii) has been independently
acquired or developed by any Party without violating any of its obligations
under this Agreement. In the event that any Party receiving the Confidential
Information  becomes  legally  compelled  (by  deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process)
to disclose any of the Confidential Information, the legally compelled Party
shall give the other Party providing the Confidential Information prompt prior
written notice of such requirement so that the providing Party may seek a
protective order or other appropriate remedy and/or waive compliance with the
terms of this Agreement. In the event that such protective order or other remedy
is not obtained, or that the providing Party waives compliance with the terms
hereof, the Party legally compelled to disclose the Confidential Information
agrees to provide only that limited portion of the Confidential Information that
it is advised by written opinion of counsel is legally required and to exercise
reasonable efforts to obtain assurance that confidential treatment will be
accorded such Confidential Information. The Parties agree that in the event of a
breach of this Confidentiality provision the Party providing the Confidential
Information shall be entitled to equitable relief, including injunction and
specific performance, in addition to all other remedies available at law or
equity.

Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Buzzard by returning an executed copy of this
Transaction Letter via facsimile to PGET at (301) 280-6601. Your response should
reflect the appropriate party in your organization who has the authority to
enter into the Transaction.

PG&E ENERGY TRADING - POWER, L.P.

By:  PG&E Energy Trading  Power Holdings Corporation, its sole general partner



By:  /s/ Sarah M. Barpoulis,
     -------------------------------------------------
     Sarah M. Barpoulis, Senior Vice President
<PAGE>
 
ACCEPTED AND AGREED:

BUZZARD POWER CORPORATION


By:  /s/ William D. Linehan,
     ----------------------------------------------
     William D. Linehan, Chief Financial Officer

 
ACKNOWLEDGED AND AGREED TO:

SCRUBGRASS GENERATING COMPANY, L.P


By:  /s/ Gary Weidinger
     ----------------------------------------------
     Gary Weidinger, Senior Vice President
<PAGE>
January 13, 1999

Buzzard Power Corporation
c/o Scrubgrass Generating Company

RE:  NOx Early Reduction Credit (OTC Budget Allowance) Purchase

Attn:  Martin Kreft

This  letter shall confirm the agreement reached between PG&E Energy Trading -
Power, L.P. ("PGET")  and Buzzard Power Corporation ("Buzzard") regarding the
transaction set forth below (the "Transaction).

Seller:              Buzzard

Buyer:               PGET

Trade Date:          January 8, 1999

Introduction:        Seller currently leases an electric generating facility
(the "Facility") in the state of Pennsylvania from Scrubgrass Generating
Company, L.P. ("SGC"). Buyer wishes to purchase Nitrogen Oxide Ozone Transport
Region Early Reduction Credits usable as NOx Budget Allowances for the year 1999
("Al1owances" or NOx Allowances") certified by the Environmental Protection
Agency and the Pennsylvania Department of Environmental Protection (the
"Regional Authorities") from Seller, and Seller wishes to sell such Allowances.

Special Condition:   If the Regional Authorities fail to certify the Allowances
on or prior to October 1, 1999, or a mutually agreed upon extension date, this
Transaction shall terminate.

Contract Quantity:   86 tons of Allowances ("Contract Quantity").

Purchase Price:      $4,075 per Allowance

Delivery:            Within five (5) business days following the 1999 allocation
of Allowances (the "Allocation") to Seller's National Allowance Tracking System
("NATS") account, Seller shall file all documents required to transfer the
Allowances from Seller's NOx account to Buyer's NOx account with the Regional
Authority, with copies of all documents sent to Buyer at the time of submission
thereof. In particular, Seller shall execute a NOx Budget Program Allowance
Transfer Form (the "ATF") and deliver such form to the Regional Authority to
transfer the Allowances. Seller shall notify Buyer when transfer of the
Allowances is posted on the NATS on the Internet. The effective date of the
transfer of Allowances (the "Transfer") shall be the date the transfer is posted
on the NATS indicating the Allowances appear in Buyer's NOx account; provided,
however, if Buyer has not established a NATS account on or before the date that
Seller files the ATF for the transfer of Allowances with the Regional Authority,
the Transfer shall be deemed to have been effective on the date that is five
business days after the submission of such ATF.

Payment:             Within ten (10) business days following the transfer of
Allowances into Buyer's name, Buyer shall pay to Seller an amount equal to the
Purchase Price multiplied by the Contract Quantity (86 tons x $4.075 per ton,
totaling $350,450).

                     Buyer shall pay to Seller all payments due hereunder by
wire transfer of immediately available funds (U.S. Dollars) to the account
identified below:


                               Bankers Trust Company N.Y
                               Corporate Trust Agency Group
                               ABA 021001033
<PAGE>
 
                               Credit Account: 01419647
                               Ref:  Venango (Scrubgrass) Operating -- A/C


                       All overdue payments shall bear interest from, and
including, the due date to, but excluding, the date of payment at a rate equal
to two percent (2%) over the per annum rate of interest equal to the prime
lending rate as may from time to time be published in the Wall Street Journal
under "Money Rates"; provided, the interest rate shall never exceed the maximum
rate permitted by applicable law.

Taxes:       Each party shall be responsible for any taxes or other fees
associated with its respective purchase and sale of the Allowances hereunder.

Liability Limitation:  FOR BREACH OF ANY PROVISION OF THIS AGREEMENT, THE
OBLIGOR'S LIABILITY, SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY. SUCH
DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY HEREUNDER, AND ALL
OTHER REMEDIES OR DAMAGES ARE WAIVED. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, IN TORT
CONTRACT OR OTHERWISE. THIS  LIMITATION  SURVIVES  EXPIRATION  OR TERMINATION
OF THIS AGREEMENT.

Warranties:  Seller hereby warrants that, subject to the terms hereof upon
transfer to Buyer, Seller shall convey the Allowances to Buyer free from all
liens and defects of title. SELLER EXPRESSLY NEGATES ANY OTHER REPRESENTATION OR
WARRANTY,  WRITTEN  OR ORAL,  EXPRESS  OR  IMPLIED. INCLUDING WITHOUT
LIMITATION, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO CONFORMITY TO MODELS
OR SAMPLES, OR MERCHANTABILITY. This section survives expiration or termination
of this Agreement.

Event of Default:      If an Event of Default (as defined below) occurs with
respect to either party (the "Affected Party"), the other party (the "Notifying
Party") may: (i) upon two business days' written notice to the Affected Party,
terminate this Agreement (provided, however, that upon the occurrence of any
Event of Default listed in clause (d) of its definition, this Agreement shall
automatically be deemed terminated, without notice, immediately prior to such
event), (ii) withhold any payments due in respect of this Agreement to the
extent of its damages (see "Buyer's Liability" and "Seller's Liability" below),
and/or (iii) exercise such other remedies as may be available at law or in
equity.

"Event of Default" means, with respect to either party (the "Affected Party"):

(a)   The failure by the Affected Party to make, when due, any payment required
under this Agreement if such failure is not remedied within five business days
after written notice of such failure is given to the Affected Party; or

(b)   Any representation or warranty made by the Affected Party in this
Agreement proves to have been false or misleading in any material respect when
made;

(c)   The Affected Party fails to perform any covenant or agreement set forth in
this Agreement (including its obligations to make any payment) and such failure
is not cured within five (5) business days after written notice thereof to the
Affected Party;

(d)   The Affected Party:

                       (i) makes an assignment or any general arrangements for
                       the benefit of creditors;

                       (ii) files a petition or otherwise commences, authorizes,
                       or acquiesces in the commencement of a proceeding or
                       cause under any bankruptcy or similar law for the
                       protection of creditors, or has such petition filed
                       against it and such proceeding remains undismissed for
                       thirty (30) days;

                       (iii) otherwise becomes bankrupt or insolvent (however
                       evidenced); or
<PAGE>
 
                       (iv) is unable to pay its debts as they fall due.

Buyer's Liability:     In the event of a Buyer's Event of Default and Seller's
resulting election to terminate this Agreement, then Buyer shall be obligated to
pay Seller direct damages for any Allowances that have been transferred to Buyer
an amount equal to the price for such Allowances set forth in this Agreement,
and direct damages for any Allowances that have not been transferred to Buyer an
amount equal to the difference between the price for such Allowances set forth
in this Agreement and the amount that Seller is able to sell such Allowances for
to a third party. If Buyer has not paid such amount to Seller within two (2)
business days after the identification of the price, Buyer shall file an ATF
with the Regional Authority to transfer to Seller such Allowances as have been
previously transferred by Seller to Buyer and not paid for by Buyer. For
purposes of this section, Seller shall identify the cost of selling to the
market within 10 business days of Buyer's Event of Default.

Seller's Liability:    In the event of a Seller's Event of Default and Buyer's
resulting election to terminate this Agreement, Seller shall pay Buyer direct
damages equal to the cost to Buyer of purchasing Allowances (including
transaction costs) equivalent to all remaining Allowances to be delivered under
this Agreement less the cost Buyer would have had to pay Seller for the same
number of Allowances within two (2) business days of the Buyer's identification
of the price.  For purposes of this section, Buyer shall identify the cost of
purchasing from the market within 10 business days of Seller's failure to
deliver.

Force Majeure:         Neither party shall be considered to be in default in the
performance of any obligations in this Agreement when a failure of performance
is due to an event of Force Majeure. The term "Force Majeure" means any event
that is beyond the reasonable control of the party affected, including, without
limitation: flood, earthquake, tornado, storm, fire, civil disobedience, labor
disputes, labor or material shortage, sabotage, restraint by court order or
public authority, and the action or failure to act of a governmental authority,
including, without limitation, the failure of the Regional Authorities to
certify the Allowances or transfer the Allowances. No party shall be relieved of
its obligation to perform if such failure is due to causes arising out of its
own negligence or due to removable or remediable causes which it failed to
remove or remedy within a reasonable time period. Either party rendered unable
to fulfill any of its obligations under this Agreement by reason of an event of
Force Majeure shall give prompt written notice of such fact to the other party
and shall exercise due diligence to remove such inability with all reasonable
dispatch.

Assignment:            Neither party shall assign this Agreement or its rights
hereunder without the prior written consent of the other party. Upon any
assignment made in compliance with this Section, this Agreement shall inure to
and be binding upon the successors and assigns of the assigning party. Not
withstanding the foregoing, Seller may transfer, pledge or assign this Agreement
to SGC pursuant to the terms of the lease for the Facility and either party may,
without the need for consent from the other party (and without relieving itself
from liability hereunder), (a) transfer, pledge or assign this Agreement as
security for any financing with financial institutions; (b) transfer or assign
this Agreement to an affiliate of such party provided that such assignee has
substantially equivalent financial capability to the assignor; or (c) transfer
or assign this Agreement to any person or entity succeeding to all or
substantially all of the assets of such assignor; provided, however, in the case
of any assignment pursuant to subparagraphs (b) and (c), that any such assignee
shall agree to be bound by the terms and conditions thereof.

Notices:               All notices, certificates, or other communications
hereunder shall be in writing. All written notices are deemed sufficiently given
when mailed by United States registered or certified mail, postage prepaid,
return receipt requested ("Mailed"), or hand-delivered, or sent by facsimile
transmission with the original document Mailed to confirm or by recognized
overnight courier service, addressed as follows:

                          To Buyer:
                          PG&E Energy Trading - Power, L.P.
                          Attn:  Authorized Emissions Account Representative
                          7500 Old Georgetown Road, Bethesda, MD 20814
                          Telephone No.: 301-280-6600
                          Fax No: 301-280-6601
<PAGE>
 
                          To Seller:
                          Buzzard Power Corporation
                          c/o Scrubgrass Generating Plant
                          P.O. Box 39, Kennerdell, PA 16374
                          Attn:  Project Director
                          Telephone No.: 814-385-6661
                          Fax No: 814-385-6704

                          with a copy to:

                          Scrubgrass Generating Company, L.P.
                          7500 Old Georgetown Road, 13th Floor
                          Bethesda, MD, 20814
                          Attn:  General Counsel

Governing Law:  THIS  AGREEMENT  IS  GOVERNED  BY  AND  CONSTRUED  IN ACCORDANCE
WITH THE LAWS OF THE STATE OF PENNSYLVANIA.

Confidentiality:  Neither party shall publish, disclose, or otherwise divulge
Confidential Information to any person, at any time during or after the term of
this Agreement. without the other party's prior express written consent:
provided that the terms of this transaction may be disclosed to governmental
agencies with jurisdiction over this matter without prior consent.  Each party
may permit knowledge of and access to the Confidential Information only to those
of its affiliates, attorneys. accountants, representatives, agents, lenders,
lessors, board members, officers and employees who have a need to know,  For
purposes of this Agreement. "Confidential Information" shall mean non-public,
confidential or proprietary information that is designated by the disclosing
party as confidential. The term "Confidential Information" does not include any
information which (i) at the time of disclosure or thereafter is generally
available to the public (other than as a result of a disclosure by any Party in
violation of this Agreement), (ii) was available to any Party on a non-
confidential basis from  a source other than the Party hereto providing the
Confidential Information, provided that such source is not and was not known by
the recipient Party to be bound by a confidentiality agreement that was
applicable to the Confidential Information or (iii) has been independently
acquired or developed by any Party without violating any of its obligations
under this Agreement. In the event that any Party receiving the Confidential
Information  becomes  legally  compelled  (by  deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process)
to disclose any of the Confidential Information, the legally compelled Party
shall give the other Party providing the Confidential Information prompt prior
written notice of such requirement so that the providing Party may seek a
protective order or other appropriate remedy and/or waive compliance with the
terms of this Agreement. In the event that such protective order or other remedy
is not obtained, or that the providing Party waives compliance with the terms
hereof, the Party legally compelled to disclose the Confidential Information
agrees to provide only that limited portion of the Confidential Information that
it is advised by written opinion of counsel is legally required and to exercise
reasonable efforts to obtain assurance that confidential treatment will be
accorded such Confidential Information. The Parties agree that in the event of a
breach of this Confidentiality provision the Party providing the Confidential
Information shall be entitled to equitable relief, including injunction and
specific performance, in addition to all other remedies available at law or
equity.

Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Buzzard by returning an executed copy of this
Transaction Letter via facsimile to PGET at (301) 280-6601. Your response should
reflect the appropriate party in your organization who has the authority to
enter into the Transaction.

PG&E ENERGY TRADING - POWER, L.P.

By:  PG&E Energy Trading  - Power Holdings Corporation, its sole general partner


By:  /s/ Sarah M. Barpoulis,
     -----------------------------------------------
     Sarah M. Barpoulis, Senior Vice President
<PAGE>
 
ACCEPTED AND AGREED:
BUZZARD POWER CORPORATION


By:  /s/ William D. Linehan,
     ------------------------------------------------
     William D. Linehan, Chief Financial Officer


ACKNOWLEDGED AND AGREED TO:

SCRUBGRASS GENERATING COMPANY, L.P


By:  /s/ Gary Weidinger
     ------------------------------------------------
     Gary Weidinger, Senior Vice President