January 5, 1998



Mr. Harold W. Keiser
3605 Royal Fox Drive
St. Charles, Illinois  60174

Dear Mr. Keiser:

     In  conjunction  with your  employment as Chief  Nuclear  Officer of Public
Service  Electric  and Gas Company  (PSE&G)  and  President  of PSE&G's  Nuclear
Business Unit,  reporting to the Chief  Executive  Officer of PSE&G,  the agreed
terms of employment are as follows:

     1. The effective  date of your  employment  with PSE&G shall be January 12,
1998 or such earlier date as may be agreed to in writing (the Date of Employment
(DOE)).  Effective  upon your  employment,  you shall  assume  the  position  of
Executive Vice President-Nuclear, and shall assume the position of Chief Nuclear
Officer and President of PSE&G's  Nuclear  Business Unit upon the  retirement of
Leon Eliason, which is expected to occur no later than April 30, 1998.

     2. You shall be paid a base  salary at the annual rate of  $335,000,  which
salary  may be  increased,  but  shall not be  reduced,  thereafter  during  the
five-year period commencing on the DOE. This initial annual rate of salary shall
remain in effect until December 31, 1998.

     3. You shall be entitled to those  benefits from time to time  available to
officers and employees of PSE&G generally,  except as otherwise provided in this
letter.  You shall be initially eligible for a minimum of four weeks of vacation
per year. In addition, financial counseling will be available to you on the same
terms and conditions that it is provided to officers of PSE&G.

     4. PSE&G will compensate you for reasonably  incurred moving and relocation
expenses in accordance with PSE&G's Relocation Program.  Such compensation shall
specifically  include  reimbursement  of any sales  commissions on your existing
principal residence and will also include, if you so elect, the purchase of your
principal  residence  at  appraised  value  which  shall  be no less  than  your
investment  therein.  In  addition,  PSE&G  will  provide  you and  your  spouse
temporary  living  expenses  in New  Jersey for a period of up to six months and
will provide for the taxes  associated  with providing you housing in New Jersey
during such 6-month  period.  PSE&G will pay for the cost of  installation  of a
security  system in your  permanent  home in New Jersey,  or vicinity,  and will
maintain such a system in your  permanent  home as long as you are Chief Nuclear
Officer of PSE&G.
<PAGE>

     5. You may be  discharged  with or without cause at any time. If you should
be discharged without cause during the five-year period commencing on DOE, PSE&G
will pay to you the salary in effect  pursuant to  Paragraph 1 above at the time
of your discharge for a period of twelve months following such discharge, or for
the remainder of such five-year  period,  whichever is less.  "Cause" shall mean
(i) the willful or negligent  dereliction  of, and  continued  failure by you to
perform your duties with PSE&G (other than any such failure  resulting from your
incapacity  due to  physical  or mental  illness),  after a written  demand  for
performance  is delivered to you by the Chief  Executive  Officer of PSE&G which
identifies  the manner in which the CEO believes  that you have not so performed
your duties, or (ii) any conduct constituting a felony or moral turpitude.

     6. Your  participation in PSE&G's  Management  Incentive  Compensation Plan
(MICP) for 1998 will reflect a full year's award. Your target incentive award as
Chief Nuclear Officer and as Executive Vice President-Nuclear, will initially be
40% of  salary.  This  may be  adjusted  from  time to time in  accordance  with
established plan procedures.  Copies of the MICP and the calculation determining
the 1997 corporate factor are being forwarded to you under separate cover.

     7. As Chief Nuclear  Officer and as Executive Vice  President-Nuclear,  you
will  participate  in the  Long-Term  Incentive  Plan  (LTIP) of Public  Service
Enterprise  Group  Incorporated  (Enterprise),  the  parent of  PSE&G.  The LTIP
provides senior officers selected by the Organization and Compensation Committee
with two forms of options to purchase  shares of Enterprise  Common  Stock:  (i)
options that are granted in tandem with performance-based cash payments that are
designed to assist  executives in exercising the options (Tandem  Options);  and
(ii) options that are granted without any such cash  equivalents  (Non-Qualified
Options).  The Tandem  Options  generally  are  granted in  annually  and become
exercisable  approximately  three  years  after the date of grant,  and the LTIP
provides for payments to be made,  dependent  upon  dividends paid by Enterprise
and  future   financial   performance  by  Enterprise  in  comparison  to  other
corporations,  to assist the officers in exercising the options granted. It will
be  recommended  to the  Organization  and  Compensation  Committee  that you be
granted  2,500 Tandem  Options in January 1998 (which  would be  exercisable  in
January  2001).  In addition,  it will be recommended  to the  Organization  and
Compensation  Committee  that you be granted 10,000  Non-Qualified  Options at a
current  market  price under the LTIP.  A third of these  options  would  become
exercisable  in one year  and an  additional  1/3 in each of the two  succeeding
years.  They  would  expire in ten  years.  All such  options  (both  Tandem and
Non-Qualified)  would be subject to all of the  provisions of the LTIP and would
permit the purchase by you of numbers of shares granted by the  Organization and
Compensation  Committee that  appropriately  reflect your  responsibilities  and
ability to contribute to the long term success of Enterprise.

<PAGE>
     8. In light of your allied work experience, after you have been employed by
PSE&G for five years after your DOE,  you shall be granted  additional  credited
service of twenty  (20) years (in  addition  to that  earned as a result of your
employment by PSE&G),  for the purpose of determining any pension  benefits from
PSE&G. Assuming you are currently age 54, this additional credited service would
provide  you with 25 years of service  after five years of  employment  (5 years
actual  plus 20 years  additional  service),  and under the terms of the Pension
Plan,  you would be entitled to retire  without a reduction  in your pension for
early  retirement.  In  addition,  the  Board of  Directors'  current  policy of
granting 5 years of additional  credited  service to officers who retire between
age 60 and 65-1/2  would be  available to you if you retire in that age bracket.
You  will  be  a  participant  in  PSE&G's  Pension  Plan  and  in  its  Limited
Supplemental  Death  Benefits and  Retirement  Plan. The Limited Plan provides a
retirement  benefit of a percentage of final average  compensation as defined in
the Plan that is equal to credited service plus 30 years. This would result in a
target  retirement  benefit  of 55% (25 years plus 30) at age 59, and 66% at age
65, times final average compensation,  adjusted for any survivorship benefit you
may choose,  and reduced by Social  Security  benefits and  pensions  from other
employers as provided in the Plan.  The amount of your  pension or  survivorship
benefits  paid by any  previous  employer  shall be  deducted  from the  pension
benefits  payable to you or your beneficiary by PSE&G on account of such service
with any previous employer.

     9. In  recognition  of your need for an automobile  for business  purposes,
PSE&G will provide you with a full size  American made  automobile  (Oldsmobile,
Buick or other  comparable  model) and shall  provide the  related  maintenance,
repairs, insurance and costs of operation thereof.

     10. As part of PSE&G's  requirement  for a work force that is free from the
influence  of foreign  chemical  substances,  you will be required to complete a
medical  examination which will include definitive  analysis of a freshly voided
urine specimen for the presence of commonly abused drugs, including marijuana.

     11. During the course of your employment, you will have access to and shall
become familiar with "Confidential Information" as defined below. You agree that
you  shall  not,  directly  or  indirectly,  disclose  or use  any  Confidential
Information,  except as required in the course of your  employment with PSE&G or
its affiliates and subsidiaries and consistent with their interests.  All files,
records,  documents,  or  recordings,  electronic  or  otherwise,  containing or
relating to  Confidential  Information,  whether  prepared  by you or  otherwise
coming into your possession, shall remain the exclusive property of PSE&G or its
affiliates and subsidiaries.
<PAGE>
     As used  herein,  the  term  "Confidential  Information"  means  all  trade
secrets,  proprietary and confidential  business information  belonging to, used
by, or in the  possession  of PSE&G or its  affiliates  and  subsidiaries,  with
respect  to  their   respective   business   strategies,   plans  and  financial
information,  purchase or sale of property,  leasing, pricing, sales programs or
tactics,  actual or past  sellers,  purchasers,  lessees,  lessors or customers,
those with whom PSE&G or its affiliates and subsidiaries has begun  negotiations
for new business, costs, employee compensation, marketing and development plans,
inventions  and  technology,  whether  such  Confidential  Information  is oral,
written or electronically  recorded or stored,  except information in the public
domain,  information  known to you  prior to your  employment  with  PSE&G,  and
information  received by you from sources other than PSE&G or its affiliates and
subsidiaries, without obligation of confidentiality.

     12.  You agree  that the  knowledge  and  information,  including,  but not
limited to,  "Confidential  Information"  as defined in the previous  paragraph,
gained in the performance of your duties  hereunder may be valuable to those who
are  now,  or  might  become,   competitors  of  PSE&G  or  its  affiliates  and
subsidiaries.  Accordingly,  you agree that,  if your  employment  is terminated
prior to the  completion of five years from DOE, you will not, for the period of
one year, or for the remainder of the period to the end of five years after DOE,
whichever is less, you will not, directly or indirectly,  own, manage,  operate,
join,  control,  become employed  (whether as an employee or a consultant) by or
participate in the  ownership,  management,  or control of, or become  connected
with,  any  business  which is in  direct  competition  with  PSE&G  and/or  its
affiliates and subsidiaries in New Jersey, New York,  Pennsylvania,  Maryland or
Delaware.  Further,  you  shall not be  entitled  to  post-employment  payments,
including  non-qualified pension payments, as provided herein from and after the
date of commencement of any such prohibited  subsequent activity in violation of
this Agreement.

     13. You further  acknowledge and agree that in the event of a breach by you
of any of the  agreements  set forth in  Paragraphs  10 and/or 11,  PSE&G  shall
suffer  irreparable harm for which money damages are not an adequate remedy, and
that, in the event of such breach, PSE&G shall be entitled to obtain an order of
a court of  competent  jurisdiction  for  equitable  relief  from  such  breach,
including,  but not limited to,  temporary  restraining  orders and  preliminary
and/or permanent injunctions against the breach of such agreements by you.

     14. Any and all  disputes  arising out of or relating to this  Agreement or
your  employment,  other than an  unemployment or workers'  compensation  claim,
shall,  at the demand of either you or PSE&G,  whether  made before or after the
institution of any legal  proceeding,  be resolved  through binding  arbitration
administered by the American  Arbitration  Association  (AAA) in accordance with
the Employment  Dispute  Resolution  Rules of the AAA and with the United States
Arbitration Act. The arbitration shall be conducted in Newark, New Jersey before
one  arbitrator.  If the parties cannot agree on the  arbitrator  within 30 days
after the demand for an  arbitration,  then either  party may request the AAA to
select  an  arbitrator,  which  selection  shall be  deemed  acceptable  to both
parties. To the maximum extent practicable,  the arbitration proceeding shall be
concluded within 180 days of filing the demand for arbitration with the AAA. All
costs and fees of the arbitration shall be shared equally by the parties, unless
otherwise awarded by the arbitrator. Each party agrees to keep all such disputes
and  arbitration  proceedings  strictly  confidential  except for  disclosure of
information  required by law. Each party further  agrees to abide by and perform
any  award  rendered  by the  arbitrator,  and  that a  judgment  of a court  of
competent jurisdiction may be entered on the award.
<PAGE>

     15. This Agreement shall be governed by the laws of New Jersey.

     16. The foregoing terms of this Agreement  constitute the entire  agreement
between the parties and supersede all previous communications,  representations,
and  agreements,  oral or  written,  between  the  parties  with  respect to the
Agreement's  subject  matter.  No  agreement  or  understanding  modifying  this
Agreement shall be binding unless signed by both parties.

                  If the  foregoing is in  accordance  with your  understanding,
please sign the enclosed copy of this letter and return it to me.

                                     Sincerely,

                                     M. PETER MELLETT
                                     ----------------
                                     M. Peter Mellett
                                     Vice President - Human Resources



Agreed to this 6th day of January, 1998.

HAROLD W. KEISER
-----------------
Harold W. Keiser




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