<PAGE>
 
                                                                   Exhibit 4.8-B
                                         [Form Relating to Preferred Securities]
 


--------------------------------------------------------------------------------

                              GUARANTEE AGREEMENT



                                    Between


                       HOUSTON LIGHTING & POWER COMPANY
                                (as Guarantor)


                                      and


                              THE BANK OF NEW YORK  
                                  (as Trustee)


                                  dated as of



                                January __, 1997



--------------------------------------------------------------------------------
<PAGE>
 
                           CROSS-REFERENCE TABLE/*/

<TABLE> 
<CAPTION> 

Section of
Trust Indenture Act                                         Section of
of 1939, as amended                                     Guarantee Agreement
-------------------                                     -------------------
<S>                                                     <C>   
  310(a)..................................................  4.1(a)
  310(b)..................................................  4.l(c), 2.8
  310(c)..................................................  Inapplicable
  311(a)..................................................  2.2(b)
  311(b)..................................................  2.2(b)
  31l(c)..................................................  Inapplicable
  312(a)..................................................  2.2(a)
  312(b)..................................................  2.2(b)
  313.....................................................  2.3
  314(a)..................................................  2.4
  314(b)..................................................  Inapplicable
  314(c)..................................................  2.5
  314(d)..................................................  Inapplicable
  314(e)..................................................  1.1, 2.5, 3.2
  314(f)..................................................  2.1, 3.2
  315(a)..................................................  3.1(d)
  315(b)..................................................  2.7
  315(c)..................................................  3.1
  315(d)..................................................  3.1(d)
  316(a)..................................................  1.1, 2.6, 5.4
  316(b)..................................................  5.3
  316(c)..................................................  8.2
  317(a)..................................................  Inapplicable
  317(b)..................................................  Inapplicable
  318(a)..................................................  2.1 (b)
  318(b)..................................................  2.1
  318(c)..................................................  2.1 (a)
</TABLE>

-----------------------------
     /*/    This Cross-Reference Table does not constitute part of the Guarantee
            Agreement and shall not affect the interpretation of any of its
            terms or provisions.

                                       i
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>

ARTICLE I.  DEFINITIONS...................................................... 1
     SECTION 1.1.  Definitions............................................... 1

ARTICLE II.  TRUST INDENTURE ACT............................................. 4
     SECTION 2.1.  Trust Indenture Act; Application.......................... 4
     SECTION 2.2.  List of Holders........................................... 4
     SECTION 2.3.  Reports by the Guarantee Trustee.......................... 4
     SECTION 2.4.  Periodic Reports to the Guarantee Trustee................. 4
     SECTION 2.5.  Evidence of Compliance with Conditions Precedent.......... 5
     SECTION 2.6.  Events of Default; Waiver................................. 5
     SECTION 2.7.  Event of Default; Notice.................................. 5
     SECTION 2.8.  Conflicting Interests..................................... 5

ARTICLE III.  POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE............. 6
     SECTION 3.1.  Powers and Duties of the Guarantee Trustee................ 6
     SECTION 3.2.  Certain Rights of Guarantee Trustee....................... 7
     SECTION 3.3.  Indemnity................................................. 9
     SECTION 3.4.  Compensation and Reimbursement............................ 9

ARTICLE IV.  GUARANTEE TRUSTEE............................................... 9
     SECTION 4.1.  Guarantee Trustee; Eligibility............................ 9
     SECTION 4.2.  Appointment, Removal and Resignation of the
                   Guarantee Trustee.........................................10

ARTICLE V.  GUARANTEE........................................................10
     SECTION 5.1.  Guarantee.................................................10
     SECTION 5.2.  Waiver of Notice and Demand...............................11
     SECTION 5.3.  Obligations Not Affected..................................11
     SECTION 5.4.  Rights of Holders.........................................12
     SECTION 5.5.  Guarantee of Payment......................................12
     SECTION 5.6.  Subrogation...............................................12
     SECTION 5.7.  Independent Obligations...................................12

ARTICLE VI.  COVENANTS AND SUBORDINATION.....................................13
     SECTION 6.1.  Subordination.............................................13
     SECTION 6.2.  Pari Passu Guarantees.....................................13

ARTICLE VII.  TERMINATION....................................................13
     SECTION 7.1.  Termination...............................................13

ARTICLE VIII.  MISCELLANEOUS.................................................13
</TABLE>

                                      ii
<PAGE>
 
     SECTION 8.1.  Successors and Assigns....................................13
     SECTION 8.2.  Amendments................................................14
     SECTION 8.3.  Notices...................................................14
     SECTION 8.4.  Benefit...................................................15
     SECTION 8.5.  Interpretation............................................15
     SECTION 8.6.  Governing Law.............................................16
     SECTION 8.7.  Limited Liability.........................................16

                                      iii
<PAGE>
 
                              GUARANTEE AGREEMENT

          This GUARANTEE AGREEMENT, dated as of January __, 1997, is executed
and delivered by HOUSTON LIGHTING & POWER COMPANY, a Texas corporation (the
"Guarantor"), having its principal office at Houston Industries Plaza, 1111
Louisiana Street, Houston, Texas 77002, and The Bank of New York, a New York
banking corporation, as trustee (the "Guarantee Trustee"), for the benefit of
the Holders (as defined herein) from time to time of the Preferred Securities
and the Common Securities (each as defined herein and, together, the
"Securities") of HL&P CAPITAL TRUST __, a Delaware statutory business trust (the
"Issuer").

          WHEREAS, pursuant to an Amended and Restated Trust Agreement, dated as
of January __, 1997 (the "Trust Agreement"), among the Guarantor, as Depositor,
the Property Trustee, the Delaware Trustee and the Administrative Trustees named
therein and the Holders from time to time of undivided beneficial interests in
the assets of the Issuer, the Issuer is issuing $___,000,000 aggregate
Liquidation Amount (as defined in the Trust Agreement) of its ____% Trust
Preferred Securities, Series __, Liquidation Amount $25 per preferred security 
(the "Preferred Securities"), and its $__________ aggregate Liquidation Amount
(as defined in the Trust Agreement) of its Common Securities, Series __,
Liquidation Amount $25 per common security (the "Common Securities"), each
representing undivided beneficial interests in the assets of the Issuer and
having the terms set forth in the Trust Agreement;

          WHEREAS, the Issuer will use the proceeds of the issuance of the
Securities to purchase the Debentures (as defined in the Trust Agreement) of the
Guarantor, which will be deposited with The Bank of New York, a New York banking
corporation, as Property Trustee under the Trust Agreement, as trust assets; and

          WHEREAS, as an incentive for the Holders to purchase Securities, the
Guarantor desires irrevocably and unconditionally to agree, to the extent set
forth herein, to pay to the Holders of the Securities the Guarantee Payments (as
defined herein) and to make certain other payments on the terms and conditions
set forth herein.

          NOW, THEREFORE, in consideration of the purchase by each Holder of
Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee Agreement for the
benefit of the Holders from time to time of the Securities.

                            ARTICLE I.  DEFINITIONS

          SECTION 1.1. Definitions.

          As used in this Guarantee Agreement, the terms set forth below shall,
unless the context otherwise requires, have the following meanings.  Capitalized
or otherwise defined terms used but
<PAGE>
 
not otherwise defined herein shall have the meanings assigned to such terms in
the Trust Agreement as in effect on the date hereof.

          "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.  For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

          "Common Securities" means the securities representing common undivided
beneficial interests in the assets of the Issuer.

          "Debentures" has the meaning specified in the Trust Agreement.

          "Event of Default" means a default by the Guarantor on any of its
payments or other obligations under this Guarantee Agreement; provided, however,
that, except with respect to a default in payment of any Guarantee Payments, the
Guarantor shall have received notice of default and shall not have cured such
default within 60 days after receipt of such notice.

          "Guarantee Payments" means the following payments or distributions,
without duplication, with respect to the Securities, to the extent not paid or
made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions
(as defined in the Trust Agreement) required to be paid on the Securities, to
the extent the Issuer shall have funds on hand available therefor at such time,
(ii) the redemption price, including all accrued and unpaid Distributions to the
date of redemption (the "Redemption Price"), with respect to any Securities
called for redemption by the Issuer, to the extent the Issuer shall have funds
on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Issuer, unless
Debentures are distributed to the Holders, the lesser of (a) the aggregate of
the Liquidation Amount of $25 per Security plus accrued and unpaid Distributions
on the Securities to the date of payment and (b) the amount of assets of the
Issuer remaining available for distribution to Holders in liquidation of the
Issuer after satisfaction of liabilities to creditors of the Issuer as required
by applicable law (in either case, the "Liquidation Distribution").

          "Guarantee Trustee" means The Bank of New York, a New York banking
corporation, until a Successor Guarantee Trustee has been appointed and has
accepted such appointment pursuant to the terms of this Guarantee Agreement, and
thereafter means each such Successor Guarantee Trustee.

          "Holder" means any holder, as registered on the books and records of
the Securities Registrar, of any Securities; provided, however, that in
determining whether the holders of the requisite percentage of Securities have
given any request, notice, consent or waiver hereunder, "Holder" shall not
include the Guarantor, the Guarantee Trustee, or any Affiliate of the Guarantor
or the Guarantee Trustee.

                                      -2-
<PAGE>
 
          "Indenture" means the Junior Subordinated Indenture, dated as of
January __, 1997, as supplemented and amended, between the Guarantor and
The Bank of New York, a New York banking corporation, as trustee.

          "List of Holders" has the meaning specified in Section 2.2(a).

          "Majority in Liquidation Amount of the Securities" means, except as
provided by the Trust Indenture Act, a vote by the Holder(s), voting separately
as a class, of more than 50% of the Liquidation Amount of all then outstanding
Securities issued by the Issuer.

          "Officers' Certificate" means, with respect to any Person, a
certificate signed by the Chairman and Chief Executive Officer, President or a
Vice President, and by the Treasurer, an Associate Treasurer, an Assistant
Treasurer, the Controller, the Secretary or an Assistant Secretary, of such
Person, and delivered to the Guarantee Trustee.  One of the officers signing an
Officers' Certificate given pursuant to Section 2.5 shall be the principal
executive, financial or accounting officer of the Guarantor.  Any Officers'
Certificate delivered with respect to compliance with a condition or covenant
provided for in this Guarantee Agreement shall include:

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

          (b)  a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;

          (c)  a statement that each officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and

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

          "Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.

          "Responsible Officer" means, with respect to the Guarantee Trustee,
any Vice President, any Assistant Vice President, the Secretary, any Assistant
Secretary, the Treasurer, any Assistant Treasurer, any Trust Officer or any
other officer of the [Corporate Trust Services Office] of the Guarantee Trustee
and also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of that officer's knowledge of
and familiarity with the particular subject.


                                      -3-
<PAGE>
 
          "Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.1.

          "Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended.

                       ARTICLE II.  TRUST INDENTURE ACT

          SECTION 2.1. Trust Indenture Act; Application.

          (a)  This Guarantee Agreement is subject to the provisions of the
Trust Indenture Act that are required to be part of this Guarantee Agreement and
shall, to the extent applicable, be governed by such provisions.

          (b)  If and to the extent that any provision of this Guarantee
Agreement limits, qualifies or conflicts with the duties imposed by Sections 310
to 317, inclusive, of the Trust Indenture Act, such imposed duties shall
control.

          SECTION 2.2. List of Holders.

          (a) The Guarantor will furnish or cause to be furnished to the
Guarantee Trustee: (i) semiannually, not more than 15 days after _______ __ and
_______ __ in each year, a list, in such form as the Guarantee Trustee may
reasonably require, of the names and addresses of the Holders as of such ____ __
and _______ __, and (ii) at such other times as the Guarantee Trustee may
request in writing, within 30 days after the receipt by the Guarantor of any
such request, a list of similar form and content as of a date not more than 15
days prior to the time such list is furnished, excluding from any such list
names and addresses received by the Guarantee Trustee in its capacity as
Securities Registrar.

          (b)  The Guarantee Trustee shall comply with its obligations under
Section 311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act.

          SECTION 2.3. Reports by the Guarantee Trustee.

          Not later than March 31 of each year, commencing March 31, 199_, the
Guarantee Trustee shall provide to the Holders such reports as are required by
Section 313 of the Trust Indenture Act, if any, in the form and in the manner
provided by Section 313 of the Trust Indenture Act.  The Guarantee Trustee shall
also comply with the requirements of Section 313(d) of the Trust Indenture Act.

          SECTION 2.4. Periodic Reports to the Guarantee Trustee.

          The Guarantor shall provide to the Guarantee Trustee, the Securities
and Exchange Commission and the Holders such documents, reports and information,
if any, as required by Section 


                                      -4-
<PAGE>
 
314 of the Trust Indenture Act and the compliance certificate required by
Section 314 of the Trust Indenture Act, in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act. Delivery of such 
reports, information and documents to the Guarantee Trustee is for informational
purposes only and the Guarantee Trustee's receipt of such shall not constitute 
constructive notice of any information contained therein or determinable from 
information contained therein, including the Guarantor's compliance with any of 
its covenants hereunder (as to which the Guarantee Trustee is entitled to rely 
exclusively on Officers' Certificates).

          SECTION 2.5. Evidence of Compliance with Conditions Precedent.

          The Guarantor shall provide to the Guarantee Trustee such evidence of
compliance with such conditions precedent, if any, provided for in this
Guarantee Agreement that relate to any of the matters set forth in 
Section 314(c) of the Trust Indenture Act. Any certificate or opinion required
to be given by an officer pursuant to Section 314(c)(1) may be given in the form
of an Officers' Certificate.

          SECTION 2.6. Events of Default; Waiver.

          The Holders of a Majority in Liquidation Amount of the Securities may,
by vote, on behalf of the Holders, waive any past Event of Default and its
consequences. Upon such waiver, any such Event of Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured,
for every purpose of this Guarantee Agreement, but no such waiver shall extend
to any subsequent or other default or Event of Default or impair any right
consequent therefrom.

          SECTION 2.7. Event of Default; Notice.

          (a)  The Guarantee Trustee shall, within 90 days after the occurrence
of an Event of Default, transmit by mail, first class postage prepaid, to the
Holders, notices of all Events of Default actually known to a Responsible
Officer of the Guarantee Trustee, unless such defaults have been cured before
the giving of such notice, provided, that, except in the case of a default in
the payment of a Guarantee Payment, the Guarantee Trustee shall be protected in
withholding such notice if and so long as a committee of Responsible Officers of
the Guarantee Trustee in good faith determines that the withholding of such
notice is in the interests of the Holders.

          (b)  The Guarantee Trustee shall not be deemed to have knowledge of
any Event of Default unless a Responsible Officer charged with the
administration of this Guarantee Agreement shall have obtained written notice of
such Event of Default.

          SECTION 2.8. Conflicting Interests.

          The Trust Agreement shall be deemed to be specifically described in
this Guarantee Agreement for the purposes of clause (i) of the first proviso
contained in Section 310(b) of the Trust Indenture Act.

                                      -5-
<PAGE>
 
       ARTICLE III.  POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

          SECTION 3.1. Powers and Duties of the Guarantee Trustee.

          (a)  This Guarantee Agreement shall be held by the Guarantee Trustee
for the benefit of the Holders, and the Guarantee Trustee shall not transfer
this Guarantee Agreement to any Person except a Holder exercising his or her
rights pursuant to Section 5.4(iv) or to a Successor Guarantee Trustee on
acceptance by such Successor Guarantee Trustee of its appointment to act as
Successor Guarantee Trustee.  The right, title and interest of the Guarantee
Trustee shall automatically vest in any Successor Guarantee Trustee, upon
acceptance by such Successor Guarantee Trustee of its appointment hereunder, and
such vesting and cessation of title shall be effective whether or not
conveyancing documents have been executed and delivered pursuant to the
appointment of such Successor Guarantee Trustee.

          (b)  If an Event of Default has occurred and is continuing, the
Guarantee Trustee shall enforce this Guarantee Agreement for the benefit of the
Holders.

          (c)  The Guarantee Trustee, before the occurrence of any Event of
Default and after the curing of all Events of Default that may have occurred,
shall undertake to perform only such duties as are specifically set forth in
this Guarantee Agreement, and no implied covenants shall be read into this
Guarantee Agreement against the Guarantee Trustee.  In case an Event of Default
has occurred (that has not been cured or waived pursuant to Section 2.6), the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee Agreement, and use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.

          (d)  No provision of this Guarantee Agreement shall be construed to
relieve the Guarantee Trustee from liability for its own negligent action, its
own negligent failure to act or its own willful misconduct, except that:

               (i)  prior to the occurrence of any Event of Default and after
          the curing or waiving of all such Events of Default that may have
          occurred:

                    (A) the duties and obligations of the Guarantee Trustee
               shall be determined solely by the express provisions of this
               Guarantee Agreement, and the Guarantee Trustee shall not be
               liable except for the performance of such duties and obligations
               as are specifically set forth in this Guarantee Agreement; and

                    (B) in the absence of bad faith on the part of the Guarantee
               Trustee, the Guarantee Trustee may conclusively rely, as to the
               truth of the statements and the correctness of the opinions
               expressed therein, upon any certificates or opinions furnished to
               the Guarantee Trustee and conforming to the requirements of this
               Guarantee Agreement; but in the case of any such certificates or
               opinions that by any 

                                      -6-
<PAGE>
 
               provision hereof or of the Trust Indenture Act are specifically
               required to be furnished to the Guarantee Trustee, the Guarantee
               Trustee shall be under a duty to examine the same to determine
               whether or not they conform on their face to the requirements of
               this Guarantee Agreement;

        (ii)   the Guarantee Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer of the Guarantee Trustee,
unless it shall be proved that the Guarantee Trustee was negligent in
ascertaining the pertinent facts upon which such judgment was made;

        (iii)  the Guarantee Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of not less than a Majority in Liquidation Amount of
the Securities relating to the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee, or exercising any
trust or power conferred upon the Guarantee Trustee under this Guarantee
Agreement; and

        (iv)   no provision of this Guarantee Agreement shall require the
Guarantee Trustee to expend or risk its own funds or otherwise incur personal
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers, if the Guarantee Trustee shall have reasonable
grounds for believing that the repayment of such funds or liability is not
reasonably assured to it under the terms of this Guarantee Agreement or adequate
indemnity against such risk or liability is not reasonably assured to it.

SECTION 3.2. Certain Rights of Guarantee Trustee.

(a)     Subject to the provisions of Section 3.1:

        (i)    The Guarantee Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other paper or
document reasonably believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.

        (ii)   Any direction or act of the Guarantor contemplated by this
Guarantee Agreement shall be sufficiently evidenced by an Officers' Certificate
unless otherwise prescribed herein.

        (iii)  Whenever, in the administration of this Guarantee Agreement, the
Guarantee Trustee shall deem it desirable that a matter be proved or established
before taking, suffering or omitting to take any action hereunder, the Guarantee
Trustee (unless other evidence is herein specifically prescribed) may, in the
absence of bad faith on its part, request and rely 

                                      -7-
<PAGE>
 
          upon an Officers' Certificate which, upon receipt of such request from
          the Guarantee Trustee, shall be promptly delivered by the Guarantor.

               (iv) The Guarantee Trustee may consult with legal counsel, and
          the advice or opinion of such legal counsel of its selection with
          respect to legal matters shall be full and complete authorization and
          protection in respect of any action taken, suffered or omitted to be
          taken by it hereunder in good faith and in accordance with such advice
          or opinion. Such legal counsel may be legal counsel to the Guarantor
          or any of its Affiliates and may be one of its employees. The
          Guarantee Trustee shall have the right at any time to seek
          instructions concerning the administration of this Guarantee Agreement
          from any court of competent jurisdiction.

               (v)    The Guarantee Trustee shall be under no obligation to
          exercise any of the rights or powers vested in it by this Guarantee
          Agreement at the request or direction of any Holder, unless such
          Holder shall have provided to the Guarantee Trustee such adequate
          security and indemnity as would satisfy a reasonable person in the
          position of the Guarantee Trustee, against the costs, expenses
          (including attorneys' fees and expenses) and liabilities that might be
          incurred by it in complying with such request or direction, including
          such reasonable advances as may be requested by the Guarantee Trustee;
          provided that, nothing contained in this Section 3.2(a)(v) shall be
          taken to relieve the Guarantee Trustee, upon the occurrence of an
          Event of Default, of its obligation to exercise the rights and powers
          vested in it by this Guarantee Agreement.

               (vi)   The Guarantee Trustee shall not be bound to make any
          investigation into the facts or matters stated in any resolution,
          certificate, statement, instrument, opinion, report, notice, request,
          direction, consent, order, bond, debenture, note, other evidence of
          indebtedness or other paper or document, but the Guarantee Trustee, in
          its discretion, may make such further inquiry or investigation into
          such facts or matters as it may see fit.

               (vii)  The Guarantee Trustee may execute any of the trusts or
          powers hereunder or perform any duties hereunder either directly or by
          or through its agents or attorneys, and the Guarantee Trustee shall
          not be responsible for any misconduct or negligence on the part of any
          such agent or attorney appointed with due care by it hereunder.

               (viii) Whenever in the administration of this Guarantee Agreement
          the Guarantee Trustee shall deem it desirable to receive instructions
          with respect to enforcing any remedy or right or taking any other
          action hereunder, the Guarantee Trustee (A) may request instructions
          from the Holders, (B) may refrain from enforcing such remedy or right
          or taking such other action until such instructions are received, and
          (C) shall be fully protected in acting in accordance with such
          instructions.

          (b)  No provision of this Guarantee Agreement shall be deemed to
impose any duty or obligation on the Guarantee Trustee to perform any act or
acts or exercise any right, power, duty or 


                                      -8-
<PAGE>
 
obligation conferred or imposed on it in any jurisdiction in which it shall be
illegal, or in which the Guarantee Trustee shall be unqualified or incompetent
in accordance with applicable law, to perform any such act or acts or to
exercise any such right, power, duty or obligation. No permissive power or
authority available to the Guarantee Trustee shall be construed to be a duty to
act in accordance with such power and authority.

          SECTION 3.3. Indemnity.

          The Guarantor agrees to indemnify the Guarantee Trustee for, and to
hold it harmless against, any and all loss, damage, claims, liability or
expense, including taxes (other than taxes based on the income of the Guarantee
Trustee), incurred without negligence or bad faith on the part of the Guarantee
Trustee arising out of or in connection with the acceptance or administration of
this Guarantee Agreement, including the costs and expenses of defending itself
against any claim or liability in connection with the exercise or performance of
any of its powers or duties hereunder. The Guarantee Trustee will not claim or
exact any lien or charge on any Guarantee Payments as a result of any amount due
to it under this Guarantee Agreement. This indemnity shall survive the
termination of this Guarantee Agreement.

          SECTION 3.4. Compensation and Reimbursement.

          The Guarantor agrees (i) to pay to the Guarantee Trustee from time to 
time such compensation as the Guarantor and the Guarantee Trustee shall from 
time to time agree in writing for all services rendered by it hereunder (which 
compensation shall not be limited by any provision of law in regard to the 
compensation of a trustee of an express trust) and (ii) except as otherwise 
expressly provided herein, to reimburse the Guarantee Trustee upon its request 
for all reasonable expenses, disbursements and advances incurred or made by the 
Guarantee Trustee in accordance with any provision of this Guarantee Agreement 
(including the compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be 
attributable to its negligence or bad faith. This Section 3.4 shall survive the 
termination of this Guarantee Agreement for a period of one year following the 
termination of this Guarantee Agreement or any reinstatement thereof pursuant to
Section 7.1.

                        ARTICLE IV.  GUARANTEE TRUSTEE

          SECTION 4.1. Guarantee Trustee; Eligibility.

          (a)  There shall at all times be a Guarantee Trustee which shall:

               (i)  not be an Affiliate of the Guarantor; and

               (ii) be a Person that is eligible pursuant to the Trust Indenture
          Act to act as such and has a combined capital and surplus of at least
          $50,000,000, and shall be a corporation meeting the requirements of
          Section 310(a) of the Trust Indenture Act. If such corporation
          publishes reports of condition at least annually, pursuant to law or
          to the requirements of the supervising or examining authority, then,
          for the purposes of this Section and to the extent permitted by the
          Trust Indenture Act, the combined capital and surplus of such
          corporation shall be deemed to be its combined capital and surplus as
          set forth in its most recent report of condition so published.

          (b)  If at any time the Guarantee Trustee shall cease to be eligible
to so act under Section 4.1(a), the Guarantee Trustee shall immediately resign
in the manner and with the effect set out in Section 4.2(c).

          (c)  If the Guarantee Trustee has or shall acquire any "conflicting
interest" within the meaning of Section 310(b) of the Trust Indenture Act, the
Guarantee Trustee and the Guarantor shall in all respects comply with the
provisions of Section 310(b) of the Trust Indenture Act.

                                      -9-
<PAGE>
 
          SECTION 4.2. Appointment, Removal and Resignation of the Guarantee
Trustee.

          (a)  Subject to Section 4.2(b), the Guarantee Trustee may be appointed
or removed by the Guarantor (i) without cause at any time when an Event of
Default has not occurred and is continuing and (ii) at any time when the
Guarantee Trustee ceases to be eligible to act as the Guarantee Trustee pursuant
to Section 4.1 hereof or becomes incapable of acting or is adjudged a bankrupt
or insolvent or a receiver of the Guarantee Trustee or of its property is
appointed or any public officer takes charge or control of the Guarantee Trustee
or of its property or affairs for the purpose of rehabilitation, conservation or
liquidation.

          (b)  The Guarantee Trustee shall not be removed until a Successor
Guarantee Trustee has been appointed and has accepted such appointment by
written instrument executed by such Successor Guarantee Trustee and delivered to
the Guarantor.

          (c)  The Guarantee Trustee appointed hereunder shall hold office until
a Successor Guarantee Trustee shall have been appointed or until its removal or
resignation.  The Guarantee Trustee may resign from office (without need for
prior or subsequent accounting) by an instrument in writing executed by the
Guarantee Trustee and delivered to the Guarantor, which resignation shall not
take effect until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by instrument in writing executed by such Successor
Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee
Trustee.

          (d)  If no Successor Guarantee Trustee shall have been appointed and
accepted appointment as provided in this Section 4.2 within 60 days after
delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition, at the expense of the Guarantor, any court of
competent jurisdiction for appointment of a Successor Guarantee Trustee. Such
court may thereupon, after prescribing such notice, if any, as it may deem
proper, appoint a Successor Guarantee Trustee.


                             ARTICLE V.  GUARANTEE

          SECTION 5.1.  Guarantee.

          The Guarantor irrevocably and unconditionally agrees to pay in full to
the Holders the Guarantee Payments (without duplication of amounts theretofore
paid by or on behalf of the Issuer), as and when due, regardless of any defense,
right of setoff or counterclaim which the Issuer may have or assert.  The
Guarantor's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Guarantor to the Holders or by causing
the Issuer to pay such amounts to the Holders.


                                     -10-
<PAGE>
 
          SECTION 5.2.  Waiver of Notice and Demand.

          The Guarantor hereby waives notice of acceptance of the Guarantee
Agreement and of any liability to which it applies or may apply, presentment,
demand for payment, any right to require a proceeding first against the
Guarantee Trustee, the Issuer or any other Person before proceeding against the
Guarantor, protest, notice of nonpayment, notice of dishonor, notice of
redemption and all other notices and demands.

          SECTION 5.3.  Obligations Not Affected.

          The obligations, covenants, agreements and duties of the Guarantor
under this Guarantee Agreement shall in no way be affected or impaired by reason
of the happening from time to time of any of the following:

          (a)  the release or waiver, by operation of law or otherwise, of the
performance or observance by the Issuer of any express or implied agreement,
covenant, term or condition relating to the Securities to be performed or
observed by the Issuer;

          (b)  the extension of time for the payment by the Issuer of all or any
portion of the Distributions (other than an extension of time for payment of
Distributions that results from the extension of any interest payment period on
the Debentures as provided in the Indenture), Redemption Price, Liquidation
Distribution or any other sums payable under the terms of the Securities or the
extension of time for the performance of any other obligation under, arising out
of, or in connection with, the Securities;

          (c)  any failure, omission, delay or lack of diligence on the part of
the Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Securities, or any action
on the part of the Issuer granting indulgence or extension of any kind;

          (d)  the voluntary or involuntary liquidation, dissolution, sale of
any collateral, receivership, insolvency, bankruptcy, assignment for the benefit
of creditors, reorganization, arrangement, composition or readjustment of debt
of, or other similar proceedings affecting, the Issuer or any of the assets of
the Issuer;

          (e)  any invalidity of, or defect or deficiency in, the Securities;

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

          (g)  any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of a guarantor, it being the intent of
this Section 5.3 that the obligations of the Guarantor hereunder shall be
absolute and unconditional under any and all circumstances.

                                     -11-
<PAGE>
 
There shall be no obligation of the Holders to give notice to, or obtain the
consent of, the Guarantor with respect to the happening of any of the foregoing.

          SECTION 5.4.  Rights of Holders.

          The Guarantor expressly acknowledges that: (i) this Guarantee
Agreement will be deposited with the Guarantee Trustee to be held for the
benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this
Guarantee Agreement on behalf of the Holders; (iii) the Holders of not less than
a Majority in Liquidation Amount of the Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of this Guarantee Agreement or exercising any
trust or power conferred upon the Guarantee Trustee under this Guarantee
Agreement; and (iv) any Holder may institute a legal proceeding directly against
the Guarantor to enforce its rights under this Guarantee Agreement, without
first instituting a legal proceeding against the Issuer or any other Person.

          SECTION 5.5.  Guarantee of Payment.

          This Guarantee Agreement creates a guarantee of payment and not of
collection. This Guarantee Agreement will not be discharged except by payment of
the Guarantee Payments in full (without duplication of amounts theretofore paid
by the Issuer) or upon distribution of Debentures to the Holders as provided in
the Trust Agreement.

          SECTION 5.6.  Subrogation.

          The Guarantor shall be subrogated to all (if any) rights of the
Holders against the Issuer in respect of any amounts paid to the Holders by the
Guarantor under this Guarantee Agreement and shall have the right to waive
payment by the Issuer pursuant to Section 5.1; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any rights which it may acquire by way
of subrogation or any indemnity, reimbursement or other agreement, in all cases
as a result of payment under this Guarantee Agreement, if, at the time of any
such payment, any amounts are due and unpaid under this Guarantee Agreement. If
any amount shall be paid to the Guarantor in violation of the preceding
sentence, the Guarantor agrees to hold such amount in trust for the Holders and
to pay over such amount to the Holders.

          SECTION 5.7.  Independent Obligations.

          The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Issuer with respect to the Securities and
that the Guarantor shall be liable as principal and as debtor hereunder to make
Guarantee Payments pursuant to the terms of this Guarantee Agreement
notwithstanding the occurrence of any event referred to in subsections (a)
through (g), inclusive, of Section 5.3 hereof.


                                     -12-
<PAGE>
 
                   ARTICLE VI.  COVENANTS AND SUBORDINATION

          SECTION 6.1.  Subordination.

          The obligations of the Guarantor under this Guarantee Agreement will
constitute unsecured obligations of the Guarantor and will rank subordinate and
junior in right of payment to all Senior Debt (as defined in the Indenture) of
the Guarantor to the extent and in the manner set forth in the Indenture with
respect to the Debentures, and the provisions of Article XIII of the Indenture
will apply, mutatis mutandis, to the obligations of the Guarantor hereunder. The
obligations of the Guarantor hereunder do not constitute Senior Debt (as defined
in the Indenture) of the Guarantor.

          SECTION 6.2.  Pari Passu Guarantees.

          The obligations of the Guarantor under this Guarantee Agreement shall
rank pari passu with the obligations of the Guarantor under any similar
Guarantee Agreements issued by the Guarantor on behalf of the holders of
preferred or capital securities issued by any HL&P Trust (as defined in the
Indenture).

                           ARTICLE VII.  TERMINATION

          SECTION 7.1.  Termination.

          This Guarantee Agreement shall terminate and be of no further force
and effect upon (i) full payment of the Redemption Price of all Securities, (ii)
the distribution of Debentures to the Holders in exchange for all of the
Securities or (iii) full payment of the amounts payable in accordance with the
Trust Agreement upon liquidation of the Issuer. Notwithstanding the foregoing,
this Guarantee Agreement will continue to be effective or will be reinstated, as
the case may be, if at any time any Holder must restore payment of any sums paid
with respect to Securities or this Guarantee Agreement. This Guarantee Agreement
will not be discharged except by payment of the Guarantee Payments in full to
the extent not paid by the Issuer or upon distribution of Debentures to the
Holders as provided inthe Trust Agreement.

                         ARTICLE VIII.  MISCELLANEOUS

          SECTION 8.1.  Successors and Assigns.

          All guarantees and agreements contained in this Guarantee Agreement
shall bind the successors, assigns, receivers, trustees and representatives of
the Guarantor and shall inure to the benefit of the Holders of the Securities
then outstanding.  Except in connection with a consolidation, merger or sale
involving the Guarantor that is permitted under Article VIII of the Indenture
and pursuant to which the successor or assignee agrees in writing to perform the
Guarantor's obligations hereunder, the Guarantor shall not assign its
obligations hereunder.



                                      13
<PAGE>
 
          SECTION 8.2.  Amendments.

          Except with respect to any changes which do not adversely affect the
rights of the Holders in any material respect (in which case no consent of the
Holders will be required), this Guarantee Agreement may be amended only with the
prior approval of the Holders of not less than a Majority in Liquidation Amount
of the Securities. The provisions of Article VI of the Trust Agreement
concerning meetings of the Holders shall apply to the giving of such approval.

          SECTION 8.3.  Notices.

          Any notice, request or other communication required or permitted to be
given hereunder shall be in writing, duly signed by the party giving such
notice, and delivered, telecopied or mailed by first class mail as follows:

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

                      Houston Lighting & Power Company
                      Houston Industries Plaza
                      1111 Louisiana Street
                      Houston, Texas  77002
                      Facsimile No.:  (713) 207-3301
                      Attention:  Treasurer

          (b)  if given to the Issuer, in care of the Guarantee Trustee, at the
Issuer's (and the Guarantee Trustee's) address set forth below or such other
address as the Guarantee Trustee on behalf of the Issuer may give notice to the
Holders:

                      HL&P Capital Trust ____
                      200 West 9th Street Plaza, Box 2105
                      Wilmington, Delaware 19899


                                      14
<PAGE>
 
                      with a copy to:

                      The Bank of New York 
                      101 Barclay Street, Floor 21 West
                      New York, New York 10286
                      Facsimile No.: (212) 815-5915
                      Attention: Corporate Trust Trustee Administration

          (c)  if given to any Holder, at the address set forth on the books and
records of the Issuer.

          All notices hereunder shall be deemed to have been given when received
in person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

          SECTION 8.4.  Benefit.

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

          SECTION 8.5.  Interpretation.

          In this Guarantee Agreement, unless the context otherwise requires:

          (a)  capitalized terms used in this Guarantee Agreement but not
defined in the preamble hereto have the respective meanings assigned to them in
Section 1.1;

          (b)  a term defined anywhere in this Guarantee Agreement has the same
meaning throughout;

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

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

          (e)  a term defined in the Trust Indenture Act has the same meaning
when used in this Guarantee Agreement unless otherwise defined in this Guarantee
Agreement or unless the context otherwise requires;

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



                                      15
<PAGE>
 
          (g)  the masculine, feminine or neuter gender used herein shall
include the masculine, feminine and neuter genders.

          SECTION 8.6.  Governing Law.

          THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.

          SECTION 8.7.  Limited Liability.  

          The Holders of the Preferred Securities, in their capacities as such,
shall not be personally liable for any liabilities or obligations of the Issuer 
arising out of this Agreement, and the parties hereto hereby agree that the 
Holders of the Preferred Securities, in their capacities as such, shall be 
entitled to the same limitation of personal liability extended to stockholders 
of private corporations for profit organized under the General Corporation Law 
of the State of Delaware.

          This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.

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


                                                HOUSTON LIGHTING & POWER COMPANY


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


                                                THE BANK OF NEW YORK, 
                                                as Guarantee Trustee


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


                                     -16-