PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                          1989 LONG-TERM INCENTIVE PLAN























                                        Restated and Amended December 16, 1997


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                 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                          1989 LONG-TERM INCENTIVE PLAN


                                    ARTICLE I
                                     PURPOSE

Section 1.1 Purpose.  This Public Service  Enterprise  Group  Incorporated  1989
Long-Term Incentive Plan is intended to advance the interests of the Company and
its  Affiliates by affording an incentive to officers and other key employees to
acquire a  proprietary  interest in the Company in order to induce them to exert
their maximum efforts toward the Company's success,  to remain in its employ and
to more closely  align the  interests of such key  employees  with the long-term
interests of the Company's Stockholders. The Plan is also intended to attract to
the  Company  and its  Affiliates  individuals  of  experience  and  ability  by
providing a more competitive total compensation program.


      Section  1.2  Types of  Awards.  This Plan  allows  the  Company  to grant
Non-Qualified  Stock  Options,  which  Options  may,  at the  discretion  of the
Committee,  be granted in tandem with Dividend  Equivalents  and/or  Performance
Units, to officers and key employees of the Company and its Affiliates.

                                   ARTICLE II
                                   DEFINITIONS

      When used herein, the words and phrases hereinafter defined shall have the
following meanings unless a different meaning is clearly required by the context
of the Plan:

      Section 2.1 "Affiliate" shall mean any organization which is a member of a
controlled  group of corporations (as defined in Code section 414(b) as modified
by Code section 415(h)) which includes the Company,  or any trades or businesses
(whether or not incorporated) which are under common control (as defined in Code
section 414(c) as modified by Code section 415(h)) with the Company, or a member
of an  affiliated  service  group (as  defined  in Code  section  414(m))  which
includes the Company,  or any other entity  required to be  aggregated  with the
Company pursuant to regulations promulgated pursuant to Code section 414(o).

      Section 2.2 "Award Cycle" shall have the meaning specified in Section 6.1.

      Section 2.3 "Board of Directors"  shall mean the Board of Directors of the
Company.

      Section  2.4  "Code"  shall mean the  Internal  Revenue  Code of 1986,  as
amended, or as it may be amended from time to time.

      Section  2.5  "Committee"  shall mean the  Organization  and  Compensation
Committee of the Board of Directors.

      Section 2.6 "Common Stock" shall mean the Common Stock, without nominal or
par value of the Company.
<PAGE>                                 
      Section  2.7  "Company"  shall  mean  Public  Service   Enterprise   Group
Incorporated, a New Jersey corporation.

      Section 2.8 "Director" shall mean a member of the Board of Directors.

      Section 2.9 "Disability" shall mean any physical or mental condition which
renders  a  Participant  incapable  of  performing  further  work for his or her
employer,  as certified in writing by a medical  practitioner  designated and/or
approved by the Committee.

      Section 2.10  "Dividend  Equivalent"  shall have the meaning  specified in
Section 6.2.

      Section 2.11  "Exchange Act" shall mean the Securities and Exchange Act of
1934, as amended, or as it may be amended from time to time.

      Section 2.12 "Fair Market  Value" shall mean,  as of a given date,  if the
shares of Common Stock are listed as of such date on the NYSE, the closing price
on such date.  If the shares are not then listed on the NYSE,  and if the shares
of Common  Stock are then listed on any other  national  securities  exchange or
traded  on the  over-the-counter  market,  the fair  market  value  shall be the
closing  price on such exchange or on the NASDAQ  National  Market System or the
mean of the  closing bid and asked  prices of the shares of Common  Stock on the
over-the-counter  market, as reported by the NASDAQ, the National Association of
Securities Dealers OTC Bulletin Board or the National Quotation Bureau, Inc., as
the case may be, on such date or, if there is no  closing  price or bid or asked
price on that day, the closing price or mean of the closing bid and asked prices
on the most recent day preceding such date for which such prices are available.

      Section 2.13      "NASDAQ"  shall  mean  the  National   Association  of
Securities Dealers Automated Quotation System.

      Section 2.14      "NYSE" shall mean the New York Stock Exchange, Inc.

      Section 2.15 "Option" shall mean a non-qualified  stock option, that is, a
stock option which is not intended to qualify as an "incentive  stock option" as
that term is defined in Section 422(b) of the Code.

      Section 2.16 "Option  Price" shall mean the exercise price for any Options
granted  pursuant to the Plan  computed in  accordance  with  Section  6.1(b) or
6.1(d), as appropriate.

      Section 2.17  "Participant"  shall mean any officer or key employee of the
Company or an Affiliate who has been granted an Option pursuant to this Plan.

      Section  2.18  "Performance  Unit"  shall have the  meaning  specified  in
Section 6.3 of this Plan.

      Section  2.19  "Plan"  shall mean this  Public  Service  Enterprise  Group
Incorporated 1989 Long-Term Incentive Plan, as amended.

      Section 2.20 "Purchase Price" shall mean the Option Price times the number
of shares with respect to which an Option is exercised.
<PAGE>
      Section 2.21  "Retirement"  shall mean the  termination of employment by a
Participant other than by reason of his death:

          (a)  under  circumstances  entitling the Participant to an immediately
               payable periodic retirement benefit under any pension plan of his
               employer, or

          (b)  at or after age 65.

      Section 2.22  "Securities  Act" shall mean the  Securities Act of 1933, as
amended, or as it may be amended from time to time.

      Section 2.23 "Share" shall mean a share of Common Stock.

      Section  2.24  "Stockholders"  shall  mean the  holders  of  Common  Stock
entitled to vote in an election of Directors.


                                   ARTICLE III
                           SHARES SUBJECT TO THE PLAN

      Section 3.1 Total Shares  Available.  The total number of shares of Common
Stock that may be subject to Options  granted  under the Plan shall be 5,000,000
shares in the aggregate, subject to adjustment as provided in Article VIII. This
shall include  shares both granted  pursuant to Options and paid as  Performance
Units.  Shares  of  Common  Stock  issued  pursuant  to this  Plan may be either
authorized but unissued  shares or shares now or hereafter  acquired in the open
market by a agent independent of the Company, as selected by the Company. In the
event any Option or  Performance  Unit  granted  under the Plan shall  expire or
terminate for any reason  without  having been  exercised in full or shall cease
for any reason to be  exercisable in whole or in part,  the  unpurchased  shares
subject  thereto  shall  again be  available  for the  granting  of  Options  or
Performance Units under the Plan.

                                   ARTICLE IV
                                   ELIGIBILITY

      Section 4.1 Eligible Recipients.  Options may be granted from time to time
under the Plan to one or more  officers or key  employees  of the Company or any
Affiliate.
<PAGE>

                                    ARTICLE V
                           ADMINISTRATION OF THE PLAN.

      Section 5.1 Committee.   The   Plan   shall  be   administered   by  the
Committee.  No member of the Committee shall be eligible to participate in the
Plan.

      Within the limits of the express  provisions  of the Plan,  the  Committee
shall  have  the  authority,   subject  to  such  orders  or  resolutions,   not
inconsistent with the provisions of the Plan, as may from time to time be issued
or  adopted  by the Board of  Directors,  in its  discretion  to  determine  the
individuals to whom,  and the time or times at which,  Options shall be granted,
the number of shares of Common Stock to be subject to each  Option,  whether any
Option shall be granted in tandem with Dividend  Equivalents  and/or Performance
Units,  the limitations,  restrictions and conditions  applicable to each Option
grant, the terms and provisions of option agreements that may be entered into in
connection with Options (which need not be identical), to interpret the Plan, to
prescribe,  amend and rescind rules and regulations  relating to the Plan and to
make all other  determinations and take all other actions necessary or advisable
for the administration of the Plan.

        In making its  determinations  relating to Option grants,  the Committee
may consult  with the Chief  Executive  Officer of the Company and may take into
account the  recommendations  of the Chief  Executive  Officer  with  respect to
grants made to other  employees.  The  Committee  may also take into account the
nature of the services rendered by such individuals, their present and potential
contributions to the Company's  success and such other factors as the Committee,
in its discretion, shall deem relevant.

      The  Committee's   determinations  on  the  matters  regarding  this  Plan
(including  matters  referred to in this  Section 5.1) shall be  conclusive  and
shall  be  binding  on  the  Company,  its  Stockholders,  its  Affiliates,  all
Participants, all other employees and all other persons.

      Section  5.2  Section 16 of the  Exchange  Act.  Notwithstanding  anything
contained  herein to the contrary,  the Committee shall have the exclusive right
to grant  Options to persons  subject to Section 16 of the  Exchange Act and set
forth the terms and  conditions  thereof.  With  respect to  persons  subject to
Section 16 of the  Exchange  Act,  transactions  under the Plan are  intended to
comply with all  applicable  conditions  of Rule 16b-3,  as amended from time to
time (and its  successor  provisions,  if any),  under the Exchange  Act. To the
extent  any  provision  of the Plan or action by the Board of  Directors  or the
Committee  fails to so  comply,  it shall be deemed  null and void to the extent
required by law and to the extent  deemed  advisable  by the Board of  Directors
and/or the Committee.
<PAGE>
      Section 5.3 Retention of Advisors.  The Committee may retain such counsel,
consultants  or  advisors  as it shall  deem  necessary  or  appropriate  in the
performance of its duties and may rely upon any opinion or computation  received
from any such counsel, consultant or advisor. Expenses incurred by the Committee
in the  engagement of such  counsel,  consultant or advisor shall be paid by the
Company or such  Affiliate  whose  employees  have  benefited  from the Plan, as
determined  by  the  Committee.  The  Company  shall  indemnify  members  of the
Committee and any agent of the Committee who is an employee of the Company or an
Affiliate  against  any and all  liabilities  or  expenses  to which they may be
subjected by reason of any act or failure to act with respect to their duties on
behalf of the Plan,  except  in  circumstances  involving  such  person's  gross
negligence or willful misconduct.

                                   ARTICLE VI
                                TERMS OF OPTIONS

      Section 6.1 Option Provisions.  The Committee may grant Options within the
limits of the  express  provisions  of the  Plan.  An Option  shall  enable  the
Participant  to  purchase  from  the  Company,  at any time  during a  specified
exercise  period,  a specified  number of shares of Common  Stock at a specified
Option  Price.  The  character  and terms of each Option  granted under the Plan
shall be determined by the Committee consistent with the provisions of the Plan,
including the following:

            (a)The  Option  Price of the  shares  of  Common  Stock  of  Options
               granted in tandem with Dividend  Equivalents  and/or  Performance
               Units shall not be less than the Fair Market Value of such shares
               of Common Stock as of the time such Option is granted.

             (b) Any Option granted in tandem with Dividend  Equivalents  and/or
               Performance  Units shall be administered in Award Cycles relating
               to the  performance  of the  Company  and/or  one or  more of its
               Affiliates  throughout a period determined by the Committee.  The
               Committee  shall  define the length of any such Award  Cycle,  as
               well as one or more  goals for each such  Award  Cycle to measure
               such performance.

             (c) The Option  Price of the shares of Common  Stock of Options not
               granted in tandem with Dividend Equivalents and Performance Units
               shall be determined by the Committee, in its sole discretion.

             (d) In no event  shall any  Option  granted  under the Plan have an
               expiration  date  later  than ten (10) years from the date of its
               grant and all Options  granted under the Plan shall be subject to
               earlier termination as expressly provided in this Article VI.
<PAGE>
             (e) Unless  otherwise  provided in any option  agreement  under the
               Plan, an Option granted under the Plan shall become  exercisable,
               in whole at any time or in part from time to time, but in no case
               may an Option (i) be exercised as to less than one hundred  (100)
               shares of Common Stock at any one time, or the  remaining  shares
               of Common  Stock  covered by the Option if less than one  hundred
               (100), and (ii) become fully exercisable more than ten (10) years
               from the date of its grant.  Notwithstanding  anything  contained
               herein to the  contrary  and  except as  otherwise  provided  for
               herein,  Options  granted  in tandem  with  Dividend  Equivalents
               and/or  Performance  Units shall not be exercisable  prior to the
               conclusion of their related Award Cycle.  All other Options shall
               not be exercisable until one (1) year after the date of grant.

             (f) An Option  granted  under the Plan  shall be  exercised  by the
               delivery by the holder  thereof to the  Company at its  principal
               office (to the  attention of the  Compensation  Manager of Public
               Service  Electric and Gas Company,  the Company's  subsidiary) of
               written  notice of the number of full shares of Common Stock with
               respect to which the Option is being  exercised,  accompanied  by
               payment in full, in cash or by certified or bank check payable to
               the order of the  Company,  of the Option Price of such shares of
               Common  Stock,  or, at the  discretion of the  Committee,  by the
               delivery of unexercised Options having an exercise value equal to
               the Option  Price  and/or  shares of Common  Stock  having a Fair
               Market Value equal to the Option Price,  or, at the option of the
               Committee,  by a  combination  of cash  and/or  such  unexercised
               Options and/or shares (subject to the restrictions above) held by
               a Participant  that have an exercise value or a Fair Market Value
               together  with such cash that shall equal the Option  Price.  The
               Option Price may also be paid in full by a broker-dealer  to whom
               the Participant has submitted an exercise notice  consisting of a
               fully endorsed Option,  or through any other medium of payment as
               the Committee, in its discretion, shall authorize.

             (g) The  holder of an  Option  shall  have none of the  rights of a
               Stockholder with respect to the shares of Common Stock covered by
               such  holder's  Option until such shares of Common Stock shall be
               issued to such holder upon the exercise of the Option.

            (h)No  Options   granted  under  the  Plan  shall  be   transferable
               otherwise  than by will or the laws of descent and  distribution,
               and any Option granted under the Plan may be exercised during the
               lifetime  of the holder  thereof  only by the  holder.  No Option
               granted under the Plan shall be subject to execution,  attachment
               or other process.

             (i) Except as otherwise  provided herein,  the right to exercise an
               Option  shall expire when the  Participant  shall no longer be an
               employee of the Company or Affiliate.

      Section 6. 2      Dividend  Equivalents.  Dividend  Equivalents  granted
in  tandem  with an  Option  under  the Plan  shall be in such  form and shall
contain such terms and  conditions  as the  Committee  shall from time to time
determine, subject to the following:

            (a)Number.  The  number  of  Dividend   Equivalents   granted  to  a
               Participant  under the Plan with  respect to an Award Cycle shall
               be equal to the number of shares of Common  Stock with respect to
               which  Options  are  granted  to the  Participant  for such Award
               Cycle.

            (b)Amount. The amount of each Dividend  Equivalent granted under the
               Plan shall be equal to the  cumulative  cash  dividends per share
               actually  paid by the  Company  on its  Common  Stock  during the
               applicable Award Cycle.

            (c)Term of  Dividend  Equivalents.  A Dividend  Equivalent  shall be
               paid to a  Participant  if, and only if, and to the extent  that,
               the  Participant  exercises the Option that was granted in tandem
               with the  Dividend  Equivalent  within the first nine months that
               the Option is initially  exercisable.  If a Participant partially
               exercises the Option within the first nine months that the Option
               is initially  exercisable,  Dividend  Equivalents with respect to
               the same number of shares  shall be paid to the  Participant.  If
               the Option, or portion thereof, is not exercised within the first
               nine  months  after  it is  initially  exercisable,  the  related
               Dividend  Equivalent or portion  thereof  shall  terminate and be
               forfeited,  and the Participant shall have no right whatsoever to
               such Dividend Equivalent or portion thereof.

            (d) Manner of Payment. Dividend Equivalents shall be paid in cash

      Section 6. 3      Performance   Units.   Performance  Units  granted  in
tandem with an Option  under the Plan shall be in such form and shall  contain
such terms and conditions as the Committee  shall from time to time determine,
subject to the following:

            (a)Number.  The number of Performance Units granted to a Participant
               under the Plan with  respect to an Award  Cycle shall be equal to
               the number of shares of Common  Stock  which has been  granted to
               the  Participant  for such Award  Cycle  pursuant  to the related
               Option.

            (b)Amount.  The Committee  shall  determine the target value of each
               Performance  Unit as of the date it is granted.  The actual value
               of the  Performance  Unit at the end of the Award  Cycle shall be
               determined  by the Committee by reference to  performance  by the
               Company  and/or  one or more  Affiliate  relative  to the goal or
               goals  established  by the  Committee  for the Award Cycle at the
               time  of  grant;  provided,  however,  that  the  Committee  may,
               subsequent  to the date of  grant,  adjust  such goal or goals to
               account  for  extraordinary  extenuating  circumstances  so as to
               equitably  reflect what would be a consistent  application of the
               goal or goals over the Award Cycle.

            (c)Term and Manner of Payment for  Performance  Units. A Performance
               Unit shall be paid to a  Participant  if, and only if, and to the
               extent  that,  the  Participant  exercises  the  Option  that was
               granted in tandem with the Performance Unit within the first nine
               months that the Option is initially exercisable. The actual value
               of the  Performance  Units  granted in tandem  with such  Option,
               determined as of the end of the Award Cycle, shall be paid to the
               Participant  in cash.  If a  Participant  does not  exercise  the
               Option  within  such  initial  nine  month  period,  the  related
               Performance  Units  shall  terminate  and  be  forfeited.  If the
               Participant  partially exercises the Option within the first nine
               months  that  the  Option  initially  becomes  exercisable,   the
               Participant  shall be so paid in cash with  respect to the number
               of Performance  Units equal to the number of Shares for which the
               Option  is  exercised,  and shall  forfeit  the  balance  of such
               Performance Units.


      Section 6.4 Retirement or Disability. Except as otherwise provided herein,
upon  termination  of employment  with the Company or an Affiliate on account of
Retirement or  Disability,  all Options not in tandem with Dividend  Equivalents
and  Performance  Units shall become  exercisable in full,  and any  Participant
holding any such Options may exercise  such Options at any time within three (3)
years after the date of such  termination,  subject to the provisions of Section
6.7. In addition, and anything contained hereto to the contrary notwithstanding,
the term during which a Participant may exercise Options  subsequent to the date
of  termination  may, in the  Committee's  discretion,  be modified,  subject to
applicable law and regulation,  from the term specified above, as of the date of
grant and as specified in an option  agreement  evidencing  the grant of Options
under the Plan.

      With  respect to a  Participant  holding  one or more  Options  granted in
tandem with  Dividend  Equivalents  and/or  Performance  Units,  who  terminates
employment  prior  to the  end of the  related  Award  Cycle(s)  on  account  of
Disability  or  Retirement,  and who survives to the end of the Award  Cycle(s),
then, if the Participant had been actively employed for at least one year during
such Award Cycle(s),  the Committee may, in its sole  discretion,  at the end of
the applicable Award Cycle(s), permit the Participant to participate in the Plan
with respect to such Award Cycle(s). If the Committee permits the Participant to
so participate with respect to such Award Cycle(s),  such participation shall be
upon the  same  terms  and  conditions  as if the  Participant  continued  to be
employed by the Company or an Affiliate, except to the extent that the Committee
in its sole  discretion  shall modify such terms and  conditions and except that
(1) the  Participant's  award  (Options,  Dividend  Equivalents  and Performance
Units) shall be prorated to reflect his or her employment  during the applicable
Award Cycle(s),  (2) any Dividend Equivalents and Performance Units shall expire
no later than nine months following the end of the applicable Award Cycle(s) and
(3) any related  Options  shall  expire no later than three (3) years  following
termination of employment.

      In the event that a  Participant  holding one or more  Options  granted in
tandem with Dividend Equivalents and/or Performance Units terminates  employment
following the  conclusion of the related Award Cycle on account of Disability or
Retirement,  then to the extent the Participant has any unexercised Options with
respect  to such  Award  Cycle at the time of  termination  of  employment,  the
Participant  shall have the same rights as an active  employee  with  respect to
such Options,  except that any Dividend  Equivalents and Performance Units shall
expire no later  than nine  months  following  the end of the  applicable  Award
Cycle(s)  and all such  Options  shall  expire on the  sooner of three (3) years
following  termination  of  employment  or on the date  specified in the related
Option agreement.

      Section 6.5 Death. If a Participant  dies holding an Option granted not in
tandem with Dividend  Equivalents or Performance Units (i) while employed by the
Company or a Affiliate or (ii) within three (3) months after the  termination of
such  Participant's  employment  on account of Retirement  or  Disability,  such
Options  shall become  exercisable  in full and,  subject to the  provisions  of
Section 6.7, may be exercised by such Participant's  personal  representative at
any time within three (3) years after the Participant's death.

      With  respect to a  Participant  holding  one or more  Options  granted in
tandem with  Dividend  Equivalents  and/or  Performance  Units,  who  terminates
employment  prior to the end of the related Award  Cycle(s) on account of death,
or  dies  prior  to the  end of  the  Award  Cycle(s)  following  Disability  or
Retirement,  then,  if the  Participant  had been  employed by the Company or an
Affiliate for at least one year during such Award  Cycle(s),  the Committee,  in
its sole discretion,  may determine that the Participant shall be entitled to an
award  with  respect  to the  applicable  Award  Cycle(s),  in  which  case  the
Participant's  personal  representative  shall have rights similar to the rights
the  Participant  would have had at the end of the  applicable  Award  Cycle(s),
except  that:  (1) the right of the  personal  representative  to  exercise  any
Options  shall  commence  as of the date of the  Participant's  death  and shall
expire no later than three (3) years after the date of the Participant's  death;
(2)  the  amount  of the  prorated  Dividend  Equivalents  shall  be paid to the
Participant's personal representative in cash as soon as practicable; and (3) if
appropriate  in  the  sole  discretion  of  the  Committee,  a  prorated  amount
appropriately reflecting the value of the Performance Units shall be paid to the
Participant's personal representative in cash as soon as practicable;

            If a  Participant  holding  Options  granted in tandem with Dividend
Equivalents and/or  Performance Units terminates  employment on account of death
after  the  end  of  the  related  Award  Cycle,  the   Participant's   personal
representative  shall have the same rights as the Participant had at the time of
his or her  death,  except  that:  (1) the right of the  Participant's  personal
representative  to exercise  any  unexercised  Option shall expire no later than
three (3) years after the date of the Participant's death; (2) the amount of any
remaining  Dividend  Equivalents  shall  be paid to the  Participant's  personal
representative  in cash as soon as  practicable;  and (3) the final value of any
remaining  Performance  Units  shall  be  paid  to  the  Participant's  personal
representative in cash as soon as practicable.

      Section 6.6 Other Termination of Employment. In the event that Participant
holding Options granted in tandem with Dividend  Equivalents  and/or Performance
Units terminates employment following the conclusion of an Award Cycle otherwise
than on account of death, Disability or Retirement,  then such Participant shall
have the same  rights  as an  actively  employed  Participant,  except  that all
Options, Dividend Equivalents and Performance Units shall expire on the earliest
of nine months  following  termination of employment,  the date specified in the
related  Option  agreement,  or the date  otherwise  applicable  to the Dividend
Equivalent and/or Performance Unit.

      Section 6.7 No Extension.  An Option may not be exercised pursuant to this
Article VI except to the extent  that the  Participant  holding  such Option was
entitled to exercise  the Option at the time of  termination  of  employment  or
death and, in any event, may not be exercised after the original expiration date
of the Option.

      Section  6.8 Change In Control.  Notwithstanding  anything in this Plan to
the contrary,  any Options granted  hereunder and then outstanding  shall become
immediately  exercisable in full in the event the Participant's  employment with
the Company is terminated by the Company  subsequent  to the  consummation  of a
tender  offer or  exchange  offer made by any  "person"  within  the  meaning of
Section 14(d) of the  Securities  Act or  subsequent to a Change in Control,  as
defined  below,  provided  however,  that if in the  opinion  of  counsel to the
Company  the   immediate   exercisability   of  such  Options  when  taken  into
consideration with all other "parachute  payments" as defined in Section 280G of
the Code  would  result in an  "excess  parachute  payment"  as  defined in such
Section,  as well as an excise tax  imposed by  Section  4999 of the Code,  such
Options shall not become  immediately  exercisable,  except as and to the extent
the Committee,  in its sole  discretion  shall  otherwise  determine,  and which
determination  by the  Committee  shall  be based  solely  upon  maximizing  the
after-tax benefits to be received by any such Participant, and provided further,
that this  Section 6.8 shall not operate to make any Option  exercisable  within
one (1) year after the grant  thereof.  In the event a Participant  elects to so
exercise  any  Option  granted  in  tandem  with a  Dividend  Equivalent  and/or
Performance Unit, such related Dividend Equivalent and/or Performance Unit shall
also become payable to the Participant whether or not the related Award Cycle(s)
has  been  completed,   adjusted,  in  the  discretion  of  the  Committee,   to
proportionately  reflect the partially completed Award Cycle(s).  In the event a
Participant does not elect to so exercise any such Option,  any related Dividend
Equivalent,  adjusted,  in the discretion of the Committee,  to  proportionately
reflect  the  partially  completed  Award  Cycle(s),   shall  terminate  and  be
automatically  paid to the  Participant  in cash,  and any  related  Performance
Units, adjusted, in the discretion of the Committee,  to proportionately reflect
the partially  completed  Award  Cycle(s),  shall be  automatically  paid to the
Participant in Common Stock and/or cash as determined by the Committee,  on such
date within 30 days prior to the effective date of such Change in Control as the
Committee shall determine and, in the absence of such determination, on the last
business day  immediately  prior to such  effective  date.  For purposes of this
Section, a "Change in Control" shall have occurred if:

            (a)   any Person is or becomes the Beneficial Owner (as that term is
                  defined  in Rule 13-3  under the  Exchange  Act,  directly  or
                  indirectly, or securities of the Company (not including in the
                  securities  beneficially  owned by such Person any  securities
                  acquired directly from the Company)  representing  twenty-five
                  percent  (25%)  or more of the  combined  voting  power of the
                  Company's then outstanding securities; or

            (b)   individuals  who,  on  December  16,  1997,  constitute  the
                  Board  and  any  new   director   (other   than  a  director
                  designated  by a Person who has  entered  into an  agreement
                  with the  Company  to  effect  a  transaction  described  in
                  clause  (a),  (c) or  (d) of  this  definition  or any  such
                  individual  whose  initial  assumption of office occurs as a
                  result of either an actual or  threatened  election  contest
                  (as such  terms are used in Rule  14a-11 of  Regulation  14A
                  promulgated  under  the  Exchange  Act) or other  actual  or
                  threatened   solicitation  of  proxies  or  consents)  whose
                  election  by the Board or  nomination  for  election  by the
                  Company's  stockholders  was  approved or  recommended  by a
                  vote of at  least  two-thirds  (2/3) of the  directors  then
                  still in office who either  were  directors  on such date or
                  whose  election or nomination for election was previously so
                  approved,  cease for any reason to  constitute a majority of
                  the Board; or

            (c)   the  Stockholders   approve  a  reorganization,   merger  or
                  consolidation,  other  than  a  reorganization,   merger  or
                  consolidation  with  respect  to which all or  substantially
                  all of the  individuals  and  entities  who were  Beneficial
                  Owners, immediately prior to such reorganization,  merger or
                  consolidation,   of  the   combined   voting  power  of  the
                  Company's  then  outstanding  securities  beneficially  own,
                  directly    or    indirectly,    immediately    after   such
                  reorganization,   merger   or   consolidation,   more   then
                  seventy-five  percent (75%) of the combined  voting power of
                  the  securities  of  the  corporation  resulting  from  such
                  reorganization,  merger or  consolidation  in  substantially
                  the  same   proportions  as  their   respective   ownership,
                  immediately   prior  to  such   reorganization,   merger  or
                  consolidation,   of  the   combined   voting  power  of  the
                  Company's securities; or

            (d)   the  Stockholders  approve (a) the sale or  disposition by the
                  Company  (other than to a subsidiary of the Company) of all or
                  substantially  all of the assets of the  Company  (or any such
                  sale  or   disposition   is  effected   through   condemnation
                  proceedings),  or (b) a complete liquidation or dissolution of
                  the Company or Public Service Electric and Gas Company

      Section 6.9 Vesting on Account of Death. In addition,  and notwithstanding
anything  contained  herein to the contrary,  in the event an  Participant  dies
during such time as the  Participant is employed by the Company or an Affiliate,
then any  outstanding  Options which have not vested and are not  exercisable by
the Participant as of the date of death shall be automatically deemed vested and
exercisable by the Participant's personal  representative and/or his legatees in
accordance with Section 6.5.

                                   ARTICLE VII
                                LEAVE OF ABSENCE

      Section 7.1 Leaves.  For the purposes of the Plan, a Participant who is on
military or sick leave or other bona fide leave of absence  shall be  considered
as  remaining  in the employ of the Company or of a Affiliate or for ninety (90)
days or such  longer  period  as such  Participant's  right to  reemployment  is
guaranteed either by statute or by contract.

                                  ARTICLE VIII
                   ADJUSTMENT UPON CHANGES IN CAPITALIZATION

Section 8.1 Recapitalization. In the event that the outstanding shares of Common
Stock are  hereafter  changed by reason of  recapitalization,  reclassification,
stock split,  combination  or exchange of shares of Common Stock or the like, or
by the issuance of dividends  payable in shares of Common Stock,  an appropriate
adjustment  shall be made by the Committee in the aggregate  number of shares of
Common Stock  available  under the Plan, in the number of shares of Common Stock
issuable  upon  exercise of  outstanding  Options or  Performance  Units and the
Option  Price  per  share.  In the event of any  consolidation  or merger of the
Company with or into another  company or the conveyance of all or  substantially
all of the  assets of the  Company  to another  company,  each then  outstanding
Option  shall,  upon  exercise,  thereafter  entitle the holder  thereof to such
number of shares of Common  Stock or other  securities  or  property  to which a
holder  of  shares  of  Common  Stock  would  have  been  entitled  to upon such
consolidation,  merger  or  conveyance;  and,  in  any  such  case,  appropriate
adjustment,  as  determined by the  Committee,  shall be made as set forth above
with respect to any future changes in the  capitalization  of the Company or its
successor entity. In the event of the proposed dissolution or liquidation of the
Company,  all outstanding  Options under the Plan will automatically  terminate,
unless  otherwise  provided by the Board or any  authorized  committee  thereof;
provided,  however, that the Committee shall give at least 30 days prior written
notice of such event to each Participant  during which time he or she shall have
a right to  exercise  his or her  unexercised  Options,  and,  subject  to prior
expiration as otherwise  provided in this Plan,  each such Stock Option shall be
exercisable after receipt of such written notice and prior to the effective date
of such transaction.  In the event a Participant  elects to so exercise any such
Option, any related Dividend Equivalents and Performance Units shall also become
payable to the  Participant  adjusted,  in the discretion of the  Committee,  to
proportionately  reflect the partially completed Award Cycle(s).  In the event a
Participant does not elect to so exercise any such Option,  any related Dividend
Equivalent,  adjusted,  in the discretion of the Committee,  to  proportionately
reflect  the  partially  completed  Award  Cycle(s),   shall  terminate  and  be
automatically  paid to the  Participant  in cash,  and any  related  Performance
Units, adjusted, in the discretion of the Committee,  to proportionately reflect
the partially  completed  Award  Cycle(s),  shall be  automatically  paid to the
Participant in Common Stock and/or cash as determined by the Committee,  on such
date  within  30  days  prior  to the  effective  date of  such  transaction  or
dissolution  as the  Committee  shall  determine  and,  in the  absence  of such
determination,  on the last  business day  immediately  prior to such  effective
date.


      Section 8.2 Unexercised Options. Any adjustment in the number of shares of
Common Stock shall apply  proportionately to only the unexercised portion of the
Options granted  hereunder.  If fractions of shares of Common Stock would result
from any such  adjustment,  the  adjustment  shall be revised to the next higher
whole number of shares of Common Stock.


                                   ARTICLE IX
                               FURTHER CONDITIONS

      Section 9.1 Representation by the Participant. Unless the shares of Common
Stock  issuable upon the exercise of an Option to be awarded under the Plan have
been registered with the Securities and Exchange Commission under the Securities
Act prior to the exercise of the Option,  the Participant  receiving such Option
must  represent  in writing to the Company  that such shares of Common Stock are
being  acquired  for  investment  purposes  only and not with a view towards the
further resale or distribution thereof and must supply to the Company such other
documentation  as may be  required  by the  Company,  unless in the  opinion  of
counsel to the Company such  representation,  agreement or  documentation is not
necessary to comply with such law.

      Section 9.2  Exchange  Listing.  The  Company  shall not be  obligated  to
deliver  any  shares  of  Common  Stock  until  they  have  been  listed on each
securities  exchange  on which the  shares of Common  Sock may then be listed or
until  there has been  qualification  under or  compliance  with  such  state or
federal  laws,  rules or  regulations  as the Company may deem  applicable.  The
Company shall use reasonable  efforts to obtain such listing,  qualification and
compliance.

      Section 9.3 Tax  Withholding.  The Committee may make such  provisions and
take such steps as it may deem necessary or appropriate  for the  withholding of
any  taxes  that  the  Company  is  required  by any  law or  regulation  of any
governmental authority, whether federal, state or local, domestic or foreign, to
withhold in  connection  with the  exercise of any  Option,  including,  but not
limited to, (i) the  withholding of delivery of shares of Common Stock until the
Participant  reimburses  the  Company  for the amount the Company is required to
withhold with respect to such taxes,  (ii) the canceling of any number of shares
of Common Stock  issuable in an amount  sufficient  to reimburse the Company for
the amount it is required to so  withhold  or (iii)  withholding  the amount due
from any such  Participant's  wages or other  compensation.  A  Participant  may
request that the Company  withhold  from the shares of Common Stock to be issued
upon  exercise  of an Option that  number of shares  having a Fair Market  Value
equal to the tax withholding amount due in order to provide for such withholding
tax.

                                    ARTICLE X
                    TERMINATION, MODIFICATION AND AMENDMENT

      Section 10.1 Termination of Plan.. The Committee or the Board of Directors
may,  at  any  time,  terminate  the  Plan  or  from  time  to  time  make  such
modifications or amendments of the Plan it may deem advisable.

      Section 10.2  Modification of Outstanding  Awards.  The Committee may from
time to time, at its discretion,  alter, amend or suspend any previously granted
Option,  including  any  previously  granted  Option  granted  in tandem  with a
Dividend  Equivalent  and/or  Performance  Unit prior to the  completion  of the
related Award Cycle.

      Section 10.3 Effect on  Outstanding  Awards.  No action taken  pursuant to
Sections  10.1 or 10.2 may  materially  and  adversely  affect  the  rights of a
Participant   under  any   outstanding   Option  without  the  consent  of  such
Participant.


                                   ARTICLE XI
                           EFFECTIVE DATE OF THE PLAN

      Section 11.1      Effective  Date.  This Plan was  initially  adopted by
the Board of Directors on December 20, 1988.

                                   ARTICLE XII
                          NOT A CONTRACT OF EMPLOYMENT

      Section 12.1 No Employment Rights Conferred. Nothing contained in the Plan
or in any option  agreement  executed  pursuant hereto shall be deemed to confer
upon any Participant to whom an Option is or may be granted  hereunder any right
to remain in the employ of the  Company or of an  Affiliate  or in any way limit
the right of the Company,  or of any  Affiliate,  to terminate the employment of
any Participant or to terminate any other relationship with a Participant.

                                  ARTICLE XIII
                            OTHER COMPENSATION PLANS

      Section 13.1 No Effect on Other Plans. The adoption of this Plan shall not
affect any other stock option  plan,  incentive  plan or any other  compensation
plan in effect for the Company or any Affiliate, nor shall the Plan preclude the
Company or any Affiliate from  establishing any other form of stock option plan,
incentive plan or any other compensation plan.


                                   ARTICLE XIV
                                  MISCELLANEOUS

      Section 14.1 Non-Assignability.  No grant of any "derivative security" (as
defined  by Rule  16a-1(c)  under the  Exchange  Act) made under the Plan or any
rights or interests therein shall be assignable or transferable by a Participant
except by will or the laws of descent and  distribution and except to the extent
it is otherwise  permissible  under the Exchange Act, nor shall any  "derivative
security"  be subject to  execution,  attachment  or similar  process,  it being
understood  that no grant of any  "derivative  security"  shall be assignable or
transferable  pursuant to a domestic  relations order.  During the lifetime of a
Participant,   awards  granted  hereunder  shall  be  exercisable  only  by  the
Participant or the Participant's guardian or legal representative. Any attempted
assignment,   transfer,  pledge,  hypothecation,   other  disposition,  levy  of
attachment or similar process not  specifically  permitted  herein shall be null
and void and without effect.

      Section 14.2 Costs and Expenses.  The costs and expenses of  administering
the Plan  shall be borne by the  Company  and its  Affiliates  and  shall not be
charged against any award nor to any Participant receiving an award.

      Section 14.3 Written  Option  Agreement.  Notwithstanding  anything to the
contrary  contained herein,  the Company shall be under no obligation to sell or
deliver  Common  Stock or to make  any  other  payment  under  this  Plan to any
Participant  unless and until such  Participant  shall execute a written  option
agreement in form and substance satisfactory to the Committee.

      Section 14.4  Non-Competition.  Any option  agreement  may contain,  among
other  things,  provisions  prohibiting  Participants  from  competing  with the
Company or any Affiliate in a form or forms acceptable to the Committee,  in its
sole discretion.

      Section  14.5  Transfer  of  Employment.   For  the  purposes   hereof,  a
Participant shall not be considered as having terminated  his/her  employment if
he/she  transfers  employment  between the Company and an  Affiliate  or between
Affiliates.

      Section 14.6  Governing  Law. To the extent not  preempted by Federal law,
this  Plan and  actions  taken in  connection  herewith  shall be  governed  and
construed in accordance with the laws of the State of New Jersey.

      Section  14.7 Rules of  Construction.  The  captions  and section  numbers
appearing in this Plan are inserted only as a matter of convenience. They do not
define, limit or describe the scope or intent of the provisions of this Plan. In
this Plan,  words in the  singular  number  include the plural and in the plural
include the singular; and words of the masculine gender include the feminine and
the  neuter,  and when the sense so  indicates,  words of the neuter  gender may
refer to any gender.

      Section  14.8  Time for  Performance.  Whenever  the time for  payment  or
performance hereunder shall fall on a weekend or public holiday, such payment or
performance shall be deemed to be timely if made on the next succeeding business
day; provided,  however, that this Section 14.6 shall not be construed to extend
the ten (10) year period referred to in Section 6.1(d).

      Section 14.9 Notices. Every direction,  revocation or notice authorized or
required by the Plan shall be deemed delivered to the Company (a) on the date it
is personally  delivered its principal executive offices to the attention of the
Compensation  Manager of Public  Service  Electric  and Gas Company or (b) three
business days after it is sent by registered or certified mail, postage prepaid,
addressed to the Company ( attn: Compensation Manager of Public Service Electric
and Gas Company) at such offices; and shall be deemed delivered to a Participant
(a) on the date it is personally  delivered to him or her, or (b) three business
days  after  it is  sent by  registered  or  certified  mail,  postage  prepaid,
addressed to him or her at the last address  shown for him or her on the records
of the Company.