PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                          1989 LONG-TERM INCENTIVE PLAN








                                                       Amended December 15, 1998


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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.


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     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.

     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.


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     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.

     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 


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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.


                                    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.


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     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.

     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 


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          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.

     (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.
          Except as otherwise provided herein, (i) Options granted in tandem
          with Dividend Equivalents and/or Performance Units shall not be
          exercisable prior to the conclusion of their related Award Cycle and
          (ii) 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.


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     (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


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     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 


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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 


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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.

     (a)  Notwithstanding anything in this Plan to the contrary, if a
          Participant's employment is terminated by the Company following a
          Change in Control (as defined below), (i) all outstanding Options
          shall immediately vest and become exercisable in full and (ii) any
          Dividend Equivalents and/or Performance Units granted in tandem with
          such Option shall be paid immediately in the form of Common Stock


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          (unless the Committee determines that they should be paid in cash).
          The amount so payable in respect of such Performance Units shall be
          calculated as if the target value with respect to such Performance
          Units had been achieved and, in respect of such Dividend Equivalents,
          shall be calculated as if the Award Cycle had been completed and the
          most recent quarterly dividend had continued to be paid through the
          end of such Award Cycle.

     (b)  "Change in Control" shall mean the occurrence of any of the following
          events:

          (i) any "person" (within the meaning of Section 13(d) of the
     Securities Exchange Act of 1934, as amended from time to time (the "Act"))
     is or becomes the beneficial owner within the meaning of Rule 13d-3 under
     the Act (a "Beneficial Owner"), directly or indirectly, of securities of
     the Corporation (not including in the securities beneficially owned by such
     person any securities acquired directly from the Corporation or its
     affiliates) representing 25% or more of the combined voting power of the
     Corporation's then outstanding securities, excluding any person who becomes
     such a Beneficial Owner in connection with a transaction described in
     clause (A) of paragraph (iii) below; or

          (ii) the following individuals cease for any reason to constitute a
     majority of the number of directors then serving: individuals who, on
     December 15, 1998, constitute the Board of Directors and any new director
     (other than a director whose initial assumption of office is in connection
     with an actual or threatened election contest, including but not limited to
     a consent solicitation, relating to the election of directors of the
     Corporation) whose appointment or election by the Board of Directors or
     nomination for election by the Corporation'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 December 15, 1998 or whose
     appointment, election or nomination for election was previously so approved
     or recommended; or

          (iii) there is consummated a merger or consolidation of the
     Corporation or any direct or indirect wholly owned subsidiary of the
     Corporation with any other corporation, other than (A) a merger or
     consolidation which would result in the voting securities of the
     Corporation outstanding immediately prior to such merger or consolidation
     continuing to represent (either by remaining outstanding or by being
     converted into voting securities of the surviving entity or any parent


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     thereof), in combination with the ownership of any trustee or other
     fiduciary holding securities under an employee benefit plan of the
     Corporation or any subsidiary of the Corporation, at least 75% of the
     combined voting power of the securities of the Corporation or such
     surviving entity or any parent thereof outstanding immediately after such
     merger or consolidation, or (B) a merger or consolidation effected to
     implement a recapitalization of the Corporation (or similar transaction) in
     which no person is or becomes the Beneficial Owner, directly or indirectly,
     of securities of the Corporation representing 25% or more of the combined
     voting power of the Corporation's then outstanding securities; or

          (iv) the stockholders of the Corporation approve a plan of complete
     liquidation or dissolution of the Corporation or there is consummated an
     agreement for the sale or disposition by the Corporation of all or
     substantially all of the Corporation's assets, other than a sale or
     disposition by the Corporation of all or substantially all of the
     Corporation's assets to an entity, at least 75% of the combined voting
     power of the voting securities of which are owned by stockholders of the
     Corporation in substantially the same proportions as their ownership of the
     Corporation immediately prior to such sale.

          Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv),
     a "Change in Control" shall not be deemed to have occurred by virtue of the
     consummation of any transaction or series of integrated transactions
     immediately following which the record holders of the common stock of the
     Corporation immediately prior to such transaction or series of transactions
     continue to have substantially the same proportionate ownership in an
     entity which owns all or substantially all of the assets of the Corporation
     immediately following such transaction or series of transactions.

     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.


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                                   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.


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<PAGE>


     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.


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<PAGE>


                                    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.


                                       15
<PAGE>


                                   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 


                                       16
<PAGE>


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.


                                       17