MANAGEMENT INCENTIVE COMPENSATION PLAN

                            PSEG ENERGY HOLDINGS INC.






                                                       AMENDED DECEMBER 15, 1998


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                            PSEG ENERGY HOLDINGS INC.

                     MANAGEMENT INCENTIVE COMPENSATION PLAN

1.   PURPOSES

     The purposes of this Plan are to foster attainment of the financial and
operating objectives of this Corporation which are important to customers and
stockholders by providing incentive to members of management who contribute to
attainment of these objectives; to supplement this Corporation's salary and
benefit programs so as to provide overall compensation for such executives which
is competitive with corporations with which this Corporation must compete for
executive talent; and to assist this Corporation in attracting and retaining
executives who are important to its continued success.

2.   DEFINITIONS

     As used in this Plan, the following words and phrases shall have the
meanings indicated:

          (a) "Account" - an Account established pursuant to Paragraph 8(a) of
     this Plan.

          (b) "Award" - the amount of final Incentive Award for a Participant
     approved by the Committee pursuant to Paragraphs 5 and 7 of the Plan.

          (c) "Award Year" - a Plan Year in which Incentive Awards are earned by
     Participants in the Plan.

          (d) "Committee" - the Compensation Committee appointed by the Board of
     Directors of this Corporation.


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          (e) "Corporation" - PSEG Energy Holdings Inc.

          (f) "Disability" - any physical or mental condition which renders a
     Participant incapable of performing further work for this Corporation and
     that results in termination of employment.

          (g) "Distribution Date" - for each Award Year, the first business day
     of January.

          (h) "Enterprise" - Public Service Enterprise Group Incorporated.

          (i) "Incentive Award" - the amount earned by a Participant in
     accordance with Paragraph 7.

          (j) "Participant" - each officer or other employee of this Corporation
     and its subsidiaries as may be designated by the Committee pursuant to
     Paragraph 3 of the Plan.

          (k) "Plan" - the PSEG Energy Holdings Inc. Management Incentive
     Compensation Plan.

          (l) "Plan Year" - the calendar year.

          (m) "Primary Award" - the amount determined under Paragraph 7(a)(1).

          (n) "PSE&G" - Public Service Electric and Gas Company.

          (o) "Retirement" - termination of service with this Corporation with
     the right to an immediately payable periodic normal or early retirement
     benefit under the Pension Plan of Public Service Electric and Gas Company
     or the Cash Balance Pension Plan of Public Service Electric and Gas
     Company. Retirement shall not include termination of service with the right
     to a deferred retirement benefits under either said plan.


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          (p) "Target Incentive Award" - the amount determined under paragraph
     6.

3.   ELIGIBILITY

     (a) The Committee may select such employees of this Corporation and its
subsidiaries (individually or by position) for participation in the Plan upon
such terms as it deems appropriate, due to the employee's responsibilities and
his opportunity to contribute substantially to the attainment of financial and
operating objectives of this Corporation. A determination of participation for a
Plan Year shall be made no later than the beginning of that Plan Year. Provided,
however, that employees whose duties and responsibilities change significantly
during a Plan Year may be added or deleted as a Participant by the Committee.
Provided further, the Committee may prorate the Incentive Award of any
Participant if appropriate to reflect any such change in employee
responsibilities during a Plan Year.

     (b) Participation in the Plan in one Plan Year shall not guarantee
participation in another Plan Year.

     (c) The Committee shall have sole discretion as to whether to suspend
operation of the Plan for any period of time.

4.   ADMINISTRATION

     (a) The Plan shall be administered by the Committee. Subject to the
provisions of the Plan, the Committee shall have full and final authority to
select Participants, to designate the Target Incentive Award for each
Participant, and to determine the performance objectives and the amount of all
Incentive Awards. The Committee shall also have, subject to the provisions of
the Plan, full and final authority to


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interpret the Plan, to establish and revise rules, regulations and guides
relating to the Plan, and to make any other determinations that it believes
necessary or advisable for the administration of the Plan. The Committee may
delegate such responsibilities, other than final approval of Awards or appeals
of alleged adverse determinations under the Plan, to the Chief Executive Officer
of this Corporation or to any other officer of this Corporation.

     (b) All decisions and determinations by the Committee shall be final and
binding upon all parties, including stockholders, Participants, legal
representatives and other employees.

5.   DETERMINATION OF AWARD YEAR

     Not later than 120 days after the close of each Plan Year, the Committee
shall, in its sole discretion, determine whether any Participants shall be
eligible to earn Incentive Awards with respect to such Plan Year. The discretion
of the Committee with respect to this final approval of Awards shall be total.

6.   DETERMINATION OF TARGET INCENTIVE AWARDS

     For each Award Year, the Committee shall establish a Target Incentive Award
for each Participant based upon the Participant's position and potential for
contribution to the attainment of this Corporation's financial and operating
objectives. The Target Incentive Award shall be expressed as a percentage of the
Participant's rate of base salary in effect as of the last day of the Plan Year
to which such Target Incentive Award relates.

7.   DETERMINATION OF INCENTIVE AWARD


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     (a) To determine each Participant's Incentive Award, the Participant's
Target Incentive Award shall be adjusted based upon the following factors,
provided that the Incentive Award for any Participant shall in no event exceed
1.5 times the Target Incentive Award and provided further that the Committee may
determine, based upon the financial and operating results of this Corporation or
any other business factors that it determines appropriate, that no Incentive
Award shall be awarded for any Plan Year:

         (1) The Target Incentive Award shall be multiplied by a factor of
             between 0 and 1.5 to proportionately reflect Enterprise's return on
             capital for the Plan Year as reported to the Board of Directors in
             accordance with such rules and procedures as are approved by the
             Committee; provided, however, that if such return is below a
             minimum threshold established by the Committee prior to the
             beginning of the Plan Year, no Incentive Award shall be earned for
             such Plan Year. This adjusted amount is the Participant's Primary
             Award.

         (2) The Participant's Primary Award shall be adjusted by a factor of
             between -0.5 and +0.5 to proportionately reflect the relative
             annual increase or decrease in this PSE&G's weighted average of
             cost per unit of electricity and gas sold in the Plan Year as
             compared with similar increases or decreases of other designated
             comparison utilities, in accordance with such rules and procedures
             as are approved by the Committee.

         (3) The sum of items (1) and (2) above shall be multiplied by a factor
             of between 0 and 1.5 to reflect the Participant's level of
             individual


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             performance, in accordance with such rules and procedures as are
             approved by the Committee.

     (b) The Chief Executive Officer shall recommend to the Committee an Award
for each Participant, except that the Committee shall have full responsibility
for assessing the performance of the Chief Executive Officer and that the
Committee shall make the final determination of all Awards.

8.   AWARD PAYMENT

     (a) For Incentive Awards Relating to Plan Years Ending Prior to 1/1/96:

         (i) There shall be established an account for each Participant for each
Plan Year which shall, to the extent not paid to the Participant, be initially
credited with the amount of the Participant's Incentive Award. The Plan shall be
unfunded. This Corporation shall not be required to segregate any amounts
credited to any Participant's Account, which shall be established merely as an
accounting convenience. Title to and beneficial ownership of any amounts
credited to a Participant's Account shall at all times remain in this
Corporation, and no Participant or shall have any interest whatsoever in any
specific assets of this Corporation. All amounts credited to Participants'
Accounts shall at all times remain solely the property of this Corporation
subject to the claims of its general creditors and available for this
Corporation's use for whatever purpose desired.

         (ii) The amount credited to a Participant's Account shall be treated
for valuation purposes as if it had been used to purchase shares of the Common
Stock of this Corporation or Enterprise, whichever is then listed on the New
York Stock Exchange, on the date it is credited to the Participant's Account at
a price equal to the average of the


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high and low sale prices of such Common Stock on such date on the New York Stock
Exchange. For the purpose of valuing a Participant's Account, the equivalent
shares so credited to a Participant's Account shall be treated as if they were
to accrue dividends the same as actual shares of Common Stock, and such
equivalent dividends were used to purchase additional shares of such Common
Stock at a price equal to 95% of the average of the high and low sale prices of
such Common Stock on the New York Stock Exchange on the dividend payment date.
 
         (iii) When a distribution or partial distribution is to be made, cash
in the amount of the equivalent number of shares of Common Stock to be
distributed times the average of the high and low sale prices of such Common
Stock on the New York Stock Exchange as of the Distribution Date shall be
distributed.

         (iv) Distribution of a Participant's Account attributable to a Plan
Year shall be made in yearly payments over a period of three years, commencing
with the second year following the Plan Year to which the Incentive Award
relates, each yearly payment to be determined by dividing the value of such
Account by the number of payments remaining.

     (b) For Incentive Awards Related to Plan Years Beginning After 12/31/95:
Participants' Incentive Awards shall be made in one lump sum cash payment as
soon as practicable after the Determination Date.

9.   DEFERRAL OF AWARDS

     (a) Effective January 1, 1997, receipt of payment of Incentive Awards
earned pursuant to this Plan may no longer be voluntarily deferred pursuant to
this


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 Plan.

     (b) Also effective on that date, all amounts previously deferred under the
voluntary deferral provisions of this Plan shall be transferred (using the last
sale price for the Common Stock on December 31, 1996 as a reference for the
amount to be transferred) to the Deferred Compensation Plan for Certain
Employees of Public Service Electric and Gas Company, as amended, and be treated
in accordance with the terms of that plan.

10.  TERMINATION

     (a) If the employment of a Participant by this Corporation is terminated by
the Participant's death, Disability or Retirement, the entire value of the
Participant's Account shall be distributed as soon as practicable. In addition,
the Committee shall, if it determines that Incentive Awards may be earned for
such year of termination, prorate an Award for that part of the year in which
the Participant was participating prior to such termination and this Corporation
shall pay the prorated Award as soon as practicable after determination, unless
otherwise determined by the Committee.

     (b) If the employment of a Participant is terminated for any reason other
than death, Disability or Retirement, any amounts held for the Account of
Participant upon any such termination which have not been paid because of the
mandatory deferral provisions of Paragraph 8(a) shall be forfeited, unless
otherwise determined by the Committee, and the balance of the Participant's
Account shall be distributed as soon as practicable. In addition, the
Participant shall not receive an Award for that part of the


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Plan Year in which the Participant was participating at the time of termination,
unless otherwise determined by the Committee.

     (c) If a Participant becomes or ceases to be a Participant during a Plan
Year, any Award to the Participant shall be appropriately prorated from the time
the Participant entered or left the Plan to the end of the Plan Year.
         
     (d) In the case of a Participant's death, payment of the entire value of
the Participant's Account under the Plan and/or any Award related to the
Participant's final year of participation shall be made to the Participant's
estate as a lump sum as soon as practicable after the Participant's death.

11.  ASSIGNMENT

     No benefit under the Plan shall in any manner or to any extent be assigned,
alienated, or transferred by any Participant or be subject to attachment,
garnishment or other legal process.

12.  PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT

     This Plan shall not constitute a contract for the continued employment of
any Participant by this Corporation. This Corporation reserves the right to
modify a Participant's compensation at any time and from time to time as it
considers appropriate and to terminate his employment for any reason at any time
notwithstanding this Plan.

13.  AMENDMENT OR TERMINATION OF THE PLAN BY THIS CORPORATION

     The Board of Directors of this Corporation may, in its sole discretion,
amend, modify or terminate this Plan at any time, provided, however, that no
such amendment, modification or termination shall materially adversely affect
the right of a Participant in respect


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of an Incentive Award previously earned by him which has not been paid, unless
such Participant or his legal representative shall consent to such change. If
this Plan is terminated during any Plan Year in which Participants have been
selected to participate, the Board of Directors may authorize the Committee to
prorate and make provision for payment of Awards for such period.

14.  WHAT CONSTITUTES NOTICE

     Any notice hereunder to a Participant or his legal representative shall be
given either by delivering it, or by depositing it in the United States mail,
postage prepaid, addressed to his last-known address. Any notice to this
Corporation or the Committee hereunder shall be given either by delivering it,
or depositing it in the United States Mail, postage prepaid, to the Secretary,
PSEG Energy Holdings Inc. c/o Public Service Enterprise Group Incorporated, 80
Park Plaza, T4B, P.O. Box 1171, Newark, New Jersey 07101.

15.  ADVANCE DISCLAIMER OF ANY WAIVER

     Failure by this Corporation or the Committee to insist upon strict
compliance with any of the terms, covenants or conditions hereof shall not be
deemed a waiver of any such term, covenant or condition, nor shall any waiver or
relinquishment of any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of any such right or power at any other time
or times.

16.  EFFECT OF INVALIDITY OF ANY PART OF THE PLAN

     The invalidity or unenforceability of any provision hereof shall in no way
affect the validity of enforceability of any other provision.


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17.  PLAN BINDING ON ANY SUCCESSOR OWNER

     Except as otherwise provided herein, this Plan shall inure to the benefit
of and be binding upon this Corporation, its successors and assigns, including
but not limited to any corporation which may acquire all or substantially all of
this Corporation's assets and business or with or into which this Corporation
may be consolidated or merged.

18.  LAWS GOVERNING THIS PLAN

     Except to the extent federal laws applies, this Plan shall be governed by
the laws of the State of New Jersey.

19.  MISCELLANEOUS

     The masculine pronoun shall also mean the feminine wherever appropriate.

20.  WITHHOLDING

     This Corporation shall have the right to deduct from any payment any sums
to be withheld by federal, state, or local tax law. There is no obligation
hereunder that any Participant or other person be advised in advance of the
existence of the tax or the amount so required to be withheld.

21.  EFFECTIVE DATE

     This Plan shall be effective as of January 1, 1993.

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