Document:

EXHIBIT 10.1

                             FORM OF SALE AGREEMENT

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                   BONDABLE TRANSITION PROPERTY SALE AGREEMENT

                                     between

                          PSE&G TRANSITION FUNDING LLC
                                     Issuer

                                       and

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                     Seller

                          Dated as of [January] , 2001

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                                TABLE OF CONTENTS

                                    ARTICLE I
                                   Definitions

SECTION 1.01  Definitions......................................................1
SECTION 1.02  Other Definitional Provisions....................................1

                                   ARTICLE II
             Conveyance of Transferred Bondable Transition Property

SECTION 2.01  Conveyance of Initial Transferred Bondable
                Transition Property............................................2
SECTION 2.02  Conditions to Conveyance of Bondable Transition Property.........3

                                   ARTICLE III
                    Representations and Warranties of Seller

SECTION 3.01  Organization and Good Standing...................................5
SECTION 3.02  Due Qualification................................................5
SECTION 3.03  Power and Authority..............................................5
SECTION 3.04  Binding Obligation...............................................5
SECTION 3.05  No Violation.....................................................5
SECTION 3.06  No Proceedings...................................................6
SECTION 3.07  Approvals........................................................6
SECTION 3.08  The Transferred Bondable Transition Property.....................6
SECTION 3.09  Solvency.........................................................9

                                   ARTICLE IV
                             Covenants of the Seller

SECTION 4.01  Seller's Existence...............................................9
SECTION 4.02  No Liens or Conveyances..........................................9
SECTION 4.03  Use of Proceeds.................................................10
SECTION 4.04  Delivery of Collections.........................................10
SECTION 4.05  Notice of Liens.................................................10
SECTION 4.06  Compliance with Law.............................................10
SECTION 4.07  Covenants Related to Transferred Bondable
                Transition Property...........................................10
SECTION 4.08  Protection of Title.............................................11
SECTION 4.09  Taxes...........................................................12

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                                    ARTICLE V
                      Additional Undertakings of the Seller

SECTION 5.01  Liability of the Seller; Indemnities............................13
SECTION 5.02  Merger or Consolidation of, or Assumption of the
                Obligations of, the Seller....................................14
SECTION 5.03  Limitation on Liability of the Seller and Others................15

                                   ARTICLE VI
                            Miscellaneous Provisions

SECTION 6.01  Amendment.......................................................15
SECTION 6.02  Notices.........................................................16
SECTION 6.03  Assignment by Seller............................................16
SECTION 6.04  Assignment to Trustee...........................................17
SECTION 6.05  Limitations on Rights of Others.................................17
SECTION 6.06  Severability....................................................17
SECTION 6.07  Separate Counterparts...........................................17
SECTION 6.08  Headings........................................................17
SECTION 6.09  Governing Law...................................................17
SECTION 6.10  Nonpetition Covenant............................................18

EXHIBIT A - Bill of Sale.....................................................A-1
EXHIBIT B - Opinion of Counsel...............................................B-1
EXHIBIT C - Opinion of Counsel...............................................C-1

APPENDIX A - Master Definitions

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      BONDABLE TRANSITION PROPERTY SALE AGREEMENT, dated as of [January] , 2001,
by and between PSE&G TRANSITION FUNDING LLC, a Delaware limited liability
company, as issuer (the "Issuer"), and PUBLIC SERVICE ELECTRIC AND GAS COMPANY,
a New Jersey corporation, as seller hereunder (in such capacity, the "Seller").

                              W I T N E S S E T H:

      WHEREAS the Issuer desires to purchase from time to time Bondable
Transition Property created pursuant to the Competition Act and the Financing
Order;

      WHEREAS the Seller is willing to sell Bondable Transition Property to the
Issuer;

      WHEREAS the Issuer, in order to finance the purchase of the Transferred
Bondable Transition Property, will from time to time issue Transition Bonds
under the Indenture; and

      WHEREAS the Issuer, to secure its obligations under the Transition Bonds
and the Indenture, will pledge its right, title and interest in, to and under
the Transferred Bondable Transition Property to the Trustee for the benefit of
the Transition Bondholders.

      NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:

                                    ARTICLE I

                                   Definitions

      SECTION 1.01 Definitions. Capitalized terms used herein and not otherwise
defined herein have the meanings assigned to them in Appendix A hereto.

      SECTION 1.02 Other Definitional Provisions.

      (a) "Agreement" means this Bondable Transition Property Sale Agreement, as
the same may be amended, supplemented or otherwise modified from time to time.

      (b) Non-capitalized terms used herein which are defined in the Competition
Act, as the context requires, have the meanings assigned to such terms in the
Competition Act, but without giving effect to amendments to the Competition Act
after the date hereof which have a material adverse effect on the Issuer or the
Transition Bondholders.

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      (c) All terms defined in this Agreement have the defined meanings when
used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.

      (d) The words "hereof", "herein", "hereunder" and words of similar import
when used in this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement; Section, Schedule and Exhibit references
contained in this Agreement are references to Sections, Schedules and Exhibits
in or to this Agreement unless otherwise specified; and the term "including"
means "including without limitation".

      (e) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms.

                                   ARTICLE II

             Conveyance of Transferred Bondable Transition Property

      SECTION 2.01 Conveyance of Initial Transferred Bondable Transition
Property.

      (a) In consideration of the Issuer's payment to or upon the order of the
Seller of $[_______________] (the "Initial Purchase Price") by wire transfer of
funds immediately available on the date hereof to Seller's account no.
[_______________] at [______________________], routing transit #
[_______________], subject to the conditions specified in Section 2.02, the
Seller does hereby irrevocably sell, transfer, assign and otherwise convey to
the Issuer, without recourse (subject to the obligations of the Seller herein),
all right, title and interest of the Seller in, to and under the Initial
Transferred Bondable Transition Property identified in the Bill of Sale
delivered pursuant to Section 2.02(a) on or prior to the Initial Transfer Date
(such sale, transfer, assignment and conveyance of the Initial Transferred
Bondable Transition Property to include, to the fullest extent permitted by the
Competition Act and the New Jersey UCC, the assignment of all revenues,
collections, claims, rights, payments, money or proceeds of or arising from the
Transition Bond Charges related to the Initial Transferred Bondable Transition
Property, as the same may be adjusted from time to time). Such sale, transfer,
assignment and conveyance of the Initial Transferred Bondable Transition
Property is hereby expressly stated to be a sale or other absolute transfer and,
pursuant to Section 23.a. of the Competition Act, shall constitute a sale or
other absolute transfer of all of the Seller's right, title and interest, in, to
and under and not a borrowing secured by, the Initial Transferred Bondable
Transition Property. The preceding sentence is the statement referred to in
Section 23.a. of the Competition Act. The Seller agrees and confirms that upon
payment of the Initial Purchase Price and the execution and delivery of this
Agreement and the related Bill of Sale, the Seller shall have no right, title or
interest in, to or under the Initial Transferred Bondable Transition Property.

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      (b) Subject to the conditions specified in Section 2.02, the Issuer does
hereby purchase the Initial Transferred Bondable Transition Property from the
Seller for the consideration set forth in paragraph (a) above.

      (c) The Seller and the Issuer each acknowledge and agree that the purchase
price for the Initial Transferred Bondable Transition Property sold pursuant to
this Agreement is equal to its fair market value at the time of sale.

      (d) The Seller and the Issuer further agree that from time to time the
Seller may offer to sell, and the Issuer may purchase, Subsequent Transferred
Bondable Transition Property as of Subsequent Transfer Dates, subject to the
conditions specified in Section 2.02, in exchange for consideration to be agreed
upon (the "Subsequent Purchase Price"). The Seller and the Issuer hereby agree
that each such sale, transfer, assignment and conveyance of any Subsequent
Transferred Bondable Transition Property shall include, to the fullest extent
permitted by the Competition Act and the New Jersey UCC, the assignment of all
revenues, collections, claims, rights, payments, money or proceeds of or arising
from the Transition Bond Charges related to the Subsequent Transferred Bondable
Transition Property, as the same may be adjusted from time to time. Such sale,
transfer, assignment and conveyance of the Subsequent Transferred Bondable
Transition Property is hereby expressly stated to be a sale or other absolute
transfer and, pursuant to Section 23.a. of the Competition Act, shall constitute
a sale or other absolute transfer of all of the Seller's right, title and
interest, in, to and under and not a borrowing secured by, the Subsequent
Transferred Bondable Transition Property. The preceding sentence is the
statement referred to in Section 23.a. of the Competition Act. The Seller agrees
and confirms that after giving effect to any sale contemplated by this paragraph
(d) and the execution and delivery of the related Bill of Sale, it shall have no
right, title or interest in, to or under the Subsequent Transferred Bondable
Transition Property.

      (e) Notwithstanding the foregoing, in the event that any sale, transfer,
assignment and conveyance of any Transferred Bondable Transition Property is
determined by a court of competent jurisdiction not to be a true and absolute
sale as contemplated by the parties hereto and by the Competition Act, then such
sale, transfer, assignment and conveyance shall be treated as a pledge of such
Transferred Bondable Transition Property and the Seller shall be deemed to have
granted, and does hereby grant, as of the date hereof a security interest to the
Issuer in such Transferred Bondable Transition Property to secure a payment
obligation incurred by the Seller in the amount paid by the Issuer for the
Transferred Bondable Transition Property.

      SECTION 2.02 Conditions to Conveyance of Bondable Transition Property. The
obligation of the Seller to sell, and the obligation of the Issuer to purchase
Bondable Transition Property upon any Transfer Date shall be subject to and
conditioned upon the satisfaction or waiver of each of the following conditions:

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      (a) on or prior to the Transfer Date, the Seller shall deliver to the
Issuer a duly executed Bill of Sale identifying the Bondable Transition Property
to be conveyed as of that date, substantially in the form of Exhibit A hereto;

      (b) as of the Transfer Date, no breach by the Seller of its
representations, warranties or covenants in this Agreement shall exist and the
Seller shall have delivered to the Issuer and the Trustee an Officers'
Certificate to such effect and no Servicer Default shall have occurred and be
continuing;

      (c) as of the Transfer Date:

            (i) the Issuer shall have sufficient funds available to pay the
      purchase price for the Transferred Bondable Transition Property to be
      conveyed on such date, and

            (ii) all conditions set forth in the Indenture to the issuance of
      one or more Series of Transition Bonds intended to provide such funds
      shall have been satisfied or waived;

      (d) on or prior to the Transfer Date, the Seller shall have taken all
actions required under the Competition Act, the Financing Order and the New
Jersey UCC, including, without limitation, filings under the New Jersey UCC, to
transfer to the Issuer ownership of the Transferred Bondable Transition Property
to be conveyed on such date, free and clear of all Liens other than Liens
created by the Issuer pursuant to the Indenture and the Issuer shall have taken
any action required for the Issuer to grant to the Trustee a first priority
perfected security interest in the Collateral and maintain such security
interest as of such date;

      (e) in the case of any sale of Subsequent Transferred Bondable Transition
Property only, the Seller shall have provided the Issuer and each Rating Agency
with a notice specifying the Subsequent Transfer Date for the Subsequent
Transferred Bondable Transition Property not later than 10 days prior to the
Subsequent Transfer Date;

      (f) the Seller shall have delivered to each Rating Agency and to the
Issuer:

            (i) an Opinion of Counsel to the Seller with respect to the transfer
      of the Transferred Bondable Transition Property then being conveyed to the
      Issuer substantially in the form of Exhibit B hereto, and

            (ii) an Opinion of Counsel to the Seller, substantially in the form
      of Exhibit C hereto;

      (g) the Seller shall have delivered to the Trustee and the Issuer an
Officers' Certificate confirming the satisfaction of each condition precedent
specified in this Section 2.02;

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      (h) with respect to any Subsequent Sale, the Seller shall have taken any
action necessary in order for the Rating Agency Condition to have been
satisfied; and

      (i) the Seller shall have received the Initial Purchase Price or the
Subsequent Purchase Price, as applicable, in funds immediately available on the
applicable Transfer Date.

                                   ARTICLE III

                    Representations and Warranties of Seller

      As of the Transfer Date, the Seller makes the following representations
and warranties on which the Issuer has relied and will rely in acquiring
Transferred Bondable Transition Property. The following representations and
warranties are made under existing law as in effect as of the Transfer Date. The
Seller shall not be in breach of any representation or warranty herein as a
result of a change in law occurring after the Transfer Date. The representations
and warranties shall survive the sale of Transferred Bondable Transition
Property to the Issuer and the pledge thereof to the Trustee pursuant to the
Indenture.

      SECTION 3.01 Organization and Good Standing. The Seller is a corporation
duly organized and in good standing under the laws of the State of New Jersey,
with corporate power and authority to own its properties and conduct its
business as currently owned or conducted.

      SECTION 3.02 Due Qualification. The Seller is duly qualified to do
business as a foreign corporation in good standing, and has obtained all
necessary licenses and approvals, in all jurisdictions in which the ownership or
lease of property or the conduct of its business requires such qualifications,
licenses or approvals (except where the failure to so qualify and to obtain such
licenses and approvals would not be reasonably likely to have a material adverse
effect on the Seller's business, operations, assets, revenues, properties or
prospects).

      SECTION 3.03 Power and Authority. The Seller has the corporate power and
authority to execute and deliver this Agreement and to carry out its terms; the
Seller has full corporate power and authority to own the Bondable Transition
Property and sell and assign the Transferred Bondable Transition Property to the
Issuer, and the Seller has duly authorized such sale and assignment to the
Issuer by all necessary corporate action; and the execution, delivery and
performance of this Agreement has been duly authorized by the Seller by all
necessary corporate action.

      SECTION 3.04 Binding Obligation. This Agreement constitutes a legal, valid
and binding obligation of the Seller enforceable against the Seller in
accordance with its terms subject to bankruptcy, receivership, insolvency,
reorganization, moratorium or other laws

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affecting creditors' rights generally from time to time in effect and to general
principles of equity (regardless of whether considered in a proceeding in equity
or at law).

      SECTION 3.05 No Violation. The consummation of the transactions
contemtions plated by this Agreement and the fulfillment of the terms hereof do
not conflict with, result in any breach of any of the terms and provisions of,
or constitute (with or without notice or lapse of time) a default under, the
articles of incorporation or by-laws of the Seller, or any indenture, agreement
or other instrument to which the Seller is a party or by which it is bound; nor
result in the creation or imposition of any Lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other instrument
(except as contemplated in the Indenture and as set forth in Section 2.01(e)
hereof); nor violate any law or any order, rule or regulation applicable to the
Seller of any court or of any federal or State regulatory body, administrative
agency or other governmental instrumentality having jurisdiction over the Seller
or its properties.

      SECTION 3.06 No Proceedings. Except as disclosed in writing by the Seller
to the Issuer, there are no proceedings or investigations pending or, to the
Seller's best knowledge, threatened, before any court, federal or State
regulatory body, administrative agency or other governmental instrumentality
having jurisdiction over the Seller or its properties:

      (a) asserting the invalidity of the Basic Documents, the Transition Bonds,
the Competition Act, the Restructuring Order (insofar as it relates to the
transactions contemplated hereby) or the Financing Order;

      (b) seeking to prevent the issuance of the Transition Bonds or the
consummation of any of the transactions contemplated by the Basic Documents or
the Transition Bonds;

      (c) challenging the Seller's treatment of the Transition Bonds as debt of
the Seller for federal and State income, gross receipts or franchise tax
purposes; or

      (d) seeking any determination or ruling that could reasonably be expected
to materially and adversely affect the performance by the Seller of its
obligations under, or the validity or enforceability of, the Basic Documents or
the Transition Bonds.

      SECTION 3.07 Approvals. Except for the filing of financing statements and
continuation statements under the New Jersey UCC, no approval, authorization,
consent, order or other action of, or filing with, any court, federal or State
regulatory body, administrative agency or other governmental instrumentality is
required in connection with the execution and delivery by the Seller of this
Agreement, the performance by the Seller of the transactions contemplated hereby
or the fulfillment by the Seller of the terms hereof, except those that have
been obtained or made. The Pricing Advice Letter has been filed in accordance
with the Financing Order.

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      SECTION 3.08 The Transferred Bondable Transition Property.

      (a) Information. All information provided by the Seller to the Issuer with
respect to the Transferred Bondable Transition Property is correct in all
material respects.

      (b) Effect of Transfer. Each sale, transfer, assignment and conveyance
herein contemplated constitutes a sale or other absolute transfer, of all right,
title and interest of the Seller in, to and under the Transferred Bondable
Transition Property from the Seller to the Issuer; upon execution and delivery
of this Agreement and the related Bill of Sale, the Seller will have no right,
title or interest in, to or under the Transferred Bondable Transition Property;
and the Transferred Bondable Transition Property would not be part of the estate
of the Seller as debtor in the event of the filing of a bankruptcy petition by
or against the Seller under any bankruptcy law.

      (c) Transfer Filings. The Seller is the sole owner of the Transferred
Bondable Transition Property sold to the Issuer on the Transfer Date; and the
Transferred Bondable Transition Property will have been validly sold, assigned,
transferred and conveyed to the Issuer free and clear of all Liens other than
Liens created by the Issuer pursuant to the Indenture. All actions or filings,
including filings with the New Jersey Secretary of State under the New Jersey
UCC, necessary in any jurisdiction to give the Issuer a valid first priority
perfected ownership interest in the Transferred Bondable Transition Property and
to grant to the Trustee a first priority perfected security interest in the
Transferred Bondable Transition Property, free and clear of all Liens of the
Seller or anyone else have been taken or made.

      (d) Financing Order Irrevocable; Process Valid; No Litigation; Etc.

            (i) The Financing Order as issued on September 17, 1999 has been
      issued by the BPU in accordance with the Competition Act, and such order
      and the process by which it was issued comply with all applicable laws,
      rules and regulations, including but not limited to the due process
      requirements of the United States Constitution and the New Jersey
      Constitution. The Financing Order has become effective pursuant to the
      Competition Act and is and as of the date of issuance of any Transition
      Bonds will be in full force and effect and final and non-appealable.

            (ii) As of the Series Issuance Date, the Transition Bonds of the
      related Series will be entitled to the protections provided by the
      Competition Act and, in accordance with the Competition Act, the Financing
      Order and the Transition Bond Charge authorized therein have become
      irrevocable and each Advice Letter is final and uncontestable.

            (iii) (A) Under the Competition Act, the State of New Jersey may not
            limit, alter or impair the Transferred Bondable Transition Property
            or other rights vested in the Seller, the Issuer, the Trustee or the
            Transition Bondholders

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            pursuant to the Financing Order until the Transition Bonds are fully
            paid and discharged, or in any way limit, alter, impair or reduce
            the value or amount of the Transferred Bondable Transition Property;
            and

                  (B) under the Contract Clauses of the United States
            Constitutions and the New Jersey Constitution, the State of New
            Jersey, including the BPU, could not constitutionally take any
            action of a legislative character, including the repeal or amendment
            of the Competition Act, which would substantially limit, alter or
            impair the Bondable Transition Property or other rights vested in
            the Transition Bondholders pursuant to the Financing Order, or
            substantially limit, alter, impair or reduce the value or amount of
            the Bondable Transition Property, unless such action is a reasonable
            exercise of the State of New Jersey's sovereign powers and of a
            character reasonable and appropriate to the public purpose
            justifying such action and under the Takings Clauses of the United
            States and New Jersey Constitutions, the State of New Jersey could
            not repeal or amend the Competition Act or take any other action in
            contravention of its pledge and agreement quoted above without
            paying just compensation to the Transition Bondholders, as
            determined by a court of competent jurisdiction, if doing so would
            constitute a permanent appropriation of a substantial property
            interest of the Transition Bondholders in the Bondable Transition
            Property and deprive the Transition Bondholders of their reasonable
            expectations arising from their investments in the Transition Bonds.
            There is no assurance, however, that, even if a court were to award
            just compensation, it would be sufficient to pay the full amount of
            principal of and interest on the Transition Bonds.

            (iv) There is no order by any court providing for the revocation,
      alteration, limitation or other impairment of the Competition Act, the
      Financing Order, the Restructuring Order (insofar as it relates to the
      sale of the Transferred Bondable Transition Property), any Advice Letter,
      the Transferred Bondable Transition Property or the Transition Bond Charge
      or any rights arising under any of them or to enjoin the performance of
      any obligations under the Financing Order.

            (v) No other approval, authorization, consent, order or other action
      of, or filing with, any court, federal or State regulatory body,
      administrative agency or other governmental instrumentality is required in
      connection with the creation or transfer of the Transferred Bondable
      Transition Property, except those that have been obtained or made.

            (vi) Except as disclosed in writing by the Seller to the Issuer,
      there are no proceedings or investigations pending, or to the best of the
      Seller's knowledge, threatened before any court, federal or State
      regulatory body, administrative agency or other governmental
      instrumentality having jurisdiction over the Seller or the Issuer or their
      respective properties challenging the Competition Act, the Financing Order
      or the

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      Restructuring Order (insofar as it relates to the sale of the Transferred
      Bondable Transition Property).

      (e) Assumptions. The assumptions used in calculating the Transition Bond
Charge in any Advice Letter delivered by the Issuer to the BPU pursuant to the
Financing Order are reasonable and made in good faith.

      (f) Creation of Transferred Bondable Transition Property.

            (i) For purposes of the Competition Act and the UCC, the Transferred
      Bondable Transition Property constitutes presently existing property;

            (ii) the Bondable Transition Property consists of (A) the
      irrevocable right of the Seller to charge, collect and receive, and be
      paid from collections of, the Transition Bond Charge in the amount
      necessary to provide for the full recovery of the Bondable Stranded Costs
      which have been determined to be recoverable in the Financing Order and
      (B) all rights of the Seller under the Financing Order, including, without
      limitation, all rights to obtain periodic adjustments of the Transition
      Bond Charge pursuant to the Competition Act, and all revenues,
      collections, payments, money and proceeds arising under, or with respect
      to, all of the foregoing; and

            (iii) the Financing Order, including the right to collect the
      Transition Bond Charge, has become irrevocable.

      (g) Prospectus. As of the date hereof, the information describing the
Seller under the caption "The Seller and Servicer of the Bondable Transition
Property" in the prospectus dated January [ ], 2001 relating to the Transition
Bonds is correct in all material respects.

      SECTION 3.09 Solvency. After giving effect to the sale of any Transferred
Bondable Transition Property hereunder, the Seller:

      (a) is solvent and expects to remain solvent;

      (b) is adequately capitalized to conduct its business and affairs
considering its size and the nature of its business and intended purposes;

      (c) is not engaged in nor does it expect to engage in a business for which
its remaining property represents an unreasonably small capital;

      (d) reasonably believes that it will be able to pay its debts as they come
due; and

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      (e) is able to pay its debts as they mature and does not intend to incur,
or believes that it will incur, indebtedness that it will not be able to repay
at its maturity.

                                   ARTICLE IV

                             Covenants of the Seller

      SECTION 4.01 Seller's Existence. So long as any of the Transition Bonds
are outstanding, the Seller shall keep in full force and effect its existence as
a corporation and remain in good standing under the laws of the jurisdiction of
its organization, and shall obtain and preserve its qualification to do business
in each jurisdiction in which such qualification is or will be necessary to
protect the validity and enforceability of this Agreement and each other
instrument or agreement to which the Seller is a party necessary to the proper
administration of this Agreement and the transactions contemplated hereby.

      SECTION 4.02 No Liens or Conveyances. Except for the conveyances
hereunder, the Seller shall not sell, pledge, assign or transfer to any other
Person, or grant, create, incur, assume or suffer to exist any Lien on, any of
the Transferred Bondable Transition Property, whether now existing or hereafter
created, or any interest therein. The Seller shall not at any time assert any
Lien against or with respect to any Transferred Bondable Transition Property,
and shall defend the right, title and interest of the Issuer and the Trustee, as
assignee of the Issuer, in, to and under the Transferred Bondable Transition
Property, whether now existing or hereafter created, against all claims of third
parties claiming through or under the Seller.

      SECTION 4.03 Use of Proceeds. The Seller shall use proceeds from the sale
of the Bondable Transition Property in accordance with the Financing Order and
the Competition Act.

      SECTION 4.04 Delivery of Collections. If the Seller receives collections
of the Transition Bond Charge with respect to the Transferred Bondable
Transition Property or the proceeds thereof, the Seller shall pay the Servicer
all payments received by the Seller in respect thereof as soon as practicable
after receipt thereof by the Seller, but in no event later than two Business
Days after such receipt.

      SECTION 4.05 Notice of Liens. The Seller shall notify the Issuer and the
Trustee promptly after becoming aware of any Lien on any Transferred Bondable
Transition Property other than the conveyances hereunder or under the Indenture.

      SECTION 4.06 Compliance with Law. The Seller shall comply with its
organizational or governing documents and all laws, treaties, rules, regulations
and determinations of any governmental instrumentality applicable to the
Seller, except to the extent that failure to so comply would not adversely
affect the Issuer's or the Trustee's interests in the

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Transferred Bondable Transition Property or under any of the Basic Documents or
the Seller's performance of its obligations hereunder.

      SECTION 4.07 Covenants Related to Transferred Bondable Transition
Property.

      (a) So long as any of the Transition Bonds are outstanding, the Seller
shall:

            (i) treat the Transition Bonds as debt of the Issuer and not of the
      Seller, except for financial accounting or tax reporting purposes;

            (ii) disclose in its financial statements that it is not the owner
      of the Transferred Bondable Transition Property and that the assets of the
      Issuer are not available to pay creditors of the Seller or any of its
      Affiliates (other than the Issuer);

            (iii) disclose the effects of all transactions between the Seller
      and the Issuer in accordance with generally accepted accounting
      principles; and

            (iv) not own or purchase any Transition Bonds.

      (b) The Seller agrees that upon the sale by the Seller of the Transferred
Bondable Transition Property to the Issuer pursuant to this Agreement:

            (i) to the fullest extent permitted by law, including the
      Competition Act and applicable BPU Regulations, the Issuer shall have all
      of the rights originally held by the Seller with respect to the
      Transferred Bondable Transition Property, including the right to collect
      any amounts payable by any Customer or Third Party in respect of such
      Transferred Bondable Transition Property, notwithstanding any objection or
      direction to the contrary by the Seller; and

            (ii) any payment by any Customer or Third Party to the Issuer shall
      discharge such Customer's or such Third Party's obligations in respect of
      such Transferred Bondable Transition Property to the extent of such
      payment, notwithstanding any objection or direction to the contrary by the
      Seller.

      (c) So long as any of the Transition Bonds are Outstanding,

            (i) the Seller shall not make any statement or reference in respect
      of the Transferred Bondable Transition Property that is inconsistent with
      the ownership thereof by the Issuer (other than for financial accounting
      or tax reporting purposes); and

            (ii) the Seller shall not take any action in respect of the
      Transferred Bondable Transition Property except as contemplated by the
      Basic Documents.

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      SECTION 4.08 Protection of Title. The Seller shall execute and file such
filings, and cause to be executed and filed such filings, and take all such
actions, all in such manner and in such places as may be required by law fully
to preserve, maintain, and protect the interests of the Issuer and the Trustee
in the Transferred Bondable Transition Property, including all filings required
under the New Jersey UCC relating to the transfer of the ownership of the
Transferred Bondable Transition Property by the Seller to the Issuer and the
pledge of the Transferred Bondable Transition Property by the Issuer to the
Trustee. The Seller shall deliver (or cause to be delivered) to the Issuer and
the Trustee file-stamped copies of, or filing receipts for, any document filed
as provided above, as soon as available following such filing. The Seller shall
institute any action or proceeding necessary to compel the performance by the
BPU or the State of New Jersey of any of their obligations or duties under the
Competition Act or the Financing Order, and the Seller agrees to take such legal
or administrative actions, including defending against or instituting and
pursuing legal actions and appearing or testifying at hearings or similar
proceedings, as may be reasonably necessary:

      (a)   to protect the Issuer and the Transition Bondholders from claims,
            State actions or other actions or proceedings of third parties
            which, if successfully pursued, would result in a breach of any
            representation set forth in Article III; or

      (b)   to block or overturn any attempts to cause a repeal of, modification
            of or supplement to the Competition Act, the Financing Order, any
            Advice Letter, the Restructuring Order (to the extent it affects
            the rights of Transition Bondholders or the validity or value of the
            Bondable Transition Property) or the rights of Transition
            Bondholders by legislative enactment or constitutional amendment
            that would be adverse to the Issuer, the Trustee or the Transition
            Bondholders.

The costs of any such actions or proceedings shall be reimbursed by the Issuer
to the Seller from amounts on deposit in the Collection Account as an Operating
Expense. The Seller's obligations pursuant to this Section 4.08 shall survive
and continue notwithstanding that the payment of Operating Expenses pursuant to
the Indenture may be delayed (it being understood that the Seller may be
required to advance its own funds to satisfy its obligation hereunder). The
Seller designates the Issuer as its agent and attorney-in-fact to execute any
filings of financing statements, continuation statements or other instruments
required of the Issuer pursuant to this Section, it being understood that the
Issuer shall have no obligation to execute any such instruments.

      SECTION 4.09 Taxes. So long as any of the Transition Bonds are
outstanding, the Seller shall, and shall cause each of its subsidiaries to, pay
all material taxes, assessments and governmental charges imposed upon it or any
of its properties or assets or with respect to any of its franchises, business,
income or property before any penalty accrues thereon if the failure to pay any
such taxes, assessments and governmental charges would, after any applicable
grace periods, notices or other similar requirements, result in a Lien on the
Transferred Bondable

                                       12
<PAGE>

Transition Property; provided that no such tax need be paid if the Seller or one
of its Affiliates is contesting the same in good faith by appropriate
proceedings promptly instituted and diligently conducted and if the Seller or
such Affiliate has established appropriate reserves as shall be required in
conformity with generally accepted accounting principles.

                                    ARTICLE V

                      Additional Undertakings of the Seller

      The Seller hereby undertakes the obligations contained in this Article V
and agrees that the Issuer shall have the right to assign its rights with
respect to such obligations to the Trustee for the benefit of the Transition
Bondholders.

      SECTION 5.01 Liability of the Seller; Indemnities.

      (a) The Seller shall be liable in accordance herewith only to the extent
of the obligations specifically undertaken by the Seller under this Agreement.

      (b) The Seller shall indemnify the Issuer and the Trustee, for itself and
on behalf of the Transition Bondholders, and each of their respective officers,
directors, managers, employees and agents for, and defend and hold harmless each
such Person from and against, any and all taxes (other than any taxes imposed on
Transition Bondholders solely as a result of their ownership of Transition
Bonds) that may at any time be imposed on or asserted against any such Person
under existing law as of any Transfer Date as a result of the sale and
assignment of the Transferred Bondable Transition Property by the Seller to the
Issuer, the acquisition or holding of the Transferred Bondable Transition
Property by the Issuer or the issuance and sale by the Issuer of the Transition
Bonds, including any sales, gross receipts, general corporation, personal
property, privilege, franchise or license taxes, but excluding any taxes imposed
as a result of a failure of such person to properly withhold or remit taxes
imposed with respect to payments on any Transition Bond, it being understood
that the Transition Bondholders shall be entitled to enforce their rights
against the Seller under this Section 5.01(b) solely through a cause of action
brought for their benefit by the Trustee.

      (c) The Seller shall indemnify the Issuer and the Trustee, for itself and
on behalf of the Transition Bondholders, and each of their respective officers,
directors, managers, employees and agents for, and defend and hold harmless each
such Person from and against, (i) any and all amounts of principal of and
interest on the Transition Bonds (including amounts owed to Holders of any
floating rate Transition Bonds at the Gross Fixed Rate) not paid when due or
when scheduled to be paid in accordance with their terms and the amount of any
deposits to the Issuer required to have been made in accordance with the terms
of the Basic Documents which are not made when so required, in each case as a
result of the Seller's breach of any of its representations, warranties or
covenants contained in this Agreement, and (ii) any and all

                                       13
<PAGE>

liabilities, obligations, claims, actions, suits or payments of any kind
whatsoever that may be imposed on or asserted against any such Person, other
than any liabilities, obligations or claims for or payments of principal of or
interest on the Transition Bonds, together with any reasonable costs and
expenses incurred by such Person, as a result of the Seller's breach of any of
its representations, warranties or covenants contained in this Agreement.

      (d) The Seller shall pay any and all taxes levied or assessed upon all or
any part of the Issuer's property or assets based on existing law as of the
Transfer Date.

      (e) Indemnification under this Section 5.01 shall survive the resignation
or removal of the Trustee and the termination of this Agreement and shall
include reasonable fees and expenses of investigation and litigation (including
reasonable attorneys' fees and expenses). The Seller shall not indemnify any
party under this Section 5.01 for any changes in law after the Transfer Date.

      (f) The indemnification obligation of the Seller under this Section 5.01
shall be pari passu with all other general unsecured obligations of the Seller.

      SECTION 5.02 Merger or Consolidation of, or Assumption of the Obligations
of, the Seller. Any Person:

      (a)   into which the Seller may be merged or consolidated and which
            succeeds to all or the major part of the electric distribution
            business of the Seller,

      (b)   which results from the division of the Seller into two or more
            Persons and which succeeds to all or the major part of the electric
            distribution business of the Seller,

      (c)   which may result from any merger or consolidation to which the
            Seller shall be a party and which succeeds to all or the major part
            of the electric distribution business of the Seller,

      (d)   which may succeed to the properties and assets of the Seller
            substantially as a whole and which succeeds to all or the major part
            of the electric distribution business of the Seller, or

      (e)   which may otherwise succeed to all or the major part of the electric
            distribution business of the Seller,

which Person in any of the foregoing cases executes an agreement of assumption
to perform every obligation of the Seller under this Agreement, shall be the
successor to the Seller hereunder without the execution or filing of any
document or any further act by any of the parties to this Agreement; provided,
however, that

                                       14
<PAGE>

      (i)   immediately after giving effect to such transaction, no
            representation or warranty made pursuant to Article III shall have
            been breached and no Servicer Default, and no event that, after
            notice or lapse of time, or both, would become a Servicer Default,
            shall have occurred and be continuing,

      (ii)  the Seller shall have delivered to the Issuer and the Trustee an
            Officers' Certificate and an Opinion of Counsel each stating that
            such consolidation, merger or succession and such agreement of
            assumption comply with this Section 5.02 and that all conditions
            precedent, if any, provided for in this Agreement relating to such
            transaction have been complied with,

      (iii) the Seller shall have delivered to the Issuer and the Trustee an
            Opinion of Counsel either

            (A)   stating that, in the opinion of such counsel, all filings to
                  be made by the Seller, including New Jersey UCC filings, that
                  are necessary fully to preserve and protect fully the
                  respective interests of the Issuer and the Trustee in the
                  Transferred Bondable Transition Property have been executed
                  and filed, and reciting the details of such filings, or

            (B)   stating that, in the opinion of such counsel, no such action
                  is necessary to preserve and protect such interests,

      (iv)  the Rating Agencies shall have received prior written notice of such
            transaction; and

      (v)   the Seller shall have delivered to the Issuer and the Trustee an
            opinion of independent tax counsel (as selected by, and in form and
            substance reasonably satisfactory to, the Seller, and which may be
            based on a ruling from the Internal Revenue Service) to the effect
            that, for federal income tax purposes, such consolidation or merger
            will not result in a material adverse federal income tax consequence
            to the Seller, the Issuer, the Trustee or the holders of the
            Outstanding Transition Bonds.

The Seller shall not consummate any transaction referred to in clauses (a), (b),
(c), (d) or (e) above except upon execution of the above described agreement of
assumption and compliance with clauses (i), (ii), (iii), (iv) and (v) above.
When any Person acquires the properties and assets of the Seller substantially
as a whole and becomes the successor to the Seller in accordance with the terms
of this Section 5.02, then upon the satisfaction of all of the other conditions
of this Section 5.02, the Seller shall automatically and without further notice
be released from its obligations hereunder.

                                       15
<PAGE>

      SECTION 5.03 Limitation on Liability of the Seller and Others. The Seller
and any director, officer, employee or agent of the Seller may rely in good
faith on the advice of counsel or on any document of any kind, prima facie
properly executed and submitted by any Person, respecting any matters arising
hereunder. Subject to Section 4.08, the Seller shall not be under any obligation
to appear in, prosecute or defend any legal action that is not incidental to its
obligations under this Agreement, and that in its opinion may involve it in any
expense or liability.

                                   ARTICLE VI

                            Miscellaneous Provisions

      SECTION 6.01 Amendment. (a) This Agreement may be amended by the Seller
and the Issuer, with the consent of the Trustee and the satisfaction of the
Rating Agency Condition. Promptly after the execution of any such amendment or
consent, the Issuer shall furnish written notification of the substance of such
amendment or consent to each of the Rating Agencies.

      (b) Prior to the execution of any amendment to this Agreement, the Issuer
and the Trustee shall be entitled to receive and rely upon an Opinion of Counsel
stating that the execution of such amendment is authorized or permitted by this
Agreement. The Issuer and the Trustee may, but shall not be obligated to, enter
into any such amendment which affects their own rights, duties or immunities
under this Agreement or otherwise.

      SECTION 6.02 Notices. Unless otherwise specifically provided herein, all
notices, directions, consents and waivers required under the terms and
provisions of this Agreement shall be in English and in writing, and any such
notice, direction, consent or waiver may be given by United States first-class
mail, reputable overnight courier service, facsimile transmission or electronic
mail (confirmed by telephone, United States first-class mail or reputable
overnight courier service in the case of notice by facsimile transmission or
electronic mail) or any other customary means of communication, and any such
notice, direction, consent or waiver shall be effective when delivered or
transmitted, or if mailed, five days after deposit in the United States
first-class mail with proper postage for first-class mail prepaid:

      (a)   in the case of the Seller, at Public Service Electric and Gas
            Company, 80 Park Plaza, Newark, New Jersey 07102, Attention:
            Treasurer,

      (b)   in the case of the Issuer, at PSE&G Transition Funding LLC, 80 Park
            Plaza, T-4D, Newark, New Jersey 07102, Attention: Managers,

      (c)   in the case of Moody's, at Moody's Investors Service, Inc., ABS
            Monitoring Department, 99 Church Street, New York, New York 10007,

                                       16
<PAGE>

      (d)   in the case of Standard & Poor's, at Standard & Poor's Ratings
            Group, 55 Water Street, New York, New York 10041, Attention: Asset
            Backed Surveillance Department, and

      (e)   in the case of Fitch, at Fitch, Inc., 1 State Street Plaza, New
            York, New York 10004, Attention: ABS Surveillance,

      (f)   in the case the Trustee, at the address provided for notices or
            communications to the Trustee in the Indenture;

or, as to each of the foregoing, at such other address as shall be designated by
written notice to the other parties.

      SECTION 6.03 Assignment by Seller. Subject to Section 5.02, this Agreement
may not be assigned by the Seller.

      SECTION 6.04 Assignment to Trustee. The Seller hereby acknowledges and
consents to any pledge, assignment and grant of a security interest by the
Issuer to the Trustee pursuant to the Indenture for the benefit of the
Transition Bondholders of all right, title and interest of the Issuer in, to and
under the Transferred Bondable Transition Property and the proceeds thereof and
the assignment of any or all of the Issuer's rights hereunder to the Trustee.

      SECTION 6.05 Limitations on Rights of Others. The provisions of this
Agreement are solely for the benefit of the Seller, the Issuer and the Trustee,
on behalf of itself and the Transition Bondholders, and nothing in this
Agreement, whether express or implied, shall be construed to give to any other
Person any legal or equitable right, remedy or claim in the Collateral or under
or in respect of this Agreement or any covenants, conditions or provisions
contained herein.

      SECTION 6.06 Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

      SECTION 6.07 Separate Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.

                                       17
<PAGE>

      SECTION 6.08 Headings. The headings of the various Articles and Sections
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.

      SECTION 6.09 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.

      SECTION 6.10 Nonpetition Covenant. Notwithstanding any prior termination
of this Agreement or the Indenture, the Seller hereby covenants and agrees that
it shall not, prior to the date which is one year and one day after the
termination of the Indenture and the payment in full of the Transition Bonds,
any other amounts owed under the Indenture, including, without limitation, any
amounts owed to third-party credit enhancers, and any amounts owed under the
Hedge Agreement or the Interest Rate Swap Agreement, acquiesce, petition or
otherwise invoke or cause the Issuer to invoke the process of any court or
government authority for the purpose of commencing or sustaining a case against
the Issuer under any federal or State bankruptcy, insolvency or similar law or
appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or
other similar official of the Issuer or any substantial part of the property of
the Issuer, or ordering the winding up or liquidation of the affairs of the
Issuer.

                                       18
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective duly authorized officers as of
the date and year first above written.

                                       PSE&G TRANSITION FUNDING LLC,
                                          as Issuer

                                       By:______________________________________
                                          Name:
                                          Title: Manager

                                       PUBLIC SERVICE ELECTRIC
                                          AND GAS COMPANY,
                                          as Seller

                                       By:______________________________________
                                          Name:
                                          Title:

                                       19
<PAGE>

                                    EXHIBIT A

                                  BILL OF SALE

      For good and valuable consideration the receipt of which is hereby
acknowledged, PUBLIC SERVICE ELECTRIC AND GAS COMPANY, a New Jersey corporation
(the "Seller"), does hereby sell, assign, transfer and convey to PSE&G
TRANSITION FUNDING LLC, a Delaware limited liability company (the "Issuer"),
without recourse except as provided in the Sale Agreement referred to below, all
of the Seller's right, title and interest in, to and under [the Bondable
Transition Property] [the Bondable Transition Property identified as follows:
______], which sale, assignment, transfer and conveyance of such Bondable
Transition Property shall include, as provided in the Competition Act, the sale,
assignment, transfer and conveyance of all of the Seller's right, title and
interest in, to and under all revenues, collections, payments, money or proceeds
arising under or with respect to the Transition Bond Charge related to such
Bondable Transition Property, as the same may be adjusted from time to time in
accordance with the Competition Act and the Financing Order, to have and to hold
the same unto the Issuer and to the successors and assigns of the Issuer,
forever.

      Capitalized terms used herein and not defined shall have the meanings set
forth in the Bondable Transition Property Sale Agreement dated [January] , 2001
(the "Sale Agreement") between the Issuer and the Seller.

      IN WITNESS WHEREOF, the Seller has duly executed and delivered this Bill
of Sale this [ ]th day of [January], 2001.

                                       PUBLIC SERVICE ELECTRIC
                                       AND GAS COMPANY, as Seller

                                       By:______________________________________
                                       Name:____________________________________
                                       Title:___________________________________

Accepted this [ ]th day of [January], 2001.

PSE&G TRANSITION FUNDING LLC

By:______________________________________
Name:____________________________________
Title:___________________________________

                                       A-1EXHIBIT 10.2

                           FORM OF SERVICING AGREEMENT

<PAGE>

                BONDABLE TRANSITION PROPERTY SERVICING AGREEMENT

                                     between

                          PSE&G TRANSITION FUNDING LLC
                                     Issuer

                                       and

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                    Servicer

                         Dated as of January [__], 2001

<PAGE>

                                TABLE OF CONTENTS

                                    ARTICLE I

                                   Definitions

SECTION 1.01 Definitions.......................................................1
SECTION 1.02 Other Definitional Provisions.....................................1

                                   ARTICLE II

                    Appointment and Authorization of Servicer

SECTION 2.01 Appointment of Servicer; Acceptance of Appointment................2
SECTION 2.02 Authorization.....................................................2
SECTION 2.03 Dominion and Control over Transferred Bondable
               Transition Property.............................................2

                                   ARTICLE III

                                Billing Services

SECTION 3.01 Duties of Servicer................................................3
SECTION 3.02 Collection and Allocation of the Transition Bond Charge...........4
SECTION 3.03 Payment of TBC Collections........................................5
SECTION 3.04 Servicing and Maintenance Standards...............................6
SECTION 3.05 Servicer's Certificates...........................................7
SECTION 3.06 Annual Statement as to Compliance.................................7
SECTION 3.07 Annual Independent Certified Public Accountants' Report...........8
SECTION 3.08 Bondable Transition Property Documentation........................8
SECTION 3.09 Computer Records; Audits of Documentation.........................8
SECTION 3.10 Defending Transferred Bondable Transition Property
               Against Claims..................................................9
SECTION 3.11 Opinions of Counsel...............................................9

                                   ARTICLE IV

             Services Related to Transition Bond Charge Adjustments

SECTION 4.01 Transition Bond Charge Adjustments...............................10

                                    ARTICLE V

                                  The Servicer

SECTION 5.01 Representations and Warranties of Servicer.......................11
SECTION 5.02 Indemnities of Servicer; Release of Claims.......................13

                                        i

<PAGE>

                                                                            Page

SECTION 5.03 Merger or Consolidation of, or Assumption of the
               Obligations of, Servicer.......................................14
SECTION 5.04 Assignment of Servicer's Obligations.............................16
SECTION 5.05 Limitation on Liability of Servicer and Others...................16
SECTION 5.06 PSE&G Not To Resign as Servicer..................................16
SECTION 5.07 Monthly Servicing Fee............................................17
SECTION 5.08 Servicer Expenses................................................17
SECTION 5.09 Subservicing.....................................................17
SECTION 5.10 No Servicer Advances.............................................17
SECTION 5.11 Remittances......................................................18
SECTION 5.12 Protection of Title..............................................18

                                   ARTICLE VI

                                Servicer Default

SECTION 6.01 Servicer Default.................................................19
SECTION 6.02 Notice of Servicer Default.......................................20
SECTION 6.03 Waiver of Past Defaults..........................................20
SECTION 6.04 Appointment of Successor.........................................20
SECTION 6.05 Cooperation with Successor.......................................21

                                   ARTICLE VII

                            Miscellaneous Provisions

SECTION 7.01 Amendment........................................................21
SECTION 7.02 Notices..........................................................22
SECTION 7.03 Limitations on Rights of Others..................................22
SECTION 7.04 Severability.....................................................23
SECTION 7.05 Separate Counterparts............................................23
SECTION 7.06 Headings.........................................................23
SECTION 7.07 Governing Law....................................................23
SECTION 7.08 Assignment to the Trustee........................................23
SECTION 7.09 Nonpetition Covenants............................................23
SECTION 7.10 Termination......................................................24

ANNEX 1        TBC Adjustment Process and Reports--
               PSE&G Transition Funding LLC

APPENDIX I     Master Definitions

                                       ii

<PAGE>

      BONDABLE TRANSITION PROPERTY SERVICING AGREEMENT, dated as of January
[__], 2001, by and between PSE&G TRANSITION FUNDING LLC, a Delaware limited
liability company, as issuer (the "Issuer"), and PUBLIC SERVICE ELECTRIC AND GAS
COMPANY, a New Jersey corporation ("PSE&G"), as the servicer of the Bondable
Transition Property hereunder (together with each successor to PSE&G (in the
same capacity) pursuant to Section 5.03, 5.04 or 6.04, the "Servicer").

                              W I T N E S S E T H:

      WHEREAS the Servicer is willing to service the Transferred Bondable
Transition Property purchased from the Seller by the Issuer; and

      WHEREAS the Issuer, in connection with ownership of Transferred Bondable
Transition Property, desires to engage the Servicer to carry out the functions
described herein.

      NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:

                                    ARTICLE I

                                   Definitions

      SECTION 1.01 Definitions. Capitalized terms used but not otherwise defined
herein have the meanings assigned to them in Appendix A hereto.

      SECTION 1.02 Other Definitional Provisions.

      (a) "Agreement" means this Bondable Transition Property Servicing
Agreement, as the same may be amended, supplemented or otherwise modified from
time to time.

      (b) Non-capitalized terms used herein which are defined in the Competition
Act, as the context requires, have the meanings assigned to such terms in the
Competition Act, but without giving effect to amendments to the Competition Act
after the date hereof which have a material adverse effect on the Issuer or the
Transition Bondholders.

      (c) All terms defined in this Agreement have the defined meanings when
used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.

      (d) The words "hereof", "herein", "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular

<PAGE>

provision of this Agreement; Section, Annex, Schedule and Exhibit references
contained in this Agreement are references to Sections, Annexes, Schedules and
Exhibits in or to this Agreement unless otherwise specified; and the term
"including" shall mean "including without limitation".

      (e) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms.

                                   ARTICLE II

                    Appointment and Authorization of Servicer

      SECTION 2.01 Appointment of Servicer; Acceptance of Appointment. Subject
to Section 5.06 and Article VI, the Issuer hereby appoints the Servicer, and the
Servicer hereby accepts such appointment, to perform the Servicer's obligations
pursuant to this Agreement on behalf of and for the benefit of the Issuer in
accordance with the terms of this Agreement. This appointment and the Servicer's
acceptance thereof may not be revoked except in accordance with the express
terms of this Agreement.

      SECTION 2.02 Authorization. With respect to all or any portion of the
Transferred Bondable Transition Property, the Servicer shall be, and hereby is,
authorized and empowered by the Issuer to:

      (a) execute and deliver, on behalf of itself, the Issuer, or both, as the
case may be, any and all instruments, documents or notices, and

      (b) on behalf of itself, the Issuer, or both, as the case may be, make any
filing and participate in proceedings of any kind with any governmental
authorities, including with the BPU.

      The Issuer shall furnish the Servicer with such documents as have been
prepared by the Servicer for execution by the Issuer, and with such other
documents as may be in the Issuer's possession, as necessary or appropriate to
enable the Servicer to carry out its servicing and administrative duties
hereunder. Upon the written request of the Servicer, the Issuer shall furnish
the Servicer with any powers of attorney or other documents necessary or
appropriate to enable the Servicer to carry out its duties hereunder.

      SECTION 2.03 Dominion and Control over Transferred Bondable Transition
Property. Notwithstanding any other provision herein, the Servicer and the
Issuer agree that the Issuer shall have dominion and control over the
Transferred Bondable Transition Property, and the Servicer, in accordance with
the terms hereof, is acting solely as the servicing agent of the Issuer with
respect to the Transferred Bondable Transition Property. The Servicer hereby
agrees that it shall not take any action that is not authorized by this
Agreement, the Competition Act or the Financing Order, that is not consistent
with its customary procedures and practices, or that shall impair the rights of
the Issuer with respect to the Transferred Bondable

                                       2
<PAGE>

Transition Property, in each case unless such action is required by law or court
or regulatory order.

                                   ARTICLE III

                                Billing Services

      SECTION 3.01 Duties of Servicer. The Servicer, as agent for the Issuer (to
the extent provided herein), shall have the following duties:

      (a) Duties of Servicer Generally. The Servicer will manage, service,
administer and make collections in respect of the Transition Bond Charge. The
Servicer's duties will include:

            (i) obtaining meter reads, calculating and billing the Transition
      Bond Charge and collecting (from Customers and Third Parties, as
      applicable) all TBC Collections;

            (ii) responding to inquiries by Customers, Third Parties, the BPU,
      or any federal, local or other State governmental authority with respect
      to the Transition Bond Charge;

            (iii) delivering bills to customers and Third Parties, accounting
      for TBC Collections, investigating and resolving delinquencies, processing
      and depositing collections, making periodic remittances and furnishing
      periodic reports to the Issuer, the Trustee and the Rating Agencies;

            (iv) selling, as the agent for the Issuer, as its interest may
      appear, defaulted or written off accounts in accordance with the
      Servicer's usual and customary practices for accounts of its own electric
      service customers; and

            (v) taking action in connection with Transition Bond Charge
      Adjustments as is set forth herein.

      Anything to the contrary notwithstanding, the duties of the Servicer set
forth in this Agreement shall be qualified in their entirety by the Competition
Act, the Financing Order and any BPU Regulations, as in effect at the time such
duties are to be performed. Without limiting the generality of this Section
3.01(a), in furtherance of the foregoing, the Servicer hereby agrees that it
shall also have, and shall comply with, the duties and responsibilities set
forth in Annex 1 which, among other things, relate to data acquisition, usage
and bill calculation, billing, customer service functions, collections, payment
processing and remittance.

      (b) Notification of Laws and Regulations. The Servicer shall immediately
notify the Issuer, the Trustee and the Rating Agencies in writing of any laws or
BPU Regulations

                                       3
<PAGE>

hereafter promulgated that have a material adverse effect on the Servicer's
ability to perform its duties under this Agreement.

      (c) Other Information. Upon the reasonable request of the Issuer, the
Trustee or any Rating Agency, the Servicer shall provide to the Issuer, the
Trustee or the Rating Agencies, as the case may be, any public financial
information in respect of the Servicer, or any material information regarding
the Transferred Bondable Transition Property to the extent it is reasonably
available to the Servicer, that may be reasonably necessary and permitted by law
for the Issuer, the Trustee or the Rating Agencies to monitor the performance by
the Servicer hereunder. In addition, so long as any of the Transition Bonds of
any Series are outstanding, the Servicer shall provide to the Issuer and to the
Trustee, within a reasonable time after written request therefor, any
information available to the Servicer or reasonably obtainable by it that is
necessary to calculate the Transition Bond Charge.

      SECTION 3.02 Collection and Allocation of the Transition Bond Charge.

      (a) The Servicer shall use all reasonable efforts, consistent with its
customary servicing procedures, to collect all amounts owed in respect of the
Transition Bond Charge as and when the same shall become due and shall follow
such collection procedures as it follows with respect to collection activities
that the Servicer conducts for itself or others. The Servicer shall not change
the amount of or reschedule the due date of any scheduled payment of the
Transition Bond Charge, except as contemplated in this Agreement or as required
by law or court or BPU Regulations; provided, however, that the Servicer may
take any of the foregoing actions to the extent that such action would be in
accordance with customary billing and collection practices of the Servicer with
respect to billing and collection activities that it conducts for itself. The
Servicer shall enforce the obligations of any Third Parties providing billing
and collection services with respect to the Transition Bond Charge.

      (b) As specified in the Petition and the Financing Order, any amounts
received by the Servicer from a Customer that represent a partial payment toward
an outstanding balance will be applied in the following manner:

            (i) to sales taxes (which the Servicer collects as trustee for the
      State of New Jersey and not for its own account or for that of the
      Issuer);

            (ii) pro rata to the Transition Bond Charge and the Servicer's other
      charges and taxes, where any of such charges are in arrears, based on
      their proportion to the Servicer's total charges assessed in arrears for
      that period; and

            (iii) pro rata to the Transition Bond Charge and the Servicer's
      other charges and taxes, where any of such charges are current charges,
      based on their proportion to the Servicer's total current charges assessed
      for that period.

PSE&G's other charges may include gas charges which may be billed together with
electric charges, the market transition charge, the MTC-Tax and all other
charges which PSE&G and any

                                       4
<PAGE>

Third Party may be authorized to bill and collect from Customers on account of
electric and gas service. If there is more than one Series of Transition Bonds,
the Servicer shall allocate partial payments among such Series, pro rata, based
on the respective outstanding amounts payable with respect to such Series.

      SECTION 3.03 Payment of TBC Collections. (a) The Servicer shall prepare
annually a Collections Curve for each Billing Month, based on statistically
significant random sampling of actual TBC Collections. With the exception of the
Monthly Servicing Fee, which the Servicer is entitled to withhold from TBC
Collections pursuant to Section 5.07 hereof, the Servicer agrees to remit TBC
Collections for each Billing Month to the Trustee for deposit in the Collection
Account not later than the corresponding Reconciliation Date or Dates following
such Billing Month. In addition, the Servicer agrees to make periodic payments
on account of TBC Collections to the Trustee for deposit in the Collection
Account as follows:

      (i)   on each Monthly Remittance Date, for so long as the Servicer has
            satisfied the conditions of Section 5.11(b), the Servicer shall
            remit to the Trustee for each of the seven preceding Billing Months
            an amount equal to the amount of TBC Collections estimated to have
            been received during the preceding calendar month, based on the
            applicable Collections Curve then in effect for those seven
            preceding Billing Months, and

      (ii)  on each Daily Remittance Date, for so long as the Servicer has not
            satisfied the conditions of Section 5.11(b), the Servicer shall
            remit to the Trustee for the Billing Month in which such Daily
            Remittance Date occurs and for each of the six preceding Billing
            Months an amount equal to the amount of TBC Collections estimated to
            have been received during the Business Day which is two Business
            Days preceding such Daily Remittance Date for those seven Billing
            Months (including the Billing Month in which such Daily Remittance
            Date occurs), including any amounts on deposit with the Servicer
            prior to such Daily Remittance Date during a period when the
            Servicer had been remitting on a Monthly Remittance Date, provided
            that,

            (x)   in the case of each such Billing Month other than the Billing
                  Month in which such Daily Remittance Date occurs, such
                  estimate shall be made by dividing (1) the amount of TBC
                  Collections estimated to be received during the calendar month
                  in which such Daily Remittance Date occurs ("the current
                  remittance month"), based on the applicable Collections Curve
                  then in effect, for each of those six preceding Billing
                  Months, divided by (2) the number of Business Days in the
                  current remittance month,

            (y)   in the case of the Billing Month in which such Daily
                  Remittance Date occurs, such estimate shall be made, by

                                       5
<PAGE>

                  first, determining the amount of TBC Collections estimated to
                  be received during that Billing Month, based on the applicable
                  Collections Curve then in effect, for each day on which bills
                  are sent in such Billing Month (each, a "Billing Day"; such
                  estimated TBC Collections during such Billing Month for each
                  Billing Day being the "Billing Month Estimated Collections"
                  for such Billing Day),

                  second, dividing the amount of the Billing Month Estimated
                  Collections for such Billing Day by the number of Business
                  Days remaining in such Billing Month (for each Billing Day,
                  the "Daily Billing Month Estimated Collections" for such
                  Billing Month), and

                  third, for each Daily Remittance Date during such Billing
                  Month, summing the amount of the Daily Billing Month Estimated
                  Collections for each Billing Day in such Billing Month through
                  the Business Day which is two Business Days preceding such
                  Daily Remittance Date and

            (z)   for each Daily Remittance Date, any unremitted Daily Billing
                  Month Estimated Collections received in the preceding Billing
                  Month on a Business Day that is two Business Days preceding
                  such Daily Remittance Date in accordance with subclause (y)
                  above shall be remitted on such Daily Remittance Date.

      (b) On or before each Reconciliation Date, the Servicer shall determine
whether there exists a Curve Payment Shortfall or an Excess Curve Payment by
comparing the actual TBC Collections to the Collection Curve Payments previously
made to the Trustee in respect of (i) for each Annual Reconciliation Date, each
of the twelve Billing Months beginning 19 months before the month in which such
Reconciliation Date occurs (or from the first Series Issuance Date, if less than
19 months have elapsed), and (ii) for each Monthly Reconciliation Date, the
Billing Month that is eight months prior to the Billing Month in which such
Reconciliation Date occurs. In the event that there is a Curve Payment Shortfall
with respect to the applicable Billing Months or Billing Month, as the case may
be, the Servicer shall pay the Curve Payment Shortfall to the Trustee for
deposit into the Collection Account on that Reconciliation Date. In the event
that there is an Excess Curve Payment for the applicable Billing Months or
Billing Month, as the case may be, the Servicer may either (A) reduce the amount
that the Servicer is required to remit to the Trustee for deposit in the
Collection Account on the following Remittance Date (and, if necessary,
succeeding Remittance Dates) by the amount of the Excess Curve Payment, or (B)
require the Trustee to pay to the Servicer from the General Subaccount the
amount of the Excess Curve Payment, which upon payment shall become the property
of the Servicer.

      (c) The Servicer agrees and acknowledges that it holds all TBC Collections
collected by it for the benefit of the Issuer and that all amounts will be
remitted by the Servicer in accordance with this Agreement without any
surcharge, fee, offset, charge or other deduction and without making any claim
to reduce its obligation to remit all TBC Collections collected by it,

                                       6
<PAGE>

except (i) as set forth in clause (b) above, (ii) the Monthly Servicing Fee
which it may withhold pursuant to Section 5.07 hereof and (iii) late fees
permitted by Section 5.07.

      SECTION 3.04 Servicing and Maintenance Standards. The Servicer shall, on
behalf of the Issuer:

      (a) manage, service, administer and make collections in respect of the
Transferred Bondable Transition Property with reasonable care and in material
compliance with applicable law, including all applicable BPU Regulations, using
the same degree of care and diligence that the Servicer exercises with respect
to billing and collection activities that the Servicer conducts for itself and
others;

      (b) follow standards, policies and procedures in performing its duties as
Servicer that are customary in the electric distribution industry;

      (c) use all reasonable efforts, consistent with its customary servicing
procedures, to enforce and maintain the Issuer's and the Trustee's rights in
respect of the Transferred Bondable Transition Property; and

      (d) calculate the Transition Bond Charge in compliance with the
Competition Act, the Financing Order and any applicable tariffs;

[except where the failure to comply with any of the foregoing would not
materially and adversely affect the Issuer's or the Trustee's interest in the
Transferred Bondable Transition Property]. The Servicer shall follow such
customary and usual practices and procedures as it shall deem necessary or
advisable in its servicing of the Transferred Bondable Transition Property,
which, in the Servicer's judgment, may include the taking of legal action
pursuant to Section 3.10 or otherwise. Notwithstanding the foregoing, the
Servicer shall not change its customary and usual practices and procedures in
any manner that would materially and adversely affect the Issuer's or the
Trustee's interest in the Transferred Bondable Transition Property unless it
shall have provided the Rating Agencies with prior written notice.

      SECTION 3.05 Servicer's Certificates. The Servicer will provide to the
Issuer and to the Trustee the statements and certificates specified in Annex 1.

      SECTION 3.06 Annual Statement as to Compliance.

      The Servicer shall deliver to the Issuer, the Trustee and each Rating
Agency, on or before March 31 of each year beginning March 31, 2002 to and
including March 31 succeeding the retiring of the Transition Bonds, an Officers'
Certificate, stating that:

            (a) a review of the activities of the Servicer during the preceding
      calendar year (or relevant portion thereof in the case of the first such
      Officer's Certificate) and of its performance under this Agreement has
      been made under such officers' supervision, and

                                       7
<PAGE>

            (b) to the best of such officers' knowledge, based on such review,
      the Servicer has fulfilled all its obligations under this Agreement
      throughout such period or, if there has been a default in the fulfillment
      of any such obligation, describing each such default and its status.

      SECTION 3.07 Annual Independent Certified Public Accountants' Report.

      (a) The Servicer shall cause a firm of independent certified public
accountants (which may also provide other services to the Servicer or the
Seller) to prepare, and the Servicer shall deliver to the Issuer, to the Trustee
and to each Rating Agency, on or before March 31 of each year, beginning March
31, 2002 to and including the March 31 succeeding the retirement of all
Transition Bonds, a report addressed to the Servicer (the "Annual Accountant's
Report"), which may be included as part of the Servicer's customary auditing
activities, to the effect that such firm has performed certain procedures in
connection with the Servicer's compliance with its obligations under this
Agreement during the preceding calendar year (or, in the case of the first
Annual Accountant's Report, the period of time from the Initial Transfer Date
until December 31, 2001), identifying the results of such procedures and
including any exceptions noted. In the event such accounting firm requires the
Trustee or the Issuer to agree or consent to the procedures performed by such
firm, the Issuer shall direct the Trustee in writing to so agree; it being
understood and agreed that the Trustee will deliver such letter of agreement or
consent in conclusive reliance upon the direction of the Issuer, and the Trustee
will not make any independent inquiry or investigation as to, and shall have no
obligation or liability in respect of, the sufficiency, validity or correctness
of such procedures.

      (b) The Annual Accountant's Report shall also indicate that the accounting
firm providing such report is independent of the Servicer within the meaning of
the Code of Professional Ethics of the American Institute of Certified Public
Accountants.

      SECTION 3.08 Bondable Transition Property Documentation. To assure uniform
quality in servicing the Transferred Bondable Transition Property and to reduce
administrative costs, the Servicer shall keep on file, in accordance with its
customary procedures, all Bondable Transition Property Documentation, it being
understood that the Servicer is acting solely as the servicing agent and
custodian for the Issuer with respect to the Bondable Transition Property
Documentation.

      SECTION 3.09 Computer Records; Audits of Documentation.

      (a) Safekeeping. The Servicer shall maintain accurate and complete
accounts, records and computer systems pertaining to the Transferred Bondable
Transition Property and the Bondable Transition Property Documentation in
accordance with its standard accounting procedures and in sufficient detail to
permit reconciliation between payments or recoveries on (or with respect to) the
Transition Bond Charge and the TBC Collections from time to time remitted to the
Trustee pursuant to Section 3.03 and to enable the Issuer to comply with this
Agreement and the Indenture. The Servicer shall conduct, or cause to be
conducted, periodic audits of the Bondable Transition Property Documentation
held by it under this Agreement and of the related

                                       8
<PAGE>

accounts, records and computer systems, in such a manner as shall enable the
Issuer and the Trustee, as pledgee of the Issuer, to verify the accuracy of the
Servicer's record keeping. The Servicer shall promptly report to the Issuer and
to the Trustee any failure on the Servicer's part to hold the Bondable
Transition Property Documentation and maintain its accounts, records and
computer systems as herein provided and promptly take appropriate action to
remedy any such failure. Nothing herein shall be deemed to require an initial
review or any periodic review by the Issuer or the Trustee of the Bondable
Transition Property Documentation. The Servicer's duties to hold the Bondable
Transition Property Documentation on behalf of the Issuer set forth in this
Section 3.09, to the extent such Bondable Transition Property Documentation has
not been previously transferred to a successor Servicer, shall terminate three
years after the earlier of the date on which (i) the Servicer is succeeded by a
successor Servicer pursuant to the provisions of this Agreement or (ii) no
Transition Bonds of any Series are outstanding.

      (b) Maintenance of and Access to Records. The Servicer shall maintain the
Bondable Transition Property Documentation at 80 Park Plaza, Newark, New Jersey
or at such other office as shall be specified to the Issuer and to the Trustee
by written notice not later than 30 days prior to any change in location. The
Servicer shall permit the Issuer and the Trustee or their respective duly
authorized representatives, attorneys, agents or auditors at any time during
normal business hours to inspect, audit and make copies of and abstracts from
the Servicer's records regarding the Transferred Bondable Transition Property,
the Transition Bond Charge and the Bondable Transition Property Documentation.
The failure of the Servicer to provide access to such information as a result of
an obligation or applicable law (including BPU Regulations) prohibiting
disclosure of information regarding customers shall not constitute a breach of
this Section 3.09(b).

      SECTION 3.10 Defending Transferred Bondable Transition Property Against
Claims. The Servicer shall institute and maintain any action or proceeding
necessary to compel performance by the BPU or the State of New Jersey of any of
their obligations or duties under the Competition Act or the Financing Order
with respect to the Transferred Bondable Transition Property, and the Servicer
agrees to take such legal or administrative actions, including defending against
or instituting and pursuing legal actions and appearing or testifying at
hearings or similar proceedings, as may be reasonably necessary to block or
overturn any attempts to cause a repeal of, modification of or supplement to the
Competition Act or the Financing Order, as the case may be, or the rights of
holders of Transferred Bondable Transition Property that would be adverse to
Transition Bondholders. The costs of any such action reasonably allocated by the
Servicer to the Transferred Bondable Transition Property shall be payable from
TBC Collections as an Operating Expense in accordance with the Indenture. The
Servicer's obligations pursuant to this Section 3.10 shall survive and continue
notwithstanding the fact that the payment of Operating Expenses pursuant to the
Indenture may be delayed (it being understood that the Servicer may be required
to advance its own funds to satisfy its obligations under this Section 3.10).

      SECTION 3.11 Opinions of Counsel. The Servicer shall deliver to the Issuer
and to the Trustee:

                                       9
<PAGE>

      (a) promptly after the execution and delivery of this Agreement and of the
Sale Agreement and of each amendment hereto or thereto, and on each Transfer
Date, an Opinion of Counsel either:

            (i) to the effect that, in the opinion of such counsel, all UCC
      filings that are necessary to fully preserve and protect the interests of
      the Trustee in the Transferred Bondable Transition Property have been
      executed and filed, and reciting the details of such filings or referring
      to prior Opinions of Counsel in which such details are given, or

            (ii) to the effect that, in the opinion of such counsel, no such
      action is necessary to preserve and protect such interest; and

      (b) within 90 days after the beginning of each calendar year beginning
with the first calendar year beginning more than three full calendar months
after the Initial Transfer Date, an Opinion of Counsel, dated as of a date
during such 90-day period, either:

            (i) to the effect that, in the opinion of such counsel, all UCC
      filings have been executed and filed that are necessary to preserve fully
      and protect fully the interest of the Trustee in the Transferred Bondable
      Transition Property, and reciting the details of such filings or referring
      to prior Opinions of Counsel in which such details are given, or

            (ii) to the effect that, in the opinion of such counsel, no such
      action is necessary to preserve and protect such interest.

Each Opinion of Counsel referred to in clause (a) or (b) above shall specify any
action necessary (as of the date of such opinion) to be taken in the following
year to preserve and protect such interest.

                                   ARTICLE IV

             Services Related to Transition Bond Charge Adjustments

      SECTION 4.01 Transition Bond Charge Adjustments. The Servicer shall
perform the calculations and take the actions relating to adjusting the
Transition Bond Charge, as set forth in Annex 1.

                                       10
<PAGE>

                                    ARTICLE V

                                  The Servicer

      SECTION 5.01 Representations and Warranties of Servicer. The Servicer
makes the following representations and warranties as of each Transfer Date, on
which the Issuer has relied and will rely in acquiring Transferred Bondable
Transition Property and in entering into this Agreement. The representations and
warranties shall survive the execution and delivery of this Agreement, the sale
of the Transferred Bondable Transition Property to the Issuer and the pledge
thereof to the Trustee pursuant to the Indenture.

      (a) Organization and Good Standing. The Servicer is a corporation duly
organized and in good standing under the laws of the State of its incorporation,
with the corporate power and authority to own its properties and to conduct its
business as such properties are currently owned and such business is presently
conducted and to execute, deliver and carry out the terms of this Agreement, and
has the power, authority and legal right to service the Transferred Bondable
Transition Property.

      (b) Due Qualification. The Servicer is duly qualified to do business as a
foreign corporation in good standing, and has obtained all necessary licenses
and approvals in, all jurisdictions in which the ownership or lease of property
or the conduct of its business (including the servicing of the Transferred
Bondable Transition Property as required by this Agreement) requires such
qualifications, licenses or approvals (except where the failure to so qualify
would not be reasonably likely to have a material adverse effect on the
Servicer's business, operations, assets, revenues, properties or prospects or
adversely affect the servicing of the Transferred Bondable Transition Property).

      (c) Power and Authority. The Servicer has the corporate power and
authority to execute and deliver this Agreement and to carry out its terms; and
the execution, delivery and performance of this Agreement have been duly
authorized by the Servicer by all necessary corporate action.

      (d) Binding Obligation. This Agreement constitutes a legal, valid and
binding obligation of the Servicer enforceable against the Servicer in
accordance with its terms subject to bankruptcy, receivership, insolvency,
reorganization, moratorium or other laws affecting creditors' rights generally
from time to time in effect and to general principles of equity (regard less of
whether considered in a proceeding in equity or at law).

      (e) No Violation. The consummation of the transactions contemplated by
this Agreement and the fulfillment of the terms hereof will not conflict with,
result in any breach of any of the terms and provisions of, or constitute (with
or without notice or lapse of time) a default under, the articles of
incorporation or by-laws of the Servicer, or any indenture, agreement or other
instrument to which the Servicer is a party or by which it is bound; or result
in the creation or imposition of any Lien upon any of its properties pursuant to
the terms of any such

                                       11
<PAGE>

indenture, agreement or other instrument; or violate any law or any order, rule
or regulation applicable to the Servicer of any court or of any federal or State
regulatory body, administrative agency or other governmental instrumentality
having jurisdiction over the Servicer or its properties.

      (f) Approvals. Except for filings with the BPU for adjusting the
Transition Bond Charge pursuant to Section 4.01 and Annex 1, filing of financing
statements under the UCC and UCC continuation filings, no approval,
authorization, consent, order or other action of, or filing with, any court,
federal or State regulatory body, administrative agency or other governmental
instrumentality is required in connection with the execution and delivery by the
Servicer of this Agreement, the performance by the Servicer of the transactions
contemplated hereby or the fulfillment by the Servicer of the terms hereof,
except those that have been obtained or made.

      (g) No Proceedings. There are no proceedings or investigations pending or,
to the Servicer's best knowledge, threatened before any court, federal or State
regulatory body, administrative agency or other governmental instrumentality
having jurisdiction over the Servicer or its properties:

            (i) [seeking to prevent the issuance of the Transition Bonds or the
      consummation of any of the transactions contemplated by this Agreement or
      any of the other Basic Documents];

            (ii) seeking any determination or ruling that might materially and
      adversely affect the performance by the Servicer of its obligations under,
      or the validity or enforceability against the Servicer of, this Agreement
      or any of the other Basic Documents; or

            (iii) relating to the Servicer and which might materially and
      adversely affect the federal or State income, gross receipts or franchise
      tax attributes of the Transition Bonds.

      (h) Reports and Certificates. Each report and certificate delivered in
connection with any filing made to the BPU by the Servicer on behalf of the
Issuer with respect to the Transition Bond Charge or Transition Bond Charge
Adjustments will constitute a representation and warranty by the Servicer that
each such report or certificate, as the case may be, is true and correct in all
material respects; provided, however, that to the extent any such report or
certificate is based in part upon or contains assumptions, forecasts or other
predictions of future events, the representation and warranty of the Servicer
with respect thereto will be limited to the representation and warranty that
such assumptions, forecasts or other predictions of future events are reasonable
based upon historical performance.

                                       12
<PAGE>

      SECTION 5.02 Indemnities of Servicer; Release of Claims.

      (a) The Servicer shall be liable in accordance herewith only to the extent
of the obligations specifically undertaken by the Servicer under this Agreement.

      (b) The Servicer shall indemnify the Issuer and the Trustee (for itself
and on behalf of the Transition Bondholders) and each of their respective
trustees, members, managers, officers, directors, employees and agents for, and
defend and hold harmless each such Person from and against, any and all Losses
that may be imposed upon, incurred by or asserted against any such Person as a
result of:

            (i) the Servicer's wilful misconduct, bad faith or gross negligence
      in the performance of its duties or observance of its covenants under this
      Agreement or the Servicer's reckless disregard of its obligations and
      duties under this Agreement;

            (ii) the Servicer's breach of any of its representations or
      warranties in this Agreement; and

            (iii) litigation and related expenses relating to its status and
      obligations as Servicer,

provided, however, that the Servicer shall not be liable for any Losses
resulting from the willful misconduct or gross negligence of any Person
indemnified pursuant to this Section 5.02 (each, an "Indemnified Person") or
resulting from a breach of a representation or warranty made by such Indemnified
Person in any of the Basic Documents that gives rise to the Servicer's breach.

Promptly after receipt by an Indemnified Person of notice of its involvement in
any action, proceeding or investigation, such Indemnified Person shall, if a
claim for indemnification in respect thereof is to be made against the Servicer
under this Section 5.02, notify the Servicer in writing of such involvement.
Failure by an Indemnified Person to so notify the Servicer shall relieve the
Servicer from the obligation to indemnify and hold harmless such Indemnified
Person under this Section 5.02 only to the extent that the Servicer suffers
actual prejudice as a result of such failure. With respect to any action,
proceeding or investigation brought by a third party for which indemnification
may be sought under this Section 5.02, the Servicer shall be entitled to assume
the defense of any such action, proceeding or investigation. Upon assumption by
the Servicer of the defense of any such action, proceeding or investigation, the
Indemnified Person shall have the right to participate in such action or
proceeding and to retain its own counsel (including local counsel), and the
Servicer shall bear the reasonable fees, costs and expenses of such separate
counsel. The Indemnified Person shall not settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought under this
Section 5.02 (whether or not the Servicer is an actual or potential party to
such claim or action) unless the Servicer agrees in writing to such settlement,
compromise or consent and such settlement, compromise or consent includes an
unconditional release of the Servicer from all liability arising out of such
claim, action, suit or proceeding.

                                       13
<PAGE>

      (c) The Servicer shall indemnify the Trustee and its respective officers,
directors and agents for, and defend and hold harmless each such Person from and
against, any and all Losses that may be imposed upon, incurred by or asserted
against any such Person as a result of the acceptance or performance of the
trusts and duties contained herein and in the Indenture, except to the extent
that any such Loss is due to the wilful misconduct, bad faith or gross
negligence of the Trustee; provided, however, that the foregoing indemnity is
extended to the Trustee solely in its individual capacity and not for the
benefit of the Transition Bondholders or any other Person. Such amounts with
respect to the Trustee shall be deposited and distributed in accordance with the
Indenture.

      (d) The Servicer's indemnification obligations under Section 5.02(b) and
(c) for events occurring prior to the removal or resignation of the Trustee or
the termination of this Agreement shall survive the resignation or removal of
the Trustee or the termination of this Agreement and shall include reasonable
costs, fees and expenses of investigation and litigation (including the Issuer's
and the Trustee's reasonable attorneys' fees and expenses).

      (e) Except to the extent expressly provided for in the Basic Documents
(including the Servicer's claims with respect to the Monthly Servicing Fees and
the Seller's claim for payment of the purchase price of the Transferred Bondable
Transition Property), the Servicer hereby releases and discharges the Issuer
(including its Member, Managers, officers, employees and agents, if any), and
the Trustee (including its respective officers, directors and agents)
(collectively, the "Released Parties") from any and all actions, claims and
demands whatsoever, which the Servicer shall or may have against any such Person
relating to the Transferred Bondable Transition Property or the Servicer's
activities with respect thereto other than any actions, claims and demands
arising out of the wilful misconduct, bad faith or gross negligence of the
Released Parties.

      SECTION 5.03 Merger or Consolidation of, or Assumption of the Obligations
of, Servicer. Any Person:

      (a) into which the Servicer may be merged or consolidated and which
succeeds to all or the major part of the electric distribution business of the
Servicer,

      (b) which results from the division of the Servicer into two or more
Persons and which succeeds to all or the major part of the electric distribution
business of the Servicer,

      (c) which may result from any merger or consolidation to which the
Servicer shall be a party and which succeeds to all or the major part of the
electric distribution business of the Servicer,

      (d) which may succeed to the properties and assets of the Servicer
substantially as a whole and which succeeds to all or the major part of the
electric distribution business of the Servicer, or

                                       14
<PAGE>

      (e) which may otherwise succeed to all or the major part of the electric
distribution business of the Servicer,

which Person in any of the foregoing cases executes an agreement of assumption
to perform every obligation of the Servicer under this Agreement, shall be the
successor to the Servicer hereunder without the execution or filing of any
document or any further act by any of the parties to this Agreement; provided,
however, that:

            (i) immediately after giving effect to such transaction, no
      representation or warranty made pursuant to Section 5.01 shall have been
      breached and no Servicer Default, and no event that, after notice or lapse
      of time, or both, would become a Servicer Default, shall have occurred and
      be continuing;

            (ii) the Servicer shall have delivered to the Issuer and the Trustee
      an Officers' Certificate and an Opinion of Counsel each stating that such
      consolidation, merger or succession and such agreement of assumption
      comply with this Section 5.03 and that all conditions precedent, if any,
      provided for in this Agreement relating to such transaction have been
      complied with;

            (iii) the Servicer shall have delivered to the Issuer and to the
      Trustee an Opinion of Counsel either:

            (A)   stating that, in the opinion of such counsel, all filings to
                  be made by the Servicer, including UCC filings, that are
                  necessary fully to preserve and protect the interests of the
                  Trustee in the Transferred Bondable Transition Property have
                  been executed and filed and reciting the details of such
                  filings, or

            (B)   stating that, in the opinion of such counsel, no such action
                  is necessary to preserve and protect such interests;

            (iv) the Rating Agencies shall have received prior written notice of
      such transaction; and

            (v) the Servicer shall have delivered to the Issuer and the Trustee
      an opinion of independent tax counsel (as selected by, and in form and
      substance reasonably satisfactory to, the Servicer, and which may be based
      on a ruling from the Internal Revenue Service) to the effect that, for
      federal income tax purposes, such consolidation or merger will not result
      in a material adverse federal income tax consequence to the Servicer, the
      Issuer, the Trustee or the then existing Transition Bondholders.

The Servicer shall not consummate any transaction referred to in subclauses (a),
(b), (c), (d) or (e) above except upon execution of the above described
agreement of assumption and compliance with subclauses (i), (ii), (iii), (iv)
and (v) above. When any Person acquires the properties and assets of the
Servicer substantially as a whole and becomes the successor to the Servicer in

                                       15
<PAGE>

accordance with the terms of this Section 5.03, then upon the satisfaction of
all of the other conditions of this Section 5.03, the Servicer shall
automatically and without further notice be released from its obligations
hereunder.

      SECTION 5.04 Assignment of Servicer's Obligations. The Servicer may assign
any or all of its obligations hereunder to any successor if either (i) prior
notice to the Rating Agencies has been provided and any condition specified in
the Financing Order has been satisfied, or (ii) the Servicer is replaced by a
successor pursuant to Section 5.03 hereof.

      SECTION 5.05 Limitation on Liability of Servicer and Others. The Servicer
shall not be liable to the Issuer or the Trustee, except as provided under this
Agreement, for any action taken or for refraining from the taking of any action
pursuant to this Agreement or for errors in judgment; provided, however, that
this provision shall not protect the Servicer against any liability that would
otherwise be imposed by reason of wilful misconduct, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under this Agreement. The Servicer and any director,
officer, employee or agent of the Servicer may rely in good faith on the advice
of counsel reasonably acceptable to the Trustee or on any document of any kind,
prima facie properly executed and submitted by any Person, respecting any
matters arising under this Agreement.

      Except as provided in this Agreement, the Servicer shall not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties to service the Transferred Bondable Transition Property
in accordance with this Agreement or related to its obligation to pay
indemnification, and that in its reasonable opinion may cause it to incur any
expense or liability.

      SECTION 5.06 PSE&G Not To Resign as Servicer. Subject to the provisions of
Sections 5.03 and 5.04, PSE&G shall not resign from the obligations and duties
imposed on it as Servicer under this Agreement except upon a determination that
the performance of its duties under this Agreement shall no longer be
permissible under applicable law. Notice of any such determination permitting
the resignation of PSE&G shall be communicated to the Issuer, the Trustee and
each Rating Agency at the earliest practicable time (and, if such communication
is not in writing, shall be confirmed in writing at the earliest practicable
time), and any such determination shall be evidenced by an Opinion of Counsel to
such effect delivered to the Issuer and the Trustee concurrently with or
promptly after such notice. No such resignation shall become effective until a
successor Servicer has assumed the servicing obligations and duties hereunder of
the Servicer in accordance with Section 6.04.

      SECTION 5.07 Monthly Servicing Fee. The Issuer agrees to pay the Servicer
the Monthly Servicing Fee with respect to all Series of Transition Bonds. On any
Monthly Remittance Date, the Servicer shall be entitled to withhold the amount
of the Monthly Servicing Fee from TBC Collections as compensation under this
Agreement unless the Trustee has notified the Servicer in writing that the
Issuer does not hold sufficient funds to pay amounts owed in such month to the
Trustee. For so long as PSE&G is the Servicer, the Monthly Servicing Fee shall
be $[_______]. The Servicer shall be entitled to retain as additional
compensation net investment

                                       16
<PAGE>

income on TBC Collections related to the Transferred Bondable Transition
Property received by the Servicer during any Collection Period prior to
remittance to the Collection Account and the late fees, if any, paid by
Customers to the Servicer. The foregoing fees constitute a fair and reasonable
price for the obligations to be performed by the Servicer.

      SECTION 5.08 Servicer Expenses. Except as otherwise expressly provided
herein, the Servicer shall be required to pay all expenses incurred by it in
connection with its activities hereunder, including fees and disbursements of
independent accountants and counsel, taxes imposed on the Servicer and expenses
incurred in connection with reports to Transition Bondholders and shall not be
entitled to any additional payment or reimbursement therefor.

      SECTION 5.09 Subservicing. The Servicer may at any time appoint a
subservicer to perform all or any portion of its obligations as Servicer
hereunder; provided, however, that prior notice to the Rating Agencies shall
have been provided in connection therewith; and provided further that the
Servicer shall remain obligated and be liable to the Issuer, the Trustee and the
Transition Bondholders for the servicing and administering of the Transferred
Bondable Transition Property in accordance with the provisions hereof without
diminution of such obligation and liability by virtue of the appointment of such
subservicer and to the same extent and under the same terms and conditions as if
the Servicer alone were servicing and administering the Transferred Bondable
Transition Property. The fees and expenses of the subservicer shall be as agreed
between the Servicer and its subservicer from time to time, and none of the
Issuer, the Trustee or the Transition Bondholders shall have any responsibility
therefor. Any such appointment shall not constitute a Servicer resignation under
Section 5.06.

      SECTION 5.10 No Servicer Advances. The Servicer shall not make any
advances of interest on or principal of the Transition Bonds.

      SECTION 5.11 Remittances.

      (a) The Servicer shall remit TBC Collections (from whatever source) in
accordance with Section 3.03(a)(ii), and all proceeds of other Collateral of the
Issuer, if any, received by the Servicer, to the Trustee for deposit pursuant to
the Indenture, not later than each Daily Remittance Date. The Servicer shall
promptly remit any Indemnity Amounts paid or received by it immediately to the
Trustee for deposit pursuant to the Indenture.

      (b) Notwithstanding the foregoing clause (a), as long as:

            (i) PSE&G or any successor to PSE&G's electric distribution business
      remains the Servicer,

            (ii) no Servicer Default has occurred and is continuing, and,

            (iii) with respect to Moody's and Fitch only, PSE&G maintains a
      long-term rating on its senior, unsecured debt of "BAA2" by Moody's and
      "BBB" by Fitch, or

                                       17
<PAGE>

      better, provided however, that if the senior, unsecured debt of PSE&G is
      downgraded to "BAA3" by Moody's or "BBB-" by Fitch, PSE&G shall have 30
      days to otherwise satisfy the Rating Agency Condition with respect to
      Moody's or Fitch, as applicable, and if the long-term, unsecured debt of
      PSE&G is downgraded below "BAA3" by Moody's or "BBB-" by Fitch, PSE&G
      shall have 48 hours to otherwise satisfy the Rating Agency condition with
      respect to Moody's or Fitch, as applicable,

the Servicer need not make the daily remittances required by clause (a), but in
lieu thereof, shall remit all TBC Collections (from whatever source) in
accordance with Section 3.03(a)(i), and all proceeds of other Collateral of the
Issuer, if any, received by the Servicer during any Collection Period, to the
Trustee for deposit pursuant to the Indenture, not later than the corresponding
Monthly Remittance Date.

      SECTION 5.12 Protection of Title. The Servicer shall execute and file such
filings and cause to be executed and filed such filings, all in such manner and
in such places as may be required by law fully to preserve, maintain and protect
the interests of the Trustee in the Transferred Bondable Transition Property,
including all filings required under the UCC relating to the transfer of
ownership of or a security interest in the Transferred Bondable Transition
Property by the Seller to the Issuer or the security interest granted by the
Issuer to the Trustee in the Transferred Bondable Transition Property. The
Servicer shall deliver (or cause to be delivered) to the Issuer and the Trustee
file-stamped copies of, or filing receipts for, any document filed as provided
above, as soon as available following such filing.

                                   ARTICLE VI

                                Servicer Default

      SECTION 6.01 Servicer Default. If any one of the following events (a
"Servicer Default") occurs and is continuing:

      (a) any failure by the Servicer to remit to the Trustee, on behalf of the
Issuer, any required remittance that continues unremedied for a period of five
Business Days after written notice of such failure is received by the Servicer
from the Issuer or the Trustee; or

      (b) any failure by the Servicer duly to observe or perform in any material
respect any other covenant or agreement of the Servicer set forth in this
Agreement, which failure:

            (i) materially and adversely affects the Transferred Bondable
      Transition Property or the rights of the Transition Bondholders, and

            (ii) continues unremedied for a period of 60 days after written
      notice of such failure has been given to the Servicer by the Issuer or by
      the Trustee or after discovery of such failure by an officer of the
      Servicer; or

                                       18
<PAGE>

      (c) any representation or warranty made by the Servicer in this Agreement
proves to have been incorrect when made, which has a material adverse effect on
the Issuer or the Transition Bondholders and which material adverse effect
continues unremedied for a period of 60 days after the date on which written
notice thereof has been given to the Servicer by the Issuer or the Trustee or
after discovery of such failure by an officer of the Servicer, as the case may
be; or

      (d) an Insolvency Event occurs with respect to the Servicer;

then, and in each and every case, so long as the Servicer Default shall not have
been remedied, the Trustee, with the consent of the Holders of a majority of the
outstanding principal amount of the Transition Bonds of all Series, by notice
then given in writing to the Servicer (a "Termination Notice") may terminate all
the rights and obligations (other than the indemnification obligations set forth
in Section 5.02 hereof and the obligation under Section 6.04 to continue
performing its functions as Servicer until a successor Servicer is appointed) of
the Servicer under this Agreement. In addition, upon a Servicer Default, the
Issuer and the Trustee shall be entitled to apply to the BPU or any court of
competent jurisdiction for sequestration and payment to the Trustee of revenues
arising with respect to the Transferred Bondable Transition Property.

      On or after the receipt by the Servicer of a Termination Notice, all
authority and power of the Servicer under this Agreement, whether with respect
to the Transferred Bondable Transition Property, the related Transition Bond
Charge or otherwise, shall, upon appointment of a successor Servicer pursuant to
Section 6.04, without further action, pass to and be vested in such successor
Servicer and, without limitation, the Trustee is hereby authorized and empowered
to execute and deliver, on behalf of the predecessor Servicer, as
attorney-in-fact or otherwise, any and all documents and other instruments, and
to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such Termination Notice, whether to complete the transfer of the
Bondable Transition Property Documentation and related documents, or otherwise.
The predecessor Servicer shall cooperate with the successor Servicer, the
Trustee and the Issuer in effecting the termination of the responsibilities and
rights of the predecessor Servicer under this Agreement, including the transfer
to the successor Servicer for administration by it of all cash amounts that
shall at the time be held by the predecessor Servicer for remittance, or shall
thereafter be received by it with respect to the Transferred Bondable Transition
Property or the related Transition Bond Charge. As soon as practicable after
receipt by the Servicer of such Termination Notice, the Servicer shall deliver
the Bondable Transition Property Documentation to the successor Servicer. All
reasonable costs and expenses (including attorneys fees and expenses) incurred
in connection with transferring the Bondable Transition Property Documentation
to the successor Servicer and amending this Agreement to reflect such succession
as Servicer pursuant to this Section 6.01 shall be paid by the predecessor
Servicer upon presentation of reasonable documentation of such costs and
expenses. Termination of PSE&G as Servicer shall not terminate PSE&G's rights or
obligations under the Sale Agreement.

      SECTION 6.02 Notice of Servicer Default. The Servicer shall deliver to the
Issuer, the Trustee and each Rating Agency promptly after having obtained
knowledge thereof,

                                       19
<PAGE>

but in no event later than five Business Days thereafter, written notice in an
Officer's Certificate of any event or circumstance which, with the giving of
notice or the passage of time, would become a Servicer Default under Section
6.01.

      SECTION 6.03 Waiver of Past Defaults. The Trustee, with the consent of
Holders of the majority of the outstanding principal amount of the Transition
Bonds of all Series, may waive in writing any default by the Servicer in the
performance of its obligations hereunder and its consequences, except a default
in making any required remittances to the Trustee of TBC Collections in
accordance with Section 3.03. Upon any such waiver of a past default, such
default shall cease to exist, and any Servicer Default arising therefrom shall
be deemed to have been remedied for every purpose of this Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
consequent thereto.

      SECTION 6.04 Appointment of Successor.

      (a) Upon the Servicer's receipt of a Termination Notice pursuant to
Section 6.01 or the Servicer's resignation in accordance with the terms of this
Agreement, the predecessor Servicer shall continue to perform its functions as
Servicer under this Agreement and shall be entitled to receive the requisite
portion of the Monthly Servicing Fees, until a successor Servicer has assumed in
writing the obligations of the Servicer hereunder as described below. In the
event of the Servicer's removal or resignation hereunder, the Trustee, as
assignee of the Issuer, may appoint a successor Servicer, with the consent of
the Holders of a majority of the outstanding principal amount of the Transition
Bonds of all Series, and the successor Servicer shall accept its appointment by
a written assumption in form acceptable to the Issuer and the Trustee. If,
within 30 days after the delivery of the Termination Notice, a new Servicer has
not been appointed and accepted such appointment, the Trustee may petition the
BPU or a court of competent jurisdiction to appoint a successor Servicer under
this Agreement. A Person shall qualify as a successor Servicer only if:

            (i) such Person is permitted to perform the duties of the Servicer
      pursuant to the Competition Act, the BPU Regulations, the Financing Order
      and this Agreement;

            (ii) prior notice has been provided to the Rating Agencies; and

            (iii) such Person enters into a servicing agreement with the Issuer
      having substantially the same provisions as this Agreement.

      (b) Upon appointment, the successor Servicer shall be the successor in all
respects to the predecessor Servicer under this Agreement and shall be subject
to all the responsibilities, duties and liabilities arising thereafter relating
thereto placed on the predecessor Servicer and shall be entitled to the Monthly
Servicing Fee and all the rights granted to the predecessor Servicer by the
terms and provisions of this Agreement.

                                       20
<PAGE>

      (c) The successor Servicer may resign only if it is prohibited from
serving as such by applicable law.

      SECTION 6.05 Cooperation with Successor. The Servicer covenants and agrees
with the Issuer that it will, on an ongoing basis, cooperate with the successor
Servicer and provide whatever information is, and take whatever actions are,
reasonably necessary to assist the successor Servicer in performing its
obligations hereunder.

                                   ARTICLE VII

                            Miscellaneous Provisions

      SECTION 7.01 Amendment. This Agreement may be amended by the Servicer and
the Issuer, with the consent of the Trustee and the satisfaction of the Rating
Agency Condition. Promptly after the execution of any such amendment or consent,
the Issuer shall furnish written notification of the substance of such amendment
or consent to each of the Rating Agencies.

      Prior to the execution of any amendment to this Agreement, the Issuer and
the Trustee shall be entitled to receive and rely upon an Opinion of Counsel
stating that the execution of such amendment is authorized or permitted by this
Agreement and the Opinion of Counsel referred to in Section 3.11. The Issuer and
the Trustee may, but shall not be obligated to, enter into any such amendment
which affects their own rights, duties or immunities under this Agreement or
otherwise.

      SECTION 7.02 Notices. Unless otherwise specifically provided herein, all
notices, directions, consents and waivers required under the terms and
provisions of this Agreement shall be in English and in writing, and any such
notice, direction, consent or waiver may be given by United States first-class
mail, reputable overnight courier service, facsimile transmission or electronic
mail (confirmed by telephone, United States first-class mail or reputable
overnight courier service in the case of notice by facsimile transmission or
electronic mail) or any other customary means of communication, and any such
notice, direction, consent or waiver shall be effective when delivered or
transmitted, or if mailed, five days after deposit in the United States
first-class mail with proper postage for first-class mail prepaid,

      (a) in the case of the Servicer, at PSE&G, 80 Park Plaza, Newark, New
Jersey 07102;

      (b) in the case of the Issuer, at PSE&G Transition Funding LLC, 80 Park
Plaza, T-4D, Newark, New Jersey 07102;

      (c) in the case of the Trustee, at the address provided for notices or
communications to the Trustee in the Indenture;

                                       21
<PAGE>

      (d) in the case of Moody's, at Moody's Investors Service, Inc., ABS
Monitoring Department, 99 Church Street, New York, New York 10007;

      (e) in the case of Standard & Poor's, at Standard & Poor's Ratings Group,
55 Water Street, New York, New York 10041, Attention: Asset Backed Surveillance
Department; and

      (f) in the case of Fitch, at Fitch, Inc., 1 State Street Plaza, New York,
New York 10004, Attention: ABS Surveillance;

or, as to each of the foregoing, at such other address as shall be designated by
written notice to the other parties.

      SECTION 7.03 Limitations on Rights of Others. The provisions of this
Agreement are solely for the benefit of the Servicer, the Issuer and the
Trustee, on behalf of itself and the Transition Bondholders, and nothing in this
Agreement, whether express or implied, shall be construed to give to any other
Person any legal or equitable right, remedy or claim in any Collateral or under
or in respect of this Agreement or any covenants, conditions or provisions
contained herein.

      SECTION 7.04 Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

      SECTION 7.05 Separate Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.

      SECTION 7.06 Headings. The headings of the various Articles and Sections
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.

      SECTION 7.07 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.

      SECTION 7.08 Assignment to the Trustee. (a) The Servicer hereby
acknowledges and consents to any pledge, assignment and grant of a security
interest by the Issuer to the Trustee pursuant to the Indenture for the benefit
of the Transition Bondholders of all right, title and interest of the Issuer in,
to and under the Transferred Bondable Transition Property owned by

                                       22
<PAGE>

the Issuer and the proceeds thereof and the assignment of any or all of the
Issuer's rights hereunder to the Trustee.

      (b) In no event shall the Trustee have any liability for the
representations, warranties, covenants, agreements or other obligations of the
Issuer hereunder or in any of the certificates, notices or agreements delivered
pursuant hereto, as to all of which recourse shall be had solely to the assets
of the Issuer.

      SECTION 7.09 Nonpetition Covenants. Notwithstanding any prior termination
of this Agreement or the Indenture, the Servicer hereby covenants and agrees
that it shall not, prior to the date which is one year and one day after the
termination of the Indenture and the payment in full of the Transition Bonds,
any other amounts owed under the Indenture, including, without limitation, any
amounts owed to third-party credit enhancers, and any amounts owed by the Issuer
under the Hedge Agreement or the Interest Rate Swap Agreement, acquiesce in,
petition or otherwise invoke or cause the Issuer to invoke the process of any
court or government authority for the purpose of commencing or sustaining a case
against the Issuer under any Federal or State bankruptcy, insolvency or similar
law or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Issuer or any substantial part of
the property of the Issuer, or ordering the winding up or liquidation of the
affairs of the Issuer.

      SECTION 7.10 Termination. This Agreement shall terminate when all
Transition Bonds have been retired, redeemed or defeased in full.

                                       23
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective duly authorized officers as of
the date and year first above written.

                                       PSE&G TRANSITION FUNDING LLC,
                                          as Issuer

                                       By:______________________________________
                                          Name:
                                          Title: Manager

                                       PUBLIC SERVICE ELECTRIC AND GAS
                                          COMPANY, as Servicer

                                       By:______________________________________
                                          Name:
                                          Title:

                                       Acknowledged and Accepted:

                                       THE BANK OF NEW YORK,
                                          not in its individual capacity but
                                          solely as Trustee on behalf of the
                                          Holders of the Transition Bonds

                                       By:______________________________________
                                          Name:
                                          Title:

                                       24
<PAGE>

                                     ANNEX 1

                                       to

                               SERVICING AGREEMENT

      The Servicer agrees to comply with the following with respect to PSE&G
Transition Funding LLC (the "Issuer"):

      SECTION 1. Definitions. Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in Appendix A to the Servicing
Agreement dated as of January [__], 2001, between the Issuer and PSE&G, as
Servicer.

      SECTION 2. Trustee and Servicer Payment Date Statements. At least one
Business Day before each date on which distributions to the Trustee and Servicer
are to be made pursuant to Sections 8.02(d) and (e) of the Indenture, the
Servicer shall provide the Trustee with a statement setting forth the amounts to
be distributed to each of the Trustee and Servicer pursuant to such Sections.

      SECTION 3. Payment Date Statements. At least one Business Day before each
Payment Date, the Servicer shall provide to the Issuer, the Trustee, each Rating
Agency and for so long as any Transition Bonds are listed on the Luxembourg
Stock Exchange, any listing agent in Luxembourg, a statement indicating:

      1.    the amount to be paid to Transition Bondholders of each Series and
            Class in respect of principal on such Payment Date;

      2.    the amount to be paid to Transition Bondholders of each Series and
            Class in respect of interest on such Payment Date;

      3.    the Projected Transition Bond Balance and the Transition Bond
            Balance for each Series and Class as of that Payment Date;

      4.    the amount on deposit in the Overcollateralization Subaccount for
            each Series and the Scheduled Overcollateralization Level for each
            Series, as of that Payment Date;

      5.    the amount on deposit in the Capital Subaccount for each Series as
            of that Payment Date;

      6.    the amount, if any, on deposit in the Reserve Subaccount as of that
            Payment Date;

                                    Annex 1-1

<PAGE>

      7.    the amount to be paid to any counterparty under any Hedge Agreement
            on such Payment Date;

      8.    the amount to be paid to any Swap Counterparty (on a gross and a net
            basis, separately stated) under any Interest Rate Swap Agreement on
            or before such Payment Date;

      9.    the amounts paid to the Trustee since the preceding Payment Date
            pursuant to Sections 8.02(d) of the Indenture;

      10.   the amounts paid to the Servicer since the preceding Payment Date
            pursuant to Sections 8.02(e) of the Indenture; and

      11.   the amount of any transfers and payments to be made on such Payment
            Date pursuant to Sections 8.02(f) and (g) of the Indenture.

      SECTION 4. Remittance Date Statements. At least one Business Day before
each Remittance Date, but not more frequently than monthly, the Servicer shall
prepare and furnish to the Issuer and the Trustee a statement setting forth the
aggregate amount to be remitted by the Servicer to the Trustee (net of any
unreimbursed Excess Curve Payments) for deposit on such Remittance Date pursuant
to the Indenture.

      SECTION 5. Transition Bond Charge Adjustments.

      (a) Prior to each Calculation Date, the Servicer shall calculate

            (i) the Transition Bond Balance as of such Calculation Date (a
      written copy of which shall be delivered by the Servicer to the Trustee
      within five Business Days following such Calculation Date), and

            (ii) the revised Transition Bond Charge with respect to the
      Transferred Bondable Transition Property in respect of each Adjustment
      Date such that the Servicer projects that TBC Collections therefrom
      allocable to the Issuer will be sufficient so that:

            (A)   the Transition Bond Balance on the Payment Date immediately
                  preceding the next Adjustment Date will equal the Projected
                  Transition Bond Balance as of such date or, if earlier with
                  respect to any Series or Class of Transition Bonds, as of the
                  Payment Date immediately preceding the Expected Final Payment
                  Date therefor, taking into account any amounts on deposit in
                  the Reserve Subaccount,

            (B)   the amount on deposit in the Overcollateralization Subaccount
                  on the Payment Date immediately preceding the next Adjustment
                  Date, or if earlier with respect to any Series or Class of
                  Transition

                                    Annex 1-2

<PAGE>

                  Bonds, as of the Payment Date immediately preceding the
                  Expected Final Payment Date therefor, will equal the Scheduled
                  Overcollateralization Level for such date, taking into account
                  amounts on deposit in the Reserve Subaccount,

            (C)   the amount on deposit in the Capital Subaccount on the Payment
                  Date immediately preceding the next Adjustment Date, or if
                  earlier with respect to any Series or Class of Transition
                  Bonds, as of the Payment Date immediately preceding the
                  Expected Final Payment Date therefor, will equal its required
                  level for such date, taking into account any amounts on
                  deposit in the Reserve Subaccount,

            (D)   the amount on deposit in the Reserve Subaccount on the Payment
                  Date immediately preceding the next Adjustment Date, or if
                  earlier with respect to any Series or Class of Transition
                  Bonds, as of the Payment Date immediately preceding the
                  Expected Final Payment Date therefor, will equal zero, and

            (E)   the TBC Collections will provide for (i) amortization of the
                  remaining outstanding principal amount of each Series in
                  accordance with the Expected Amortization Schedule therefor,
                  (ii) payment of interest on each Series when due, payment of
                  any hedge payments due under the Hedge Agreement, and payment
                  of any amounts (other than termination or breakage amounts)
                  under any Interest Rate Swap Agreement, (iii) payment of all
                  Operating Expenses of the Issuer when due in accordance with
                  the Indenture, and (iv) deposits to the Overcollateralization
                  Subaccount such that the balance therein will equal the
                  Calculated Overcollateralization Level on each Payment Date.

      (b) On each Calculation Date, the Servicer shall file an Adjustment
Request with the BPU. This filing shall include the data specified in the
Petition and the Financing Order.

      (c) On each Adjustment Date, the Servicer shall

            (i) take all reasonable actions and make all reasonable efforts to
      effectuate all adjustments to the Transition Bond Charge either approved
      by the BPU or effective on an interim basis pending final approval, and

            (ii) promptly send to the Trustee copies of all material notices and
      documents relating to such adjustments.

      (d) On each Adjustment Date, the Servicer shall provide Moody's with a
schedule indicating any changes to the Transition Bond Charge.

                                    Annex 1-3

<PAGE>

      (e) If deemed appropriate by the Servicer to protect Transition
Bondholders to remedy a significant and recurring variance between actual and
expected TBC Collections, as authorized by the Financing Order, the Servicer
shall make "non-routine" filings with the BPU for adjustments to the formula
described in Exhibit A to the Petition to assure timely payment of the Total
Payment Requirements (as defined in the Financing Order). Such filings shall be
made at least 90 days prior to the proposed effective date of the proposed
adjustments.

                                    Annex 1-4

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