Document:

Exhibit 4-117

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                               Guarantee Agreement

                                     between

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                 (as Guarantor)

                                       and

                       WACHOVIA BANK, NATIONAL ASSOCIATION
                             (as Guarantee Trustee)

                                   Dated as of

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

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                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                    ARTICLE I
                                   DEFINITIONS

SECTION 1.01.  Definitions.....................................................1

                                   ARTICLE II
                               TRUST INDENTURE ACT

SECTION 2.01.  Trust Indenture Act; Application................................3
SECTION 2.02.  List of Holders ................................................4
SECTION 2.03.  Reports by the Guarantee Trustee................................4
SECTION 2.04.  Periodic Reports to Guarantee Trustee...........................4
SECTION 2.05.  Evidence of Compliance with Conditions Precedent ...............4
SECTION 2.06.  Events of Default; Waiver ......................................5
SECTION 2.07.  Event of Default; Notice .......................................5

                                   ARTICLE III
                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

SECTION 3.01.  Powers and Duties of the Guarantee Trustee .....................5
SECTION 3.02.  Certain Rights of Guarantee Trustee.............................7
SECTION 3.03.  Indemnity.......................................................9

                                   ARTICLE IV
                                GUARANTEE TRUSTEE

SECTION 4.01.  Guarantee Trustee; Eligibility..................................9
SECTION 4.02.  Appointment, Removal and Resignation of the Guarantee Trustee..10

                                    ARTICLE V
                                    GUARANTEE

SECTION 5.01.  Guarantee......................................................10
SECTION 5.02.  Waiver of Notice and Demand....................................10
SECTION 5.03.  Obligations Not Affected.......................................11
SECTION 5.04.  Rights of Holders..............................................11

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                                                                            Page
                                                                            ----

SECTION 5.05.  Guarantee of Payment...........................................12
SECTION 5.06.  Subrogation....................................................12
SECTION 5.07.  Independent Obligations........................................12

                                   ARTICLE VI
                           COVENANTS AND SUBORDINATION

SECTION 6.01.  Subordination..................................................12

                                   ARTICLE VII
                                   TERMINATION

SECTION 7.01.  Termination....................................................12

                                  ARTICLE VIII
                                  MISCELLANEOUS

SECTION 8.01.  Successors and Assigns.........................................13
SECTION 8.02.  Amendments.....................................................13
SECTION 8.03.  Notices........................................................13
SECTION 8.04.  Benefit........................................................14
SECTION 8.05.  Interpretation.................................................14
SECTION 8.06.  Governing Law..................................................15

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                             CROSS-REFERENCE TABLE*

Section of                                                            Section of
Trust Indenture Act                                                    Guarantee
of 1939, as amended                                                    Agreement
-------------------                                                   ----------

310(a)  .................................................................4.01(a)
310(b)  ...........................................................4.01(c), 2.08
310(c)  ............................................................Inapplicable
311(a)  .................................................................2.02(b)
311(b)  .................................................................2.02(b)
311(c)  ............................................................Inapplicable
312(a)  .................................................................2.02(a)
312(b)  .................................................................2.02(b)
313     ....................................................................2.03
314(a)  ....................................................................2.04
314(b)  ............................................................Inapplicable
314(c)  ....................................................................2.05
314(d)  ............................................................Inapplicable
314(e)  ........................................................1.01, 2.05, 3.02
314(f)  ..............................................................2.01, 3.02
315(a)  .................................................................3.01(d)
315(b)  ....................................................................2.07
315(c)  ....................................................................3.01
315(d)  .................................................................3.01(d)
316(a)  ........................................................1.01, 2.06, 5.04
316(b)  ....................................................................5.03
316(c)  ....................................................................8.02
317(a)  ............................................................Inapplicable
317(b)  ............................................................Inapplicable
318(a)  .................................................................2.01(b)
318(b)  ....................................................................2.01
318(c)  .................................................................2.01(a)

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

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

                                      iii

<PAGE>

                               GUARANTEE AGREEMENT

      This GUARANTEE  AGREEMENT,  dated as of  _______________,  is executed and
delivered by Public Service Electric and Gas Company,  a New Jersey  corporation
(the "Guarantor"),  to Wachovia Bank, National  Association,  a national banking
association  duly  organized and existing under the laws of the United States of
America,  as trustee (the "Guarantee  Trustee"),  for the benefit of the Holders
(as defined  herein) from time to time of the Preferred  Securities  (as defined
herein) of PSE&G Capital Trust VI, a Delaware statutory trust (the "Issuer").

      WHEREAS,  pursuant to an Amended and Restated  Trust  Agreement  for PSE&G
Capital Trust VI (the "Trust Agreement"),  dated as of  _________________  among
the Trustees named therein,  the Guarantor,  as Depositor,  and the Holders from
time to time of undivided  beneficial interests in the assets of the Issuer, the
Issuer  is  issuing  $________  aggregate   liquidation  amount  of  its  _____%
Cumulative Quarterly Income Preferred Securities,  Series __ (liquidation amount
of  $__  per  preferred  security)  (the  "Preferred  Securities")  representing
undivided  beneficial interests in the assets of the Issuer and having the terms
set forth in the Trust Agreement;

      WHEREAS,  the  Preferred  Securities  will be issued by the Issuer and the
proceeds thereof,  together with the proceeds from the sale by the Issuer of its
Common  Securities  will be used to purchase the  Debentures  (as defined in the
Trust  Agreement) of the Guarantor  which will be deposited  with Wachovia Bank,
National  Association,  as Property Trustee under the Trust Agreement,  as Trust
Property (as defined in the Trust Agreement); and

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

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

                                    ARTICLE I

                                   DEFINITIONS

      SECTION 1.01.  Definitions.  As used in this Guarantee Agreement,  each of
the terms set forth below shall, unless the context otherwise requires, have the
following  meaning.  Each  capitalized  or  otherwise  defined term used but not
otherwise  defined  herein shall have the meaning  assigned to such terms in the
Trust Agreement as in effect on the date hereof.

      "Affiliate"  of any  specified  Person means any other Person  directly or
indirectly  controlling  or  controlled  by or under  direct or indirect  common
control  with  such  specified

<PAGE>

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

      "Common Securities" means the securities representing undivided beneficial
interests in the assets of the Issuer and having the rights provided therefor in
the Trust Agreement.

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

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

      "Guarantee  Trustee" means Wachovia Bank,  National  Association,  until a
Successor  Guarantee  Trustee  (as  defined  below) has been  appointed  and has
accepted such appointment  pursuant to the terms of this Guarantee Agreement and
thereafter means each such Successor Guarantee Trustee.

      "Holder"  means a Person in whose name a Preferred  Security is registered
in the Securities Register;  provided,  however, that in determining whether the
holders of the  requisite  percentage  of  Preferred  Securities  have given any
request, notice, consent or waiver hereunder,

      "Holder"  shall not include the  Guarantor,  the Guarantee  Trustee or any
Affiliate of the Guarantor or the Guarantee Trustee.

      "Indenture"  means the Indenture dated as of ____________,  between Public
Service  Electric and Gas Company and Wachovia Bank,  National  Association,  as
trustee thereunder.

      "List of Holders" has the meaning specified in Section 2.02(a).

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      "Majority in liquidation amount of the Preferred Securities" means, except
as provided by the Trust Indenture Act, a vote by the Holders,  of more than 50%
of the aggregate liquidation amount of all then outstanding Preferred Securities
issued by the Issuer.

      "Officers'  Certificate" means a certificate  signed by the Chairman,  the
President,  any Vice  President,  the Treasurer,  any Assistant  Treasurer,  the
Secretary or any Assistant Secretary of the Guarantor.

      "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association,  joint-stock company, trust, unincorporated
organization,  government or any agency or political  subdivision thereof or any
other entity.

      "Responsible  Officer" means, with respect to the Guarantee  Trustee,  any
Vice  President,  any Assistant Vice  President,  any Trust Officer or Assistant
Trust  Officer or any other  officer of the  Corporate  Trust  Department of the
Guarantee Trustee customarily performing functions similar to those performed by
any of  the  above  designated  officers  and  also  means,  with  respect  to a
particular  corporate  trust  matter,  any other  officer to whom such matter is
referred  because  of that  officer's  knowledge  of and  familiarity  with  the
particular subject.

      "Senior   Indebtedness"  means  Senior  Indebtedness  as  defined  in  the
Indenture.

      "Successor   Guarantee  Trustee"  means  a  successor   Guarantee  Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.01.

      "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed;  provided,  however,  that in
the event the Trust  Indenture  Act of 1939 is amended  after such date,  "Trust
Indenture Act" means, to the extent  required by any such  amendment,  the Trust
Indenture Act of 1939, as so amended.

                                   ARTICLE II

                               TRUST INDENTURE ACT

      SECTION 2.01. Trust Indenture Act; Application.

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

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

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      SECTION 2.02. List of Holders.

            (a) The  Guarantor  shall  furnish or cause to be  furnished  to the
      Guarantee Trustee (a) semiannually, on or before January 15 and July 15 of
      each year, a list,  in such form as the Guarantee  Trustee may  reasonably
      require,  of the names and addresses of the Holders ("List of Holders") as
      of a date not more than 15 days prior to the delivery thereof,  and (b) at
      such other times as the Guarantee  Trustee may request in writing,  within
      30 days after the receipt by the Guarantor of any such request,  a List of
      Holders  as of a date not more than 15 days prior to the time such list is
      furnished,  in  each  case  to  the  extent  such  information  is in  the
      possession  or  control  of  the  Guarantor  and  is  not  identical  to a
      previously  supplied List of Holders or has not otherwise been received by
      the Guarantee  Trustee in its capacity as such. The Guarantee  Trustee may
      destroy  any List of  Holders  previously  given to it on receipt of a new
      List of Holders.

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

      SECTION 2.03. Reports by the Guarantee  Trustee.  Within 60 days after May
31 of each year, the Guarantee Trustee shall provide to the Holders such reports
as are required by Section 313 of the Trust  Indenture  Act, if any, in the form
and in the  manner  provided  by Section  313 of the Trust  Indenture  Act.  The
Guarantee  Trustee shall also comply with the  requirements of Section 313(d) of
the Trust Indenture Act.

      SECTION 2.04.  Periodic Reports to Guarantee Trustee.  The Guarantor shall
provide to the Guarantee Trustee, the Securities and Exchange Commission and the
Holders such documents,  reports and information, if any, as required by Section
314 of the  Trust  Indenture  Act and the  compliance  certificate  required  by
Section 314 of the Trust  Indenture  Act in the form and manner and at the times
required by Section 314 of the Trust Indenture Act.

      SECTION  2.05.  Evidence of  Compliance  with  Conditions  Precedent.  The
Guarantor  shall  provide to the  Guarantee  Trustee such evidence of compliance
with such conditions precedent, if any, provided for in this Guarantee Agreement
that  relate  to any of the  matters  set forth in  Section  314(c) of the Trust
Indenture Act. Each Officers'  Certificate and Opinion of Counsel delivered with
respect  to  compliance  with a  condition  or  covenant  provided  for in  this
Guarantee Agreement shall include:

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

            (b) a brief  statement of the nature and scope of the examination or
      investigation  undertaken  by each  officer  in  rendering  the  Officers'
      Certificate or Opinion of Counsel and upon which the statements  contained
      therein are based;

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

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

      SECTION  2.06.  Events of  Default;  Waiver.  The Holders of a Majority in
liquidation  amount of the Preferred  Securities  may, by vote, on behalf of the
Holders, waive any past Event of Default and its consequences. Upon such waiver,
any such Event of Default shall cease to exist, and any Event of Default arising
therefrom  shall be  deemed  to have  been  cured,  for  every  purpose  of this
Guarantee Agreement,  but no such waiver shall extend to any subsequent or other
default or event of Default or impair any right consequent therefrom.

      SECTION 2.07. Event of Default; Notice.

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

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

                                   ARTICLE III

                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

      SECTION 3.01. Powers and Duties of the Guarantee Trustee.

            (a) This Guarantee  Agreement shall be held by the Guarantee Trustee
      for the  benefit  of the  Holders,  and the  Guarantee  Trustee  shall not
      transfer this Guarantee Agreement to any Person except a Holder exercising
      his  or her  rights  pursuant  to  Section  5.04  (iv)  or to a  Successor
      Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its
      appointment to act as Successor  Guarantee  Trustee.  The right, title and
      interest  of  the  Guarantee  Trustee  shall  automatically  vest  in  any
      Successor

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<PAGE>

      Guarantee  Trustee upon acceptance by such Successor  Guarantee Trustee of
      its appointment hereunder and such vesting and cessation of title shall be
      effective  whether or not  conveyancing  documents  have been executed and
      delivered pursuant to the appointment of such Successor Guarantee Trustee.

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

            (c) The  Guarantee  Trustee,  before the  occurrence of any Event of
      Default  and after  the  curing of all  Events  of  Default  that may have
      occurred,  shall undertake to perform only such duties as are specifically
      set forth in this Guarantee  Agreement,  and no implied covenants shall be
      read into this Guarantee  Agreement against the Guarantee Trustee. In case
      an Event of Default has occurred and is continuing (and has not been cured
      or waived pursuant to Section 2.06), the Guarantee  Trustee shall exercise
      such of the rights and powers  vested in it by this  Guarantee  Agreement,
      and use the same degree of care and skill in its  exercise  thereof,  as a
      prudent  person  would  exercise  or use in the  conduct of his or her own
      affairs.

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

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

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

                        (B) in the  absence  of bad  faith  on the  part  of the
                  Guarantee  Trustee,  the  Guarantee  Trustee may  conclusively
                  rely, as to the truth of the statements and the correctness of
                  the  opinions  expressed  therein,  upon any  certificates  or
                  opinions  furnished to the Guarantee Trustee and conforming to
                  the requirements of this Guarantee Agreement;  but in the case
                  of any such  certificates  or opinions  that by any  provision
                  hereof or of the Trust Indenture Act are specifically required
                  to be  furnished  to  the  Guarantee  Trustee,  the  Guarantee
                  Trustee shall be under a duty to examine the same to determine
                  whether  or not  they  conform  to the  requirements  of  this
                  Guarantee Agreement;

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

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<PAGE>

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

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

      SECTION 3.02. Certain Rights of Guarantee Trustee.

            (a) Subject to the provisions of Section 3.01:

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

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

                  (iii)  Whenever,  in  the  administration  of  this  Guarantee
            Agreement,  the  Guarantee  Trustee  shall deem it desirable  that a
            matter be proved or established before taking, suffering or omitting
            to take any action  hereunder,  the Guarantee  Trustee (unless other
            evidence is herein  specifically  prescribed) may, in the absence of
            bad  faith  on  its  part,   request  and  rely  upon  an  Officers'
            Certificate  which,  upon receipt of such request from the Guarantee
            Trustee, shall be promptly delivered by the Guarantor.

                  (iv) The Guarantee Trustee may consult with legal counsel, and
            the  written  advice or  Opinion of  Counsel  with  respect to legal
            matters shall be full and complete  authorization  and protection in
            respect of any action  taken,  suffered or omitted to be taken by it
            hereunder  in good  faith  and in  accordance  with  such  advice or
            opinion. Such legal counsel may be legal counsel to the Guarantor or
            any of its Affiliates and may be one of its employees. The Guarantee
            Trustee

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<PAGE>

            shall have the right at any time to seek instructions concerning the
            administration  of  this  Guarantee  Agreement  from  any  court  of
            competent jurisdiction.

                  (v) The  Guarantee  Trustee  shall be under no  obligation  to
            exercise any of the rights or powers vested in it by this  Guarantee
            Agreement  at the request or  direction  of any Holder,  unless such
            Holder shall have provided to the Guarantee  Trustee such reasonable
            indemnity as would  satisfy a  reasonable  person in the position of
            the  Guarantee  Trustee,  against  the  costs,  expenses  (including
            attorneys' fees and expenses) and liabilities that might be incurred
            by it in complying  with such request or direction;  provided  that,
            nothing  contained  in this  Section  3.02(a)(v)  shall  be taken to
            relieve the Guarantee  Trustee,  upon the  occurrence of an Event of
            Default,  of its litigation to exercise the rights and powers vested
            in it by this Guarantee Agreement.

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

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

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

            (b) No  provision  of this  Guarantee  Agreement  shall be deemed to
      impose any duty or obligation on the Guarantee  Trustee to perform any act
      or acts or exercise  any right,  power,  duty or  obligation  conferred or
      imposed  on it in any  jurisdiction  in which it shall be  illegal,  or in
      which  the  Guarantee  Trustee  shall be  unqualified  or  incompetent  in
      accordance  with  applicable  law,  to perform  any such act or acts or to
      exercise any such right, power, duty or obligation. No permissive power or
      authority  available to the  Guarantee  Trustee shall be construed to be a
      duty to act in accordance with such power and authority.

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<PAGE>

      SECTION 3.03.  Indemnity.  The Guarantor agrees to indemnify the Guarantee
Trustee for,  and to hold it harmless  against,  any loss,  liability or expense
incurred without  negligence or willful  misconduct on the part of the Guarantee
Trustee,  arising out of or in connection with the acceptance or  administration
of this  Guarantee  Agreement,  including  the costs and  expenses of  defending
itself  against  any claim or  liability  in  connection  with the  exercise  or
performance of any of its powers or duties hereunder. The Guarantee Trustee will
not claim or exact any lien or charge on any  Guarantee  Payments as a result of
any amount due to it under this Guarantee Agreement.

                                   ARTICLE IV

                                GUARANTEE TRUSTEE

      SECTION 4.01. Guarantee Trustee; Eligibility.

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

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

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

            (b) If at any time the Guarantee  Trustee shall cease to be eligible
      to so act under Section 4.01(a),  the Guarantee  Trustee shall immediately
      resign in the manner and with the effect set out in Section 4.02(c).

            (c) If the Guarantee  Trustee has or shall acquire any  "conflicting
      interest" within the meaning of Section 310(b) of the Trust Indenture Act,
      the Guarantee  Trustee and Guarantor shall in all respects comply with the
      provisions of Section  310(b) of the Trust  Indenture  Act. In determining
      whether the  Guarantee  Trustee has a  "conflicting  interest"  within the
      meaning of Section  310(b)(1) of the Trust  Indenture  Act, the provisions
      contained in the proviso to Section  310(b)(1) of the Trust  Indenture Act
      and the Guarantee  Trustee's Statement of Eligibility on Form T-1 shall be
      deemed incorporated herein.

                                       9
<PAGE>

      SECTION  4.02.  Appointment,  Removal  and  Resignation  of the  Guarantee
Trustee.

            (a)  Subject  to  Section  4.02(b),  the  Guarantee  Trustee  may be
      appointed or removed without cause at any time by the Guarantor.

            (b) The Guarantee Trustee shall not be removed until a new, eligible
      guarantee trustee has been appointed (a "Successor Guarantee Trustee") and
      has  accepted  such  appointment  and assumed the  applicable  obligations
      hereunder  by written  instrument  executed  by such  Successor  Guarantee
      Trustee and delivered to the Guarantor.

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

            (d) If no Successor  Guarantee Trustee shall have been appointed and
      accepted appointment as provided in this Section 4.02 within 60 days after
      delivery to the Guarantor of an instrument of  resignation,  the resigning
      Guarantee Trustee may petition, at the expense of the Guarantor, any court
      of  competent  jurisdiction  for  appointment  of  a  Successor  Guarantee
      Trustee. Such court may thereupon,  after prescribing such notice, if any,
      as it may deem proper, appoint a Successor Guarantee Trustee.

                                    ARTICLE V

                                    GUARANTEE

      SECTION 5.01.  Guarantee.  The Guarantor  irrevocably and  unconditionally
agrees to pay in full to the Holders of the Outstanding Preferred Securities the
Guarantee  Payments  (without  duplication of amounts  theretofore paid by or on
behalf  of the  Issuer  pursuant  to the  Trust  Agreement  or by the  Guarantor
pursuant to the Indenture), as and when due, regardless of any defense, right of
set-off or  counterclaim  which the Issuer may have or assert.  The  Guarantor's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Guarantor to the Holders or by causing the Issuer to pay
such amounts to the Holders.

      SECTION 5.02.  Waiver of Notice and Demand.  The  Guarantor  hereby waives
notice of acceptance of the Guarantee Agreement and of any liability to which it
applies or may apply,  presentment,  demand for payment,  any right to require a
proceeding first against the Guarantee  Trustee,  the Issuer or any other Person
before proceeding against the Guarantor,  protest, notice of nonpayment,  notice
of dishonor, notice of redemption and all other notices and demands.

                                       10
<PAGE>

      SECTION  5.03.  Obligations  Not  Affected.  The  obligations,  covenants,
agreements and duties of the Guarantor  under this Guarantee  Agreement shall in
no way be affected or impaired by reason of the  happening  from time to time of
any of the following:

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

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

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

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

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

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

            (g)  to  the  extent  permitted  by  law,  any  other   circumstance
      whatsoever that might otherwise  constitute a legal or equitable discharge
      or defense of a  guarantor,  it being the intent of this Section 5.03 that
      the  obligations  of  the  Guarantor   hereunder  shall  be  absolute  and
      unconditional under any and all circumstances.

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

      SECTION  5.04.  Rights of Holders.  The Guarantor  expressly  acknowledges
that: (i) this Guarantee  Agreement will be deposited with the Guarantee Trustee
to be held for the benefit of the Holders;  (ii) the  Guarantee  Trustee has the
right to enforce this  Guarantee  Agreement on behalf of the Holders;  (iii) the
Holders of a Majority in liquidation amount of the Preferred Securities have the
right to direct the time,  method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of this Guarantee Agreement
or exercise  or direct the  exercise  of any trust or power  conferred  upon the
Guarantee  Trustee  under

                                       11
<PAGE>

this  Guarantee  Agreement;  and (iv) if the  Guarantee  Trustee  has  failed to
enforce this Guarantee  Agreement as above provided,  any Holder may institute a
legal proceeding directly against the Guarantor to enforce its rights under this
Guarantee  Agreement,  without first instituting a legal proceeding  against the
Guarantee Trustee, the Issuer or any other Person.

      SECTION 5.05.  Guarantee of Payment.  This Guarantee  Agreement  creates a
guarantee of payment and not of collection. This Guarantee Agreement will not be
discharged  except  by  payment  of the  Guarantee  Payments  in  full  (without
duplication of amounts  theretofore paid by the Issuer) or upon  distribution of
Debentures to Holders as provided in the Trust Agreement.

      SECTION 5.06.  Subrogation.  The Guarantor  shall be subrogated to all (if
any) rights of the Holders  against the Issuer in respect of any amounts paid to
the Holders by the Guarantor  under this Guarantee  Agreement and shall have the
right to waive  payment  by the  Issuer  pursuant  to  Section  5.01;  provided,
however,  that the  Guarantor  shall  not  (except  to the  extent  required  by
mandatory provisions of law) be entitled to enforce or exercise any rights which
it may acquire by way of subrogation or any  indemnity,  reimbursement  or other
agreement,  in all cases as a result of payment under this Guarantee  Agreement,
if, at the time of any such  payment,  any amounts are due and unpaid under this
Guarantee  Agreement.  If any amount shall be paid to the Guarantor in violation
of the preceding sentence, the Guarantor agrees to hold such amount in trust for
the Holders and to pay over such amount to the Holders.

      SECTION 5.07. Independent Obligations. The Guarantor acknowledges that its
obligations  hereunder are  independent  of the  obligations  of the Issuer with
respect to the Preferred  Securities  and that the Guarantor  shall be liable as
principal and as debtor  hereunder to make  Guarantee  Payments  pursuant to the
terms of this Guarantee  Agreement  notwithstanding  the occurrence of any event
referred to in subsections (a) through (g),inclusive, of Section 5.03 hereof.

                                   ARTICLE VI

                           COVENANTS AND SUBORDINATION

      SECTION 6.01.  Subordination.  This Guarantee Agreement will constitute an
unsecured  obligation of the Guarantor and will rank  subordinate  and junior in
right of payment to all general liabilities of the Guarantor.

                                   ARTICLE VII

                                   TERMINATION

      SECTION 7.01. Termination. This Guarantee Agreement shall terminate and be
of no  further  force and  effect  upon (i) full  payment  by the  Issuer or the
Guarantor,  as the  case  may be,  of the  Redemption  Price  for all  Preferred
Securities, (ii) the distribution of the Debentures to the Holders in accordance
with Article VIII of the Trust Agreement upon liquidation of the Issuer or

                                       12
<PAGE>

(iii) full  payment by the Issuer or the  Guarantor,  as the case may be, of the
amounts payable in accordance  with the Trust Agreement upon  liquidation of the
Issuer. Notwithstanding the foregoing, this Guarantee Agreement will continue to
be  effective  or will be  reinstated,  as the case  may be,  if at any time any
Holder  must  restore  payment  of any  sums  paid  with  respect  to  Preferred
Securities or this Guarantee Agreement.

                                  ARTICLE VIII

                                  MISCELLANEOUS

      SECTION  8.01.  Successors  and Assigns.  All  guarantees  and  agreements
contained  in this  Guarantee  Agreement  shall  bind the  successors,  assigns,
receivers,  trustees and representatives of the Guarantor and shall inure to the
benefit  of the  Holders  of the  Preferred  Securities  then  outstanding.  The
Guarantor  may not  consolidate  with or merge  with or into,  or sell,  convey,
transfer or lease its properties and assets as an entirety or  substantially  as
an entirety  (either in one  transaction  or a series of  transactions)  to, any
Person unless permitted under Article Five of the Indenture.  In connection with
a consolidation,  merger or sale involving the Guarantor that is permitted under
Article  Five  of  the  Indenture  the  Person  formed  by  or  surviving   such
consolidation  or merger or to which such sale,  conveyance,  transfer  or lease
shall have been made, if other than the Guarantor, shall expressly assume all of
the obligations of the Guarantor hereunder and under the Trust Agreement.

      SECTION 8.02. Amendments.  Except with respect to any changes which do not
adversely  affect the rights of the  Holders in any  material  respect (in which
case no consent of the Holders will be required),  this Guarantee  Agreement may
only be  amended  with the  prior  approval  of the  Holders  of a  Majority  in
liquidation  amount  of  the  Preferred  Securities   (excluding  any  Preferred
Securities  held by the Guarantor or an affiliate  thereof).  The  provisions of
Article VI of the Trust Agreement concerning meetings of the Holders shall apply
to the giving of such approval.

      SECTION 8.03. Notices. Any notice, request or other communication required
or permitted to be given hereunder shall be in writing and delivered, telecopied
or mailed by first class mail, postage prepaid, as follows:

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

            Public Service Electric and Gas Company
            80 Park Plaza
            P.O. Box 570
            Newark, NJ  07101
            Facsimile No:
            Attention:  Treasurer

                                       13
<PAGE>

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

            PSE&G Capital Trust VI
            80 Park Plaza
            Newark, NJ  07101
            Facsimile No:
            Attention:  Treasurer

            with a copy to:

            Wachovia Bank, National Association
            21 South Street
            Morristown, NJ  07960
            Facsimile No:
            Attention:  Corporate Trust Department

            (c) if  given  to  any  Holder,  at the  address  set  forth  in the
      Securities Register.

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

      SECTION 8.04. Benefit.  This Guarantee Agreement is solely for the benefit
of the Holders and is not separately transferable from the Preferred Securities.

      SECTION 8.05.  Interpretation.  In this  Guarantee  Agreement,  unless the
context otherwise requires:

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

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

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

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

                                       14
<PAGE>

                  (e) the  masculine,  feminine  or neuter  genders  used herein
         shall include the masculine, feminine and neuter genders.

      SECTION 8.06. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND  INTERPRETED  IN ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW
JERSEY AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW JERSEY
WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

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

                                       15
<PAGE>

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

                                   PUBLIC SERVICE ELECTRIC AND GAS COMPANY,
                                   as Guarantor

                                   By: ______________________________________
                                           Name:
                                           Title:

                                   WACHOVIA BANK, NATIONAL  ASSOCIATION,
                                   as Guarantee Trustee

                                   By: ______________________________________
                                           Name:
                                           Title:

                                       16Exhibit 4-118

================================================================================

                               Guarantee Agreement

                                     between

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                 (as Guarantor)

                                       and

                       WACHOVIA BANK, NATIONAL ASSOCIATION
                             (as Guarantee Trustee)

                                   Dated as of

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

================================================================================

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                    ARTICLE I
                                   DEFINITIONS

SECTION 1.01.  Definitions.....................................................1

                                   ARTICLE II
                               TRUST INDENTURE ACT

SECTION 2.01.  Trust Indenture Act; Application................................3
SECTION 2.02.  List of Holders ................................................4
SECTION 2.03.  Reports by the Guarantee Trustee................................4
SECTION 2.04.  Periodic Reports to Guarantee Trustee...........................4
SECTION 2.05.  Evidence of Compliance with Conditions Precedent ...............4
SECTION 2.06.  Events of Default; Waiver ......................................5
SECTION 2.07.  Event of Default; Notice .......................................5

                                   ARTICLE III
                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

SECTION 3.01.  Powers and Duties of the Guarantee Trustee .....................5
SECTION 3.02.  Certain Rights of Guarantee Trustee.............................7
SECTION 3.03.  Indemnity.......................................................9

                                   ARTICLE IV
                                GUARANTEE TRUSTEE

SECTION 4.01.  Guarantee Trustee; Eligibility..................................9
SECTION 4.02.  Appointment, Removal and Resignation of the Guarantee Trustee..10

                                    ARTICLE V
                                    GUARANTEE

SECTION 5.01.  Guarantee......................................................10
SECTION 5.02.  Waiver of Notice and Demand....................................10
SECTION 5.03.  Obligations Not Affected.......................................11
SECTION 5.04.  Rights of Holders..............................................11

                                       i

<PAGE>

                                                                            Page
                                                                            ----

SECTION 5.05.  Guarantee of Payment...........................................12
SECTION 5.06.  Subrogation....................................................12
SECTION 5.07.  Independent Obligations........................................12

                                   ARTICLE VI
                           COVENANTS AND SUBORDINATION

SECTION 6.01.  Subordination..................................................12

                                   ARTICLE VII
                                   TERMINATION

SECTION 7.01.  Termination....................................................12

                                  ARTICLE VIII
                                  MISCELLANEOUS

SECTION 8.01.  Successors and Assigns.........................................13
SECTION 8.02.  Amendments.....................................................13
SECTION 8.03.  Notices........................................................13
SECTION 8.04.  Benefit........................................................14
SECTION 8.05.  Interpretation.................................................14
SECTION 8.06.  Governing Law..................................................15

                                       ii

<PAGE>

                             CROSS-REFERENCE TABLE*

Section of                                                            Section of
Trust Indenture Act                                                    Guarantee
of 1939, as amended                                                    Agreement
-------------------                                                   ----------

310(a)  .................................................................4.01(a)
310(b)  ...........................................................4.01(c), 2.08
310(c)  ............................................................Inapplicable
311(a)  .................................................................2.02(b)
311(b)  .................................................................2.02(b)
311(c)  ............................................................Inapplicable
312(a)  .................................................................2.02(a)
312(b)  .................................................................2.02(b)
313     ....................................................................2.03
314(a)  ....................................................................2.04
314(b)  ............................................................Inapplicable
314(c)  ....................................................................2.05
314(d)  ............................................................Inapplicable
314(e)  ....................................................... 1.01, 2.05, 3.02
314(f)  ..............................................................2.01, 3.02
315(a)  .................................................................3.01(d)
315(b)  ....................................................................2.07
315(c)  ....................................................................3.01
315(d)  .................................................................3.01(d)
316(a)  ....................................................... 1.01, 2.06, 5.04
316(b)  ....................................................................5.03
316(c)  ....................................................................8.02
317(a)  ............................................................Inapplicable
317(b)  ............................................................Inapplicable
318(a)  .................................................................2.01(b)
318(b)  ....................................................................2.01
318(c)  .................................................................2.01(a)

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

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

                                      iii

<PAGE>

                               GUARANTEE AGREEMENT

      This GUARANTEE  AGREEMENT,  dated as of  _______________,  is executed and
delivered by Public Service Electric and Gas Company,  a New Jersey  corporation
(the "Guarantor"),  to Wachovia Bank, National  Association,  a national banking
association  duly  organized and existing under the laws of the United States of
America,  as trustee (the "Guarantee  Trustee"),  for the benefit of the Holders
(as defined  herein) from time to time of the Preferred  Securities  (as defined
herein) of PSE&G Capital Trust VII, a Delaware statutory trust (the "Issuer").

      WHEREAS,  pursuant to an Amended and Restated  Trust  Agreement  for PSE&G
Capital Trust VII (the "Trust Agreement"),  dated as of _________________  among
the Trustees named therein,  the Guarantor,  as Depositor,  and the Holders from
time to time of undivided  beneficial interests in the assets of the Issuer, the
Issuer  is  issuing  $________  aggregate   liquidation  amount  of  its  _____%
Cumulative Quarterly Income Preferred Securities,  Series __ (liquidation amount
of  $__  per  preferred  security)  (the  "Preferred  Securities")  representing
undivided  beneficial interests in the assets of the Issuer and having the terms
set forth in the Trust Agreement;

      WHEREAS,  the  Preferred  Securities  will be issued by the Issuer and the
proceeds thereof,  together with the proceeds from the sale by the Issuer of its
Common  Securities  will be used to purchase the  Debentures  (as defined in the
Trust  Agreement) of the Guarantor  which will be deposited  with Wachovia Bank,
National  Association,  as Property Trustee under the Trust Agreement,  as Trust
Property (as defined in the Trust Agreement); and

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

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

                                    ARTICLE I

                                   DEFINITIONS

      SECTION 1.01.  Definitions.  As used in this Guarantee Agreement,  each of
the terms set forth below shall, unless the context otherwise requires, have the
following  meaning.  Each  capitalized  or  otherwise  defined term used but not
otherwise  defined  herein shall have the meaning  assigned to such terms in the
Trust Agreement as in effect on the date hereof.

      "Affiliate"  of any  specified  Person means any other Person  directly or
indirectly  controlling  or  controlled  by or under  direct or indirect  common
control  with  such  specified

<PAGE>

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

      "Common Securities" means the securities representing undivided beneficial
interests in the assets of the Issuer and having the rights provided therefor in
the Trust Agreement.

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

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

      "Guarantee  Trustee" means Wachovia Bank,  National  Association,  until a
Successor  Guarantee  Trustee  (as  defined  below) has been  appointed  and has
accepted such appointment  pursuant to the terms of this Guarantee Agreement and
thereafter means each such Successor Guarantee Trustee.

      "Holder"  means a Person in whose name a Preferred  Security is registered
in the Securities Register;  provided,  however, that in determining whether the
holders of the  requisite  percentage  of  Preferred  Securities  have given any
request, notice, consent or waiver hereunder,

      "Holder"  shall not include the  Guarantor,  the Guarantee  Trustee or any
Affiliate of the Guarantor or the Guarantee Trustee.

      "Indenture"  means the Indenture dated as of ____________,  between Public
Service  Electric and Gas Company and Wachovia Bank,  National  Association,  as
trustee thereunder.

      "List of Holders" has the meaning specified in Section 2.02(a).

                                       2
<PAGE>

      "Majority in liquidation amount of the Preferred Securities" means, except
as provided by the Trust Indenture Act, a vote by the Holders,  of more than 50%
of the aggregate liquidation amount of all then outstanding Preferred Securities
issued by the Issuer.

      "Officers'  Certificate" means a certificate  signed by the Chairman,  the
President,  any Vice  President,  the Treasurer,  any Assistant  Treasurer,  the
Secretary or any Assistant Secretary of the Guarantor.

      "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association,  joint-stock company, trust, unincorporated
organization,  government or any agency or political  subdivision thereof or any
other entity.

      "Responsible  Officer" means, with respect to the Guarantee  Trustee,  any
Vice  President,  any Assistant Vice  President,  any Trust Officer or Assistant
Trust  Officer or any other  officer of the  Corporate  Trust  Department of the
Guarantee Trustee customarily performing functions similar to those performed by
any of  the  above  designated  officers  and  also  means,  with  respect  to a
particular  corporate  trust  matter,  any other  officer to whom such matter is
referred  because  of that  officer's  knowledge  of and  familiarity  with  the
particular subject.

      "Senior   Indebtedness"  means  Senior  Indebtedness  as  defined  in  the
Indenture.

      "Successor   Guarantee  Trustee"  means  a  successor   Guarantee  Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.01.

      "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed;  provided,  however,  that in
the event the Trust  Indenture  Act of 1939 is amended  after such date,  "Trust
Indenture Act" means, to the extent  required by any such  amendment,  the Trust
Indenture Act of 1939, as so amended.

                                   ARTICLE II

                               TRUST INDENTURE ACT

      SECTION 2.01. Trust Indenture Act; Application.

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

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

                                       3
<PAGE>

      SECTION 2.02. List of Holders.

            (a) The  Guarantor  shall  furnish or cause to be  furnished  to the
      Guarantee Trustee (a) semiannually, on or before January 15 and July 15 of
      each year, a list,  in such form as the Guarantee  Trustee may  reasonably
      require,  of the names and addresses of the Holders ("List of Holders") as
      of a date not more than 15 days prior to the delivery thereof,  and (b) at
      such other times as the Guarantee  Trustee may request in writing,  within
      30 days after the receipt by the Guarantor of any such request,  a List of
      Holders  as of a date not more than 15 days prior to the time such list is
      furnished,  in  each  case  to  the  extent  such  information  is in  the
      possession  or  control  of  the  Guarantor  and  is  not  identical  to a
      previously  supplied List of Holders or has not otherwise been received by
      the Guarantee  Trustee in its capacity as such. The Guarantee  Trustee may
      destroy  any List of  Holders  previously  given to it on receipt of a new
      List of Holders.

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

      SECTION 2.03. Reports by the Guarantee  Trustee.  Within 60 days after May
31 of each year, the Guarantee Trustee shall provide to the Holders such reports
as are required by Section 313 of the Trust  Indenture  Act, if any, in the form
and in the  manner  provided  by Section  313 of the Trust  Indenture  Act.  The
Guarantee  Trustee shall also comply with the  requirements of Section 313(d) of
the Trust Indenture Act.

      SECTION 2.04.  Periodic Reports to Guarantee Trustee.  The Guarantor shall
provide to the Guarantee Trustee, the Securities and Exchange Commission and the
Holders such documents,  reports and information, if any, as required by Section
314 of the  Trust  Indenture  Act and the  compliance  certificate  required  by
Section 314 of the Trust  Indenture  Act in the form and manner and at the times
required by Section 314 of the Trust Indenture Act.

      SECTION  2.05.  Evidence of  Compliance  with  Conditions  Precedent.  The
Guarantor  shall  provide to the  Guarantee  Trustee such evidence of compliance
with such conditions precedent, if any, provided for in this Guarantee Agreement
that  relate  to any of the  matters  set forth in  Section  314(c) of the Trust
Indenture Act. Each Officers'  Certificate and Opinion of Counsel delivered with
respect  to  compliance  with a  condition  or  covenant  provided  for in  this
Guarantee Agreement shall include:

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

            (b) a brief  statement of the nature and scope of the examination or
      investigation  undertaken  by each  officer  in  rendering  the  Officers'
      Certificate or Opinion of Counsel and upon which the statements  contained
      therein are based;

                                       4
<PAGE>

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

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

      SECTION  2.06.  Events of  Default;  Waiver.  The Holders of a Majority in
liquidation  amount of the Preferred  Securities  may, by vote, on behalf of the
Holders, waive any past Event of Default and its consequences. Upon such waiver,
any such Event of Default shall cease to exist, and any Event of Default arising
therefrom  shall be  deemed  to have  been  cured,  for  every  purpose  of this
Guarantee Agreement,  but no such waiver shall extend to any subsequent or other
default or event of Default or impair any right consequent therefrom.

      SECTION 2.07. Event of Default; Notice.

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

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

                                   ARTICLE III

                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

      SECTION 3.01. Powers and Duties of the Guarantee Trustee.

            (a) This Guarantee  Agreement shall be held by the Guarantee Trustee
      for the  benefit  of the  Holders,  and the  Guarantee  Trustee  shall not
      transfer this Guarantee Agreement to any Person except a Holder exercising
      his  or her  rights  pursuant  to  Section  5.04  (iv)  or to a  Successor
      Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its
      appointment to act as Successor  Guarantee  Trustee.  The right, title and
      interest  of  the  Guarantee  Trustee  shall  automatically  vest  in  any
      Successor

                                       5
<PAGE>

      Guarantee  Trustee upon acceptance by such Successor  Guarantee Trustee of
      its appointment hereunder and such vesting and cessation of title shall be
      effective  whether or not  conveyancing  documents  have been executed and
      delivered pursuant to the appointment of such Successor Guarantee Trustee.

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

            (c) The  Guarantee  Trustee,  before the  occurrence of any Event of
      Default  and after  the  curing of all  Events  of  Default  that may have
      occurred,  shall undertake to perform only such duties as are specifically
      set forth in this Guarantee  Agreement,  and no implied covenants shall be
      read into this Guarantee  Agreement against the Guarantee Trustee. In case
      an Event of Default has occurred and is continuing (and has not been cured
      or waived pursuant to Section 2.06), the Guarantee  Trustee shall exercise
      such of the rights and powers  vested in it by this  Guarantee  Agreement,
      and use the same degree of care and skill in its  exercise  thereof,  as a
      prudent  person  would  exercise  or use in the  conduct of his or her own
      affairs.

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

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

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

                        (B) in the  absence  of bad  faith  on the  part  of the
                  Guarantee  Trustee,  the  Guarantee  Trustee may  conclusively
                  rely, as to the truth of the statements and the correctness of
                  the  opinions  expressed  therein,  upon any  certificates  or
                  opinions  furnished to the Guarantee Trustee and conforming to
                  the requirements of this Guarantee Agreement;  but in the case
                  of any such  certificates  or opinions  that by any  provision
                  hereof or of the Trust Indenture Act are specifically required
                  to be  furnished  to  the  Guarantee  Trustee,  the  Guarantee
                  Trustee shall be under a duty to examine the same to determine
                  whether  or not  they  conform  to the  requirements  of  this
                  Guarantee Agreement;

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

                                       6
<PAGE>

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

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

      SECTION 3.02. Certain Rights of Guarantee Trustee.

            a) Subject to the provisions of Section 3.01:

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

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

                  (iii)  Whenever,  in  the  administration  of  this  Guarantee
            Agreement,  the  Guarantee  Trustee  shall deem it desirable  that a
            matter be proved or established before taking, suffering or omitting
            to take any action  hereunder,  the Guarantee  Trustee (unless other
            evidence is herein  specifically  prescribed) may, in the absence of
            bad  faith  on  its  part,   request  and  rely  upon  an  Officers'
            Certificate  which,  upon receipt of such request from the Guarantee
            Trustee, shall be promptly delivered by the Guarantor.

                  (iv) The Guarantee Trustee may consult with legal counsel, and
            the  written  advice or  Opinion of  Counsel  with  respect to legal
            matters shall be full and complete  authorization  and protection in
            respect of any action  taken,  suffered or omitted to be taken by it
            hereunder  in good  faith  and in  accordance  with  such  advice or
            opinion. Such legal counsel may be legal counsel to the Guarantor or
            any of its Affiliates and may be one of its employees. The Guarantee
            Trustee

                                       7
<PAGE>

            shall have the right at any time to seek instructions concerning the
            administration  of  this  Guarantee  Agreement  from  any  court  of
            competent jurisdiction.

                  (v) The  Guarantee  Trustee  shall be under no  obligation  to
            exercise any of the rights or powers vested in it by this  Guarantee
            Agreement  at the request or  direction  of any Holder,  unless such
            Holder shall have provided to the Guarantee  Trustee such reasonable
            indemnity as would  satisfy a  reasonable  person in the position of
            the  Guarantee  Trustee,  against  the  costs,  expenses  (including
            attorneys' fees and expenses) and liabilities that might be incurred
            by it in complying  with such request or direction;  provided  that,
            nothing  contained  in this  Section  3.02(a)(v)  shall  be taken to
            relieve the Guarantee  Trustee,  upon the  occurrence of an Event of
            Default,  of its litigation to exercise the rights and powers vested
            in it by this Guarantee Agreement.

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

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

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

            (b) No  provision  of this  Guarantee  Agreement  shall be deemed to
      impose any duty or obligation on the Guarantee  Trustee to perform any act
      or acts or exercise  any right,  power,  duty or  obligation  conferred or
      imposed  on it in any  jurisdiction  in which it shall be  illegal,  or in
      which  the  Guarantee  Trustee  shall be  unqualified  or  incompetent  in
      accordance  with  applicable  law,  to perform  any such act or acts or to
      exercise any such right, power, duty or obligation. No permissive power or
      authority  available to the  Guarantee  Trustee shall be construed to be a
      duty to act in accordance with such power and authority.

                                       8
<PAGE>

      SECTION 3.03.  Indemnity.  The Guarantor agrees to indemnify the Guarantee
Trustee for,  and to hold it harmless  against,  any loss,  liability or expense
incurred without  negligence or willful  misconduct on the part of the Guarantee
Trustee,  arising out of or in connection with the acceptance or  administration
of this  Guarantee  Agreement,  including  the costs and  expenses of  defending
itself  against  any claim or  liability  in  connection  with the  exercise  or
performance of any of its powers or duties hereunder. The Guarantee Trustee will
not claim or exact any lien or charge on any  Guarantee  Payments as a result of
any amount due to it under this Guarantee Agreement.

                                   ARTICLE IV

                                GUARANTEE TRUSTEE

      SECTION 4.01. Guarantee Trustee; Eligibility.

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

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

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

            (b) If at any time the Guarantee  Trustee shall cease to be eligible
      to so act under Section 4.01(a),  the Guarantee  Trustee shall immediately
      resign in the manner and with the effect set out in Section 4.02(c).

            (c) If the Guarantee  Trustee has or shall acquire any  "conflicting
      interest" within the meaning of Section 310(b) of the Trust Indenture Act,
      the Guarantee  Trustee and Guarantor shall in all respects comply with the
      provisions of Section  310(b) of the Trust  Indenture  Act. In determining
      whether the  Guarantee  Trustee has a  "conflicting  interest"  within the
      meaning of Section  310(b)(1) of the Trust  Indenture  Act, the provisions
      contained in the proviso to Section  310(b)(1) of the Trust  Indenture Act
      and the Guarantee  Trustee's Statement of Eligibility on Form T-1 shall be
      deemed incorporated herein.

                                       9
<PAGE>

      SECTION  4.02.  Appointment,  Removal  and  Resignation  of the  Guarantee
Trustee.

            (a)  Subject  to  Section  4.02(b),  the  Guarantee  Trustee  may be
      appointed or removed without cause at any time by the Guarantor.

            (b) The Guarantee Trustee shall not be removed until a new, eligible
      guarantee trustee has been appointed (a "Successor Guarantee Trustee") and
      has  accepted  such  appointment  and assumed the  applicable  obligations
      hereunder  by written  instrument  executed  by such  Successor  Guarantee
      Trustee and delivered to the Guarantor.

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

            (d) If no Successor  Guarantee Trustee shall have been appointed and
      accepted appointment as provided in this Section 4.02 within 60 days after
      delivery to the Guarantor of an instrument of  resignation,  the resigning
      Guarantee Trustee may petition, at the expense of the Guarantor, any court
      of  competent  jurisdiction  for  appointment  of  a  Successor  Guarantee
      Trustee. Such court may thereupon,  after prescribing such notice, if any,
      as it may deem proper, appoint a Successor Guarantee Trustee.

                                    ARTICLE V

                                    GUARANTEE

      SECTION 5.01.  Guarantee.  The Guarantor  irrevocably and  unconditionally
agrees to pay in full to the Holders of the Outstanding Preferred Securities the
Guarantee  Payments  (without  duplication of amounts  theretofore paid by or on
behalf  of the  Issuer  pursuant  to the  Trust  Agreement  or by the  Guarantor
pursuant to the Indenture), as and when due, regardless of any defense, right of
set-off or  counterclaim  which the Issuer may have or assert.  The  Guarantor's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Guarantor to the Holders or by causing the Issuer to pay
such amounts to the Holders.

      SECTION 5.02.  Waiver of Notice and Demand.  The  Guarantor  hereby waives
notice of acceptance of the Guarantee Agreement and of any liability to which it
applies or may apply,  presentment,  demand for payment,  any right to require a
proceeding first against the Guarantee  Trustee,  the Issuer or any other Person
before proceeding against the Guarantor,  protest, notice of nonpayment,  notice
of dishonor, notice of redemption and all other notices and demands.

                                       10
<PAGE>

      SECTION  5.03.  Obligations  Not  Affected.  The  obligations,  covenants,
agreements and duties of the Guarantor  under this Guarantee  Agreement shall in
no way be affected or impaired by reason of the  happening  from time to time of
any of the following:

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

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

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

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

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

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

            (g)  to  the  extent  permitted  by  law,  any  other   circumstance
      whatsoever that might otherwise  constitute a legal or equitable discharge
      or defense of a  guarantor,  it being the intent of this Section 5.03 that
      the  obligations  of  the  Guarantor   hereunder  shall  be  absolute  and
      unconditional under any and all circumstances.

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

      SECTION  5.04.  Rights of Holders.  The Guarantor  expressly  acknowledges
that: (i) this Guarantee  Agreement will be deposited with the Guarantee Trustee
to be held for the benefit of the Holders;  (ii) the  Guarantee  Trustee has the
right to enforce this  Guarantee  Agreement on behalf of the Holders;  (iii) the
Holders of a Majority in liquidation amount of the Preferred Securities have the
right to direct the time,  method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of this Guarantee Agreement
or exercise  or direct the  exercise  of any trust or power  conferred  upon the
Guarantee  Trustee  under

                                       11
<PAGE>

this  Guarantee  Agreement;  and (iv) if the  Guarantee  Trustee  has  failed to
enforce this Guarantee  Agreement as above provided,  any Holder may institute a
legal proceeding directly against the Guarantor to enforce its rights under this
Guarantee  Agreement,  without first instituting a legal proceeding  against the
Guarantee Trustee, the Issuer or any other Person.

      SECTION 5.05.  Guarantee of Payment.  This Guarantee  Agreement  creates a
guarantee of payment and not of collection. This Guarantee Agreement will not be
discharged  except  by  payment  of the  Guarantee  Payments  in  full  (without
duplication of amounts  theretofore paid by the Issuer) or upon  distribution of
Debentures to Holders as provided in the Trust Agreement.

      SECTION 5.06.  Subrogation.  The Guarantor  shall be subrogated to all (if
any) rights of the Holders  against the Issuer in respect of any amounts paid to
the Holders by the Guarantor  under this Guarantee  Agreement and shall have the
right to waive  payment  by the  Issuer  pursuant  to  Section  5.01;  provided,
however,  that the  Guarantor  shall  not  (except  to the  extent  required  by
mandatory provisions of law) be entitled to enforce or exercise any rights which
it may acquire by way of subrogation or any  indemnity,  reimbursement  or other
agreement,  in all cases as a result of payment under this Guarantee  Agreement,
if, at the time of any such  payment,  any amounts are due and unpaid under this
Guarantee  Agreement.  If any amount shall be paid to the Guarantor in violation
of the preceding sentence, the Guarantor agrees to hold such amount in trust for
the Holders and to pay over such amount to the Holders.

      SECTION 5.07. Independent Obligations. The Guarantor acknowledges that its
obligations  hereunder are  independent  of the  obligations  of the Issuer with
respect to the Preferred  Securities  and that the Guarantor  shall be liable as
principal and as debtor  hereunder to make  Guarantee  Payments  pursuant to the
terms of this Guarantee  Agreement  notwithstanding  the occurrence of any event
referred to in subsections (a) through (g), inclusive, of Section 5.03 hereof.

                                   ARTICLE VI

                           COVENANTS AND SUBORDINATION

      SECTION 6.01.  Subordination.  This Guarantee Agreement will constitute an
unsecured  obligation of the Guarantor and will rank  subordinate  and junior in
right of payment to all general liabilities of the Guarantor.

                                   ARTICLE VII

                                   TERMINATION

      SECTION 7.01. Termination. This Guarantee Agreement shall terminate and be
of no  further  force and  effect  upon (i) full  payment  by the  Issuer or the
Guarantor,  as the  case  may be,  of the  Redemption  Price  for all  Preferred
Securities, (ii) the distribution of the Debentures to the Holders in accordance
with Article VIII of the Trust Agreement upon liquidation of the Issuer or

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<PAGE>

(iii) full  payment by the Issuer or the  Guarantor,  as the case may be, of the
amounts payable in accordance  with the Trust Agreement upon  liquidation of the
Issuer. Notwithstanding the foregoing, this Guarantee Agreement will continue to
be  effective  or will be  reinstated,  as the case  may be,  if at any time any
Holder  must  restore  payment  of any  sums  paid  with  respect  to  Preferred
Securities or this Guarantee Agreement.

                                  ARTICLE VIII

                                  MISCELLANEOUS

      SECTION  8.01.  Successors  and Assigns.  All  guarantees  and  agreements
contained  in this  Guarantee  Agreement  shall  bind the  successors,  assigns,
receivers,  trustees and representatives of the Guarantor and shall inure to the
benefit  of the  Holders  of the  Preferred  Securities  then  outstanding.  The
Guarantor  may not  consolidate  with or merge  with or into,  or sell,  convey,
transfer or lease its properties and assets as an entirety or  substantially  as
an entirety  (either in one  transaction  or a series of  transactions)  to, any
Person unless permitted under Article Five of the Indenture.  In connection with
a consolidation,  merger or sale involving the Guarantor that is permitted under
Article  Five  of  the  Indenture  the  Person  formed  by  or  surviving   such
consolidation  or merger or to which such sale,  conveyance,  transfer  or lease
shall have been made, if other than the Guarantor, shall expressly assume all of
the obligations of the Guarantor hereunder and under the Trust Agreement.

      SECTION 8.02. Amendments.  Except with respect to any changes which do not
adversely  affect the rights of the  Holders in any  material  respect (in which
case no consent of the Holders will be required),  this Guarantee  Agreement may
only be  amended  with the  prior  approval  of the  Holders  of a  Majority  in
liquidation  amount  of  the  Preferred  Securities   (excluding  any  Preferred
Securities  held by the Guarantor or an affiliate  thereof).  The  provisions of
Article VI of the Trust Agreement concerning meetings of the Holders shall apply
to the giving of such approval.

      SECTION 8.03. Notices. Any notice, request or other communication required
or permitted to be given hereunder shall be in writing and delivered, telecopied
or mailed by first class mail, postage prepaid, as follows:

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

            Public Service Electric and Gas Company
            80 Park Plaza
            P.O. Box 570
            Newark, NJ  07101
            Facsimile No:
            Attention:  Treasurer

                                       13
<PAGE>

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

            PSE&G Capital Trust VII
            80 Park Plaza
            Newark, NJ  07101
            Facsimile No:
            Attention: Treasurer

            with a copy to:

            Wachovia Bank, National Association
            21 South Street
            Morristown, NJ  07960
            Facsimile No:
            Attention:  Corporate Trust Department

            (c) if  given  to  any  Holder,  at the  address  set  forth  in the
      Securities Register.

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

      SECTION 8.04. Benefit.  This Guarantee Agreement is solely for the benefit
of the Holders and is not separately transferable from the Preferred Securities.

      SECTION 8.05.  Interpretation.  In this  Guarantee  Agreement,  unless the
context otherwise requires:

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

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

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

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

                                       14
<PAGE>

            (e) the  masculine,  feminine or neuter  genders  used herein  shall
      include the masculine, feminine and neuter genders.

      SECTION 8.06. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND  INTERPRETED  IN ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW
JERSEY AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW JERSEY
WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

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

                                       15
<PAGE>

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

                                  PUBLIC SERVICE ELECTRIC AND GAS COMPANY,
                                  as Guarantor

                                  By: _____________________________________
                                        Name:
                                        Title:

                                  WACHOVIA BANK, NATIONAL  ASSOCIATION,
                                  as Guarantee Trustee

                                  By: _____________________________________
                                        Name:
                                        Title:

                                       16

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