Document:

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                                                                    EXHIBIT 10.3

                        ADMINISTRATIVE SERVICES AGREEMENT
                                     BETWEEN
                          EL PASO MERCHANT ENERGY L.P.
                                       AND
                             CEDAR BRAKES I, L.L.C.

                  This Administrative Services Agreement (this "Agreement") made
as of September 20, 2000 is entered into by and between El Paso Merchant Energy
L.P., a Delaware limited partnership ("Servicer" or "EPM"), and Cedar Brakes I,
L.L.C., a Delaware limited liability company ("Cedar Brakes") (Servicer and
Cedar Brakes are individually referred to as a "Party," and collectively as the
"Parties").

                  WHEREAS, Public Service Electric and Gas ("PSE&G") and Cedar
Brakes are parties to that certain Amended and Restated Power Purchase
Agreement, dated as of the same day as this Agreement whereby Cedar Brakes
agrees to deliver Energy and Capacity to PSE&G (the "Amended and Restated PPA");

                  WHEREAS, Cedar Brakes desires to engage Servicer to perform
all of the administrative and management functions to be performed by Cedar
Brakes under the Amended and Restated PPA and certain other agreements to which
Cedar Brakes is a party, as set forth herein;

                  NOW, THEREFORE, in consideration of the mutual obligations and
undertakings set forth herein, it is agreed as follows:

                                    ARTICLE 1

          EFFECTIVENESS, AMENDMENT OF CONTRACTS, AND TERM OF AGREEMENT

         1.1 Definitions. Unless otherwise specified, capitalized terms used
herein but not defined herein have the respective meanings assigned to such
terms in the Amended and Restated PPA. As used herein, "Business Day" shall mean
any day excluding Saturday, Sunday and any other day on which banking
institutions in New York, New York are authorized or required by law to close.

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         1.2 Effectiveness; Commencement Date. This Agreement shall become
effective, and the rights and obligations of Servicer and Cedar Brakes with
respect to this Agreement shall commence, on the Effective Date.

         1.3 Term.

                  1.3.1 The term of this Agreement shall run from the date of
execution of this Agreement (the "Effective Date") until the expiration or
earlier termination of the EPM Power Services Agreement (defined below) unless
earlier terminated in accordance with the provisions hereof.

                  1.3.2 This Agreement may be terminated by Cedar Brakes (a) at
any time on sixty (60) days written notice by Cedar Brakes to Servicer and the
payment by Cedar Brakes to Servicer of all outstanding amounts owed to Servicer
by Cedar Brakes under this Agreement or (b) upon the bankruptcy, insolvency or
liquidation of Servicer.

                  1.3.3 Notwithstanding the provisions of Sections 1.3.1 and
1.3.2 hereof, the termination of this Agreement shall not in any manner impact
the obligations of Servicer under this Agreement arising prior to such
termination.

         1.4 Agent. Cedar Brakes hereby appoints Servicer to be and act as its
agent to do and perform those obligations, and protect and exercise such rights,
of Cedar Brakes that are specified herein, and such other things as may be
necessary or convenient thereto. As agent for Cedar Brakes, Servicer is
authorized to act for Cedar Brakes in its own name or in the name of Cedar
Brakes, as deemed necessary or advisable by Servicer.

         1.5 Expenses. Any expenses incurred by Servicer in performing its
obligations under this Agreement shall be paid by Servicer from its own accounts
and shall, thereafter, be reimbursed by Cedar Brakes in accordance with Section
4.2 hereof.

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                                    ARTICLE 2

                               SUPPORT OBLIGATIONS

         2.1 Management and Administrative Services. Subject to the terms of
this Agreement, Servicer shall perform for Cedar Brakes all management and
administrative services necessary for Cedar Brakes to perform its obligations
and to exercise its rights under the following agreements: the Amended and
Restated PPA, the EPM Power Services Agreement, dated as of September 20, 2000,
between EPM and Cedar Brakes (the "EPM Power Services Agreement"), the EPEC
Guaranty, dated as of September 20, 2000, between Cedar Brakes and El Paso
Energy Corporation ("EPEC") (the "EPEC Guaranty"), the EPEC Funding Agreement,
dated as of September 26, 2000 between Cedar Brakes and EPEC (the "EPEC Funding
Agreement"), the Indenture, to be dated on or about September 26, 2000, between
Cedar Brakes and Bankers Trust Company (the "Indenture"), each other Material
Agreement and Financing Document (as each such term is defined in the
Indenture), and any other contracts to which Cedar Brakes is a party and of
which Servicer has been given prior notice. Servicer shall perform for Cedar
Brakes the following management and administrative services: accounting,
auditing, financial reporting, budgeting and forecasting, tax, cash management,
review of significant operating and financial matters, contract administrative
services, invoicing, computer and information services, and such other
management, administrative, and regulatory filing services as directed by Cedar
Brakes. Without limiting the above, Servicer shall provide the following
services:

                  (a) to maintain the books and records of Cedar Brakes in
         accordance with good business practice, Internal Revenue Service
         regulations, applicable law and generally accepted accounting
         principles and the retention and oversight of independent auditors to
         review such books and records on an annual basis;

                  (b) to provide services regarding the cash of Cedar Brakes,
         including (i) establishing bank accounts and (ii) investing funds in
         accordance with the Financing Documents (as defined under the
         Indenture);

                  (c) to provide accounting services related to the development
         and implementation of financial controls and systems of Cedar Brakes
         and the administering of the financing proceeds;

                  (d) to exercise all rights, and perform all obligations, of
         Cedar Brakes under the Financing Documents (as defined under the
         Indenture), including, without limitation, taking all actions necessary
         or desirable in order to perfect and

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         maintain the perfection and priority of any security interests granted
         by Cedar Brakes to any lender or creditor of Cedar Brakes over any
         assets of Cedar Brakes (including, without limitation, the Amended and
         Restated PPA and the other Material Agreements);

                  (e) to administer the Amended and Restated PPA, the EPM Power
         Services Agreement and the other Material Agreements, exercise all
         rights and perform all of the administrative and management obligations
         of Cedar Brakes thereunder, including, without limitation, serving as
         Cedar Brakes' point-of-contact, coordinating the exercise of Cedar
         Brakes' rights under the EPM Power Services Agreement and the
         performance of its obligations under the Amended and Restated PPA,
         providing and receiving notices in accordance with the terms thereof,
         invoicing for all transactions of Cedar Brakes and amounts payable to
         Cedar Brakes and collecting all such amounts due Cedar Brakes, applying
         set-offs against amounts owed to EPM by Cedar Brakes as permitted under
         the terms of the Amended and Restated PPA, reviewing invoices provided
         to Cedar Brakes and exercising its rights to dispute any invoice and
         resolving any disputes and coordinating the resolution of disputes
         (including any arbitration proceedings) under the Amended and Restated
         PPA and the EPM Power Services Agreement on the most favorable terms
         available to Cedar Brakes;

                  (f) to the extent that amounts are available from Cedar
         Brakes, paying all fees, debts and obligations of Cedar Brakes;

                  (g) to provide tax related services, including, without
         limitation, paying from Servicer's accounts directly to any third party
         payees, upon demand, any taxes or other administrative fees and
         expenses due and payable by Cedar Brakes;

                  (h) to make and prosecute, or cause to be made and prosecuted,
         such filings and reports, keep such records, and take or cause to be
         taken such other actions as may be necessary and lawful to maintain the
         existence and good standing of Cedar Brakes and to ensure the
         compliance by Cedar Brakes with all applicable laws, regulations,
         authorizations and orders of any government agencies (including,
         without limitation, the Federal Energy Regulatory Commission); and

                  (i) to do and perform such other acts as may be mutually
         agreed to by Servicer and Cedar Brakes from time to time.

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         2.2 Notice of Payment Obligations.

                  2.2.1 Within two (2) Business Days of Cedar Brakes receiving
from PSE&G a notice stating that (a) Distribution Surcharges are due and payable
to PSE&G pursuant to Article II(E) of the Amended and Restated PPA, (b) damage
amounts are due and payable to PSE&G pursuant to Article XIV of the Amended and
Restated PPA or (c) indemnity payments are due and payable to PSE&G pursuant to
Article XII or Article XIII of the Amended and Restated PPA, Servicer will send
a written notice to EPM notifying EPM of such damage amounts or indemnity
payments and requiring EPM to pay such amounts in accordance with Article X of
the EPM Power Services Agreement. If any such amounts are not paid by EPM within
five (5) Business Days of Cedar Brakes receiving from PSE&G a notice reflecting
that such damage or indemnity payments are due and payable, Servicer will
immediately send a written notice to EPEC notifying EPEC that such amounts are
due and payable and requiring EPEC to pay such amounts pursuant to the EPEC
Guaranty.

                  2.2.2 On the last day of each month, Servicer shall send a
written notice to EPM notifying EPM of any outstanding credit at the end of such
month and requiring EPM to pay any Delivery Point Excess amount in accordance
with Article IV(B) of the EPM Power Services Agreement or any Article V(E)
Energy Payment or Article V(E) Capacity Payment (as each such term is defined in
the EPM Power Services Agreement) in accordance with Article V(E) of the EPM
Power Services Agreement, as the case may be. If any such amounts are not paid
within two (2) Business Days after EPM's receipt of notice, Servicer will
immediately send a written notice to EPEC notifying EPEC that such amounts are
due and payable and requiring EPEC to pay such amounts pursuant to the EPEC
Guaranty.

                  2.2.3 Prior to February 5 of each calendar year, Servicer
shall send a written notice to EPM in accordance with Article V(F) of the EPM
Power Services Agreement, notifying EPM of the Energy Shortfall Liquidated
Damages (if any) due for such year. If any such amounts are not paid by EPM in
accordance with Article V(F) of the EPM Power Services Agreement within five (5)
days' of EPM receipt of such notice from Servicer, Servicer will immediately
send a written notice to EPEC notifying EPEC that such amounts are due and
payable and requiring EPEC to pay such amounts pursuant to the EPEC Guaranty.

                  2.2.4 If Servicer has received notice from the trustee under
the Indenture that Additional Interest (as defined in the Registration Rights
Agreement) is due and payable in accordance with the Registration Rights
Agreement and that there are insufficient funds in the Collections Account to
pay such Additional Interest in addition to

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any other interest and principal payable on the next interest payment date, then
Servicer will promptly send a written notice to EPEC requiring EPEC to pay such
Additional Interest pursuant to the EPEC Funding Agreement.

                                    ARTICLE 3

                                   ASSIGNMENT

         3.1 Assignment and Assumption of Obligations. Cedar Brakes may at any
time and from time to time during the term of this Administrative Services
Agreement, without the consent of Servicer, assign its rights in this
Administrative Services Agreement to (i) any Financier(s) in connection with the
transfer, pledge, encumbrance or assignment of this Administrative Services
Agreement or the accounts, revenues, or proceeds hereof in connection with any
financing or other financial arrangements or (ii) to any person or entity
succeeding to all or substantially all of the assets of Cedar Brakes. Servicer
shall, at Cedar Brakes' request, execute a consent to assignment provided that
the terms and conditions of same are reasonably acceptable to Servicer. Servicer
may not assign its rights and/or transfer its rights and obligations under this
Administrative Services Agreement without the prior written consent of Cedar
Brakes, which consent shall not be unreasonably withheld or delayed. Nothing
contained herein shall prevent Cedar Brakes from pledging or mortgaging all or
any part of its assets or interests in connection with any financing for or
related to the transactions contemplated herein. Except as otherwise provided
herein, Cedar Brakes may not assign its rights and/or transfer its obligations
under this Administrative Services Agreement without the prior written consent
of Servicer. Servicer shall not unreasonably delay or withhold any approval of
an assignment or assignment/transfer by Cedar Brakes provided that the assignee
or assignee/transferee agrees to be bound by, subject to and to comply with the
terms and conditions of this Administrative Services Agreement.

                                    ARTICLE 4

                                  FEE STRUCTURE

         4.1 Semi-Annual Fee. Cedar Brakes shall pay Servicer fifty thousand
dollars $50,000 in arrears for each semi-annual period beginning on the date of
this Agreement and ending on February 15 and August 15 of each year during the
term of this Agreement and on the last day of the term of this Agreement (or if
such day is not a Business Day, on

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the first Business Day thereafter, each, a "Fee Payment Date") for services
provided under this Agreement (the "Fee"), which shall cover all internal and
overhead costs of Servicer; provided, however, that (a) the amount of the Fee
shall be prorated for the actual number of days in the period (i) from the
Effective Date to the first Fee Payment Date and (ii) ending on the last Fee
Payment Date of the term and (b) the Fee shall be due and payable only to the
extent that there amounts on deposit in the Collections Account (as defined in
the Indenture) after payment in accordance with Section 502 of the Indenture of
all current and past due amounts ranking prior to the payment of the Fee.

         4.2 Reimbursement of Expenses. Servicer shall not less than 30 days
prior to each Fee Payment Date deliver to Cedar Brakes an invoice for all
expenses (other than internal and overhead costs of Servicer, which are covered
by the Fee) incurred by Servicer in performing its obligations hereunder since
the Effective Date or the date of Servicer's last invoice under this Section 4.2
(whichever is later). Each invoice shall contain a statement explaining in
reasonable detail how the expenses on the invoice were calculated. Cedar Brakes
shall pay the amount shown on Servicer's invoice on the next Fee Payment Date;
provided, however, that such amount shall be due and payable only to the extent
that there amounts on deposit in the Collections Account (as defined in the
Indenture) after payment in accordance with Section 502 of the Indenture of all
current and past due amounts ranking prior to the payment of such expenses.

                                    ARTICLE 5

                                EVENTS OF DEFAULT

         5.1 Events of Default. An "Event of Default" shall mean with respect to
a Party (the "Defaulting Party"):

                  5.1.1 The failure by the Defaulting Party to make, when due,
any payment required hereunder if such failure is not remedied within ten (10)
Business Days after written notice of such failure is given to the Defaulting
Party by the other Party;

                  5.1.2 Any representation or warranty made by the Defaulting
Party herein shall prove to have been false or misleading in any material
respect when made; or

                  5.1.3 The failure by the Defaulting Party to perform any
material covenant set forth in this Agreement (other than with respect to a
payment obligation described in Section 5.1.1 above).

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         5.2 Termination Right. Upon an Event of Default, the Party not in
default may terminate this Agreement by notice to the Defaulting Party.

                                    ARTICLE 6

                         REPRESENTATIONS AND WARRANTIES

         6.1 Organization; Powers.

                  6.1.1 Servicer represents and warrants that it is a duly
formed and validly existing limited partnership under the laws of the State of
Delaware and has the requisite power and authority to carry on its business as
now being conducted and currently proposed to be conducted and to execute,
deliver and perform its obligations under this Agreement.

                  6.1.2 Cedar Brakes represents and warrants that it is a duly
formed and validly existing limited liability company under the laws of the
State of Delaware and has the requisite power and authority to carry on its
business as now being conducted and currently proposed to be conducted and to
execute, deliver and perform its obligations under this Agreement.

         6.2 Authorization; Enforceability.

                  6.2.1 Servicer represents and warrants that it has taken all
action necessary to authorize it to execute, deliver and perform its obligations
under this Agreement and that this Agreement, when executed and delivered, will
constitute a legal, valid and binding obligation of Servicer, enforceable in
accordance with its terms, subject to bankruptcy, reorganization, moratorium or
other similar laws affecting the enforcement of the rights of creditors
generally and to general principles of equity.

                  6.2.2 Cedar Brakes represents and warrants that it has taken
all action necessary to authorize it to execute, deliver and perform its
obligations under this Agreement and that this Agreement, when executed and
delivered, will constitute a legal, valid and binding obligation of Cedar
Brakes, enforceable in accordance with its terms, subject to bankruptcy,
reorganization, moratorium or other similar laws affecting the enforcement of
the rights of creditors generally and to general principles of equity.

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         6.3 No Conflict.

                  6.3.1 Servicer represents and warrants that the execution,
delivery and performance of this Agreement does not and will not (a) violate any
laws, statutes, codes, acts, ordinances, orders, judgments, decrees,
injunctions, rules, regulations, permits, licenses, authorizations, directions
and requirements of any federal, state, local or foreign governmental
department, commission, board, bureau, authority, agency, court, instrumentality
or judicial or regulatory body or entity ("Legal Requirement") applicable to
Servicer or the violation of which could reasonably be expected to result in a
material adverse effect on the business, assets or financial condition of
Servicer; or (b) conflict with, result in a breach of, or constitute a default
under any of Servicer's limited partnership agreement, by-laws, or other similar
document, or any indenture or agreement to which Servicer is a party.

                  6.3.2 Cedar Brakes represents and warrants that the execution,
delivery and performance of this Agreement does not and will not (a) violate any
Legal Requirement applicable to Cedar Brakes or the violation of which could
reasonably be expected to result in a material adverse effect on the business,
assets or financial condition of Cedar Brakes; or (b) conflict with, result in a
breach of, or constitute a default under Cedar Brakes' limited liability company
agreement, charter, by-laws, or other similar document, or any indenture or
agreement to which Cedar Brakes is a party.

         6.4 Compliance.

                  6.4.1 Servicer represents and warrants that it is in
compliance with all Legal Requirements and governmental approvals applicable to
it and this Agreement, except to the extent that non-compliance could not
reasonably be expected to result in a material adverse effect on the business,
assets or financial condition of Servicer, or on Servicer's ability to perform
under this Agreement.

                  6.4.2 Cedar Brakes represents and warrants that it is in
compliance with all Legal Requirements and governmental approvals applicable to
it and this Agreement, except to the extent that non-compliance could not
reasonably be expected to result in a material adverse effect on the business,
assets or financial condition of Cedar Brakes, or on Cedar Brakes' ability to
perform under this Agreement.

         6.5 Litigation.

                  6.5.1 Servicer represents and warrants that there are no
actions, suits or proceedings pending or, to the best of its knowledge,
threatened (in writing) against

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Servicer in any court or before or by any federal, state, local or foreign
governmental department, commission, board, bureau, authority, agency, court,
instrumentality or judicial or regulatory body or entity, wherein an unfavorable
ruling or finding could reasonably be expected to result in a material adverse
effect on Servicer's business, assets or financial condition, or on the ability
of Servicer to perform its obligations under this Agreement.

                  6.5.2 Cedar Brakes represents and warrants that there are no
actions, suits or proceedings pending or, to the best of its knowledge,
threatened (in writing) against Cedar Brakes in any court or before or by any
federal, state, local or foreign governmental department, commission, board,
bureau, authority, agency, court, instrumentality or judicial or regulatory body
or entity, wherein an unfavorable ruling or finding could reasonably be expected
to result in a material adverse effect on Cedar Brakes' business, assets or
financial condition, or the ability of Cedar Brakes to perform its obligations
under this Agreement.

         6.6 Governmental Approvals.

                  6.6.1 Servicer represents and warrants that all governmental
and/or third party approvals necessary for it to enter into, and perform its
obligations under, this Agreement have been obtained, are in full force and
effect and are final and non-appealable.

                  6.6.2 Cedar Brakes represents and warrants that all
governmental and/or third party approvals necessary for it to enter into, and
perform its obligations under, this Agreement have been obtained, are in full
force and effect and are final and non-appealable.

         6.7 No Default.

                  6.7.1 Servicer represents and warrants that as of the date
hereof, no condition or event that would constitute an Event of Default has
occurred and is continuing.

                  6.7.2 Cedar Brakes represents and warrants that as of the date
hereof, no condition or event that would constitute an Event of Default has
occurred and is continuing.

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                                    ARTICLE 7

                            MISCELLANEOUS PROVISIONS

         7.1 Amendments. This Agreement may be amended only by a written
instrument duly executed by each of EPM and Servicer.

         7.2 Binding Effect. This Agreement and any extension shall inure to the
benefit of and shall be binding upon the Parties and their respective permitted
successors and assigns.

         7.3 Specific Performance. Each of the Parties hereto hereby
acknowledges that money damages would not be a sufficient remedy for any breach
of this Agreement and that irreparable harm would result if this Agreement were
not specifically enforced. Therefore, notwithstanding any other provision
hereof, the rights and obligations of the parties hereto under this Agreement
shall be enforceable by a decree of specific performance issued by any court of
competent jurisdiction and appropriate injunctive relief may be applied for and
granted in connection therewith. The right of a Party hereto to specific
performance hereunder shall be in addition to all other legal or equitable
remedies available to such Party.

         7.4 Counterparts. This Agreement may be executed in two or more
counterparts. Each counterpart shall be deemed an original but together shall
constitute one and the same instrument.

         7.5 Notices. Any notice, request, demand, or statement to be given by a
Party hereunder shall be in writing and shall be deemed to have been duly given
to the addressee when mailed by certified mail, return receipt requested, or
delivered against receipt by messenger or overnight courier addressed as
follows:

         To Servicer:

         El Paso Merchant Energy L.P.
         1001 Louisiana Street
         Houston, TX  77002
         Attention:  General Counsel

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         To Cedar Brakes:

         Cedar Brakes I, L.L.C.
         1001 Louisiana Street
         Houston, TX  77002
         Attention:  President

or to such other address as may be designated by the addressee by notice to the
other Party.

         7.6 Entire Agreement. The Agreement constitutes the entire Agreement
between the Parties with respect to the matters contained herein and all prior
agreements with respect thereto are superseded hereby. Each Party confirms that
it is not relying on any oral representations or warranties of the other Party.

         7.7 Governing Law. This Agreement shall be interpreted, construed,
governed by, performed and enforced in accordance with the laws of the State of
New York without regard to any principles of conflicts of laws thereunder.

         7.8 Headings. The subject headings of the Articles of this Agreement
are inserted solely for the purpose of convenient reference and are not intended
to, nor shall same affect the meaning of any provision of this Agreement.

         7.9 Severability. If any term or provision of this Agreement or the
application thereof to any person, entity, or circumstance shall to any extent
be invalid or unenforceable, the remainder of this Agreement, and the
application of such term or provision to persons, entities or circumstances
other than those as to which it is invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Agreement shall be valid
and enforceable to the fullest extent permitted by law.

         7.10 Set-offs. Cedar Brakes shall have the right to set off against any
and all amounts owed by Cedar Brakes to Servicer pursuant to this Agreement any
and all amounts owed by (a) Servicer to Cedar Brakes or (b) EPEC to Cedar Brakes
under the EPEC Funding Agreement or the EPEC Guaranty.

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                  IN WITNESS WHEREOF, the Parties have duly executed this
Agreement as of the date first above written.

                              CEDAR BRAKES I, L.L.C.

                              By:   /s/ Thomas G. Kilgore
                                    --------------------------------------------
                                    Name:  Thomas G. Kilgore
                                    Title: Attorney in Fact

                              EL PASO MERCHANT ENERGY, L.P.

                              By:   /s/ Thomas G. Kilgore
                                    --------------------------------------------
                                    Name:  Thomas G. Kilgore
                                    Title: Attorney in Fact

                                       13<PAGE>   1

                                                                    EXHIBIT 10.4

                                    GUARANTY

                  This Guaranty made and entered into as of September 20, 2000
(this "Guaranty"), by and between El Paso Energy Corporation, a Delaware
corporation ("Guarantor"), and Cedar Brakes I, L.L.C., a Delaware limited
liability company ("Buyer").

                              W I T N E S S E T H :

                  WHEREAS, Buyer will purchase from Newark Bay Cogeneration
Partnership L.P. ("NBCP") a power purchase agreement originally entered into
between Public Service Electric and Gas Company ("PSE&G") and NBCP and Buyer has
entered into an agreement with PSE&G to amend and restate such power purchase
agreement (as so amended and restated, the "Amended and Restated PPA");

                  WHEREAS, El Paso Merchant Energy L.P. ("EPM"), a wholly-owned
indirect subsidiary of the Guarantor, and Buyer desire to enter into a Power
Services Agreement (the "Power Services Agreement") and an Administrative
Service Agreement (the "Administrative Services Agreement") each dated as of the
date of this Guaranty, pursuant to which EPM has agreed to sell and deliver to
Buyer capacity and energy sufficient to enable Buyer to meet its obligations
under the Amended and Restated PPA and to perform all of Buyer's administrative
and managerial functions; and

                  WHEREAS, Guarantor has determined that EPM's financial and
performance obligations pursuant to the Power Services Agreement and the
Administrative Services Agreement are beneficial to Guarantor and Guarantor
desires to guarantee such obligations.

                  NOW, THEREFORE, in consideration of the premises and in order
to induce Buyer to enter into the Power Services Agreement and the
Administrative Services Agreement, Guarantor does hereby agree as follows:

                  1. Guarantor hereby irrevocably and unconditionally guarantees
         to Buyer the punctual performance by EPM of all its obligations under
         the Power Services Agreement and the Administrative Services Agreement
         (collectively the "Obligations"). Performance by Guarantor of the
         Obligations hereunder shall be made in full irrespective of (but
         without prejudice to the rights otherwise of Guarantor with respect to)
         any claim, set-off or other right that Guarantor may have at any time
         against Buyer, EPM, or any other person or entity, whether in
         connection herewith or with any unrelated transaction.

                  2. The Guaranty is a primary obligation of Guarantor and shall
         be construed as an irrevocable, unconditional, absolute and continuing
         guaranty of the full and punctual performance of all of the Obligations
         and not of their collectibility only, irrespective of (i) the validity
         or enforceability of the Power Services Guaranty or the Administrative
         Services Guaranty or any other agreement or instrument relating
         thereto, (ii) any

<PAGE>   2

         amplification, alteration, amendment, variation, supplement, renewal
         or replacement of the provisions of the Power Services Guaranty or the
         Administrative Services Guaranty or (iii) any other circumstances
         which might otherwise constitute a legal or equitable discharge or
         defense of a guarantor. This Guaranty shall remain in full force and
         effect until all Obligations of EPM have been performed.

                  3. Guarantor hereby irrevocably waives diligence, promptness,
         presentment, demand for payment or performance, protest, notice of
         protest, notice of non-performance or non-payment, notice of
         acceptance, notice of dishonor and any other notice with respect to any
         of the Obligations and this Guaranty, and covenants that the
         obligations of Guarantor under this Guaranty will not be discharged
         except by complete and final performance of all Obligations. All
         payments that Guarantor is required to make under this Guaranty shall
         be without any set-off, counterclaim or condition. The obligations of
         Guarantor shall not be affected by any change of ownership of EPM or
         the insolvency, bankruptcy or any other change in the legal status of
         EPM. In the event that the performance of EPM's Obligations are stayed
         or performance is delayed or deferred upon the insolvency, bankruptcy,
         reorganization or other proceeding involving EPM, all obligations of
         Guarantor shall remain in full force and effect and shall become
         immediately due to the extent that EPM would have otherwise been
         required to perform the Obligations absent the stay, delay or deferral
         in the enforceability of such Obligations. Guarantor hereby waives any
         legal or equitable defenses arising out of the insolvency, bankruptcy
         or other legal disability of EPM.

                  4. This Guaranty constitutes the entire agreement, and
         supersedes all prior written agreements and understandings, and all
         oral agreements, between the parties with respect to the subject matter
         hereof and may be executed simultaneously in several counterparts, each
         of which shall be deemed an original, and all of which together shall
         constitute one and the same instrument.

                  5. The invalidity or unenforceability of any one or more
         phrases, sentences, clauses or Sections in this Guaranty shall not
         affect the validity or enforceability of the remaining portions of this
         Guaranty or any part thereof.

                  6. Guarantor represents and warrants to Buyer that (a) it has
         the legal right to execute and deliver this Guaranty and to perform its
         obligations hereunder, (b) this Guaranty and the performance of
         Guarantor's obligations hereunder have been duly authorized by
         Guarantor and constitute legal, valid and binding obligations of
         Guarantor enforceable against Guarantor in accordance with their terms
         and (c) neither the execution and delivery by Guarantor of this
         Guaranty, nor the consummation of the transactions herein contemplated,
         nor compliance with the provisions hereof will violate any law, rule,
         regulations, order, writ, judgment, injunction, decree or award binding
         on Guarantor or the provisions of any indenture, instrument or
         agreement to which Guarantor or Guarantor's property is bound, or
         conflict with or constitute a default thereunder, or result in the
         creation or imposition of any lien in, of or on the property of
         Guarantor pursuant to the terms of any such indenture, instrument or
         agreement.

                                       2

<PAGE>   3

                  7. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
         ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO
         PRINCIPLES OF CONFLICTS OF LAWS. GUARANTOR HEREBY IRREVOCABLY WAIVES
         ALL RIGHT TO TRIAL BY JURY IN ANY ACTION PROCEEDING OR COUNTERCLAIM
         (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
         RELATING TO THIS AGREEMENT OR THE ACTIONS OF THE GUARANTOR OR BUYER IN
         THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
         Guarantor, by its execution hereof, hereby submits to the non-exclusive
         jurisdiction of the courts of the State of New York, in connection with
         any action or proceeding relating to this Guaranty and hereby consents
         to service of process or other summons in any such action or proceeding
         brought by Buyer against it in any such court by means of registered
         mail to the last known address of Guarantor. Nothing herein, however,
         shall prevent service of process by any other means permitted by law or
         the bringing of any such action or proceeding in any other
         jurisdiction.

                  8. This Guaranty shall remain in full force and effect or
         shall be reinstated (as the case may be) if at any time any payment by
         EPM, in whole or in part, is rescinded or must otherwise be returned by
         Buyer upon the insolvency, bankruptcy or reorganization of EPM, or
         otherwise, all as though that payment had not been made.

                  9. Notwithstanding any payment or payments made by Guarantor
         hereunder or any set-off or application of funds of Guarantor by Buyer,
         until all of the Obligations are performed or paid in full, Guarantor
         shall not (i) exercise any right of subrogation or indemnity, or
         similar right or remedy, against EPM or any of its assets or property
         in respect of any amount paid by the Guarantor under this Guaranty or
         (ii) file a proof of claim in competition with Buyer for any amount
         owing to the Guarantor by EPM on any account whatsoever in the event of
         the bankruptcy, insolvency or liquidation of EPM.

                  10. The rights and remedies set forth in the Power Services
         Agreement, the Administrative Services Agreement and this Guaranty are
         in addition to and not exclusive of any rights and remedies available
         to Buyer by law in respect of this Guaranty. If any amount payable by
         Guarantor under this Guaranty is not paid when due, Buyer may, without
         notice or demand of any kind, set-off and apply such amount against any
         indebtedness of Buyer to Guarantor then due and payable (including,
         without limitation, principal, interest, indemnity or reimbursement for
         losses) whether under any loan or credit agreement, note, interest rate
         or currency exchange agreement, or otherwise, and such set-off and
         application shall satisfy the obligations hereunder of Guarantor to
         Buyer to the extent such amount is so set-off and applied. Buyer shall
         be entitled to apply any amount received by it from any source,
         including Guarantor, in respect of EPM's Obligations to the discharge
         of those obligations in such order as Buyer may from time to time elect
         in its sole discretion.

                  11. Guarantor shall pay or reimburse Buyer on demand for all
         reasonable costs and expenses (including fees and expenses of counsel)
         incurred in connection with the enforcement of Buyer's rights under
         this Guaranty.

                                       3

<PAGE>   4

                  12. All amendments, waivers and modifications of or to any
         provision of this Guaranty and any consent to departure by Guarantor
         from the terms hereof shall be in writing and signed and delivered by
         Buyer and, in the case of any such amendment or modification, by
         Guarantor, and shall not otherwise be effective. Any such waiver or
         consent shall be effective only in the specific instance and for the
         purpose for which it is given.

                  13. This Guaranty shall be binding on Guarantor and its
         successors and assigns. However, Guarantor shall not transfer any of
         its obligations hereunder without the prior written consent of Buyer
         and any purported transfer without that consent shall be void.
         Guarantor hereby expressly agrees that Buyer may assign all of its
         rights hereunder without Guarantor's approval to (i) transfer, pledge,
         encumber or assign this Guaranty or the accounts, revenues or proceeds
         hereof in connection with any financing or other financial arrangements
         or (ii) transfer or assign this Guaranty to any affiliate or to any
         person or entity succeeding to all or substantially all of the assets
         of Buyer. This Guaranty shall inure to the benefit of Buyer and its
         successors and assigns.

                  14. Any notice, request, demand, or statement which either
         Guarantor or Buyer may desire to give the other shall be in writing and
         shall be considered as duly delivered when mailed by certified mail or
         delivered against receipt by messenger or overnight courier addressed
         to said party as follows:

         (a)      If to Guarantor:

                  El Paso Energy Corporation
                  1001 Louisiana St.
                  Houston, TX 77002         Attention: General Counsel

                  With electronic mail copies to:

                  Sullivant@epenergy.com

         (b)      If to Buyer:

                  El Paso Merchant Energy L.P.
                  1001 Louisiana St.
                  Houston, TX 77002         Attention: General Counsel

                  With electronic mail copies to:

                  Regulskik@epenergy.com

                                       4

<PAGE>   5

                  IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be
executed in its name and behalf.

                                            EL PASO ENERGY CORPORATION

                                            By:    /s/ H. Brent Austin
                                                   -----------------------------
                                            Name:  H. Brent Austin
                                            Title: Executive Vice President and
                                                     Chief Financial Officer

                                            AGREED AND ACCEPTED BY
                                            CEDAR BRAKES I, L.L.C.

                                            By:  CEDAR BRAKES I, L.L.C.

                                            By:    /s/ John L. Harrison
                                                   -----------------------------
                                            Name:  John L. Harrison
                                            Title: Vice President

                                       5

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