Document:

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                                                                   Exhibit 10.14

                               PG&E CORPORATION
                          LONG-TERM INCENTIVE PROGRAM
                   (As amended effective as of May 16, 2001)

1.   Purpose of the Program

     This is the controlling and definitive statement of the PG&E Corporation
     Long-Term Incentive Program, as amended and restated herein (hereinafter
     called the PROGRAM/1/). The purpose of the PROGRAM is to advance the
     interests of the CORPORATION by providing ELIGIBLE PARTICIPANTS with
     financial incentives to promote the success of its long-term (five to ten
     years) business objectives, and to increase their proprietary interest in
     the success of the CORPORATION. It is the intent of the CORPORATION to
     reward those ELIGIBLE PARTICIPANTS who have a significant impact on
     improved long-term corporate achievements. Inasmuch as the PROGRAM is
     designed to encourage financial performance and to improve the value of
     shareholders' investment in PG&E CORPORATION, the costs of the PROGRAM will
     be funded from corporate earnings.

2.   Program Administration

     The PROGRAM shall be administered by the COMMITTEE, except that the BOARD
     OF DIRECTORS shall administer the PROGRAM with respect to grants of
     INCENTIVE AWARDS TO NON-EMPLOYEE DIRECTORS. The BOARD OF DIRECTORS may at
     any time revest authority to administer the PROGRAM in all respects in the
     BOARD OF DIRECTORS. Subject to the provisions of the PROGRAM, the COMMITTEE
     or the BOARD OF DIRECTORS, as the case may be, shall have full and final
     authority, in its sole discretion:

     (a)  to determine the ELIGIBLE PARTICIPANTS to whom INCENTIVE AWARDS shall
          be granted and the number of shares of COMMON STOCK to be awarded
          under each INCENTIVE AWARD, based on the recommendation of the CHIEF
          EXECUTIVE OFFICER (except that awards to the CHIEF EXECUTIVE OFFICER
          shall be based on the recommendation of the BOARD OF DIRECTORS and
          awards to NON-EMPLOYEE DIRECTORS shall be based on the recommendation
          of the COMMITTEE);

     (b)  to determine the time or times at which INCENTIVE AWARDS shall be
          granted;

     (c)  to designate the types of INCENTIVE AWARD being granted;

     (d)  to vary the OPTION vesting schedule described in the STOCK OPTION
          PLAN;

     (e)  to determine the terms and conditions, not inconsistent with the terms
          of the PROGRAM, of any INCENTIVE AWARD granted hereunder (including,
          but not limited to, the consideration and method of payment for shares
          purchased upon the exercise of an INCENTIVE AWARD, and any vesting
          acceleration or exercisability provisions in the event of a CHANGE IN
          CONTROL or TERMINATION), based in each case on such factors as the
          COMMITTEE or BOARD OF DIRECTORS shall deem appropriate;

     (f)  to approve forms of agreement for use under the PROGRAM;

     (g)  to construe and interpret the PROGRAM and any related INCENTIVE AWARD
          agreement and to define the terms employed herein and therein;

     (h)  except as provided in Section 18 hereof, to modify or amend any
          INCENTIVE AWARD or to waive any restrictions or conditions applicable
          to any INCENTIVE AWARD or the exercise or realization thereof;

     (i)  except as provided in Section 18 hereof, to prescribe, amend and
          rescind rules, regulations and policies relating to the administration
          of the PROGRAM;

_________________
/1/  Capitalized words are defined in Section 20 hereof.
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     (j)  except as provided in Section 18 hereof, to suspend, terminate, modify
          or amend the PROGRAM;

     (k)  to delegate to one or more agents such administrative duties as the
          COMMITTEE or BOARD OF DIRECTORS may deem advisable, to the extent
          permitted by applicable law; and

     (l)  to make all other determinations and take such other action with
          respect to the PROGRAM and any INCENTIVE AWARD granted hereunder as
          the COMMITTEE may deem advisable, to the extent permitted by
          applicable law.

     Notwithstanding the provisions contained in the foregoing paragraph, the
     CHIEF EXECUTIVE OFFICER shall have the authority, in his sole discretion:
     (a) to grant INCENTIVE AWARDS to any ELIGIBLE PARTICIPANT who, at the time
     of the INCENTIVE AWARD grant, (i) is not an officer of the CORPORATION or a
     DIRECTOR, and (ii) if such ELIGIBLE PARTICIPANT is an EMPLOYEE, is
     receiving an annual salary which is below the level which requires approval
     by the COMMITTEE; (b) to determine the time or times at which INCENTIVE
     AWARDS shall be granted to such ELIGIBLE PARTICIPANTS; (c) to designate the
     types of INCENTIVE AWARD being granted to such ELIGIBLE PARTICIPANTS; and
     (d) to vary the OPTION vesting schedule described in the STOCK OPTION PLAN
     for the OPTIONS granted to such ELIGIBLE PARTICIPANTS; provided, however,
     that all grants of INCENTIVE AWARDS by the CHIEF EXECUTIVE OFFICER shall
     conform to the guidelines previously approved by the COMMITTEE.

3.   Shares of Stock Subject to the Program

     There shall be reserved for use under the PROGRAM (subject to the
     provisions of Section 13 hereof) a total of 49,389,230 shares of COMMON
     STOCK, which shares may be authorized but unissued shares of COMMON STOCK
     or issued shares of COMMON STOCK which shall have been reacquired by PG&E
     CORPORATION. Such shares consist of (i) 13,000,000 shares of COMMON STOCK
     originally reserved for use under the PROGRAM at the time it first became
     effective on January 1, 1992, (ii) 389,230 shares of COMMON STOCK remaining
     under the 1986 OPTION PLAN and carried over to the PROGRAM, (iii)
     10,000,000 shares of COMMON STOCK added to the PROGRAM effective as of
     January 1, 1996, (iv) 11,000,000 shares of COMMON STOCK added to the
     PROGRAM effective as of April 21, 1999, and (v) 15,000,000 shares of COMMON
     STOCK added to the PROGRAM effective as of May 16, 2001. No more than
     2,000,000 of the shares described in (i) -- (iv), and no more than
     3,000,000 of the shares described in (v) may be designated as RESTRICTED
     STOCK.

     If (i) any INCENTIVE AWARD expires or terminates for any reason without
     having been exercised or purchased in full, (ii) an INCENTIVE AWARD is
     surrendered in exchange for one or more other INCENTIVE AWARDS, or (iii)
     any RESTRICTED STOCK is forfeited, then, in each such case, any
     unexercised, unpurchased, surrendered or forfeited shares which were
     subject to such INCENTIVE AWARD (except shares as to which a related TANDEM
     SAR has been exercised) shall again be available for the future grant of
     INCENTIVE AWARDS under the PROGRAM (unless the PROGRAM has terminated). In
     addition, shares may be reused or added back to the PROGRAM to the extent
     permitted by applicable law.

4.   Eligibility

     INCENTIVE AWARDS will be granted only to ELIGIBLE PARTICIPANTS. ISOS will
     be granted only to EMPLOYEES. The COMMITTEE, in its sole discretion, may
     grant INCENTIVE AWARDS to an ELIGIBLE PARTICIPANT who is a resident or
     citizen of a foreign country, with such modifications as the COMMITTEE may
     deem advisable to reflect the laws, tax policy or customs of such foreign
     country.

     The PROGRAM shall not confer upon any RECIPIENT any right to continuation
     of employment, service as a DIRECTOR or consulting relationship with the
     CORPORATION; nor shall it interfere in any way with the right of the
     RECIPIENT or the CORPORATION to terminate such employment, service as a
     DIRECTOR or consulting relationship at any time, with or without cause.

5.   Designation of Incentive Awards

     At the time of the grant of each INCENTIVE AWARD under the Program, the
     COMMITTEE (or the CHIEF EXECUTIVE OFFICER, in the case of INCENTIVE AWARDS
     granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS
     pursuant to Section 2 hereof, or the BOARD OF DIRECTORS, in the case of
     INCENTIVE AWARDS granted by the BOARD OF DIRECTORS to NON-EMPLOYEE
     DIRECTORS) shall determine whether such INCENTIVE AWARD is to be designated
     as an ISO, NON-QUALIFIED STOCK OPTION, SAR, DIVIDEND EQUIVALENT,

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     PERFORMANCE UNIT, stock grant, RESTRICTED STOCK, LSAR, PHANTOM STOCK or
     other STOCK-BASED AWARD; provided, however, that ISOS may be granted only
     to EMPLOYEES.

     Notwithstanding such designation, to the extent that the aggregate FAIR
     MARKET VALUE (determined for each share as of the date of grant of the
     OPTION covering each share) of the shares with respect to which OPTIONS
     designated as ISOS become exercisable for the first time by any RECIPIENT
     during any calendar year exceeds $100,000, such OPTIONS shall be treated as
     NON-QUALIFIED STOCK OPTIONS.

     Any INCENTIVE AWARD may be granted alone, contingent upon, in addition to
     or in TANDEM with one or more other INCENTIVE AWARDS granted under the
     PROGRAM. In addition, except as provided in Section 12 hereof, any
     INCENTIVE AWARD may be granted in exchange for one or more other INCENTIVE
     AWARDS.

6.   Stock Options, Tandem Stock Appreciation Rights and Tandem Dividend
     Equivalents

     Except as provided in Section 9 below (relating to grants of INCENTIVE
     AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion,
     may grant ISOS, NON-QUALIFIED STOCK OPTIONS, TANDEM SARS and TANDEM
     DIVIDEND EQUIVALENTS to ELIGIBLE PARTICIPANTS, subject to the terms and
     conditions set forth in the STOCK OPTION PLAN attached hereto as Exhibit A.

7.   Performance Units

     Except as provided in Section 9 below (relating to grants of INCENTIVE
     AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion,
     may grant PERFORMANCE UNITS to ELIGIBLE PARTICIPANTS, subject to the terms
     and conditions set forth in the PERFORMANCE UNIT PLAN attached hereto as
     Exhibit B.

8.   Other Incentive Awards

     Except as provided in Section 9 below (relating to grants of INCENTIVE
     AWARDS to NON-EMPLOYEE DIRECTORS), the COMMITTEE, in its sole discretion,
     may grant other INCENTIVE AWARDS (including, but not limited to, SARS
     granted without OPTIONS, DIVIDEND EQUIVALENTS granted without OPTIONS,
     stock grants, RESTRICTED STOCK, LSARS, PHANTOM STOCK or other STOCK-BASED
     AWARDS) to ELIGIBLE PARTICIPANTS, subject to such terms and conditions as
     the COMMITTEE shall deem appropriate.

9.   Grants of Incentive Awards to Non-Employee Directors

     NON-EMPLOYEE DIRECTORS will only be eligible to be granted DIRECTOR
     RESTRICTED STOCK, PHANTOM STOCK and NON-QUALIFIED STOCK OPTIONS in
     accordance with, and subject to the terms and conditions contained in, the
     NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN RULES attached hereto as Exhibit
     C.

10.  Termination of Employment or Relationship with the CORPORATION

     The COMMITTEE may, in its sole discretion, establish terms and conditions
     pertaining to the effect of TERMINATION on INCENTIVE AWARDS granted to a
     RECIPIENT prior to TERMINATION, to the extent permitted by applicable law.

11.  Tax Withholding

     When a RECIPIENT incurs tax liability in connection with the exercise of an
     INCENTIVE AWARD or the receipt of shares of COMMON STOCK pursuant to an
     INCENTIVE AWARD, which tax liability is subject to tax withholding under
     applicable tax laws, and the RECIPIENT is obligated to pay the CORPORATION
     an amount required to be withheld under applicable tax laws, the RECIPIENT
     may satisfy the withholding tax obligation by (i) electing to have the
     CORPORATION withhold such amount from his or her current compensation
     through payroll deductions, or (ii) making a direct payment to the
     CORPORATION in cash or by check.

     The COMMITTEE may, in its sole discretion, permit a RECIPIENT to satisfy
     all or part of his or her withholding tax obligations by having the
     CORPORATION withhold from the shares to be issued to the RECIPIENT that
     number of shares

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     having a FAIR MARKET VALUE equal to the amount required to be withheld
     determined on the date when taxes otherwise would be withheld in cash. The
     payment of withholding taxes in this manner, if permitted by the COMMITTEE,
     shall be subject to such restrictions as the COMMITTEE may impose,
     including any restrictions required by rules of the Securities and Exchange
     Commission.

12.  Replacement of Grants

     The COMMITTEE may, in its sole discretion, offer a RECIPIENT (other than
     NON-EMPLOYEE DIRECTORS) the option of surrendering an unexercised OPTION or
     other INCENTIVE AWARD in exchange for another INCENTIVE AWARD of the same
     type or for a different type of INCENTIVE AWARD; provided, however, that no
     OPTION or INCENTIVE AWARD may be exchanged for a new OPTION or INCENTIVE
     AWARD having an OPTION PRICE or purchase price that is lower than the
     OPTION PRICE or purchase price of the original OPTION or INCENTIVE AWARD.

13.  Deferral of Payments

     The COMMITTEE may, in its sole discretion, approve a RECIPIENT'S deferral
     of any cash payments which may become due under the PROGRAM. Such deferrals
     shall be subject to any conditions, restrictions or requirements as the
     COMMITTEE may determine.

14.  Adjustments Upon Changes in Number or Value of Shares of Common Stock

     If there are any changes in the number or value of shares of COMMON STOCK
     by reason of stock dividends, stock splits, reverse stock splits,
     recapitalizations, mergers, consolidations or other events that materially
     increase or decrease the number or value of issued and outstanding shares
     of COMMON STOCK, the COMMITTEE may make such adjustments as it shall deem
     appropriate, in order to prevent dilution or enlargement of rights.

15.  Non-Transferability of Incentive Awards

     An INCENTIVE AWARD shall not be transferable by the RECIPIENT otherwise
     than by will or the laws of descent and distribution, or pursuant to a
     qualified domestic relations order as defined by the CODE, Title I of ERISA
     or the rules thereunder. During the lifetime of the RECIPIENT, an INCENTIVE
     AWARD may be exercised only by the RECIPIENT or by an alternate payee under
     a qualified domestic relations order.

16.  Change in Control

     Upon the occurrence of a CHANGE IN CONTROL (as defined below):

     (a)  Any time periods relating to the exercise or realization of any
          INCENTIVE AWARD granted hereunder shall be accelerated so that such
          INCENTIVE AWARD may be immediately exercised or realized in full;

     (b)  All shares of RESTRICTED STOCK granted hereunder shall immediately
          cease to be forfeitable; and

     (c)  All conditions relating to the realization of any STOCK-BASED AWARD
          granted hereunder shall immediately terminate.

     A "CHANGE IN CONTROL" shall be deemed to have occurred if:

     (a)  any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
          the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any
          trustee, agent or other fiduciary for any such plan acting in such
          person's capacity as such fiduciary), directly or indirectly, becomes
          the beneficial owner of securities of the CORPORATION representing
          twenty percent (20%) or more of the combined voting power of the
          CORPORATION's then outstanding securities;

     (b)  during any two consecutive years, individuals who at the beginning of
          such a period constitute the BOARD OF DIRECTORS cease for any reason
          to constitute at least a majority of the BOARD OF DIRECTORS, unless
          the election, or the nomination for election by the shareholders of
          the CORPORATION, of each new DIRECTOR was approved by a

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          vote of at least two-thirds (2/3) of the DIRECTORS then still in
          office who were DIRECTORS at the beginning of the period; or

     (c)  the shareholders of the CORPORATION shall have approved (i) any
          consolidation or merger of the CORPORATION other than a merger or
          consolidation which would result in the voting securities of the
          CORPORATION outstanding immediately prior thereto continuing to
          represent (either by remaining outstanding or by being converted into
          voting securities of the surviving entity or any parent of such
          surviving entity) at least 70 percent of the Combined Voting Power of
          the CORPORATION, such surviving entity or the parent of such surviving
          entity outstanding immediately after the merger or consolidation; (ii)
          any sale, lease, exchange or other transfer (in one transaction or a
          series of related transactions) of all or substantially all of the
          assets of the CORPORATION, or (iii) any plan or proposal for the
          liquidation or dissolution of the CORPORATION. For purposes of this
          paragraph, the term Combined Voting Power shall mean the combined
          voting power of the CORPORATION's or other relevant entity's then
          outstanding voting securities.

17.  Listing and Registration of Shares

     Each INCENTIVE AWARD shall be subject to the requirement that if at any
     time the COMMITTEE shall determine, in its discretion, that the listing,
     registration or qualification of the shares covered thereby under any
     securities exchange or under any state or federal law or the consent or
     approval of any governmental regulatory body, including the California
     Public Utilities Commission, is necessary or desirable as a condition of,
     or in connection with, the granting of such INCENTIVE AWARD or the issue or
     purchase of shares thereunder, such INCENTIVE AWARD may not be exercised in
     whole or in part unless and until such listing, registration,
     qualification, consent or approval shall have been effected or obtained
     free of any conditions not acceptable to the COMMITTEE.

18.  Amendment and Termination of the Program and Incentive Awards

     The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate,
     modify or amend the PROGRAM in any respect; provided, however, that to the
     extent necessary and desirable to comply with Section 422 of the CODE (or
     any other applicable law or regulation, including the requirements of any
     stock exchange on which the COMMON STOCK is listed or quoted), shareholder
     approval of any PROGRAM amendment shall be obtained in such a manner and to
     such a degree as is required by the applicable law or regulation.

     No suspension, termination, modification or amendment of the PROGRAM may,
     without the consent of the RECIPIENT, adversely affect his or her rights
     under INCENTIVE AWARDS theretofore granted to such RECIPIENT. In the event
     of amendments to the CODE or applicable rules or regulations relating to
     ISOS subsequent to the date hereof, the CORPORATION may amend the PROGRAM,
     and the CORPORATION and RECIPIENTS holding OPTION agreements may agree to
     amend outstanding OPTION agreements, to conform to such amendments.

     The BOARD OF DIRECTORS or COMMITTEE may make such amendments or
     modifications in the terms and conditions of any INCENTIVE AWARD as it may
     deem advisable, or cancel or annul any grant of an INCENTIVE AWARD;
     provided, however, that no such amendment, modification, cancellation or
     annulment may, without the consent of the RECIPIENT, adversely affect his
     or her rights under such INCENTIVE AWARD; and provided further the BOARD OF
     DIRECTORS or COMMITTEE may not reduce the OPTION PRICE or purchase price of
     any OPTION or INCENTIVE AWARD below the original OPTION PRICE or purchase
     price.

     Notwithstanding the foregoing, the BOARD OF DIRECTORS or COMMITTEE reserves
     the right, in its sole discretion, to (i) convert any outstanding ISOS to
     NON-QUALIFIED STOCK OPTIONS, (ii) to require a RECIPIENT to forfeit any
     unexercised or unpurchased INCENTIVE AWARDS, any shares received or
     purchased pursuant to an INCENTIVE AWARD, or any gains realized by virtue
     of the receipt of an INCENTIVE AWARD in the event that such RECIPIENT
     competes against the CORPORATION, and (iii) to cancel or annul any grant of
     an INCENTIVE AWARD in the event of a RECIPIENT'S TERMINATION FOR CAUSE. For
     purposes of the PROGRAM, "TERMINATION FOR CAUSE" shall include, but not be
     limited to, termination because of dishonesty, criminal offense or
     violation of a work rule, and shall be determined by, and in the sole
     discretion of, the BOARD OF DIRECTORS or COMMITTEE.

19.  Effective Date of the Program and Duration

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     The Program first became effective as of January 1, 1992. The first
     amendment and restatement of the PROGRAM as of January 1, 1996, was
     approved by the shareholders of Pacific Gas and Electric Company at its
     Annual Meeting on April 17, 1996. Effective January 1, 1997, the PROGRAM
     was assumed by PG&E CORPORATION. At its meeting on December 17, 1997, the
     BOARD OF DIRECTORS amended and restated the PROGRAM effective January 1,
     1998, to (i) reflect the adoption of new RULE 16B-3 which became effective
     November 1, 1996, and (ii) provide automatic formula awards of NON-
     QUALIFIED STOCK OPTIONS and PHANTOM STOCK to NON-EMPLOYEE DIRECTORS within
     the limits of the PROGRAM as previously approved by shareholders in 1996.
     The PROGRAM was subsequently amended on October 21, 1998, April 21, 1999,
     February 16, 2000, September 19, 2000, and February 21, 2001. Effective May
     16, 2001, the PROGRAM was amended to add 15,000,000 shares of COMMON STOCK
     to the total number of shares of COMMON STOCK reserved for use under the
     PROGRAM. Unless terminated sooner pursuant to Section 16 hereof, the
     PROGRAM shall terminate on December 31, 2005.

20.  Definitions

     (a)  BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION.

     (b)  CHANGE IN CONTROL has the meaning set forth in Section 16 hereof.

     (c)  CHIEF EXECUTIVE OFFICER means the Chief Executive Officer of PG&E
          CORPORATION.

     (d)  CODE means the Internal Revenue Code of 1986, as amended from time to
          time.

     (e)  COMMITTEE means the Nominating and Compensation Committee of the BOARD
          OF DIRECTORS or any successor to such committee.

     (f)  COMMON STOCK means common shares of PG&E CORPORATION with no par value
          and any class of common shares into which such common shares hereafter
          may be converted.

     (g)  CONSULTANT means any person, including an advisor, who is engaged by
          the CORPORATION to render services.

     (h)  CORPORATION means PG&E CORPORATION, and any parent corporation (as
          defined in Section 424(e) of the CODE) or subsidiary corporation (as
          defined in Section 424(f) of the CODE).

     (i)  DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or
          the Board of Directors of any parent corporation (as defined in
          Section 424(e) of the CODE) which may hereafter be established,
          including an advisory, emeritus or honorary director.

     (j)  DIRECTOR RESTRICTED STOCK means RESTRICTED STOCK granted to a NON-
          EMPLOYEE DIRECTOR under the NON-EMPLOYEE DIRECTOR STOCK INCENTIVE
          PLAN.

     (k)  DIVIDEND EQUIVALENT means a right that entitles the RECIPIENT to
          receive cash or COMMON STOCK based on the dividends declared on the
          COMMON STOCK covered by such right.

     (l)  ELIGIBLE PARTICIPANT means any KEY EMPLOYEE. It also means, if so
          identified by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the
          case of INCENTIVE AWARDS granted by the CHIEF EXECUTIVE OFFICER to
          certain ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), other
          EMPLOYEES, DIRECTORS, CONSULTANTS, employees or consultants of any
          affiliates of PG&E CORPORATION, and other persons whose participation
          in the PROGRAM is deemed by the COMMITTEE (or by the CHIEF EXECUTIVE
          OFFICER, in the case of INCENTIVE AWARDS granted by the CHIEF
          EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section
          2 hereof) to be in the best interests of the CORPORATION.

     (m)  EMPLOYEE means any person who is employed by the CORPORATION. The
          payment of a director's fee or consulting fee by the CORPORATION shall
          not be sufficient to constitute "employment" by the CORPORATION.

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     (n)  ERISA means the Employee Retirement Income Security Act of 1974, as
          amended.

     (o)  EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.

     (p)  FAIR MARKET VALUE means the closing price of the COMMON STOCK reported
          on the New York Stock Exchange Composite Transactions for the date
          specified for determining such value.

     (q)  INCENTIVE AWARD means any ISO, NON-QUALIFIED STOCK OPTION, SAR,
          DIVIDEND EQUIVALENT, PERFORMANCE UNIT or other STOCK-BASED AWARD
          granted under the PROGRAM.

     (r)  ISO means an OPTION intended to qualify as an incentive stock option
          under Section 422 of the CODE.

     (s)  KEY EMPLOYEE means the Corporate Secretary, Treasurer, Vice Presidents
          and other executive officers of PG&E CORPORATION above the rank of
          Vice President. It also means, if so identified by the COMMITTEE (or
          by the CHIEF EXECUTIVE OFFICER, in the case of INCENTIVE AWARDS
          granted by the CHIEF EXECUTIVE OFFICER to certain ELIGIBLE
          PARTICIPANTS pursuant to Section 2 hereof), executive officers of
          wholly-owned subsidiaries of PG&E CORPORATION (including subsidiaries
          which become such after adoption of the PROGRAM) and any other key
          management employee of PG&E CORPORATION or any wholly-owned subsidiary
          of PG&E CORPORATION.

     (t)  LSAR means a limited stock appreciation right which is exercisable
          only in the event of a CHANGE IN CONTROL.

     (u)  1986 OPTION PLAN means the Pacific Gas and Electric Company 1986 Stock
          Option Plan, as amended to date.

     (v)  NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE.

     (w)  NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN RULES means the Non-
          Employee Director Stock Incentive Plan attached hereto as Exhibit C or
          any successor rules which the BOARD OF DIRECTORS may adopt from time
          to time with respect to the grant of INCENTIVE AWARDS to NON-EMPLOYEE
          DIRECTORS under the PROGRAM.

     (x)  NON-QUALIFIED STOCK OPTION means any OPTION which is not an ISO.

     (y)  OPTION means an option to purchase shares of COMMON STOCK granted
          under the STOCK OPTION PLAN.

     (z)  OPTION PRICE means the purchase price for the COMMON STOCK upon
          exercise of an OPTION.

     (aa) PERFORMANCE UNIT means a performance unit granted under the
          PERFORMANCE UNIT PLAN.

     (bb) PERFORMANCE UNIT PLAN means the Performance Unit Plan Rules attached
          hereto as Exhibit B or any successor rules which the COMMITTEE may
          adopt from time to time with respect to the grant of PERFORMANCE UNITS
          under the PROGRAM.

     (cc) PG&E CORPORATION means PG&E CORPORATION, a California corporation.

     (dd) PHANTOM STOCK means allocated hypothetical shares of COMMON STOCK that
          can be converted at a future date into cash or stock.

     (ee) PROGRAM means the PG&E Corporation Long-Term Incentive Program set
          forth herein and as may be amended from time to time.

     (ff) RECIPIENT means the ELIGIBLE PARTICIPANT receiving the INCENTIVE
          AWARD, or his or her legal representative, legatees, distributees or
          alternate payees, as the case may be.

     (gg) RESTRICTED STOCK means COMMON STOCK that is subject to forfeiture by
          the RECIPIENT to the CORPORATION under such circumstances as may be
          specified by the COMMITTEE in its sole discretion.

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     (hh) RETIREMENT means termination of employment with the CORPORATION at age
          55 or later, provided that the ELIGIBLE PARTICIPANT was employed by
          the CORPORATION for at least five consecutive years prior to the date
          of termination.

     (ii) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any successor to
          Rule 16b-3, as in effect when discretion is being exercised with
          respect to the Plan.

     (jj) SAR means a stock appreciation right whose value is based on the
          increase in the FAIR MARKET VALUE of the COMMON STOCK covered by such
          right.

     (kk) SECTION 16 OFFICER means any person who is designated by the BOARD OF
          DIRECTORS as an executive officer of PG&E CORPORATION and any other
          person who is designated as an officer of PG&E CORPORATION for
          purposes of Section 16 of the EXCHANGE ACT.

     (ll) STOCK-BASED AWARD means any award that is valued in whole or in part
          by reference to, or is otherwise based on, the COMMON STOCK,
          including, but not limited to, stock grants, RESTRICTED STOCK, LSARS
          and PHANTOM STOCK.

     (mm) STOCK OPTION PLAN means the Stock Option Plan Rules attached hereto as
          Exhibit A or any successor rules which the COMMITTEE may adopt from
          time to time with respect to the grant of OPTIONS under the PROGRAM.

     (nn) TANDEM refers to an INCENTIVE AWARD granted in conjunction with
          another INCENTIVE AWARD.

     (oo) TERMINATION occurs when an EMPLOYEE ceases to be employed by the
          CORPORATION as a common law employee, when a DIRECTOR ceases to be a
          member of the BOARD OF DIRECTORS or the Board of Directors of any
          parent corporation which may hereafter be established (as the case may
          be), or when the relationship between the CORPORATION and a CONSULTANT
          or other ELIGIBLE PARTICIPANT terminates, as the case may be.

     (pp) TERMINATION FOR CAUSE has the meaning set forth in Section 18 hereof.

                                       8
<PAGE>

                                   EXHIBIT A

                                PG&E CORPORATION
                               STOCK OPTION PLAN
                   (As amended effective as of May 16, 2001)

1.   Purpose of the Plan

     This is the controlling and definitive statement of the PG&E Corporation
     Stock Option Plan set forth herein and as may be amended from time to time
     (hereinafter called the PLAN/2/). The purpose of the PLAN is to advance the
     interests of the CORPORATION by providing ELIGIBLE PARTICIPANTS with
     financial incentives to promote the success of its long-term (five to ten
     years) business objectives, and to increase their proprietary interest in
     the success of the CORPORATION. It is the intent of the CORPORATION to
     reward those ELIGIBLE PARTICIPANTS who have a significant impact on
     improved long-term corporate achievements. Inasmuch as the PLAN is designed
     to encourage financial performance and to improve the value of
     shareholders' investment in PG&E CORPORATION, the costs of the PLAN will be
     funded from corporate earnings.

2.   Plan Administration

     The PLAN shall be administered by the COMMITTEE, which shall be constituted
     in such a manner as to comply with the rules governing a plan intended to
     qualify as a discretionary plan under RULE 16b-3.

     Subject to the provisions of the PLAN, the COMMITTEE shall have full and
     final authority, in its sole discretion:

     (a)  to determine the ELIGIBLE PARTICIPANTS to whom OPTIONS shall be
          granted and the number of shares of COMMON STOCK to be awarded under
          each OPTION, based on the recommendation of the CHIEF EXECUTIVE
          OFFICER (except that awards to the CHIEF EXECUTIVE OFFICER shall be
          shall be based on the recommendation of the BOARD OF DIRECTORS);
          provided, however, that the number of shares of COMMON STOCK to be
          awarded under each OPTION shall be subject to the limitations
          specified in Section 5 hereof;

     (b)  to determine the time or times at which OPTIONS shall be granted;

     (c)  to designate the OPTIONS being granted as ISOS or NON-QUALIFIED STOCK
          OPTIONS;

     (d)  to vary the OPTION vesting schedule described in Section 11 hereof;

     (e)  to determine the terms and conditions, not inconsistent with the terms
          of the PLAN, of any OPTION granted hereunder (including, but not
          limited to, the consideration and method of payment for shares
          purchased upon the exercise of an OPTION, and any vesting acceleration
          or exercisability provisions in the event of a CHANGE IN CONTROL or
          TERMINATION), based in each case on such factors as the COMMITTEE
          shall deem appropriate;

     (f)  to approve forms of agreement for use under the PLAN;

     (g)  to construe and interpret the PLAN and any related OPTION agreement
          and to define the terms employed herein and therein;

     (h)  except as provided in Section 18 hereof, to modify or amend any OPTION
          or to waive any restrictions or conditions applicable to any OPTION or
          the exercise thereof;

     (i)  except as provided in Section 18 hereof, to prescribe, amend and
          rescind rules, regulations and policies relating to the administration
          of the PLAN;

     (j)  except as provided in Section 18 hereof, to suspend, terminate, modify
          or amend the PLAN;

___________________
/2/  Capitalized words are defined in Section 20 hereof.

                                       9
<PAGE>

     (k)  to delegate to one or more agents such administrative duties as the
          COMMITTEE may deem advisable, to the extent permitted by applicable
          law; and

     (l)  to make all other determinations and take such other action with
          respect to the PLAN and any OPTION granted hereunder as the COMMITTEE
          may deem advisable, to the extent permitted by applicable law.

     Notwithstanding the provisions contained in the foregoing paragraph, the
     CHIEF EXECUTIVE OFFICER shall have the authority, in his sole discretion:
     (a) to grant OPTIONS to any ELIGIBLE PARTICIPANT who, at the time of the
     OPTION grant, (i) is not an officer of the CORPORATION or a DIRECTOR, and
     (ii) if such ELIGIBLE PARTICIPANT is an EMPLOYEE, is receiving an annual
     salary which is below the level which requires approval by the COMMITTEE;
     (b) to determine the time or times at which OPTIONS shall be granted to
     such ELIGIBLE PARTICIPANTS; (c) to designate the OPTIONS being granted to
     such ELIGIBLE PARTICIPANTS as ISOS or NON-QUALIFIED STOCK OPTIONS; and (d)
     to vary the OPTION vesting schedule described in Section 11 hereof for the
     OPTIONS granted to such ELIGIBLE PARTICIPANTS; provided, however, that (x)
     all grants of OPTIONS by the CHIEF EXECUTIVE OFFICER shall conform to the
     guidelines previously approved by the COMMITTEE, and (y) the number of
     shares of COMMON STOCK to be awarded under each OPTION shall be subject to
     the limitations specified in Section 5 hereof.

3.   Shares of Stock Subject to the Plan

     There shall be reserved for use under the PLAN and for the grant of any
     other incentive awards pursuant to the PROGRAM (subject to the provisions
     of Section 14 hereof) a total of 49,389,230 shares of COMMON STOCK, which
     shares may be authorized but unissued shares of COMMON STOCK or issued
     shares of COMMON STOCK which shall have been reacquired by PG&E
     CORPORATION.

     If any OPTION expires or terminates for any reason without having been
     exercised in full, then any unexercised, shares which were subject to such
     OPTION (except shares as to which a related TANDEM SAR has been exercised)
     shall again be available for the future grant of OPTIONS under the PLAN
     (unless the PLAN has terminated). In addition, shares may be reused or
     added back to the PLAN to the extent permitted by applicable law.

4.   Eligibility

     OPTIONS will be granted only to ELIGIBLE PARTICIPANTS. ISOS will be granted
     only to EMPLOYEES. The COMMITTEE, in its sole discretion, may grant OPTIONS
     to an ELIGIBLE PARTICIPANT who is a resident or citizen of a foreign
     country, with such modifications as the COMMITTEE may deem advisable to
     reflect the laws, tax policy or customs of such foreign country.

     The PLAN shall not confer upon any OPTIONEE any right to continuation of
     employment, service as a DIRECTOR or consulting relationship with the
     CORPORATION; nor shall it interfere in any way with the right of the
     OPTIONEE or the CORPORATION to terminate such employment, service as a
     DIRECTOR or consulting relationship at any time, with or without cause.

5.   Limitation on Options and SARs Awarded to Any Eligible Participant

     The aggregate number of shares of COMMON STOCK with respect to which any
     ELIGIBLE PARTICIPANT may be granted OPTIONS and SARS under the PLAN during
     any calendar year shall in no event exceed two percent (2%) of the total
     number of shares reserved for use under the PLAN.

6.   Designation of Options

     At the time of the grant of each OPTION under the PLAN, the COMMITTEE (or
     the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS granted by the CHIEF
     EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to Section 2
     hereof) shall determine whether such OPTION is to be designated as an ISO
     or a NON-QUALIFIED STOCK OPTION; provided, however, that ISOS may be
     granted only to EMPLOYEES.

                                       10
<PAGE>

     Notwithstanding such designation, to the extent that the aggregate FAIR
     MARKET VALUE (determined for each share as of the date of grant of the
     OPTION covering each share) of the shares with respect to which OPTIONS
     designated as ISOS become exercisable for the first time by any OPTIONEE
     during any calendar year exceeds $100,000, such OPTIONS shall be treated as
     NON-QUALIFIED STOCK OPTIONS.

7.   Option Price

     The OPTION PRICE of the COMMON STOCK under each OPTION issued shall be the
     FAIR MARKET VALUE of the COMMON STOCK on the date of grant.

8.   Stock Appreciation Rights

     At the discretion of the COMMITTEE, an OPTION may be granted with or
     without a TANDEM SAR which permits the OPTIONEE to surrender unexercised an
     OPTION or portion thereof and to receive in exchange a payment having a
     value equal to the difference between (x) the FAIR MARKET VALUE of the
     COMMON STOCK covered by the surrendered portion of the OPTION on the date
     the SAR is exercised and (y) the OPTION PRICE for such COMMON STOCK. The
     SAR is subject to the same terms and conditions as the related OPTION,
     except that (i) the SAR may be exercised only when there is a positive
     spread (i.e., when the FAIR MARKET VALUE of the COMMON STOCK subject to the
     OPTION exceeds the OPTION PRICE), (ii) in accordance with Section 9 hereof,
     payment of the DEA (if any) to the OPTIONEE may be restricted, and (iii) if
     the OPTIONEE is a SECTION 16 OFFICER, DIRECTOR or other person whose
     transactions in the COMMON STOCK are subject to Section 16(b) of the
     EXCHANGE ACT, the SAR may be exercised only during the period beginning on
     the third (3rd) business day following the date of release of the
     CORPORATION's quarterly or annual statement of earnings and ending on the
     twelfth (12th) business day following such date. Upon the exercise of a
     SAR, the number of shares subject to exercise under the related OPTION
     shall be automatically reduced by the number of shares represented by the
     OPTION or portion thereof surrendered. No payment will be required from the
     OPTIONEE upon the exercise of a SAR, except that any amount necessary to
     satisfy applicable federal, state or local tax requirements shall be
     withheld.

9.   Dividend Equivalent Account

     At the discretion of the COMMITTEE, an OPTION may be granted with or
     without TANDEM DIVIDEND EQUIVALENTS. When an OPTION is granted with TANDEM
     DIVIDEND EQUIVALENTS, a Dividend Equivalent Account ("DEA") shall be
     established for the OPTIONEE. This DEA shall be credited quarterly on each
     dividend record date with dividends which would have been paid on the
     COMMON STOCK subject to the unexercised portion of the OPTION (including
     any portion which has not yet vested on the record date), if such portion
     had been exercised. Except as provided in Section 12(d) hereof, at the time
     the OPTION or any related SAR is exercised, the OPTIONEE shall receive all
     funds which have accumulated in the DEA with respect to the shares of
     COMMON STOCK for which the OPTION or SAR is being exercised; provided,
     however, that if the OPTIONEE exercises a SAR, such DEA funds shall only be
     paid to the OPTIONEE if (i) the percentage increase in the FAIR MARKET
     VALUE of the COMMON STOCK over the OPTION PRICE averages at least five
     percent (5%) per year for the first five (5) years after the grant, or (ii)
     in the case of OPTIONS held for longer than five (5) years from the date of
     grant, such FAIR MARKET VALUE has increased by at least twenty-five percent
     (25%) over the OPTION PRICE.

10.  Terms of Options

     The term of each ISO shall be for ten (10) years from the date of grant,
     subject to earlier termination as provided in Section 12 hereof. The term
     of each NON-QUALIFIED STOCK OPTION shall be ten (10) years and one (1) day
     from the date of grant, subject to earlier termination as provided in
     Section 12 hereof. Any provision of the PROGRAM to the contrary
     notwithstanding, no OPTION shall be exercised after the time limitations
     stated in this Section 10.

11.  Limitations on Exercise

     (a)  Each OPTION granted under the PROGRAM shall become exercisable and
          vested only to the following extent: (i) up to one-third (1/3) of the
          OPTIONS granted may be exercised on or after the second (2nd)
          anniversary of the date of grant; (ii) up to two-thirds (2/3) of the
          OPTIONS granted may be exercised on or after the third (3rd)
          anniversary of the date of grant; and (iii) up to one hundred percent
          (100%) of the OPTIONS granted may be exercised on or after the fourth
          (4th) anniversary of the date of grant.

                                       11
<PAGE>

     (b)  No OPTION under the PROGRAM designated by the COMMITTEE as an ISO and
          granted before January 1, 1987 may be exercised while there is
          outstanding in the hands of the OPTIONEE any ISO which was granted
          before the granting of the ISO hereunder sought to be exercised. For
          this purpose an ISO shall be treated as outstanding until such OPTION
          is (i) exercised in full, (ii) surrendered in full by exercising SARS
          pursuant to Section 8 hereof, or (iii) rendered void by reason of
          lapse of time.

12.  Termination of Employment or Relationship with the CORPORATION

     (a)  In the event of a TERMINATION by reason of a discharge or TERMINATION
          FOR CAUSE, any unexercised OPTIONS theretofore granted to an OPTIONEE
          under the PROGRAM shall forthwith terminate.

     (b)  In the event of a TERMINATION by reason of RETIREMENT, all OPTIONS
          held by the OPTIONEE, to the extent that such OPTIONS have not
          previously expired or been exercised, shall become fully exercisable
          and vested, notwithstanding the provisions of Section 11(a) hereof,
          and the OPTIONEE shall have the right to exercise such OPTIONS in full
          at any time within their respective terms or within five (5) years
          after such RETIREMENT, whichever is shorter. This five-year period
          shall be extended if an OPTIONEE remains on the BOARD OF DIRECTORS
          after RETIREMENT. In such case, the OPTIONS may be exercised as long
          as the OPTIONEE remains a DIRECTOR and for a period of six (6) months
          thereafter, or within five (5) years after RETIREMENT, whichever is
          longer; provided, however, that no OPTION may be exercised after the
          expiration of its term. To the extent any ISO held by the OPTIONEE is
          exercised after the expiration of three (3) months after such
          TERMINATION, the exercise will be deemed to involve the exercise of a
          NON-QUALIFIED STOCK OPTION.

     (c)  In the event of a TERMINATION by reason of disability or death, all
          OPTIONS held by the OPTIONEE, to the extent that such OPTIONS have not
          previously expired or been exercised, shall become fully exercisable
          and vested, notwithstanding the provisions of Section 11(a) hereof,
          and the OPTIONEE (or the OPTIONEE'S estate or a person who acquired
          the right to exercise such OPTIONS by bequest or inheritance) shall
          have the right to exercise such OPTIONS at any time within their
          respective terms or within one (1) year after the date of such
          TERMINATION, whichever is shorter. The term "disability" shall, for
          the purposes of the PLAN, be defined in Section 22(e)(3) of the CODE.

     (d)  In the event of a TERMINATION by reason of a divestiture or change in
          control of a subsidiary of PG&E CORPORATION, which divestiture or
          change in control results in such subsidiary no longer qualifying as a
          subsidiary corporation under Section 424(f) of the CODE or in the
          event of a TERMINATION coincident with the sale of all or
          substantially all of the assets of a subsidiary of PG&E CORPORATION,
          all OPTIONS held by the OPTIONEE, to the extent that such OPTIONS have
          not previously expired or been exercised, shall become fully
          exercisable and vested, notwithstanding the provisions of Section
          11(a) hereof, and the OPTIONEE shall have the right to exercise such
          OPTIONS in full at any time within their respective terms or within
          three (3) years after such TERMINATION, whichever is shorter. This
          three-year period shall be extended if an OPTIONEE remains on the
          BOARD OF DIRECTORS after such TERMINATION. In such case, the OPTIONS
          may be exercised as long as the OPTIONEE remains a DIRECTOR and for a
          period of six (6) months thereafter, or within three (3) years after
          such TERMINATION, whichever is longer; provided, however, that no
          OPTION may be exercised after the expiration of its term. To the
          extent any ISO held by the OPTIONEE is exercised after the expiration
          of three (3) months after such TERMINATION, the exercise will be
          deemed to involve the exercise of a NON-QUALIFIED STOCK OPTION.

     (e)  In the event of a TERMINATION within one year after a CHANGE IN
          CONTROL of the CORPORATION (other than a TERMINATION covered by
          clauses (a), (b), or (c) above), OPTIONEE shall have the right to
          exercise OPTIONS which OPTIONEE then holds (which OPTIONS will have
          been accelerated previously in accordance with Section 16 below), to
          the extent that such OPTIONS have not previously expired or been
          exercised, in full at any time within their respective terms or within
          three (3) years after such TERMINATION, whichever is shorter. This
          three-year period shall be extended if an OPTIONEE remains on the
          BOARD OF DIRECTORS after such TERMINATION. In such case, the OPTIONS
          may be exercised as long as the OPTIONEE remains a DIRECTOR and for a
          period of six (6) months thereafter, or within three (3) years after
          such TERMINATION, whichever is longer; provided, however, that no
          OPTION may be exercised after the expiration of its term. To the
          extent any ISO held by the OPTIONEE is exercised after the expiration
          of three (3) months after such TERMINATION, the exercise will be
          deemed to involve the exercise of a NON-QUALIFIED STOCK OPTION.

                                       12
<PAGE>

     (f)  In the event of a TERMINATION for any reason other than those
          specified in subparagraphs (a) through (e) above, (i) any unexercised
          OPTION or OPTIONS granted under the PROGRAM shall be deemed canceled
          and terminated forthwith, except that the OPTIONEE may exercise any
          unexercised OPTIONS theretofore granted which are otherwise
          exercisable and vested within the provisions of Section 11(a) hereof,
          during the balance of their respective terms or within thirty (30)
          days of such TERMINATION, whichever is shorter, and (ii) the DEA (if
          any) shall not be credited with any dividends paid after the date of
          such TERMINATION.

     (g)  Notwithstanding the provisions of subparagraphs (a) through (f) above,
          the COMMITTEE may, in its sole discretion, establish different terms
          and conditions pertaining to the effect of TERMINATION, to the extent
          permitted by applicable federal and state law.

13.  Payment for Shares Upon Exercise of Options

     The exercise of any OPTION shall be contingent upon receipt by the
     CORPORATION of (i) cash (including any DEA funds payable to the OPTIONEE in
     connection with the exercise of such OPTION), (ii) check, (iii) shares of
     COMMON STOCK, (iv) an executed exercise notice together with irrevocable
     instructions to a broker to either sell the shares subject to the OPTION or
     hold such shares as collateral for a margin loan and to promptly deliver to
     the CORPORATION the amount of sale or loan proceeds required to pay the
     OPTION PRICE, (v) any combination of the foregoing in an amount equal to
     the full OPTION PRICE of the shares being purchased, or (vi) such other
     consideration and method of payment, other than a note from the OPTIONEE,
     as the COMMITTEE, in its sole discretion, may allow (which, in the case of
     an ISO shall be determined at the time of grant), to the extent permitted
     by applicable law. For purposes of this paragraph, shares of COMMON STOCK
     that are delivered in payment of the OPTION PRICE must have been previously
     owned by the OPTIONEE for a minimum of one year, and shall be valued at
     their FAIR MARKET VALUE as of the date of the exercise of the OPTION. The
     CORPORATION shall not make loans to any OPTIONEE for the purpose of
     exercising OPTIONS.

14.  Adjustments Upon Changes in Number or Value of Shares of Common Stock

     If there are any changes in the number or value of shares of COMMON STOCK
     by reason of stock dividends, stock splits, reverse stock splits,
     recapitalizations, mergers, consolidations or other events that materially
     increase or decrease the number or value of issued and outstanding shares
     of COMMON STOCK, the COMMITTEE may make such adjustments as it shall deem
     appropriate, in order to prevent dilution or enlargement of rights.

15.  Non-Transferability of Options

     An OPTION shall not be transferable by the OPTIONEE otherwise than by will
     or the laws of descent and distribution, or pursuant to a qualified
     domestic relations order as defined by the CODE, Title I of ERISA or the
     rules thereunder. During the lifetime of the OPTIONEE, an OPTION may be
     exercised only by the OPTIONEE or by an alternate payee under a qualified
     domestic relations order.

16.  Change in Control

     Upon the occurrence of a CHANGE IN CONTROL (as defined below), any time
     periods relating to the exercise of any OPTION granted hereunder shall be
     accelerated so that such OPTION may be immediately exercised in full.

     A "CHANGE IN CONTROL" shall be deemed to have occurred if:

     (a)  any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
          the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any
          trustee, agent or other fiduciary for any such plan acting in such
          person's capacity as such fiduciary), directly or indirectly, becomes
          the beneficial owner of securities of PG&E CORPORATION representing
          twenty percent (20%) or more of the combined voting power of the
          CORPORATION's then outstanding securities;

     (b)  during any two consecutive years, individuals who at the beginning of
          such a period constitute the BOARD OF DIRECTORS cease for any reason
          to constitute at least a majority of the BOARD OF DIRECTORS, unless
          the election, or the nomination for election by the shareholders of
          the CORPORATION, of each new DIRECTOR was approved by a

                                       13
<PAGE>

          vote of at least two-thirds (2/3) of the DIRECTORS then still in
          office who were DIRECTORS at the beginning of the period; or

     (c)  the shareholders of the CORPORATION shall have approved (i) any
          consolidation or merger of the CORPORATION other than a merger or
          consolidation which would result in the voting securities of the
          CORPORATION outstanding immediately prior thereto continuing to
          represent (either by remaining outstanding or by being converted into
          voting securities of the surviving entity or any parent of such
          surviving entity) at least 70 percent of the Combined Voting Power of
          the CORPORATION, such surviving entity or the parent of such surviving
          entity outstanding immediately after the merger or consolidation; (ii)
          any sale, lease, exchange or other transfer (in one transaction or a
          series of related transactions) of all or substantially all of the
          assets of the CORPORATION, or (iii) any plan or proposal for the
          liquidation or dissolution of the CORPORATION. For purposes of this
          paragraph, the term Combined Voting Power shall mean the combined
          voting power of the CORPORATION's or other relevant entity's then
          outstanding voting securities.

17.  Listing and Registration of Shares

     Each OPTION shall be subject to the requirement that if at any time the
     COMMITTEE shall determine, in its discretion, that the listing,
     registration or qualification of the shares covered thereby under any
     securities exchange or under any state or federal law or the consent or
     approval of any governmental regulatory body, including the California
     Public Utilities Commission, is necessary or desirable as a condition of,
     or in connection with, the granting of such OPTION or the issue or purchase
     of shares thereunder, such OPTION may not be exercised in whole or in part
     unless and until such listing, registration, qualification, consent or
     approval shall have been effected or obtained free of any conditions not
     acceptable to the COMMITTEE.

18.  Amendment and Termination of the Plan and Options

     The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate,
     modify or amend the PLAN in any respect; provided, however, that, to the
     extent necessary and desirable to comply with Section 422 of the CODE (or
     any other applicable law or regulation, including the requirements of any
     stock exchange on which the COMMON STOCK is listed or quoted), shareholder
     approval of any PLAN amendment shall be obtained in such a manner and to
     such a degree as is required by the applicable law or regulation.

     No suspension, termination, modification or amendment of the PLAN may,
     without the consent of the OPTIONEE, adversely affect his or her rights
     under OPTIONS theretofore granted to such OPTIONEE. In the event of
     amendments to the CODE or applicable rules or regulations relating to ISOS
     subsequent to the date hereof, the CORPORATION may amend the PLAN, and the
     CORPORATION and OPTIONEES holding OPTION agreements may agree to amend
     outstanding OPTION agreements, to conform to such amendments.

     The COMMITTEE may make such amendments or modifications in the terms and
     conditions of any OPTION as it may deem advisable, or cancel or annul any
     grant of an OPTION; provided, however, that no such amendment,
     modification, cancellation or annulment may, without the consent of the
     OPTIONEE, adversely affect his or her rights under such OPTION; and
     provided further the COMMITTEE may not reduce the OPTION PRICE or purchase
     price of any OPTION or OPTION below the original OPTION PRICE or purchase
     price.

     Notwithstanding the foregoing, the COMMITTEE reserves the right, in its
     sole discretion, to (i) convert any outstanding ISOS to NON-QUALIFIED STOCK
     OPTIONS, (ii) to require a OPTIONEE to forfeit any unexercised or
     securities unpurchased OPTIONS, any shares received or purchased pursuant
     to an OPTION, or any gains realized by virtue of the receipt of an OPTION
     in the event that such OPTIONEE competes against the CORPORATION, and (iii)
     to cancel or annul any grant of an OPTION in the event of a OPTIONEE'S
     TERMINATION FOR CAUSE. For purposes of the PROGRAM, "TERMINATION FOR CAUSE"
     shall include, but not be limited to, termination because of dishonesty,
     criminal offense or violation of a work rule, and shall be determined by,
     and in the sole discretion of, the COMMITTEE.

19.  Effective Date of the Plan and Duration

     The PLAN first became effective as of January 1, 1992. It has since been
     amended and restated. The amended and restated PLAN became effective as of
     January 1, 1996, upon approval by the shareholders of Pacific Gas and
     Electric Company at its

                                       14
<PAGE>

     Annual Meeting on April 17, 1996. Effective January 1, 1997, the PLAN was
     assumed by PG&E CORPORATION. The PLAN was subsequently amended on October
     21, 1998, April 21, 1999, February 16, 2000, and September 19, 2000.
     Effective May 16, 2001, the PLAN, and the PROGRAM of which the PLAN is a
     part, were amended to add 15,000,000 shares of COMMON STOCK to the total
     number of shares of COMMON STOCK reserved for use under the PLAN and the
     PROGRAM. Unless terminated sooner pursuant to Section 18 hereof, the PLAN
     shall terminate on December 31, 2005.

20.  Definitions

     (a)  BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION.

     (b)  CHANGE IN CONTROL has the meaning set forth in Section 16 hereof.

     (c)  CHIEF EXECUTIVE OFFICER means the Chief Executive Officer of PG&E
          CORPORATION.

     (d)  CODE means the Internal Revenue Code of 1986, as amended from time to
          time.

     (e)  COMMITTEE means the Nominating and Compensation Committee of the BOARD
          OF DIRECTORS or any successor to such committee.

     (f)  COMMON STOCK means common shares of PG&E CORPORATION with no par value
          and any class of common shares into which such common shares hereafter
          may be converted.

     (g)  CONSULTANT means any person, including an advisor, who is engaged by
          the CORPORATION to render services.

     (h)  CORPORATION means PG&E CORPORATION, and any parent corporation (as
          defined in Section 424(e) of the CODE) or subsidiary corporation (as
          defined in Section 424(f) of the CODE).

     (i)  DEA means a Dividend Equivalent Account described in Section 9 hereof.

     (j)  DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or
          the Board of Directors of any parent corporation (as defined in
          Section 424(e) of the CODE) which may hereafter be established,
          including an advisory, emeritus or honorary director.

     (k)  DIVIDEND EQUIVALENT means a right that entitles the OPTIONEE to
          receive cash or COMMON STOCK based on the dividends declared on the
          COMMON STOCK covered by such right.

     (l)  ELIGIBLE PARTICIPANT means any KEY EMPLOYEE. It also means, if so
          identified by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the
          case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain
          ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof), other EMPLOYEES,
          DIRECTORS, CONSULTANTS, employees or consultants of any affiliates of
          PG&E CORPORATION, and other persons whose participation in the PROGRAM
          is deemed by the COMMITTEE (or by the CHIEF EXECUTIVE OFFICER, in the
          case of OPTIONS granted by the CHIEF EXECUTIVE OFFICER to certain
          ELIGIBLE PARTICIPANTS pursuant to Section 2 hereof) to be in the best
          interests of the CORPORATION; provided, however, that DIRECTORS who
          are not EMPLOYEES shall not be ELIGIBLE PARTICIPANTS for purposes of
          the PLAN.

     (m)  EMPLOYEE means any person who is employed by the CORPORATION. The
          payment of a director's fee or consulting fee by the CORPORATION shall
          not be sufficient to constitute "employment" by the CORPORATION.

     (n)  ERISA means the Employee Retirement Income Security Act of 1974, as
          amended.

     (o)  EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.

     (p)  FAIR MARKET VALUE means the closing price of the COMMON STOCK reported
          on the New York Stock Exchange Composite Transactions for the date
          specified for determining such value.

                                       15
<PAGE>

     (q)  ISO means an OPTION intended to qualify as an incentive stock option
          under Section 422 of the CODE.

     (r)  KEY EMPLOYEE means the Corporate Secretary, Treasurer, Vice Presidents
          and other executive officers of PG&E CORPORATION above the rank of
          Vice President. It also means, if so identified by the COMMITTEE (or
          by the CHIEF EXECUTIVE OFFICER, in the case of OPTIONS granted by the
          CHIEF EXECUTIVE OFFICER to certain ELIGIBLE PARTICIPANTS pursuant to
          Section 2 hereof), executive officers of wholly-owned subsidiaries of
          PG&E CORPORATION (including subsidiaries which become such after
          adoption of the PROGRAM) and any other key management employee of PG&E
          CORPORATION or any wholly-owned subsidiary of PG&E CORPORATION.

     (s)  NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE.

     (t)  NON-QUALIFIED STOCK OPTION means any OPTION which is not an ISO.

     (u)  OPTION means an option to purchase shares of COMMON STOCK granted
          under the PLAN.

     (v)  OPTIONEE means the ELIGIBLE PARTICIPANT receiving the OPTION, or his
          or her legal representative, legatees, distributees or alternate
          payees, as the case may be.

     (w)  OPTION PRICE means the purchase price for the COMMON STOCK upon
          exercise of an OPTION.

     (x)  PG&E CORPORATION means PG&E CORPORATION, a California corporation.

     (y)  PLAN means this Stock Option Plan as amended and restated herein and
          as may be amended from time to time, or any successor plan which the
          COMMITTEE may adopt from time to time with respect to the grant of
          OPTIONS under the PROGRAM.

     (z)  PROGRAM means the PG&E Corporation Long-Term Incentive Program, as
          amended effective as of May 16, 2001, and as may be amended from time
          to time, pursuant to which the PLAN is adopted.

     (aa) RETIREMENT means termination of employment with the CORPORATION at age
          55 or later, provided that the ELIGIBLE PARTICIPANT was employed by
          the CORPORATION for at least five consecutive years prior to the date
          of termination.

     (bb) RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any successor to
          Rule 16b-3, as in effect when discretion is being exercised with
          respect to the PLAN.

     (cc) SAR means a stock appreciation right whose value is based on the
          increase in the FAIR MARKET VALUE of the COMMON STOCK covered by such
          right.

     (dd) SECTION 16 OFFICER means any person who is designated by the BOARD OF
          DIRECTORS as an executive officer of PG&E CORPORATION and any other
          person who is designated as an officer of PG&E CORPORATION for
          purposes of Section 16 of the EXCHANGE ACT.

     (ee) TANDEM refers to a DIVIDEND EQUIVALENT or SAR (as the case may be)
          granted in conjunction with an OPTION.

     (ff) TERMINATION occurs when an EMPLOYEE ceases to be employed by the
          CORPORATION as a common law employee, when a DIRECTOR ceases to be a
          member of the BOARD OF DIRECTORS or the Board of Directors of any
          parent corporation which may hereafter be established (as the case may
          be), or when the relationship between the CORPORATION and a CONSULTANT
          or other ELIGIBLE PARTICIPANT terminates, as the case may be.

     (gg) TERMINATION FOR CAUSE has the meaning set forth in Section 12 hereof.

                                       16
<PAGE>

                                   EXHIBIT B

                               PG&E CORPORATION
                             PERFORMANCE UNIT PLAN

     This is the controlling and definitive statement of the Performance Unit
Plan ("PLAN"/3/) for ELIGIBLE EMPLOYEES of PG&E CORPORATION ("CORPORATION") and
such other companies, affiliates, subsidiaries, or associations as the BOARD OF
DIRECTORS may designate from time to time. The PLAN was first adopted by the
BOARD in 1989 and was effective January 1, 1990. It has since been amended from
time to time, most recently on September 19, 2000. Effective May 16, 2001, the
PLAN, and the PROGRAM of which the PLAN is a part, was amended to add 15,000,000
shares of COMMON STOCK to the total number of shares of COMMON STOCK reserved
for use under the PLAN and the PROGRAM.

                                   ARTICLE I

                                  DEFINITIONS

     1.01   Board of Directors or Board shall mean the BOARD OF DIRECTORS of the
CORPORATION or, when appropriate, any committee of the BOARD which has been
delegated the authority to take action with respect to the PLAN.

     1.02   Committee shall mean the Nominating and Compensation Committee of
the BOARD OF DIRECTORS.

     1.03   Corporation shall mean PG&E CORPORATION, a California corporation.

     1.04   Eligible Employee shall mean employees of the CORPORATION who are
officers at the vice presidential level or above, the corporate secretary, the
controller, and the treasurer of the CORPORATION, and such other employees of
the CORPORATION, other companies, affiliates, subsidiaries, or associations as
may be designated by the COMMITTEE.

     1.05   Performance Targets shall mean the annual CORPORATION financial and
operational goals adopted by the COMMITTEE to be used in determining awards
under the PLAN.

     1.06   Plan shall mean the Performance Unit Plan ("PUP") as set forth
herein and as may be amended from time to time.

     1.07   Plan Administrator shall mean the COMMITTEE or such individual or
individuals as that COMMITTEE may appoint to handle the day-to-day affairs of
the PLAN.

     1.08   Price shall mean the average market price of STOCK for the last 30-
day period of the YEAR preceding the YEAR in which UNITS are payable.

     1.09   PUP Units shall mean the units granted to ELIGIBLE EMPLOYEES who
participate in the PLAN. A PUP UNIT has the equivalent value of the current
market price of a share of STOCK at the time of grant.

     1.10   Retirement means termination of employment with the CORPORATION at
age 55 or later, provided that the ELIGIBLE EMPLOYEE was employed by the
CORPORATION for at least five consecutive years prior to the date of
termination.

     1.11   Stock shall mean the common stock of the CORPORATION and any class
of common shares into which such STOCK hereafter may be converted.

     1.12   Vesting Period shall mean the three calendar YEARS commencing with
the YEAR in which PUP UNITS are granted.

     1.13   Year shall mean a calendar year.

_________________________
/3/ Words in all capitals are defined in Article I.

                                       17
<PAGE>

                                  ARTICLE II

     2.01   Prior to the beginning of each YEAR, the COMMITTEE shall determine
whether PUP UNITS will be granted for such YEAR, the ELIGIBLE EMPLOYEES to whom
PUP UNITS will be granted, and the number of PUP UNITS to be granted to each
ELIGIBLE EMPLOYEE. Employees who become ELIGIBLE EMPLOYEES after the beginning
of a YEAR shall be entitled to a prorata grant of PUP UNITS.

     2.02   At the same time that the COMMITTEE makes its determination as to
the granting of PUP UNITS, it shall also establish PERFORMANCE TARGETS. Although
it is intended that PERFORMANCE TARGETS will not change in the course of the
YEAR, the COMMITTEE reserves the right to modify or adjust a previously set
PERFORMANCE TARGET if, in its sole discretion, extraordinary events warrant such
modification or adjustment; provided, however, that no such modification or
adjustment shall increase the amount of any payment that would otherwise be due
based upon performance as measured against the original PERFORMANCE TARGET.

     2.03   Each grant of PUP UNITS shall have its own VESTING PERIOD. Subject
to modification as measured against a given YEAR's applicable PERFORMANCE
TARGET, each grant of PUP UNITS shall be payable as follows:

     a. One-third after the end of the first YEAR of the VESTING PERIOD;

     b. One-third after the end of the second YEAR of the VESTING PERIOD; and

     c. One-third after the end of the third YEAR of the VESTING PERIOD.

     2.04   To determine the number of PUP UNITS earned, the applicable
PERFORMANCE TARGET shall be the PERFORMANCE TARGET for the YEAR in which the PUP
UNITS vest. Performance as measured against the applicable PERFORMANCE TARGET
for a YEAR shall modify all PUP UNITS that vest at the end of such YEAR. The
PERFORMANCE TARGETS established by the COMMITTEE may modify the number of UNITS
earned from 0% to 200% of the number of vested UNITS.

     2.05   ELIGIBLE EMPLOYEES shall receive a cash payment as soon as
practicable following the YEAR PUP UNITS vest pursuant to the schedule set forth
in Section 2.03. The amount of the payment shall be equal to the product of the
number of PUP UNITS earned multiplied by the PRICE of STOCK.

     2.06   Each time that the CORPORATION declares a dividend on its STOCK, an
amount equal to the dividend multiplied by an ELIGIBLE EMPLOYEE's outstanding,
but unearned PUP UNITS, shall be accrued on behalf of each ELIGIBLE EMPLOYEE. As
soon as practicable following the end of each YEAR, ELIGIBLE EMPLOYEES shall
receive a cash payment of the dividends accrued for that YEAR, modified by
performance for that YEAR as measured under Section 2.04.

     2.07   An ELIGIBLE EMPLOYEE may elect to defer the payment of PUP UNITS
and/or dividends paid on PUP UNITS by making a timely election under the
Deferred Compensation Plan. Deferrals of benefits payable under this Plan shall
be subject to the rules contained in the Deferred Compensation Plan governing
elections to defer and receipt of deferred amounts.

                                  ARTICLE III

     3.01   Retirement. Upon RETIREMENT, all outstanding PUP UNITS continue to
be payable according to the terms of the PLAN. Thus, the number of UNITS
eventually earned by a retired employee is still subject to modification
depending on the extent to which applicable PERFORMANCE TARGETS are met during
the YEAR preceding the January in which UNITS become payable under the schedule
of Section 2.03. A retired employee is not entitled to receive grants of PUP
UNITS after RETIREMENT.

     3.02   Disability. If an ELIGIBLE EMPLOYEE is both disabled and entitled to
receive benefits under Pacific Gas and Electric Company's Long Term Disability
Plan, UNITS granted prior to the date of disability shall continue to be payable
according to the terms of this PLAN. An ELIGIBLE EMPLOYEE is not entitled to
receive grants of PUP UNITS after the date of disability as determined under the
provisions of the Long Term Disability Plan. If an ELIGIBLE EMPLOYEE ceases to
be an ELIGIBLE EMPLOYEE because of disability and is not entitled to receive
benefits under Pacific Gas and Electric Company's Long Term Disability Plan, all
outstanding grants of PUP UNITS become vested and payable as soon as practicable
in the YEAR following the

                                       18
<PAGE>

YEAR in which the ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE. All of
the UNITS payable shall be subject to modification based upon performance as
measured against the PERFORMANCE TARGET for the YEAR in which the ELIGIBLE
EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE.

     3.03   Death. In the event of the death of an ELIGIBLE EMPLOYEE, all
outstanding grants of PUP UNITS held by the ELIGIBLE EMPLOYEE at the date of
death shall become vested and payable as soon as practicable in the YEAR
following the YEAR of death. All of the UNITS payable after an ELIGIBLE
EMPLOYEE's death shall be subject to modification based upon performance as
measured against the PERFORMANCE TARGET for the YEAR in which the death of the
ELIGIBLE EMPLOYEE occurs.

     3.04   Termination. If an ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE
EMPLOYEE for any reason other than RETIREMENT, disability, or death, all
outstanding grants of PUP UNITS shall be canceled as of the date that the
ELIGIBLE EMPLOYEE ceases to be an ELIGIBLE EMPLOYEE unless otherwise provided in
the PG&E Corporation Officer Severance Policy.

     3.05   Change in Control. Upon a Change in Control as defined in the PG&E
Corporation Long Term Incentive Program (Program) or upon a termination of
employment coincident with the sale of all or substantially all of the assets of
a subsidiary of PG&E Corporation, all PUP UNITS shall become vested and payable
as soon as practicable in the YEAR following the Change in Control in accordance
with Section 16 of the Program.

                                  ARTICLE IV

                           ADMINISTRATIVE PROVISIONS

     4.01   Administration. The PLAN shall be administered by the PLAN
ADMINISTRATOR who shall have the authority to interpret the PLAN and make such
rules as it deems appropriate. The PLAN ADMINISTRATOR shall have the duty and
responsibility of maintaining records, making the requisite calculations, and
disbursing payments hereunder. The PLAN ADMINISTRATOR's interpretations,
determinations, rules, and calculations shall be final and binding on all
persons and parties concerned.

     4.02   Amendment and Termination. The CORPORATION may amend or terminate
the PLAN at any time, provided, however, that no such amendment or termination
shall adversely affect PUP UNITS which an ELIGIBLE EMPLOYEE has earned prior to
the date of such amendment or termination. PUP UNITS outstanding but unearned at
the date of any such amendment or termination may, in the sole discretion of the
CORPORATION, be canceled, and the CORPORATION shall have no obligation to
provide a substitute benefit of lesser, equal, or greater value.

     4.03   Nonassignability of Benefits. The benefits payable under this PLAN
or the right to receive future benefits under this PLAN may not be anticipated,
alienated, pledged, encumbered, or subject to any charge or legal process, and
if any attempt is made to do so, or a person eligible for any benefits becomes
bankrupt, the interest under the PLAN of the person affected may be terminated
by the PLAN ADMINISTRATOR which, in its sole discretion, may cause the same to
be held if applied for the benefit of one or more of the dependents of such
person or make any other disposition of such benefits that it deems appropriate.

     4.04   No Guarantee of Employment. Nothing contained in this PLAN shall be
construed as a contract of employment between the CORPORATION or the ELIGIBLE
EMPLOYEE, or as a right of the ELIGIBLE EMPLOYEE to be continued in the employ
of the CORPORATION, to remain as an officer of the CORPORATION, or as a
limitation on the right of the CORPORATION to discharge any of its employees,
with or without cause.

     4.05   Benefits Unfunded and Unsecured. The benefits under this PLAN are
unfunded, and the interest under this PLAN of any ELIGIBLE EMPLOYEE and such
ELIGIBLE EMPLOYEE's right to receive a distribution of benefits under this PLAN
shall be an unsecured claim against the general assets of the CORPORATION.

     4.06   Applicable Law. All questions pertaining to the construction,
validity, and effect of the PLAN shall be determined in accordance with the laws
of the United States, and to the extent not preempted by such laws, by the laws
of the State of California.

                                       19
<PAGE>

                                   EXHIBIT C

                                PG&E CORPORATION
                   NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
                   (As amended effective as of May 16, 2001)

1.   Purpose of the Plan

     This is the controlling and definitive statement of the PG&E Corporation
     Non-Employee Director Stock Incentive Plan (hereinafter called the
     PLAN/4/). The purpose of the PLAN is to advance the interests of the
     CORPORATION by providing NON-EMPLOYEE DIRECTORS with financial incentives
     to promote the success of its long-term (five to ten years) business
     objectives, and to increase their proprietary interest in the success of
     the CORPORATION. Inasmuch as the PLAN is designed to encourage financial
     performance and to improve the value of shareholders' investment in PG&E
     CORPORATION, the costs of the PLAN will be funded from corporate earnings.

2.   Formula Awards of Director Restricted Stock, Non-Qualified Stock Options
     and Phantom Stock to Non-Employee Directors

     All awards of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS and
     PHANTOM STOCK under the PLAN shall be automatic and non-discretionary, and
     shall be made strictly in accordance with the provisions contained herein.
     No person shall have any discretion to select which NON-EMPLOYEE DIRECTORS
     shall be granted DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or
     PHANTOM STOCK. Further, no person shall have any discretion to determine
     the number of shares of DIRECTOR RESTRICTED STOCK awarded to a NON-EMPLOYEE
     DIRECTOR, and, except as otherwise provided in Section 4 with respect to a
     NON-EMPLOYEE DIRECTOR'S election to allocate formula awards between NON-
     QUALIFIED STOCK OPTIONS and PHANTOM STOCK, no person shall have any
     discretion to determine the number of shares underlying NON-QUALIFIED STOCK
     OPTIONS and PHANTOM STOCK awarded to a NON-EMPLOYEE DIRECTOR.

3.   Awards of Director Restricted Stock

     (a)  On the first business day of each calendar year beginning on January
          1, 1998, during the duration of the PLAN, each person who is a NON-
          EMPLOYEE DIRECTOR on the first business day of the applicable calendar
          year shall receive a grant of DIRECTOR RESTRICTED STOCK in an amount
          to be determined in accordance with the formula set forth in this
          Section 3(a). The number of shares of DIRECTOR

          RESTRICTED STOCK to be granted to each NON-EMPLOYEE DIRECTOR each
          calendar year shall be determined by (i) dividing ten thousand dollars
          ($10,000) by the FAIR MARKET VALUE of the COMMON STOCK on the first
          business day of the applicable calendar year, and (ii) rounding the
          resulting number down to the nearest whole share. No person shall
          receive more than one (1) grant of DIRECTOR RESTRICTED STOCK during
          any calendar year.

     (b)  Shares of DIRECTOR RESTRICTED STOCK shall vest cumulatively as
          follows: (i) twenty percent (20%) of such shares on the first
          anniversary of the date of grant; (ii) forty percent (40%) of such
          shares on the second anniversary of the date of grant; (iii) sixty
          percent (60%) of such shares on the third anniversary of the date of
          grant; (iv) eighty percent (80%) of such shares on the fourth
          anniversary of the date of grant; and (v) one hundred percent (100%)
          of such shares on the fifth anniversary of the date of grant. Shares
          of DIRECTOR RESTRICTED STOCK may not be resold or otherwise
          transferred by a GRANTEE until such shares are vested in accordance
          with the provisions of this Section 3(b).

4.   Annual Election to Receive Non-Qualified Stock Options and Phantom Stock

     By June 30 of each calendar year during the term of the Plan, each person
     who is then a NON-EMPLOYEE DIRECTOR shall deliver to the Corporate
     Secretary a written election to receive either NON-QUALIFIED STOCK OPTIONS
     or PHANTOM

_______________
/4/ Capitalized words are defined in Section 15 hereof.

                                       20
<PAGE>

     STOCK, or both, with an aggregate value of $20,000, on the first business
     day of the following calendar year, provided the person continues to be a
     NON-EMPLOYEE DIRECTOR on the date the award would otherwise be made. A NON-
     EMPLOYEE DIRECTOR may allocate between NON-QUALIFIED STOCK OPTIONS and
     PHANTOM STOCK in minimum increments with a value equal to $5,000, as
     determined in accordance with Section 5 below with respect to NON-QUALIFIED
     STOCK OPTIONS, and Section 6 below, with respect to PHANTOM STOCK. All
     awards of NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK made to NON-
     EMPLOYEE DIRECTORS shall comply with Section 5 and Section 6 below,
     respectively. A NON-EMPLOYEE DIRECTOR who has failed to make a timely
     election or who became a NON-EMPLOYEE DIRECTOR after June 30 shall be
     awarded NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK, each with a value of
     $10,000 as determined in accordance with Section 5 and Section 6,
     respectively, provided that the NON-EMPLOYEE DIRECTOR continues to be a
     NON-EMPLOYEE DIRECTOR on the on the first business day of the following
     calendar year. Notwithstanding the foregoing, elections for calendar year
     1998 must be received by December 31, 1997, to be effective on the first
     business day of calendar year 1998.

5.   Grant of Non-Qualified Stock Options to Non-Employee Directors

     (a)  On the first business day of each calendar year beginning on January
          1, 1998, during the duration of the PLAN, each person who is then a
          NON-EMPLOYEE DIRECTOR and who has elected to receive an award of NON-
          QUALIFIED STOCK OPTIONS in accordance with Section 4, shall receive a
          grant of NON-QUALIFIED STOCK OPTIONS with an aggregate value equal to
          $5,000, $10,000, $15,000, or $20,000, as previously elected by the
          NON-EMPLOYEE DIRECTOR (or $10,000 in the case of a NON-EMPLOYEE
          DIRECTOR who has failed to make a timely election in accordance with
          Section 4 or who became a NON-EMPLOYEE DIRECTOR after June 30) (the
          "Elected Option Value"). The number of shares subject to the NON-
          QUALIFIED STOCK OPTIONS shall be determined by dividing the Elected
          Option Value by the value of a NON-QUALIFIED STOCK OPTION to purchase
          a single share of PG&E Corporation common stock as of the first
          business day of the applicable calendar year. The per stock option
          value shall be calculated in accordance with the Black-Scholes stock
          option valuation method using the average preceding November closing
          price of PG&E Corporation stock and reducing the per option value so
          calculated by twenty percent. The resulting number of NON-QUALIFIED
          STOCK OPTIONS shall be rounded down to the nearest whole share. No
          person shall receive more than one grant of NON-QUALIFIED STOCK
          OPTIONS during any calendar year.

     (b)  The OPTION PRICE of the COMMON STOCK subject under each NON-QUALIFIED
          STOCK OPTION shall be the FAIR MARKET VALUE of the COMMON STOCK on the
          date of grant. The exercise of any NON-QUALIFIED STOCK OPTION shall be
          contingent upon receipt by the CORPORATION of (i) cash, (ii) check,
          (iii) shares of COMMON STOCK, (iv) an executed exercise notice
          together with irrevocable instructions to a broker to either sell the
          shares subject to the NON-QUALIFIED STOCK OPTION or hold such shares
          as collateral for a margin loan and to promptly deliver to the
          CORPORATION the amount of sale or loan proceeds required to pay the
          OPTION PRICE, or (v) any combination of the foregoing in an amount
          equal to the full OPTION PRICE of the shares being purchased. For
          purposes of this paragraph, shares of COMMON STOCK that are delivered
          in payment of the OPTION PRICE must have been previously owned by the
          GRANTEE for a minimum of one year, and shall be valued at their FAIR
          MARKET VALUE as of the date of the exercise of the NON-QUALIFIED STOCK
          OPTION. The CORPORATION shall not make loans to any GRANTEE for the
          purpose of exercising NON-QUALIFIED STOCK OPTIONS.

     (c)  Each NON-QUALIFIED STOCK OPTION granted under the Plan shall become
          exercisable and vested cumulatively as follows: (i) up to thirty-three
          percent (33%) of the NON-QUALIFIED STOCK OPTION may be exercised on or
          after the second anniversary of the date of grant; (ii) up to sixty-
          six percent (66%) of the NON-QUALIFIED STOCK OPTION may be exercised
          on or after the third anniversary of the date of grant; and (iii) up
          to one hundred percent (100%) of the NON-QUALIFIED STOCK OPTION may be
          exercised on or after the fourth anniversary of the date of grant.

     (d)  The term of each NON-QUALIFIED STOCK OPTION shall be ten years and one
          day from the date of grant, subject to earlier termination as provided
          in Section 9 hereof. Any provision of the PLAN to the contrary
          notwithstanding, no NON-QUALIFIED STOCK OPTION shall be exercised
          after the time limitations stated in this Section 5(d).

6.   Awards of Phantom Stock to Non-Employee Directors

     (a)  On the first business day of each calendar year beginning on January
          1, 1998, during the duration of the PLAN, each person who is then a
          NON-EMPLOYEE DIRECTOR and who has elected to receive an award of
          PHANTOM STOCK

                                       21
<PAGE>

          in accordance with Section 4, shall be credited with an amount of
          PHANTOM STOCK with a value (as determined by the FAIR MARKET VALUE of
          the COMMON STOCK on the first business day of the applicable calendar
          year) equal to $5,000, $10,000, $15,000, or $20,000, as previously
          elected by the NON-EMPLOYEE DIRECTOR (the "Elected Phantom Stock
          Value"). The number of shares of PHANTOM STOCK (including fractions
          computed to three decimal places) to be granted to each NON-EMPLOYEE
          DIRECTOR each calendar year shall be determined by dividing the
          Elected Phantom Stock Value (or $10,000 in the case of a NON-EMPLOYEE
          DIRECTOR who has failed to make a timely election in accordance with
          Section 4 or who became a NON-EMPLOYEE DIRECTOR after June 30) by the
          FAIR MARKET VALUE of the COMMON STOCK on the first business day of the
          applicable calendar year. No person shall receive more than one grant
          of PHANTOM STOCK during any calendar year. The shares of PHANTOM STOCK
          awarded to a NON-EMPLOYEE DIRECTOR shall be credited to a newly
          established PHANTOM STOCK account for the NON-EMPLOYEE DIRECTOR. Each
          share of PHANTOM STOCK shall be deemed to be equal to one share (or
          fraction thereof) of COMMON STOCK on the date of grant, and shall
          thereafter fluctuate in value in accordance with the FAIR MARKET VALUE
          of the COMMON STOCK.

     (b)  Each NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall be credited
          quarterly on each dividend payment date with additional shares of
          PHANTOM STOCK (including fractions computed to three decimal places)
          determined by dividing (i) the aggregate amount of dividends, i.e,.
          the dividend multiplied by the number of shares of PHANTOM STOCK
          credited to the participant's account as of the dividend record date,
          by (ii) by the FAIR MARKET VALUE of the COMMON STOCK on the dividend
          payment date.

     (c)  Payment of the shares of PHANTOM STOCK credited to a NON-EMPLOYEE
          DIRECTOR'S PHANTOM STOCK account shall only be made after the NON-
          EMPLOYEE DIRECTOR'S RETIREMENT or MANDATORY RETIREMENT from the BOARD
          OF DIRECTORS. Payment shall be made only in the form of shares of
          COMMON STOCK equal to the number of shares of PHANTOM STOCK credited
          to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account on the date of
          distribution, rounded down to the nearest whole share. The NON-
          EMPLOYEE DIRECTOR may elect to receive the number of shares of COMMON
          STOCK to which he is entitled in a lump sum distribution of the entire
          amount or in a series of ten or less approximately equal annual
          installments, provided that distribution shall commence no later than
          January of the year following the year in which the NON-EMPLOYEE
          DIRECTOR'S RETIREMENT or MANDATORY RETIREMENT occurred.

7.   Shares of Stock Subject to the Plan

     There shall be reserved for use under the PLAN and for the grant of any
     other INCENTIVE AWARDS pursuant to the PROGRAM (subject to the provisions
     of Section 10 hereof) a total of 49,389,230 shares of COMMON STOCK, which
     shares may be authorized but unissued shares of COMMON STOCK or issued
     shares of COMMON STOCK which shall have been reacquired by PG&E
     CORPORATION.

8.   Dividend, Voting and Other Shareholder Rights

     Except as otherwise provided in the PLAN, each GRANTEE shall have all of
     the rights of a shareholder of PG&E CORPORATION with respect to all
     outstanding shares of DIRECTOR RESTRICTED STOCK registered in his or her
     name, whether or not such shares are vested, including the right to receive
     dividends and other distributions paid or made with respect to such shares
     and the right to vote such shares. No GRANTEE shall have any of the rights
     of a shareholder of PG&E CORPORATION with respect to a NON-QUALIFIED STOCK
     OPTION until the shares acquired upon exercise of such NON-QUALIFIED STOCK
     OPTION have been issued and registered in his or her name. No GRANTEE shall
     have any of the rights of a shareholder of PG&E CORPORATION with respect to
     PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account
     under the Plan.

9.   Termination of Status as a Non-Employee Director

     (a)  In the event of a TERMINATION by reason of disability or death, (i)
          all shares of DIRECTOR RESTRICTED STOCK held by the GRANTEE shall
          become fully vested, notwithstanding the provisions of Section 3(b)
          hereof, and the GRANTEE (or the GRANTEE'S estate or a person who
          acquired the shares of DIRECTOR RESTRICTED STOCK by bequest or
          inheritance) shall have the right to resell or transfer such shares at
          any time, (ii) all NON-QUALIFIED STOCK OPTIONS held by the GRANTEE, to
          the extent that such NON-QUALIFIED STOCK OPTIONS have not

                                       22
<PAGE>

          previously expired or been exercised, shall become fully vested and
          exercisable, notwithstanding the provisions of Section 5(c) hereof,
          and the GRANTEE (or the GRANTEE'S estate or a person who acquired the
          right to exercise the NON-QUALIFIED STOCK OPTION by bequest or
          inheritance) shall have the right to exercise the NON-QUALIFIED STOCK
          OPTIONS at any time within their respective terms or within one (1)
          year after the date of the GRANTEE'S death or disability, whichever is
          shorter, and (iii) all shares of PHANTOM STOCK credited to the NON-
          EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall immediately become
          payable to the GRANTEE (or the GRANTEE'S estate or a person who
          acquired the shares of PHANTOM STOCK by bequest or inheritance) in the
          form of a number of shares of COMMON STOCK equal to the number of
          shares of PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTOR'S
          PHANTOM STOCK account, rounded down to the nearest whole share. The
          term "disability" shall, for the purposes of the PLAN, be defined in
          Section 22(e)(3) of the CODE.

     (b)  In the event of a TERMINATION by reason of MANDATORY RETIREMENT, (i)
          all shares of DIRECTOR RESTRICTED STOCK held by the GRANTEE shall
          become fully vested, notwithstanding the provisions of Section 3(b)
          hereof, and the GRANTEE shall have the right to resell or transfer
          such shares at any time, (ii) the NON-QUALIFIED STOCK OPTIONS then
          held by the GRANTEE, to the extent that such NON-QUALIFIED STOCK
          OPTIONS have not previously expired or been exercised, shall become
          fully vested and exercisable, notwithstanding the provisions of
          Section 5(c) hereof, and the GRANTEE shall have the right to exercise
          the NON-QUALIFIED STOCK OPTIONS at any time within their respective
          terms or within five (5) years after such MANDATORY RETIREMENT,
          whichever is shorter; and (iii) all shares of PHANTOM STOCK credited
          to the NON- EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall become
          payable to the GRANTEE in accordance with Section 6(c) hereof.

     (c)  In the event of a TERMINATION for any reason other than those
          specified in subparagraphs (a) and (b) above, (i) any unvested shares
          of DIRECTOR RESTRICTED STOCK granted hereunder shall be forfeited and
          the GRANTEE shall return to the CORPORATION for cancellation any stock
          certificates representing such forfeited shares which forfeited shares
          shall be deemed to be canceled and no longer outstanding as of the
          date of TERMINATION; and from and after the date of TERMINATION, the
          GRANTEE shall cease to be a shareholder with respect to such forfeited
          shares and shall have no dividend, voting or other rights with respect
          thereto, (ii) any NON-QUALIFIED STOCK OPTIONS granted hereunder that
          have not yet vested and become exercisable shall terminate, (iii) the
          GRANTEE shall have the right to exercise NON-QUALIFIED STOCK OPTIONS,
          to the extent that such NON-QUALIFIED STOCK OPTIONS have vested and
          become exercisable as of the date of TERMINATION, at any time within
          their respective terms or within three months after such TERMINATION,
          whichever is shorter, after which the NON-QUALIFIED STOCK OPTIONS
          shall terminate, and (iv) all shares of PHANTOM STOCK credited to the
          NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account shall be forfeited on
          the date of TERMINATION; provided, however, that if the TERMINATION
          results from the NON-EMPLOYEE DIRECTOR'S RETIREMENT, then the PHANTOM
          STOCK credited to the NON-EMPLOYEE DIRECTOR'S PHANTOM STOCK account
          shall become payable in accordance with Section 6(c) hereof.

     (d)  Notwithstanding the provisions of subparagraphs (a) through (c) above,
          the BOARD OF DIRECTORS may, in its sole discretion, establish
          different terms and conditions pertaining to the effect of
          TERMINATION, to the extent permitted by applicable federal and state
          law.

10.  Adjustments Upon Changes in Number or Value of Shares of Common Stock

     If there are any changes in the number or value of shares of COMMON STOCK
     by reason of stock dividends, stock splits, reverse stock splits,
     recapitalizations, mergers, consolidations or other events that materially
     increase or decrease the number or value of issued and outstanding shares
     of COMMON STOCK, the BOARD OF DIRECTORS or COMMITTEE may make such
     adjustments as it shall deem appropriate, in order to prevent dilution or
     enlargement of rights.

11.  Non-Transferability

     NON-QUALIFIED STOCK OPTIONS, PHANTOM STOCK, and shares of DIRECTOR
     RESTRICTED STOCK that have not vested in accordance with the provisions of
     Section 3(b) hereof, shall not be transferable by the GRANTEE otherwise
     than by will or the laws of descent and distribution, or pursuant to a
     qualified domestic relations order as defined by the CODE, Title I of ERISA
     or the rules thereunder.

12.  Change in Control

                                       23
<PAGE>

     Upon the occurrence of a CHANGE IN CONTROL (as defined below), (i) any time
     periods relating to the vesting of any shares of DIRECTOR RESTRICTED STOCK
     granted hereunder shall be accelerated so that all such shares immediately
     become fully vested, (ii) any time periods relating to the vesting of NON-
     QUALIFIED STOCK OPTIONS granted hereunder shall be accelerated so that all
     such NON-QUALIFIED STOCK OPTIONS immediately become fully vested and
     exercisable for the remainder of their terms, and (iii) all shares of
     PHANTOM STOCK credited to the NON-EMPLOYEE DIRECTORS' PHANTOM STOCK
     accounts shall become payable in accordance with Section 6(c) hereof as if
     the CHANGE IN CONTROL constituted a RETIREMENT.

     A "CHANGE IN CONTROL" shall be deemed to have occurred if:

     (a)  any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
          the EXCHANGE ACT, but excluding any benefit plan for EMPLOYEES or any
          trustee, agent or other fiduciary for any such plan acting in such
          person's capacity as such fiduciary), directly or indirectly, becomes
          the beneficial owner of securities of PG&E CORPORATION representing
          twenty percent (20%) or more of the combined voting power of PG&E
          CORPORATION's then outstanding securities;

     (b)  during any two consecutive years, individuals who at the beginning of
          such a period constitute the BOARD OF DIRECTORS cease for any reason
          to constitute at least a majority of the BOARD OF DIRECTORS, unless
          the election, or the nomination for election by the shareholders of
          PG&E CORPORATION, of each new DIRECTOR was approved by a vote of at
          least two-thirds (2/3) of the DIRECTORS then still in office who were
          DIRECTORS at the beginning of the period; or

     the shareholders of the CORPORATION shall have approved (i) any
     consolidation or merger of the CORPORATION other than a merger or
     consolidation which would result in the voting securities of the
     CORPORATION outstanding immediately prior thereto continuing to represent
     (either by remaining outstanding or by being converted into voting
     securities of the surviving entity or any parent of such surviving entity)
     at least 70 percent of the Combined Voting Power of the CORPORATION, such
     surviving entity or the parent of such surviving entity outstanding
     immediately after the merger or consolidation; (ii) any sale, lease,
     exchange or other transfer (in one transaction or a series of related
     transactions) of all or substantially all of the assets of the CORPORATION,
     or (iii) any plan or proposal for the liquidation or dissolution of the
     CORPORATION. For purposes of this paragraph, the term Combined Voting Power
     shall mean the combined voting power of the CORPORATION's or other relevant
     entity's then outstanding voting securities.

13.  Amendment and Termination of the Plan

     The BOARD OF DIRECTORS or the COMMITTEE may at any time suspend, terminate,
     modify or amend the PLAN in any respect; provided, however, that, to the
     extent necessary and desirable to comply with the CODE (or any other
     applicable law or regulation, including the requirements of any stock
     exchange on which the COMMON STOCK is listed or quoted), shareholder
     approval of any PLAN amendment shall be obtained in such a manner and to
     such a degree as is required by the applicable law or regulation.

     No suspension, termination, modification or amendment of the PLAN may,
     without the consent of the GRANTEE, adversely affect his or her rights with
     respect to DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or
     PHANTOM STOCK theretofore granted to such GRANTEE.

     Except as provided in Section 2 hereof, the BOARD OF DIRECTORS or COMMITTEE
     may make such amendments or modifications in the terms and conditions of
     any grant of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or
     PHANTOM STOCK as it may deem advisable, or cancel or annul any grant of
     DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS or PHANTOM STOCK;
     provided, however, that no such amendment, modification, cancellation or
     annulment may, without the consent of the GRANTEE, adversely affect his or
     her rights with respect to such grant.

14.  Effective Date of the Plan and Duration

     This PLAN became effective as of January 1, 1996, upon approval by the
     shareholders of Pacific Gas and Electric Company at its Annual Meeting on
     April 17, 1996. Effective January 1, 1997, the PLAN was assumed by PG&E
     CORPORATION. At its

                                       24
<PAGE>

     meeting on December 17, 1997, the BOARD OF DIRECTORS amended and restated
     the PLAN effective January 1, 1998, to (i) reflect the adoption of new RULE
     16B-3 which became effective November 1, 1996, and (ii) provide automatic
     formula awards of NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK to NON-
     EMPLOYEE DIRECTORS within the limits of the PROGRAM as previously approved
     by shareholders in 1996. The PLAN was subsequently amended on October 21,
     1998 and April 21, 1999.

     Effective May 16, 2001, the PLAN, and the PROGRAM of which the PLAN is a
     part, were amended to add 15,000,000 shares of COMMON STOCK to the total
     number of shares of COMMON STOCK reserved for use under the PLAN and the
     PROGRAM. Unless terminated sooner pursuant to Section 13 hereof, the PLAN
     shall terminate on December 31, 2005.

15.  Definitions

     (a)  BOARD OF DIRECTORS means the Board of Directors of PG&E CORPORATION.

     (b)  CHANGE IN CONTROL has the meaning set forth in Section 12 hereof.

     (c)  CODE means the Internal Revenue Code of 1986, as amended from time to
          time.

     (d)  COMMITTEE means the Nominating and Compensation Committee of the BOARD
          OF DIRECTORS or any successor to such committee.

     (e)  COMMON STOCK means common shares of PG&E CORPORATION with no par value
          and any class of common shares into which such common shares hereafter
          may be converted.

     (f)  CORPORATION means PG&E CORPORATION, and any parent corporation (as
          defined in Section 424(e) of the CODE) or subsidiary corporation (as
          defined in Section 424(f) of the CODE).

     (g)  DIRECTOR means any person who is a member of the BOARD OF DIRECTORS or
          the Board of Directors of any parent corporation (as defined in
          Section 424(e) of the CODE) which may hereafter be established,
          including an advisory, emeritus or honorary director.

     (h)  DIRECTOR RESTRICTED STOCK means RESTRICTED STOCK granted to a NON-
          EMPLOYEE DIRECTOR under the PLAN.

     (i)  EMPLOYEE means any person who is employed by the CORPORATION. The
          payment of a director's fee or consulting fee by the CORPORATION shall
          not be sufficient to constitute "employment" by the CORPORATION.

     (j)  ERISA means the Employee Retirement Income Security Act of 1974, as
          amended.

     (k)  EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.

     (l)  FAIR MARKET VALUE means the closing price of the COMMON STOCK reported
          on the New York Stock Exchange Composite Transactions for the date
          specified for determining such value.

     (m)  GRANTEE means the NON-EMPLOYEE DIRECTOR receiving the DIRECTOR
          RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS and PHANTOM STOCK or his
          or her legal representative, legatees, distributees or alternate
          payees, as the case may be.

     (n)  MANDATORY RETIREMENT means retirement as a DIRECTOR at age 70 or at
          such other age as may be specified in the retirement policy for the
          BOARD OF DIRECTORS or the Board of Directors of any parent corporation
          which may hereafter be established (as the case may be), as in effect
          at the time of a NON-EMPLOYEE DIRECTOR'S TERMINATION.

     (o)  NON-EMPLOYEE DIRECTOR means a DIRECTOR who is not an EMPLOYEE.

                                       25
<PAGE>

     (p)  NON-QUALIFIED STOCK OPTION means a option to purchase shares of COMMON
          STOCK which is not intended to qualify as an incentive stock option
          under Section 422 of the CODE.

     (q)  PG&E CORPORATION means PG&E CORPORATION, a California corporation.

     (r)  PHANTOM STOCK means allocated hypothetical shares of COMMON STOCK that
          can be converted at a future date into stock.

     (s)  PLAN means this Non-Employee Director Stock Incentive Plan, as may be
          amended from time to time, or any successor plan which the COMMITTEE
          or BOARD OF DIRECTORS may adopt from time to time with respect to the
          grant of DIRECTOR RESTRICTED STOCK, NON-QUALIFIED STOCK OPTIONS,
          PHANTOM STOCK or other stock-based incentive awards under the PROGRAM.

     (t)  PROGRAM means the PG&E Corporation Long-Term Incentive Program, as
          amended effective May 16, 2001, and as may be amended from time to
          time, pursuant to which this PLAN is adopted.

     (u)  RESTRICTED STOCK means COMMON STOCK that is subject to forfeiture by
          the GRANTEE to the CORPORATION under such circumstances as may be
          specified by the COMMITTEE.

     (v)  RETIREMENT means TERMINATION of service on the BOARD OF DIRECTORS
          after serving continuously for five consecutive years.

     (w)  RULE 16b-3 means Rule 16b-3 under the EXCHANGE ACT or any successor to
          Rule 16b-3, as in effect when discretion is being exercised with
          respect to the PLAN.

          TERMINATION occurs when a NON-EMPLOYEE DIRECTOR ceases to be a member
     of the BOARD OF DIRECTORS or the Board of Directors of any parent
     corporation which may hereafter be established (as the case may be).

                                       26<PAGE>

                                                                   EXHIBIT 10.19

                                    SECOND
                             AMENDED AND RESTATED
                  WHOLESALE STANDARD OFFER SERVICE AGREEMENT

                           WHOLESALE STANDARD OFFER
                               SERVICE AGREEMENT

                                    between

                       THE NARRAGANSETT ELECTRIC COMPANY

                                      and

                            USGEN NEW ENGLAND, INC.

Dated as of September 1, 1998
<PAGE>

                               Table of Contents

<TABLE>
<S>                                                                               <C>
ARTICLE 1.  BASIC UNDERSTANDING..................................................  1

ARTICLE 2.  DEFINITIONS..........................................................  2

ARTICLE 3.  TERM AND REGULATORY APPROVAL.........................................  5
   3.1  Term.....................................................................  5
   3.2  Obtaining and Maintaining Required Permits...............................  5

ARTICLE 4.  SALE AND PURCHASE....................................................  5
   4.1  Wholesale Standard Offer Service.........................................  5
   4.2  Dispatchable Load Credits................................................  6

ARTICLE 5.  PRICE AND BILLING....................................................  6
   5.1  Price....................................................................  6
   5.2  Payment..................................................................  7
   5.3  Taxes, Fees and Levies...................................................  9

ARTICLE 6.  DELIVERY, LOSSES, AND DETERMINATION AND REPORTING OF HOURLY LOADS....  9
   6.1  Delivery.................................................................  9
   6.2  Losses...................................................................  9
   6.3  Determination and Reporting of Hourly Loads.............................. 10

ARTICLE 7.  DEFAULT AND TERMINATION.............................................. 11
   7.1  Material Breach and Termination.......................................... 11

ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES............................... 12
   8.1  Notices.................................................................. 12
   8.2  Authority of Representative.............................................. 13

ARTICLE 9.  LIABILITY, INDEMNIFICATION AND RELATIONSHIP OF PARTIES............... 13
   9.1  Limitation on Consequential, Incidental and Indirect Damages............. 13
   9.2  Recovery of Direct Damages Permitted..................................... 13
   9.3  Indemnification.......................................................... 14
   9.4  Independent Contractor Status............................................ 15

ARTICLE 10. ASSIGNMENT........................................................... 15
   10.1 Assignment............................................................... 15
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                          <C>
ARTICLE 11. FORCE MAJEURE...................................................  16
   11.1 Force Majeure Standard..............................................  16
   11.2 Force Majeure Definition............................................  16
   11.3 Obligation to Diligently Cure Force Majeure.........................  16

ARTICLE 12. WAIVERS.........................................................  17

ARTICLE 13. REGULATION......................................................  17
   13.1 Laws and Regulations................................................  17
   13.2 NEPOOL Requirements.................................................  17

ARTICLE 14. INTERPRETATION, DISPUTE RESOLUTION..............................  18
   14.1 Interpretation......................................................  18
   14.2 Dispute Resolution..................................................  18

ARTICLE 15. SEVERABILITY....................................................  18

ARTICLE 16. MODIFICATIONS...................................................  18

ARTICLE 17. SUPERSESSION....................................................  19

ARTICLE 18. COUNTERPARTS....................................................  19

ARTICLE 19. HEADINGS........................................................  19

Appendix A. Standard Offer Fuel Adjustment Provision........................ A-1

Appendix B. Estimation of Supplier Hourly Loads............................. B-1

Appendix C. Arbitration Agreement........................................... C-1
</TABLE>

                                      ii
<PAGE>

                     SECOND AMENDED AND RESTATED WHOLESALE
                       STANDARD OFFER SERVICE AGREEMENT

     This SECOND AMENDED AND RESTATED WHOLESALE STANDARD OFFER SERVICE AGREEMENT
("Agreement") is dated as of September 1, 1998 and is by and between THE
NARRAGANSETT ELECTRIC COMPANY, a Rhode Island corporation ("NECO"), and USGen
New England, Inc., a Delaware corporation ("Seller"), and amends and restates
and supersedes in its entirety the Amended and Restated Wholesale Standard
Offer Service Agreement dated as of October 29, 1997 between NECO and Seller.
This Agreement provides for the purchase by NECO and the sale by Seller of
Wholesale Standard Offer Service, as defined in this Agreement.

                       ARTICLE 1. BASIC UNDERSTANDINGS

     NECO purchases all of its requirements of electricity for resale to its
retail electric customers from its affiliate, New England Power Company ("NEP").

     NEP, NECO and other parties have entered into an agreement in settlement of
regulatory proceedings before the Federal Energy Regulatory Commission (the
"Rhode Island Restructuring Agreement") that, among other things, implements
certain requirements of the Rhode Island Utility Restructuring Act of 1996 (the
"Act"), permits NECO to terminate wholesale purchases from NEP, permits current
retail customers of NECO to purchase electricity from other suppliers on and
after a date defined therein as the "Retail Access Date," or, for a limited
time, to purchase Standard Offer Service from NECO, obligates NEP to supply
NECO with power sufficient to meet the latter's obligations to supply Standard
Offer Service, and obligates NEP to transfer its interests in the electric
generating business to another party or parties.

     NEP, NECO, and Seller have entered an agreement under which Seller will
acquire certain NEP and NECO generating assets.

     NEP and Seller desire that Seller shall supply electric capacity and
energy to NECO to fulfill a portion of NEP's power supply obligations under the
Rhode Island Restructuring Agreement.

     Under the Rhode Island Restructuring Agreement, NECO is obligated to
afford wholesale power suppliers other than NEP the opportunity to commit to
supply NECO with power sufficient to meet NECO's obligation to supply retail
Standard Offer Service after the Retail Access Date.
<PAGE>

     This Agreement sets forth the terms under which Seller will supply
Wholesale Standard Offer Service to NECO, for a period beginning on the
Closing Date, to enable NECO to meet the needs of its retail customers for
electricity, including all or a portion of the needs of customers receiving
retail Standard Offer Service after the Retail Access Date.

                            ARTICLE 2. DEFINITIONS

     The following words and terms shall be understood to have the following
meanings when used in this Agreement, or in any associated documents entered
into in conjunction with this Agreement. In addition, except as otherwise
expressly provided, where terms used in this Agreement are defined in the NEPOOL
Agreement and not otherwise defined herein, such definitions are expressly
incorporated into this Agreement by reference.

Affiliate of NECO - Any company that is a subsidiary of New England Electric
-----------------
System and its successors.

Closing Date - The date upon which the Seller acquires ownership of generating
------------
assets it purchases from NEP.

Commission or FERC - The Federal Energy Regulatory Commission or such successor
------------------
federal regulatory agency as may have jurisdiction over this Agreement.

Contract Termination Date - The date established by the Rhode Island
-------------------------
Restructuring Agreement when the respective obligations of NEP and NECO under
NEP's FERC Electric Tariff, Original Volume No. 1, to sell and purchase
wholesale electric requirements service shall cease. The Contract Termination
Date occurred on January 1, 1998.

GWh - Gigawatt hour.
---

ISO - The Independent System Operator to be established in accordance with the
---
NEPOOL Agreement and the Interim Independent System Operator Agreement as
amended, superseded or restated from time to time.

kWh - Kilowatt- hour.
---

MECO - Massachusetts Electric Company.
----

MECO Wholesale Standard Offer Service Agreement - The Wholesale Standard Offer
-----------------------------------------------
Service Agreement of even date herewith between MECO and the Seller.

NECO's Service Territory - The geographic area in which NECO provided electric
------------------------
service to retail customers on August 6, 1996.

                                       2
<PAGE>

NECO's System - The electrical system of NECO and/or the electrical system of
-------------
any Affiliate of NECO.

MMBtu - Million British thermal units.
-----

NEP - New England Power Company, an Affiliate of NECO.
---

NEPEX - The New England Power Exchange.
-----

NEPOOL - The New England Power Pool.
------

NEPOOL Agreement - The New England Power Pool Agreement dated as of September
----------------
1, 1971, as amended and as may be amended or restated from time to time.

Price - The price set forth in SECTION 5.1, below.
-----

Prime Rate - The prime (or comparable) rate announced from time to time as its
----------
prime rate by the Bank of Boston or its successor, which rate may differ from
the rate offered to its more substantial and creditworthy customers.

PTF - Facilities categorized as Pool Transmission Facilities under the NEPOOL
---
Agreement.

Retail Access Date - The date so defined under the Rhode Island Restructuring
------------------
Agreement. The Retail Access Date occurred on January 1, 1998.

Rhode Island Restructuring Agreement - The Offer of Settlement dated May 30,
------------------------------------
1997, entered into by and among the RIPUC, the Rhode Island Division of Public
Utilities and Carriers, NECO, and NEP, as amended and accepted or approved by
the FERC.

RIPUC - The Rhode Island Public Utilities Commission.
-----

Standard Offer Auction - The solicitation by NECO of offers from wholesale power
----------------------
suppliers, including, at their option, NEP and Seller, of electric energy and
associated capacity and ancillary services necessary to meet the needs of
ultimate customers of NECO eligible for and accepting retail Standard Offer
Service on or after the Retail Access Date, and any wholesale electric supply
contracts resulting from that solicitation. The solicitation and any contract(s)
entered into as a result thereof shall not be on terms that are materially
different from those described by MECO in the Massachusetts Restructuring
Agreement (as defined in the MECO Wholesale Standard Offer Service Agreement),
the RFQ dated April 3, 1997, and the letter to potential asset purchasers dated
June 16, 1997, or result in a material adverse impact on Seller. NECO shall not,
without Seller's consent, conduct the Standard Offer Auction more than once or
more than six (6) months prior to the Retail Access Date, which date shall be
as reasonably determined by NECO.

                                       3
<PAGE>

Standard Offer Service - The electric service provided by NECO pursuant to the
----------------------
Rhode Island Restructuring Agreement: (i) to retail customers in NECO's Service
Territory during the period, if any, during the term of this Agreement
preceding the Retail Access Date: and (ii) to NECO's retail customers on the
Retail Access Date that do not elect to obtain their electric supply from an
alternative supplier on or after the Retail Access Date through December 31,
2009.

Wholesale Access Date - The date so defined under the Rhode Island
---------------------
Restructuring Agreement, as the date on which NECO in its sole discretion
decides to terminate its purchase from NEP of wholesale requirements service
pursuant to NEP's FERC Electric Tariff, Original Volume No. 1, by providing the
Commission and the Signatories to the Rhode Island Restructuring Agreement with
90 days advance notice in writing, said date not to be earlier than January 1,
1998.

Wholesale Standard Offer Service - The generation and delivery, to any location
--------------------------------
on the NEPOOL PTF system or NECO's system, of the portion of the electric
capacity, energy and ancillary services required by NECO to meet the needs of
NECO's ultimate customers taking Standard Offer Service, excluding, after the
Retail Access Date, any portion of such requirements that NECO has contracted
to obtain through the Standard Offer Auction, determined in accordance with
ARTICLE 4. Seller, as the supplier of Wholesale Standard Offer Service capacity
and energy, will be responsible for all present, or future requirements and
associated costs for installed capability, operable capability, energy,
operating reserves, and automatic generation control, including tie benefit
payments, losses and any congestion charges associated with Seller's supply of
Wholesale Standard Offer Service and any other requirements imposed by NEPOOL or
the ISO, as they may be in effect from time to time. To the extent that any
NEPOOL, ISO or any successor entity expenses or uplift costs are allocated to
wholesale suppliers, the portion of such costs associated with Seller's
supply of Standard Offer Service will also be the responsibility of Seller. To
the extent any costs contemplated by this paragraph are applicable to NECO and
recoverable by NECO from its customers, NECO shall be responsible for such
costs.

                    ARTICLE 3. TERM AND REGULATORY APPROVAL

3.1  Term
     ----

     The term of this Agreement shall begin at at 12:01 am on the Closing Date
and continue until the earlier of: (a) 11:59 p.m. on December 31, 2009; or (b)
the first date that NECO has no requirements for electric capacity and energy to
supply Standard Offer Service that are not satisfied by contracts resulting from
the Standard Offer Auction.

                                       4
<PAGE>

3.2  Obtaining and Maintaining Required Permits
     ------------------------------------------

     (a)  Performance under this Agreement is conditioned upon both Parties
securing and maintaining such federal, state or local approvals, grants or
permits as may be necessary for the sale and purchase of Wholesale Standard
Offer Service, which shall not include any approvals, grants, or permits
necessary for the operation of any particular generating facility. Each Party
shall use reasonable efforts to acquire and maintain such approvals, grants or
permits. If the acquisition or maintenance of a particular approval, grant, or
permit requires a modification to this Agreement, then the Parties agree to
negotiate in good-faith to reach a mutually agreeable modification of the
Agreement. The Parties are not required to reach such a mutually acceptable
modification.

     (b)  Seller will file this Agreement with FERC (and any other regulatory
agency as may have jurisdiction over the Agreement) in accordance with the
provisions of applicable laws, rules and regulations. Seller will be responsible
for any filing fees for filing this Agreement with FERC (and any other
regulatory agency as may have jurisdiction over the Agreement) and for any
regulatory assessments associated with sales under this Agreement. FERC approval
of this Agreement shall be a condition to the obligations of the Parties
hereunder.

                         ARTICLE 4. SALE AND PURCHASE

4.1  Wholesale Standard Offer Service
     --------------------------------

     Seller shall sell and deliver to the Delivery Points, as defined in ARTICLE
6, SECTION 6.1, and NECO shall purchase 90.78% of NECO's requirements for
Wholesale Standard Offer Service. NECO's requirements for Wholesale Standard
Offer Service shall be determined on the basis of ARTICLE 6, SECTION 6.3, below,
and the price for such sale and purchase shall be as set forth in ARTICLE 5,
SECTION 5.1, below.

4.2  Dispatchable Load Credits
     -------------------------

     Seller shall have the right, but not the obligation, to elect to purchase a
portion of the peak load reduction credits, if any, as provided for in NEPOOL
Criteria, Rules and Standards No. 16, associated with NECO's retail customers
which are taking Standard Offer Service and which are taking service under
NECO's Cooperative Interruptible Service Provision (as defined in NECO's tariffs
on file with RIPUC) ("Dispatchable Load Credits"), during the period commencing
at 0001 hours on the Closing Date and ending at 2400 hours on October 31, 1998
(the "Option Period"). Seller may purchase such credits for any, all, or any
combination of calendar months during the Option Period.

                                       5

<PAGE>

     In order to receive such credits, Seller shall provide NECO with written
notice of such election at least seven days prior to the requested start date.
Such notice shall include: (i) the requested start date, which shall be the
first day of a calendar month, (ii) the requested end date, which shall be the
last day of a calendar month, and (iii) the fixed amount per month of
Dispatchable Load Credits (the "Seller's Election"), which shall not exceed
90.78% of the minimum load reduction actually experienced by NECO during the
most recent 12 month period, excluding for such period months in which
interruptions occurred ("Load Reductions").

     In the event Seller does not provide a timely notice of election for any
month, Seller's election for such month will be presumed to be zero (0)
kilowatts.

     NECO will provide Seller during each month of this Agreement with a report
on (i) the quantity of Load Reductions for the preceding month and (ii) the
number of customers (and associated nominal interruptible load), if any, which
ceased taking service under NECO's Cooperative Interruptible Service Provision
during the preceding month.

                         ARTICLE 5. PRICE AND BILLING

5.1  Price
     -----

     (a)  For each kilowatt hour of Wholesale Standard Offer Service that Seller
delivers to the Delivery Points, in accordance with ARTICLE 6, SECTION 6.3,
below, NECO shall pay Seller a price equal to the following amounts for each
period during the term of this Agreement:

               ---------------------------------------------
                    Period            Price in Cents per
                                             kWh
               ---------------------------------------------
                     1998                 3.2 Cents
               ---------------------------------------------
                     1999                 3.5 Cents
               ---------------------------------------------
                     2000                 3.8 Cents
               ---------------------------------------------
                     2001                 3.8 Cents
               ---------------------------------------------
                     2002                 4.2 Cents
               ---------------------------------------------
                     2003                 4.7 Cents
               ---------------------------------------------
                     2004                 5.1 Cents
               ---------------------------------------------
                     2005                 5.5 Cents
               ---------------------------------------------

                                       6
<PAGE>

               ---------------------------------------------
                     2006                 5.9 Cents
               ---------------------------------------------
                     2007                 6.3 Cents
               ---------------------------------------------
                     2008                 6.7 Cents
               ---------------------------------------------
                     2009                 7.1 Cents
               ---------------------------------------------

     In addition, in the event of increases in the market price of No. 6
residual fuel oil (1% sulphur) and natural gas after 1999 as described in
Appendix A, NECO shall pay Seller additional amounts in accordance with the
Standard Offer Fuel Adjustment Provision, described in Appendix A, attached and
incorporated herein by reference.

     (b)  For any month in which Seller elects to receive Dispatchable Load
Credits, in accordance with ARTICLE 4, SECTION 4.2, for each kilowatt of
Seller's Election, NECO shall be entitled to a reduction in the amount owed to
Seller by NECO pursuant to paragraph (a) above at a value calculated pursuant to
the second paragraph of ARTICLE 5, SECTION 5.2, using the following rates
("Option Price"):

          ---------------------------------------------------------------------
                Month Of Transfer                        Option Price in
                                                       Dollars per KW Month
          ---------------------------------------------------------------------
            January, February, July, Au-                        $3.125
                  gust, September,
                      December
          ---------------------------------------------------------------------
            March, April, May, June,                            $1.875
               October, November
          ---------------------------------------------------------------------

5.2  Payment
     -------

     (a)  On or before the tenth (10th) day of each month during the term of
this Agreement, NECO shall: (i) calculate the amount due and payable to Seller
pursuant to this ARTICLE 5 with respect to the preceding month; and (ii) advise
Seller of the schedule upon which it shall pay the amount so calculated, which
schedule shall comply with paragraph (b), below.

     The amount payable shall be calculated by (i) multiplying the Price
specified in the first paragraph of ARTICLE 5, SECTION 5.1, above, for the
applicable Contract Period by the quantity of Wholesale Standard Offer Service
delivered by Seller to the Delivery Points for NECO's Standard Offer Service
customers in the month, as determined in accordance with ARTICLE 6, SECTION 6.3,
below and then subtracting the result obtained by (ii) multiplying the Option
Price specified in the second paragraph of ARTICLE 5, SECTION 5.1, above, for

                                       7
<PAGE>

the applicable month by the Seller's Election for the applicable month, as
determined and certified as true and accurate, by Seller.

     Because quantities determined under SECTION 6.3 are estimated, subject to a
reconciliation process described in SECTION 6.3(d), quantities used in
calculations under this paragraph (a) shall be subject to adjustment, whether
positive or negative, in subsequent months' calculations, to reflect that
reconciliation process, and any adjusted quantities shall be applied to the
Price applicable during the month of the calculation being adjusted. Additional
amounts due Seller, if any, from the Standard Offer Fuel Adjustment Provision
shall be added to such amount.

     (b) NECO shall pay Seller any amounts due and payable on or before the
twenty-fifth (25th) day after the date a calculation is made pursuant to
paragraph (a), provided that, if and to the extent NECO pays Seller any portion
of the amount due and payable before the twenty-fifth (25th) day after a
calculation is made, it shall be entitled, without interest or penalty, to defer
payment of an equal portion of the amount due and payable for that month by the
lesser of: (i) the same number of days that the early payment preceded the
twenty-fifth day after the calculation; and (ii) twenty-five (25) days. If all
or any part of any amount due and payable pursuant to paragraph (a) shall remain
unpaid thereafter, interest shall thereafter accrue and be payable to Seller on
such unpaid amount at a rate per annum equal to two percent (2%) above the
Prime Rate in effect on the date of such bill; provided, however, if the amount
                                               --------  -------
due and payable is disputed, interest shall accrue and be payable to Seller on
the unpaid amount finally determined to be due and payable at a rate per annum
equal to the Prime Rate in effect on the date of the calculation pursuant to
paragraph (a): and provided, further, no interest shall accrue in favor of
               ------------  -------
Seller or NECO on amounts that are added to or credited against a calculation
due to the adjustment of estimated quantities in accordance with paragraph (a)
and ARTICLE 6, SECTION 6.3.

     (c) With respect to reconciliation adjustments pursuant to SECTION 6.3(d)
or any error in a calculation (whether the amount is paid to not), any
overpayment, underpayment, or reconciliation adjustment will be refunded or paid
up, as appropriate. Interest shall accrue from the date of the error or
adjustment on the unpaid or overpaid amount finally determined to be due and
shall be calculated pursuant to Section 35.19a of the Commission regulations.

5.3  Taxes, Fees and Levies
     ----------------------

     Seller shall be obligated to pay all present and future taxes, fees and
levies which may be assessed upon Seller by any entity upon the purchase or
sale of electricity covered by the Agreement. To the extent such taxes, fees,
and levies are allowed to be, and are actually, recoverable by NECO from its
customers, NECO shall reimburse Seller for such taxes, fees, and levies paid by
Seller. It is expressly agreed that Seller shall not be responsible for, and
shall be held harmless from, the Rhode Island Tax on gross receipts or earnings
(Public

                                       8
<PAGE>

Service Corporation Tax, Chapter 44-13 of the Rhode Island General Laws, as
amended or superseded).

              ARTICLE 6. DELIVERY, LOSSES, AND DETERMINATION AND
                           REPORTING OF HOURLY LOADS

6.1  Delivery
     --------

     All electricity shall be delivered to NECO in the form of three-phase
sixty-hertz alternating current at any location on the NEPOOL PTF system or
NECO's System ("Delivery Points"). Title shall pass to NECO at the Delivery
Point and Seller shall incur no expense or risk beyond the Delivery Point other
than those described in SECTION 6.2. If the NEPOOL control area experiences
congestion, Seller will be responsible for any congestion costs incurred in
delivering power across the PTF system to NECO to the extent such costs are
imposed by NEPOOL or the ISO on suppliers. Seller shall be responsible for all
transmission and distribution costs associated with the use of transmission
systems outside of NEPOOL and any local point to point charges and distribution
charges needed to deliver the power to the NEPOOL PTF.

6.2  Losses
     ------
     Seller shall be responsible for all transmission and distribution losses
associated with the delivery of electricity supplied under this Agreement to
the meters of ultimate customers of NECO receiving retail Standard Offer
Service, provided, however, that losses do not include service to unmetered
facilities for which estimates of kWh use are available and provided, further,
that Seller shall not be responsible for unmetered use or consumption of
electricity by NECO's Affiliates. Seller shall provide NECO at the Delivery
Points with additional quantities of electricity and ancillary services to
cover such losses, but Seller shall not be entitled to payment under ARTICLE 5
of this Agreement for such additional quantity. The quantities required for this
purpose in each hour of a billing period shall be determined in accordance with
NEPOOL's, NEP's and NECO's filed procedures for loss determination.

6.3  Determination and Reporting of Hourly Loads
     -------------------------------------------

    (a) To meet its NEPOOL obligations, Seller, or a NEPOOL member having an
own-load dispatch or settlement account with the NEPOOL billing system with
whom Seller has a load inclusion agreement, must report to NEPOOL or the ISO the
Standard Offer Service load for which Seller is providing Wholesale Standard
Offer Service pursuant to this Agreement, including losses. To accomplish this,
NECO will estimate its total hourly Standard Offer Service load based upon
average load profiles developed for each NECO customer class and NECO's actual
total hourly load. Appendix B, attached and incorporated herein by reference,
provides a general description of the estimation process that NECO will
initially employ (the "Estimation Process"). NECO reserves the right, subject
to the approval of appropriate

                                       9
<PAGE>

regulatory authorities having jurisdiction to modify the Estimation Process in
the future, provided that any such modification be designed to improve the
accuracy of its results, and provided further that NECO shall consult with
Seller and other similarly situated sellers to the maximum extent permitted by
any applicable standards of conduct. NECO will report to NEPOOL, on behalf of
Seller or such other NEPOOL member, Seller's hourly Standard Offer Service load,
which shall equal the portion of NECO's estimated total Standard Offer Service
hourly load for which Seller is responsible for supplying Wholesale Standard
Offer Service under this Agreement.

     (b)  NECO will report to NEPOOL or the IS0 Seller's hourly adjusted
Standard Offer Service loads by 1:00 p.m. of the second following business day.
This adjusted load should be added by NEPOOL or the IS0 to the other NEPOOL load
of Seller or such other NEPOOL member.

     (c)  At the end of each month, NECO shall aggregate Seller's hourly loads
for the month as determined by the Estimation Process. For purposes of SECTION
5.1, above, the result of the Estimation Process, less losses to the Standard
Offer Service customers' meters determined as specified in ARTICLE 6 SECTION
5.2, above, will be deemed to be the quantity of Wholesale Standard Offer
Service delivered by Seller to the Delivery Points in a month.

     (d)  To refine the estimates of Seller's monthly Standard Offer Service
load developed by the Estimation Process, a monthly calculation will be
performed to reconcile the original estimate of Seller's Standard Offer Service
loads to actual customer usage based on meter reads. NECO will apply any
resulting billing adjustment (debit or credit) to Seller's account no later than
the last day of the third month following the billing month. Appendix B,
attached and incorporated herein by reference, also provides a general
description of this reconciliation process.

                      ARTICLE 7. DEFAULT AND TERMINATION

7.1 Material Breach and Termination
    -------------------------------

     (a)  (i)  If NECO fails in any material respect to comply with observe or
               perform any covenant, warranty or obligation under this Agreement
               (except due to causes excused by force majeure or attributable to
                                                -------------
               to Seller's wrongful act or wrongful failure to act); and

          (ii) After receipt of written notice from Seller such failure
               continues for the Cure Period (as defined below), or, if such
               failure cannot be reasonably cured within the Cure Period, such
               further period as shall reasonably be required to effect such
               cure (except in the case of a payment default), provided that
               NECO commences within the Cure Period to effect such

                                      10
<PAGE>

                   cure and at all times thereafter proceeds diligently to
                   complete such cure as quickly as possible; then

             (iii) Seller shall have the right to terminate this Agreement,
                   subject to paragraph (c) below. For purposes of this Section
                   7.1(a), the Cure Period shall mean five days in the case of a
                   failure by NECO to fulfill its payment obligations pursuant
                   to Section 5.2 and forty-five (45) days in the case of a
                   failure by NECO to comply with, observe or perform any other
                   covenant, warranty or obligation under this Agreement. If an
                   unexcused failure to pay continues for fifteen (15) days,
                   Seller shall have the right to suspend service until payment
                   is made in full and appropriate security is posted for future
                   payments or to terminate this Agreement.

     (b)     (i)   If Seller fails in any material respect to comply with,
                   observe, or perform any covenant, warranty or obligation
                   under this Agreement (except due to causes excused by force
                                                                         -----
                   majeure or attributable to NECO's wrongful act or wrongful
                   -------
                   failure to act); and

             (ii)  After receipt of written notice from NECO such failure
                   continues for a period of forty-five (45) days or, if such
                   failure cannot be reasonably cured within such forty-five
                   (45) day period, such further period as shall reasonably be
                   required to effect such cure, provided that Seller commences
                   within such forty-five (45) day period to effect such cure
                   and at all times thereafter proceeds diligently to complete
                   such cure as quickly as possible; then

             (iii) NECO shall have the right to terminate this Agreement,
                   subject to paragraph (c) below.

     (c)     Any termination arising out of the exercise of the termination
rights specified in paragraphs (a) or (b) above (with the exception of
termination for a payment default) may not take effect unless and until an
arbitrator (pursuant to ARTICLE 14, SECTION 14.2 of this Agreement) has made a
ruling that the exercise of such termination right was valid. The fact that one
party alleged to be in material breach of this Agreement ("Alleged Breaching
Party') complies with the request of the other to cure an alleged material
breach shall not be considered by the arbitrator as an admission against the
Alleged Breaching Party or evidence that such party was or was not in material
breach.

     (d)     Nothing in this SECTION 7.1 shall be construed to limit the right
of any party to seek any remedies for damages, as limited by ARTICLE 9 of this
Agreement, even if a cure of an alleged breach is made within the periods of
time specified for curing any such breach stated above. The provisions of this
SECTION 7.1 are intended only to provide the exclusive process through which one
party may exercise and effectuate its right to terminate this Agreement as a
result of a material breach of this Agreement.

                                      11
<PAGE>

              ARTICLE 8. NOTICES, REPRESENTATIVES OF THE PARTIES

8.1 Notices
    -------

     Any notice, demand, or request required or authorized by this Agreement to
be given by one party to another party shall be in writing. It shall either be
sent by facsimile (confirmed by telephone), overnight courier, personally
delivered and acknowledged in writing or by registered or certified mail,
(return receipt requested) postage prepaid, to the representative of the other
party designated in this ARTICLE 8. Any such notice, demand, or request shall be
deemed to be given (i) when sent by facsimile confirmed by telephone, (ii) when
actually received if delivered by courier or personal deliver or (iii) three (3)
days after deposit in the United States mail, if sent by first class mail.

     Notices and other communications by Seller to NECO shall be addressed to:

                      The Narragansett Electric Company
                      c/o New England Power Service Company
                      25 Research Drive
                      Westborough, MA 01582
                      Attention: Michael J. Hager
                      Fax: (508) 389-2463

     Notices and other communications by NECO to Seller shall be addressed to:

                      USGen New England, Inc.
                      7500 Old Georgetown Road, 13th Floor
                      Bethesda, MD 20814
                      Attention: Stephen A. Herman
                      Fax: (301) 718-6913

     Any party may change its representative by written notice to the others.

8.2 Authority of Representative
    ---------------------------

     The parties' representatives designated in ARTICLE 8, SECTION 8.1 shall
have full authority to act for their respective principals in all technical
matters relating to the performance of this Agreement. They shall not, however,
have the authority to amend, modify, or waive any provision of this Agreement
unless they are authorized officers of their respective entities.

                                      12
<PAGE>

                   ARTICLE 9. LIABILITY, INDEMNIFICATION, AND
                            RELATIONSHIP OF PARTIES

9.1 Limitation on Consequential, Incidental and Indirect Damages
    ------------------------------------------------------------

     To the fullest extent permissible by law, neither NECO nor Seller, nor
their respective officers, directors, agents, employees, parent or affiliates,
successor or assigns, or their respective officers, directors, agents, or
employees, successors, or assigns, shall be liable to the other party or its
parent, subsidiaries, affiliates, officers, directors, agents, employees,
successors or assigns, for claims, suits, actions or causes of action for
incidental, indirect, special, punitive, multiple or consequential damages
(including attorney's fees or litigation costs) connected with or resulting from
performance or non-performance of this Agreement, or any actions undertaken in
connection with or related to this Agreement, including without limitation any
such damages which are based upon causes of action for breach of contract, tort
(including negligence and misrepresentation), breach of warranty, strict
liability, Rhode Island Gen. Laws Title 6, c. 13.1, statute, operation of law,
or any other theory of recovery. The provisions of this SECTION 9.1 shall apply
regardless of fault and shall survive termination, cancellation, suspension,
completion or expiration of this Agreement.

9.2 Recovery of Direct Damages Permitted
    ------------------------------------

     Notwithstanding the provisions of ARTICLE 9, SECTION 9.1, subject to the
duty to mitigate damages as provided under common law of damages recovery, both
NECO and Seller shall be entitled to recover their actual, direct damages (i)
incurred as a result of the other party's breach of this Agreement or (ii)
incurred as a result of any other claim arising out of any action undertaken in
connection with or related to this Agreement. For purposes of avoiding any
disputes about the difference between direct damages and consequential damages,
the parties agree as follows:

     (a)  (1)  To the extent that NECO is found to be in breach of this
               Agreement or liable under another cause of action; and

          (2)  as a result of such breach or event giving rise to the cause of
               action, Seller suffers loss of profits that Seller reasonably
               expected to have received from NECO under this Agreement had NECO
               performed under this Agreement; then

          (3)  Seller shall be entitled to recover any lost profits that Seller
               can demonstrate it lost or will lose as a result of NECO's
               breach, subject to the duty to mitigate.

     (b)  (1)  To the extent that Seller fails to provide NECO Wholesale
               Standard Offer Service Power under the terms of this Agreement;
               and

                                      13
<PAGE>

          (2)  as a result, Seller is found to be in material breach of this
               Agreement or liable under another cause of action; and

          (3)  subject to the duty to mitigate, NECO purchases (as a result of
               Seller's failure) power from a third party at a price that is
               higher than what NECO would have paid under the terms of this
               Agreement, NECO may recover the difference between the price NECO
               paid to such third party and the price it would have paid had
               Seller performed; provided, however, Seller shall not be liable
                                 --------  -------
               to NECO for lost profits associated with any expected revenue
               streams from the sale of power to third parties or lost profits
               from any other contracts or sales.

     (c)  Except as provided in paragraphs (a) and (b) above, neither NECO nor
Seller shall be liable to the other for lost profits arising out of performance,
or non-performance of this Agreement, whether such lost profits may be
categorized as direct, incidental, indirect, or consequential damages and
irrespective of whether such claims are based upon warranty, tort, strict
liability, contract, statute (including R.I. G.L. Title 6, c. 13.1), operation
of law or otherwise.

9.3 Indemnification
    ---------------

     (a)  Seller agrees to defend, indemnify and save NECO, its officers,
directors, employees, agents, successors, assigns, and Affiliates and their
officers, directors, employees, and agents harmless from and against any and all
claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by Seller, its officers, directors,
employees, agents or affiliates or caused by or sustained on its facilities,
except to the extent caused by an act of negligence or willful misconduct by an
officer, director, agent, employee or Affiliate of NECO or their successors or
assigns.

     (b)  NECO agrees to defend, indemnify and save Seller, its officers,
directors, employees, agents, successors, assigns, and affiliates and their
officers, directors, employees, and agents harmless from and against any and all
claims, suits, actions or causes of action for damage by reason of bodily
injury, death, or damage to property caused by NECO, its officers, directors,
employees, agents or affiliates or caused by or sustained on its facilities,
except to the extent caused by an act of negligence or willful misconduct by an
officer, director, agent, employee or Affiliate of Seller or their successors or
assigns.

     (c)  If any party intends to seek indemnification under this ARTICLE from
the other party with respect to any action or claim, the party seeking
indemnification shall give the other party notice of such claim or action within
fifteen (15) days of the commencement of, or actual knowledge of, such claim or
action. Such party seeking indemnification shall have the right, at its sole
cost and expense, to participate in the defense of any such claim or action. The
party seeking indemnification shall not compromise or settle any such claim or
action without the prior consent of the other party, which consent shall not be
unreasonably withheld.

                                      14
<PAGE>

9.4     Independent Contractor Status
        -----------------------------

        Nothing in this Agreement shall be construed as creating any
relationship between NECO and Seller other than that of independent contractors
for the sale and purchase of electricity provided as Wholesale Standard Offer
Service.

                            ARTICLE 10. ASSIGNMENT

10.1    Assignment
        ----------

        This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto,
including by operation of law without the prior written consent of the other
party, nor is this Agreement intended to confer upon any other Person except the
parties hereto any rights or remedies hereunder. Notwithstanding the foregoing,
(i) NECO may, without Seller's prior written consent, (A) assign all or a
portion of its rights and obligations under this Agreement to any Affiliate of
NECO or (B) assign its rights and obligations hereunder, or transfer such rights
and obligations by operation of law, to any corporation or other entity with
which or into which NECO shall merge or consolidate or to which NECO shall
transfer all or substantially all of its assets, provided that such Affiliate or
other entity agrees to be bound by the terms thereof; provided, in either case,
that the assignee or transferor shall have senior securities rated investment,
grade or better; (ii) the Seller may assign all of its rights and obligations
hereunder to any wholly owned Subsidiary (direct or indirect) of PG&E
Corporation and upon NECO's receipt of notice from Seller of any such
assignment, the Seller will be released from all liabilities and obligations,
hereunder, accrued and unaccrued, such assignee will be deemed to have assumed,
ratified, agreed to be bound by and perform all such liabilities and
obligations, and all references herein to "Seller" shall thereafter be deemed
references to such assignee, in each case without the necessity for further act
or evidence by the parties hereto or such assignee; provided, however, that no
such assignment and assumption shall release the Buyer from its liabilities and
obligations hereunder unless the assignee shall have acquired all or
substantially all of the Buyer's assets; provided, further, however,
that no such assignment and assumption shall relieve or in any way discharge
PG&E Corporation from the performance of its duties and obligations under the
Guaranty dated as of the date of this Agreement executed by PG&E Corporation,
and (iii) the Seller or its permitted assignee may assign, transfer, pledge or
otherwise dispose of its rights and interests hereunder to a trustee or lending
institution(s) for the purposes of financing or refinancing the Purchased
Assets, including upon or pursuant to the exercise of remedies under such
financing or refinancing, or by way of assignment, transfers, conveyances or
dispositions in lieu thereof; provided, however, that no such assignment or
disposition shall relieve or in any way discharge the Seller or such assignee
from the performance of its duties and obligations under this Agreement. NECO
agrees to execute and deliver such documents as may be reasonably necessary to
accomplish any such assignment, transfer, conveyance, pledge or

                                      15
<PAGE>

disposition of rights hereunder so long as NECO's rights under this Agreement
are not thereby altered, amended, diminished or otherwise impaired.

                           ARTICLE 11. FORCE MAJEURE

11.1    Force Majeure Standard
        ----------------------

        The parties shall be excused from performing their respective
obligations hereunder and shall not be liable in damages or otherwise, if and
only to the extent that they are unable to so perform or are prevented from
performing by an event of force majeure.
                          -------------

11.2    Force Majeure Definition
        ------------------------

        An event of force majeure includes, without limitation, storm, flood,
                    -------------
lightning, drought, earthquake, fire, explosion, equipment failure, civil
disturbance, labor dispute, act of God or the public enemy, action of a court or
public authority, or any other cause beyond a party's control, but only if and
to the extent that the event directly affects the availability of the
transmission or distribution facilities of NEPOOL, NECO or an Affiliate
necessary to deliver Wholesale Standard Offer Service to NECC's customers.
Events affecting the availability or cost of operating any generating facility
shall not be events of force majeure.
                       -------------

11.3    Obligation to Diligently Cure Force Majeure
        -------------------------------------------

        If any party shall rely on the occurrence of an event or condition
described in ARTICLE 11, SECTION 11.2, above, as a basis for being excused from
performance of its obligations under this Agreement, then the party relying on
the event or condition shall:

              a.  provide written notice to the other parties promptly but in no
                  event later than 5 days of the occurrence of the event or
                  condition giving an estimation of its expected duration and
                  the probable impact on the performance of its obligations
                  hereunder;

              b.  exercise all reasonable efforts to continue to perform its
                  obligations hereunder;

              c.  expeditiously take reasonable action to correct or cure the
                  event or condition excusing performance; provided that
                                                           -------- ----
                  settlement of strikes or other labor disputes will be
                  completely within the sole discretion of the party affected by
                  such strike or labor dispute;

              d.  exercise all reasonable efforts to mitigate or limit damages
                  to the other parties to the extent such action will not
                  adversely affect its own interests; and

                                      16
<PAGE>

              e.  provide prompt notice to the other parties of the cessation of
                  the event or condition giving rise to its excuse from
                  performance.

                              ARTICLE 12. WAIVERS

        The failure of either party to insist in any one or more instance upon
strict performance of any of the provisions of this Agreement or to take
advantage of any of its rights under this Agreement shall not be construed as a
general waiver of any such provision or the relinquishment of any such right,
but the same shall continue and remain in full force and effect, except with
respect to the particular instance or instances.

                            ARTICLE 13. REGULATION

13.1    Laws and Regulations
        --------------------

        This Agreement and all rights, obligations, and performances of the
parties hereunder, are subject to all applicable Federal and state laws, and to
all duly promulgated orders and other duly authorized action of governmental
authority having jurisdiction.

13.2    NEPOOL Requirements
        -------------------

        This Agreement must comply with all NEPOOL Criteria, Rules, and Standard
Operating Procedures ("Rules"). If, during the term of this Agreement, the
NEPOOL Agreement is terminated or amended in a manner that would eliminate or
materially alter a Rule affecting a right or obligation of a party hereunder, or
if such a Rule is eliminated or materially altered by NEPOOL, the parties agree
to negotiate in good faith in an attempt to amend this Agreement to incorporate
a replacement Rule ("Replacement Rule"). The intent of the parties is that any
such Replacement Rule reflect, as closely as possible, the intent and substance
of the Rule being replaced as such Rule was in effect prior to such termination
or amendment of the NEPOOL Agreement or elimination or alteration of the Rule.
If the parties are unable to reach agreement on such an amendment, the parties
agree to submit the matter to arbitration under the terms of Appendix C,
attached and incorporated herein by reference, and to seek a resolution of the
matter consistent with the above stated intent.

                ARTICLE 14. INTERPRETATION, DISPUTE RESOLUTION

14.1    Interpretation
        --------------

        The interpretation and performance of this Agreement shall be in
accordance with and controlled by the laws of The State of Rhode Island.

                                      17
<PAGE>

14.2    Dispute Resolution
        ------------------

        All disputes between NECO and Seller arising out of or relating to this
Agreement which are defined as "Arbitrable Claims" in SECTION 2 of Appendix C,
attached and incorporated herein by reference, shall be resolved by binding
arbitration and be governed by the terms of such Arbitration Agreement. Any
arbitration of an Arbitrable Claim that is substantially related to an
arbitrable claim under a Wholesale Standard Offer Service Agreement among
Seller, Massachusetts Electric Company, and Nantucket Electric Company shall be
conducted jointly with the arbitration of the latter claim, before the same
panel of arbitrators, with NECO, Massachusetts Electric Company, and Nantucket
Electric Company jointly exercising their rights regarding the selection of
arbitrators. Any decisions of the arbitrators shall be final and binding upon
the parties.

                           ARTICLE 15. SEVERABILITY

        If any provision or provisions of this Agreement shall be held invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.

                           ARTICLE 16. MODIFICATIONS

        No modification to this Agreement will be binding on any party unless it
is in writing and signed by all parties.

                           ARTICLE 17. SUPERSESSION

        This Agreement constitutes the entire agreement between the parties
 relating to the subject matter hereof and its execution supersedes any other
 agreements, written or oral, between the parties concerning such subject
 matter.

                           ARTICLE 18. COUNTERPARTS

        This Agreement may be executed in any number of counterparts, and each
 executed counterpart shall have the same force and effect as an original
 instrument.

                             ARTICLE 19. HEADINGS

        Article and Section headings used throughout this Agreement are for the
 convenience of the parties only and are not to be construed as part of this
 Agreement.

                                      18
<PAGE>

        IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on their behalf as of the date first
above written.

                                           THE NARRAGANSETT ELECTRIC
                                           COMPANY

                                           By: /s/ Michael E. Jesanis
                                              ------------------------------
                                                   Michael E. Jesanis

                                           Its:  Vice President
                                               -----------------------------

                                           USGEN NEW ENGLAND, INC.

                                           By: /s/ James V. Mahoney
                                              ------------------------------
                                                   James V. Mahoney

                                           Its:  Senior Vice President
                                               -----------------------------
<PAGE>

                          Appendix A. Standard Offer
                           Fuel Adjustment Provision

     In the event of substantial increases in the market prices of No. 6
residual fuel oil (1% sulphur) and natural gas after 1999, NECO will pay
additional amounts to Seller in accordance with this Standard Offer Fuel
Adjustment Provision, which is calculated as follows:

     The Stipulated Price that is in effect for a given billing month is
multiplied by a "Fuel Adjustment" that is set equal to 1.0 and thus has no
impact on the rate paid unless the "Market Gas Price" plus "Market Oil Price"
                                                      ----
for the billing month exceeds the "Fuel Trigger Point" then in effect, where:

          The Stipulated Price is the following predetermined, flat
          --------------------
          rate, for energy consumed at the customer meter point:

                Calendar Year             Price per Kilowatt hour
                -------------             -----------------------

                     1998                        3.2 cents
                     1999                        3.5 cents
                     2000                        3.8 cents
                     2001                        3.8 cents
                     2002                        4.2 cents
                     2003                        4.7 cents
                     2004                        5.1 cents
                     2005                        5.5 cents
                     2006                        5.9 cents
                     2007                        6.3 cents
                     2008                        6.7 cents
                     2009                        7.1 cents

     Seller will be paid the difference between the Stipulated Price as
adjusted in accordance with this Standard Offer Fuel Adjustment Provision and
the Stipulated Price for each kilowatt-hour it provides in the applicable month.

     Market Gas Price is the average of the values of "Gas Index" for the most
     ----------------
recent available twelve months, where:

          Gas Index is the average of the daily settlement prices for
          ---------
          the last three days that the NYMEX Contract (as defined
          below) for the month of delivery trades as reported in the
          "Wall Street Journal", expressed in dollars per MMBtu. NYMEX
          Contract shall mean the New York Mercantile Exchange Natural
          Gas Futures Contract as approved by the Commodity Futures
          Trading Commission for the purchase and sale of natural gas
          at Henry Hub;

                                      A-1
<PAGE>

     Market Oil Price is the average of the values of "Oil Index" for the most
     ----------------
recent available twelve months, where:

          Oil Index is the average for the month of the daily low
          ---------
          quotations for cargo delivery of 1.0% sulphur No. 6 residual
          fuel oil into New York harbor, as reported in "Patt's
          Oilgram U.S. Marketscan" in dollars per barrel and converted
          to dollars per MMBtu by dividing by 6.3; and

     If the indices referred to above should become obsolete or no longer
suitable, NECO shall file alternate indices with the RIPUC.

     Fuel Trigger Point is the following amounts, expressed in dollars per
     ------------------
MMBtu, applicable for all months in the specified calendar year:

                    2000                        $ 5.35/MMBtu
                    2001                        $ 5.35
                    2002                        $ 6.09
                    2003                        $ 7.01
                    2004                        $ 7.74
                    2005                        $ 8.48
                    2006                        $ 9.22
                    2007                        $ 9.95
                    2008                        $10.69
                    2009                        $11.42

     In the event that the Fuel Trigger Point is exceeded, the Fuel Adjustment
value for the billing month is determined based according to the following
formula:

     Fuel =     (Market Gas Price + $.60/MMBtu)+(Market Oil Price +$.04/MMBtu)
 Adjustment     --------------------------------------------------------------
                              Fuel Trigger Point+$.60+$.04/MMBtu

     Where:

          Market Gas Price, Market Oil Price and Fuel Trigger Point
          are as defined above. The values of $.60 and $.04/MMBtu
          represent for gas and oil respectively, estimated basis
          differentials or market costs of transportation from the
          point where the index is calculated to a proxy power plant
          in the New England market.

     For example if at a point in the year 2002 the Market Gas Price
and Market Oil Price total $6.50 ($3.50/MMBtu plus $3.00/MMBtu
respectively), the Fuel Trigger Point of 6.09 would be exceeded. In
this case the Fuel Adjustment value would be:

                                 A-2
<PAGE>

                  ($3.50+$.60/MMBtu)+($3.00+$.04/MMBtu) = 1.0609
                  -------------------------------------
                          $6.09+$.60+$.04/MMBtu

The Stipulated Price is increased by this Fuel Adjustment factor for the billing
month, becoming 4.4548(cents)/kWh (4.2 x 1.0609).

     In subsequent months the same comparisons are made and, if applicable, a
Fuel Adjustment determined.

                                      A-3
<PAGE>

                Appendix B. Estimation of Supplier Hourly Loads

Overview

     Generating units operated by suppliers are dispatched by the power pool to
meet the region's electrical requirements reliably, and at the lowest possible
cost. As a result, a supplier's electricity production may not match the demand
of its customers. In each hour some suppliers with low cost production units are
net sellers of electricity to the pool, while other suppliers are purchasing
power from the pool to meet the demand of their customers. To determine the
extent to which suppliers are net buyers or sellers on an hourly basis, it is
necessary to estimate the hourly aggregate demand for all of the customers
served by each supplier ("own-load"). NECO will estimate Seller's Wholesale
Standard Offer Service "own-load" within NECO's service territory and report the
hourly results to NEPOOL or the ISO on a daily basis.

     The estimation process is a cost effective approach to producing results
that are reliable, unbiased and reasonably accurate. The hourly load estimates
will be based on rate class load profiles which will be developed from
statistically designed samples. Each day, the class load shapes will be scaled
to the population of customers served by each supplier. In cases where
telemetered data on individual customers are available, they will be used in
place of the estimated shapes. On a monthly basis, the estimates will be
refined by incorporating actual usage data obtained from meter readings. In
both processes, the sum of all suppliers' estimated loads will match the total
load delivered into the distribution system. A description of the estimation
process follows.

Daily Estimation of Suppliers' Own Load

     The daily process estimates the hourly load for each supplier for the
previous day. There are five components in this process:

     .     Select a proxy date from the previous year with characteristics which
           best match the day for which the hourly demand estimates are being
           produced. Extract class load shapes for the selected proxy date from
           the load research data base.

     .     Scale the class load shapes appropriately for each individual
           customer based on the usage level of the customer relative to the
           class average usage level.

     .     Calculate a factor for each customer which reflects their relative
           usage level and includes an adjustment for losses ("load adjustment
           factor"). Aggregate the load adjustment factors across the customers
           served by each supplier in each class.

                                      B-1
<PAGE>

     .     Produce a preliminary estimate of each supplier's hourly loads by
           combining the proxy day class load shapes with the supplier's total
           load adjustment factors. Aggregate the loads across the classes for
           each supplier.

     .     Adjust the preliminary hourly supplier estimates so that their sum is
           equal to NECO's actual hourly metered loads (as metered at the point
           of delivery to the distribution system) by allocating any
           differences to suppliers in proportion to their estimated load.

Monthly Reconciliation Process

     The monthly process will improve the estimates of supplier loads by
incorporating the most recent customer usage information, which will be
available after the monthly meter readings are processed. A comparison will be
made between customers' estimated and actual usage, by billing cycle, then
summed across billing cycles for each supplier. The ratio between the actual
kWh and the estimated kWh reflects the kWh amount for which the supplier may
have been overcharged or undercharged by NEPOOL or the ISO during the month.
This ratio will be used to develop a kWh adjustment amount for each supplier
for the calendar month. The sum of the adjustments will be zero because the
total kWh will still be constrained to equal NECO's actual hourly metered loads
during the month.

                                      B-2
<PAGE>

                       Appendix C. Arbitration Agreement

                            ARBITRATION AGREEMENT
                            ---------------------

     This Arbitration Agreement, dated as of September 1, 1998, is entered into
between The Narragansett Electric Company, a Rhode Island corporation ("NECO")
and USGen New England, Inc., a Delaware corporation ("Seller"). Reference is
made to that certain Second Amended and Restated Wholesale Standard Offer
Service Agreement dated as of September 1, 1998 (the "Service Agreement")
between NECO and Seller. Unless otherwise specified or apparent from the
context of this Arbitration Agreement, the term "Party" shall mean either NECO
or Seller, or both of them.

     WHEREAS, NECO and Seller wish to avoid the burden, time, and expense of
court proceedings with respect to any disputes that may arise from or relate to
the Service Agreement, and to submit such disputes to mandatory binding
arbitration if they cannot first be resolved through negotiation and mediation.

     NOW, THEREFORE, NECO and SELLER AGREE AS FOLLOWS:

1.   Mediation
     ---------

     Before resorting to mediation or arbitration under this Arbitration
Agreement, the Parties will try to resolve promptly through negotiation any
Arbitrable claim, as defined below. If the Arbitrable Claim has not been
resolved through negotiation within ten (10) days after the existence of the
Arbitrable Claim has been brought to the attention of the other Party in a
writing, any Party may request in writing to resolve the Arbitrable Claim
through mediation conducted by a mediator selected by agreement of the Parties.
The mediation procedure shall be determined by the Parties in consultation with
the mediator. Any medication pursuant hereto shall be kept confidential. The
fees and expenses of the mediator shall be borne equally by the Parties. If the
Parties are unable to agree upon the identity of a mediator or a mediation
procedure within ten (10) days after a Party has requested mediation in writing
or if the Arbitrable Claim has not been resolved to the satisfaction of either
NECO or Seller within forty (40) days after the Parties have selected a mediator
and agreed upon a mediation procedure, either Party may invoke arbitration
pursuant to the following sections by notifying the other Party of such
selection in writing consistent with Section 3(c), below.

2.   Mandatory Arbitration
     ---------------------

     (a)  Except as provided in paragraph (b) of this Section 2 and in
Section 8, below, any case, controversy or claim arising out of or relating to
the Service Agreement, its breach, or any other disputes arising out of the
business relationship created by the Service Agreement, of whatever nature,
including but not limited to any claim based in contract, in law, in equity,
any statute, regulation, or theory of law now in existence or which may come
into

                                      C-1
<PAGE>

existence in the future, whether known or unknown, including without limitation,
claims based upon deceit, fraudulent inducement, misrepresentation, 18 U.S.C
(S)(S)1962 and 1964 (RICO), and R.I. G.L. Title 6, c. 13.1, the federal and
state antitrust laws (collectively, the "Arbitrable Claims"), which cannot be
resolved by negotiation or mediation, as provided in Section 1 above, shall be
submitted to mandatory, binding, and final arbitration in accordance with
procedures set forth in this Agreement, which shall constitute the exclusive
remedy for any and all Arbitrable Claims.

     (b)  Notwithstanding paragraph (a) above, physical accidents or events
giving rise to negligence or intentional tort claims for the recovery of
property damages and/or damages for personal injury and failure to make payments
due under Section 5.2 of the Service Agreement shall not be considered
"Arbitrable Claims." However disputes regarding the interpretation or scope of
any indemnification clauses in the Service Agreement shall be subject to
arbitration, even if the dispute relates to whether one Party must indemnify the
other for property damages and/or damages for personal injury, the recovery of
which was or will be determined in a court of law.

     (c)  Each Party agrees that it will not attempt to circumvent this
Arbitration Agreement by coordinating or cooperating with their respective
parent companies of affiliates or guarantors in the filing of a legal action in
the name of any of the parent companies or affiliates or guarantors of the
Parties to this Arbitration Agreement regarding claims that otherwise are
subject to this Arbitration Agreement. Any Party failing to comply with this
provision shall indemnify the other Party against, and hold the other harmless
from, the costs (including reasonable litigation costs) incurred by the other in
defending any and all claims brought by a parent company or affiliate or
guarantor of the other in a court of law regarding claims that otherwise would
be Arbitrable Claims under this Arbitration Agreement.

3.   Selection and Qualification of Arbitrators
     ------------------------------------------

     (a)  Any arbitration shall be conducted by a panel of three neutral
arbitrators, consisting of (i) a practicing lawyer admitted to practice in the
Commonwealth of Massachusetts; (ii) a person with professional experience in and
substantial knowledge of the power generation industry in any one or more of the
New England States, who may be, but need not be a lawyer, and (iii) a person
with professional experience in and substantial knowledge of power markets in
any one or more of the New England States, who may, but need not be, a lawyer
(collectively, the "Arbitration Panel"). For purposes of this Arbitration
Agreement, an arbitrator or candidate shall be considered "neutral" only if the
arbitrator or candidate has not previously served as an arbitrator for a Party
or one of its affiliates or guarantors and is not a present or former lawyer,
employee or consultant of a Party or any of its affiliates or guarantors.

     (b)  Any Party entitled to commence arbitration hereunder shall do
so by serving a written Notice of Arbitration briefly describing the Arbitrable
Claims and the Agreements

                                      C-2
<PAGE>

under which they are brought. Service of such Notice of Arbitration shall be
complete upon receipt by the person designated for each party at the addresses
specified in Section 12 below.

     (c)  Within twenty (20) days after service of a Notice of Arbitration, each
Party shall serve upon the other Party a list of seven neutral candidates for
each of the three panel members described in subparagraph (a) above.

     (d)  Within twenty (20) days after service of the lists referred to in
subparagraph (c), NECO and Seller shall then strike from the other's lists any
two candidates from each of the lists, for any reason whatsoever. For the
remaining candidates each Party shall rank each candidate on its three lists
from one to five and shall do the same for the other Party's lists.

     (e)  The candidates in each of the three categories with the lowest total
score shall be invited to serve as panel members. In the event that the
candidate in any of the three categories with the lowest total score is unable
or unwilling to serve, or has a potential conflict of interest not consented to
by each Party, then the candidate with the next lowest score in that category
shall be invited to serve, subject to full disclosure by each candidate of, and
consent by each Party to any potential conflicts of interests. This process
shall be repeated until a full arbitration Panel is selected or the list of
candidates for that category is exhausted. If the list of candidates for a
category is exhausted the Parties shall exchange a new list of candidates for
that category and the procedures set forth above shall be repeated a second
time.

     (f)  If the parties cannot select a full Arbitration Panel in accordance
with these procedures than any Party may request that a court of competent
jurisdiction appoint the remaining members subject to their qualifications,
willingness and ability to serve as provided above.

     (g)  The American Arbitration Association shall be appointed to facilitate
and administer the parties' compliance with the procedures set forth above.

4.   Time Schedule
     -------------

     The Arbitration shall be conducted as expeditiously as possible. The
Arbitration Panel shall schedule a pre-hearing conference and hearings as it
deems advisable and shall use its best efforts to schedule consecutive days of
hearings. Hearings shall be limited to a total of ten (10) days. The Arbitration
Panel shall issue its final decision and award within thirty (30) days of the
close of the hearings, which shall be accompanied by a written, reasoned
opinion.

5.   Remedies
     --------

     (a)  The Arbitration Panel shall not award punitive or multiple damages or
any other damages not measured by the prevailing Party's actual damages - except
that the Arbitration Panel, in its sole discretion, may shift all or a portion
of the costs of the Arbitration to any Party.

                                      C-3
<PAGE>

     (b)  Any award of damages by the Arbitration Panel shall be determined,
limited and controlled by the damages limitation clauses of the Service
Agreement applicable to the dispute before the Arbitration Panel.

     (c)  The Arbitration Panel may, in its discretion, award pre-award and
post-award interest on any damages award; provided, however, that the rate of
pre-award or post-award interest shall not exceed a rate equal to the rate
provided for post-judgment interest by 28 U.S.C.(S) 1961 as published from time
to time by the Administrative Office of the United States Courts based on the
equivalent coupon issue yield for auctions of 52-week Treasury bills.

6.   Confidentiality
     ---------------

     The existence, contents, or results of any mediation or arbitration
hereunder may not be disclosed without the prior written consent of both
Parties; provided, however, either Party may make disclosures as may be
necessary to fulfill regulatory obligations to any regulatory bodies having
jurisdiction, and may inform their lenders, affiliates, auditors and insurers,
as necessary, under pledge of confidentiality and can consult with experts as
required in connection with the arbitration under pledge of confidentiality. If
any Party seeks preliminary injunctive relief from any court to preserve the
status quo or avoid irreparable harm pending mediation or arbitration, the
Parties agree to use best efforts to keep the court proceedings confidential, to
the maximum extent permitted by law.

7.   FERC Jurisdiction over Certain Disputes
     ---------------------------------------

     (a)  Nothing in this Arbitration Agreement shall preclude, or be construed
to preclude, any Party from filing a petition or complaint with the Federal
Energy Regulatory Commission ("FERC") with respect to any Arbitrable Claim. In
such case, the other Party may request FERC to reject or to waive jurisdiction.
If the FERC rejects or waives jurisdiction, with respect to all or a portion of
the claim, the portion of the claim not so accepted by FERC shall be resolved
through arbitration, as provided in this Arbitration Agreement. To the extent
that FERC asserts or accepts jurisdiction over the claim, the decision, finding
of fact, or order of FERC shall be final and binding, and any arbitration
proceedings that may have commenced prior to the assertion or acceptance of
jurisdiction by FERC shall be stayed, pending the outcome of the FERC
proceedings.

     (b)  The Arbitration Panel shall have no authority to modify, and shall be
conclusively bound by, any decision, finding of fact, or order of FERC. However,
to the extent that a decision finding of fact, or order of FERC does not provide
a final or complete remedy to the Party seeking relief, such Party may proceed
to arbitration under this Arbitration Agreement to secure such remedy, subject
to the FERC decision, finding or order.

                                      C-4
<PAGE>

8.   Preliminary Injunctive Relief
     -----------------------------

     Nothing in this Arbitration Agreement shall preclude, or be construed to
preclude, the resort by either Party to a court of competent jurisdiction solely
for the purposes of securing a temporary or preliminary injunction to preserve
the status quo or avoid irreparable harm pending mediation or arbitration
pursuant to this Arbitration Agreement.

9.   Governing Law
     -------------

     This Arbitration Agreement shall be construed, enforced in accordance with,
and governed by, the laws of the State of Rhode Island.

10.  Location of Arbitration
     -----------------------

     Any arbitration hereunder shall be conducted in Boston, Massachusetts.

11.  Severability
     -----------

     If any section, subsection, sentence, or clause of this Arbitration
Agreement is adjudged illegal, invalid, or unenforceable, such illegality,
invalidity, or enforceability shall not affect the legality, validity, or
enforceability of the Arbitration Agreement as a whole or of any section,
subsection, sentence or clause hereof not so adjudged.

12.  Notices
     -------

     Any notices required to be given pursuant to this Arbitration Agreement
shall be in writing and sent to the receiving party by (i) certified mail,
return receipt requested, (ii) overnight delivery service, or (iii) facsimile
transmission (confirmed by telephone), addressed to the receiving party at the
address shown below or such other address as a party may subsequently designate
in writing. Any such notice shall be deemed to be given (i) three days after
deposit in the United States mail, if sent by mail, (ii) when actually received
if sent by overnight delivery service, or (iii) when sent, if sent by facsimile
and confirmed by telephone.

     If to NECO:  The Narragansett Electric Company
                  25 Research Drive
                  Westborough, Massachusetts 01582
                  Attention: General Counsel
                  Facsimile: (508) 389-2463

     If to Seller USGen New England, Inc.
                  7500 Old Georgetown Road, 13th floor
                  Bethesda, MD 20814
                  Attention: Stephen A. Herman, Esq.
                  Facsimile: (301) 718-6913

                                      C-5
<PAGE>

     In addition, the parties shall send copies of any notices required by the
terms of any of the Agreements, in accordance with the terms of each Agreement.

     IN WITNESS WHEREOF, each Party has caused its duly authorized officers to
execute this Arbitration Agreement on the dates set forth below.

                                             THE NARRAGANSETT ELECTRIC COMPANY

                                             BY: /s/ Michael E. Jeranis
                                                ------------------------------

                                             Its Vice President
                                                ------------------------------

                                             USGEN NEW ENGLAND, INC.

                                             BY: /s/ James V. Mahoney
                                                ------------------------------

                                             Its Senior Vice President
                                                 -----------------------------

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