Document:

Exhibit 10.2

             BGS BONDABLE TRANSITION PROPERTY SERVICING AGREEMENT

                                    between

                        PSE&G TRANSITION FUNDING II LLC
                                    Issuer

                                      and

                    PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                   Servicer

                          Dated as of _________, 2005

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                                                  TABLE OF CONTENTS
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                                                                                                               Page

ARTICLE I  Definitions............................................................................................4

         Section 1.01.  Definitions...............................................................................4
         Section 1.02.  Other Definitional Provisions.............................................................4

ARTICLE II  Appointment and Authorization of Servicer.............................................................5

         Section 2.01.  Appointment of Servicer; Acceptance of Appointment........................................5
         Section 2.02.  Authorization.............................................................................5
         Section 2.03.  Dominion and Control over Transferred BGS Bondable Transition Property....................5

ARTICLE III  Billing Services.....................................................................................6

         Section 3.01.  Duties of Servicer........................................................................6
         Section 3.02.  Collection and Allocation of the BGS Transition Bond Charge...............................7
         Section 3.03.  Payment of TBC Collections................................................................7
         Section 3.04.  Servicing and Maintenance Standards.......................................................9
         Section 3.05.  Servicer's Certificates..................................................................10
         Section 3.06.  Annual Statement as to Compliance........................................................10
         Section 3.07.  Annual Independent Certified Public Accountants' Report..................................10
         Section 3.08.  BGS Bondable Transition Property Documentation...........................................11
         Section 3.09.  Computer Records; Audits of Documentation................................................11
         Section 3.10.  Defending Transferred BGS Bondable Transition Property Against Claims....................12
         Section 3.11.  Opinions of Counsel......................................................................12

ARTICLE IV  Services Related to BGS Transition Bond Charge Adjustments...........................................13

         Section 4.01.  BGS Transition Bond Charge Adjustments...................................................13

ARTICLE V  The Servicer..........................................................................................13

         Section 5.01.  Representations and Warranties of Servicer...............................................13
         Section 5.02.  Indemnities of Servicer; Release of Claims...............................................15
         Section 5.03.  Merger or Consolidation of, or Assumption of the Obligations of, Servicer................17
         Section 5.04.  Assignment of Servicer's Obligations.....................................................18
         Section 5.05.  Limitation on Liability of Servicer and Others...........................................18
         Section 5.06.  PSE&G Not To Resign as Servicer..........................................................19
         Section 5.07.  Monthly Servicing Fee....................................................................19
         Section 5.08.  Servicer Expenses........................................................................19
         Section 5.09.  Subservicing.............................................................................19
         Section 5.10.  No Servicer Advances.....................................................................20
         Section 5.11.  Remittances..............................................................................20
         Section 5.12.  Protection of Title......................................................................20
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                                                  TABLE OF CONTENTS
                                                     (continued)
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ARTICLE VI  Servicer Default.....................................................................................21

         Section 6.01.  Servicer Default.........................................................................21
         Section 6.02.  Notice of Servicer Default...............................................................22
         Section 6.03.  Waiver of Past Defaults..................................................................22
         Section 6.04.  Appointment of Successor.................................................................22
         Section 6.05.  Cooperation with Successor...............................................................23

ARTICLE VII  Miscellaneous Provisions............................................................................23

         Section 7.01.  Amendment................................................................................23
         Section 7.02.  Notices..................................................................................25
         Section 7.03.  Limitations on Rights of Others..........................................................25
         Section 7.04.  Severability.............................................................................25
         Section 7.05.  Separate Counterparts....................................................................26
         Section 7.06.  Headings.................................................................................26
         Section 7.07.  GOVERNING LAW............................................................................26
         Section 7.08.  Assignment to the Trustee................................................................26
         Section 7.09.  Nonpetition Covenants....................................................................26
         Section 7.10.  Termination..............................................................................26

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

APPENDIX A              Master Definitions

EXHIBIT A               Servicing Procedures

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     BGS BONDABLE TRANSITION PROPERTY SERVICING AGREEMENT, dated as of
_________, 2005, by and between PSE&G TRANSITION FUNDING II LLC, a Delaware
limited liability company, as issuer (the "Issuer"), and PUBLIC SERVICE
ELECTRIC AND GAS COMPANY, a New Jersey corporation ("PSE&G"), as the servicer
of the BGS Bondable Transition Property hereunder (together with each
successor to PSE&G (in the same capacity) pursuant to Section 5.03, 5.04 or
6.04, the "Servicer").

                             W I T N E S S E T H:

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

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

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

                                   ARTICLE I
                                  DEFINITIONS

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

     Section 1.02. Other Definitional Provisions.

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

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

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

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

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

                                  ARTICLE II
                   APPOINTMENT AND AUTHORIZATION OF SERVICER

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

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

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

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

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

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

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                                  ARTICLE III
                               BILLING SERVICES

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

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

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

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

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

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

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

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

         (b) Notification of Laws and Regulations. The Servicer shall
     immediately notify the Issuer, the BPU, the Trustee and the Rating
     Agencies in writing of any laws or BPU Regulations hereafter promulgated
     that have a material adverse effect on the Servicer's ability to perform
     its duties under this Agreement.

         (c) Other Information. Upon the reasonable request of the Issuer, the
     BPU, the Trustee or any Rating Agency, the Servicer shall provide to the
     Issuer, the BPU, the Trustee or the Rating Agencies, as the case may be,
     any public financial information in

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

     Section 3.02. Collection and Allocation of the BGS Transition Bond
Charge.

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

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

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

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

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

PSE&G's other charges may include gas charges which may be billed together
with electric charges, the market transition charge, the MTC-Tax and all other
charges which PSE&G and any Third Party may be authorized to bill and collect
from Customers on account of electric and gas service. If there is more than
one Series of BGS Transition Bonds, the Servicer shall allocate partial
payments among such Series, pro rata, based on the respective outstanding
amounts payable with respect to such Series.

     Section 3.03. Payment of TBC Collections. (a) The Servicer shall prepare
annually a Collections Curve for each Billing Month, based on statistically
significant random sampling of actual TBC Collections. With the exception of
the Monthly Servicing Fee, which the Servicer is

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entitled to withhold from TBC Collections pursuant to Section 5.07 hereof, the
Servicer agrees to remit TBC Collections for each Billing Month to the Trustee
for deposit in the Collection Account not later than the corresponding
Reconciliation Date or Dates following such Billing Month. In addition, the
Servicer agrees to make periodic payments on account of TBC Collections to the
Trustee for deposit in the Collection Account as follows:

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

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

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

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

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

              second, dividing the amount of the Billing Month Estimated
              Collections for such Billing Day by the number of Business Days
              remaining in such

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              Billing Month (for each Billing Day, the "Daily Billing Month
              Estimated Collections" for such Billing Month),

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

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

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

     (c) The Servicer agrees and acknowledges that it holds all TBC
Collections collected by it for the benefit of the Issuer and that all amounts
will be remitted by the Servicer in accordance with this Agreement without any
surcharge, fee, offset, charge or other deduction and without making any claim
to reduce its obligation to remit all TBC Collections collected by it, except
(i) as set forth in clause (b) above, (ii) the Monthly Servicing Fee which it
may withhold pursuant to Section 5.07 hereof and (iii) late fees permitted by
Section 5.07.

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

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

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

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

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

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

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

     Section 3.06. Annual Statement as to Compliance.

     The Servicer shall deliver to the Issuer, the BPU, the Trustee and each
Rating Agency, on or before March 31 of each year beginning March 31, 2006 to
and including March 31 succeeding the retiring of the BGS Transition Bonds, an
Officers' Certificate, stating that:

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

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

     Section 3.07. Annual Independent Certified Public Accountants' Report.

     (a) The Servicer shall cause a firm of independent certified public
accountants (which may also provide other services to the Servicer or the
Seller) to prepare, and the Servicer shall deliver to the Issuer, the BPU to
the Trustee and to each Rating Agency, on or before March 31 of each year,
beginning March 31, 2006 to and including the March 31 succeeding the
retirement of all BGS Transition Bonds, a report addressed to the Servicer
(the "Annual Accountant's Report"), which may be included as part of the
Servicer's customary auditing activities, to the effect that such firm has
performed certain procedures in connection with the Servicer's

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compliance with its obligations under this Agreement during the preceding
calendar year (or, in the case of the first Annual Accountant's Report, the
period of time from the Initial Transfer Date until December 31, 2005),
identifying the results of such procedures and including any exceptions noted.
In the event such accounting firm requires the Trustee or the Issuer to agree
or consent to the procedures performed by such firm, the Issuer shall direct
the Trustee in writing to so agree; it being understood and agreed that the
Trustee will deliver such letter of agreement or consent in conclusive
reliance upon the direction of the Issuer, and the Trustee will not make any
independent inquiry or investigation as to, and shall have no obligation or
liability in respect of, the sufficiency, validity or correctness of such
procedures.

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

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

     Section 3.09. Computer Records; Audits of Documentation.

     (a) Safekeeping. The Servicer shall maintain accurate and complete
accounts, records and computer systems pertaining to the Transferred BGS
Bondable Transition Property and the BGS Bondable Transition Property
Documentation in accordance with its standard accounting procedures and in
sufficient detail to permit reconciliation between payments or recoveries on
(or with respect to) the BGS Transition Bond Charge and the TBC Collections
from time to time remitted to the Trustee pursuant to Section 3.03 and to
enable the Issuer to comply with this Agreement and the Indenture. The
Servicer shall conduct, or cause to be conducted, periodic audits of the BGS
Bondable Transition Property Documentation held by it under this Agreement and
of the related accounts, records and computer systems, in such a manner as
shall enable the Issuer and the Trustee, as pledgee of the Issuer, to verify
the accuracy of the Servicer's record keeping. The Servicer shall promptly
report to the Issuer, the BPU and to the Trustee any failure on the Servicer's
part to hold the BGS Bondable Transition Property Documentation and maintain
its accounts, records and computer systems as herein provided and promptly
take appropriate action to remedy any such failure. Nothing herein shall be
deemed to require an initial review or any periodic review by the Issuer or
the Trustee of the BGS Bondable Transition Property Documentation. The
Servicer's duties to hold the BGS Bondable Transition Property Documentation
on behalf of the Issuer set forth in this Section 3.09, to the extent such BGS
Bondable Transition Property Documentation has not been previously transferred
to a successor Servicer, shall terminate three years after the earlier of the
date on which (i) the Servicer is succeeded by a successor Servicer pursuant
to the provisions of this Agreement or (ii) no BGS Transition Bonds of any
Series are outstanding.

     (b) Maintenance of and Access to Records. The Servicer shall maintain the
BGS Bondable Transition Property Documentation at 80 Park Plaza, Newark, New
Jersey or at such

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

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

     Section 3.11. Opinions of Counsel. The Servicer shall deliver to the
Issuer, the BPU and to the Trustee:

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

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

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

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

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

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

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

                                  ARTICLE IV
          SERVICES RELATED TO BGS TRANSITION BOND CHARGE ADJUSTMENTS

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

                                  ARTICLE V
                                 THE SERVICER

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

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

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

                                      13
<PAGE>

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

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

     (e) No Violation. The consummation of the transactions contemplated by
this Agreement and the fulfillment of the terms hereof will not conflict with,
result in any breach of any of the terms and provisions of, or constitute
(with or without notice or lapse of time) a default under, the articles of
incorporation or by-laws of the Servicer, or any indenture, agreement or other
instrument to which the Servicer is a party or by which it is bound; or result
in the creation or imposition of any Lien upon any of its properties pursuant
to the terms of any such indenture, agreement or other instrument; or violate
any law or any order, rule or regulation applicable to the Servicer of any
court or of any federal or State regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over the Servicer or
its properties.

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

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

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

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

                                      14
<PAGE>

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

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

     Section 5.02. Indemnities of Servicer; Release of Claims.

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

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

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

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

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

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

Promptly after receipt by an Indemnified Person of notice of its involvement
in any action, proceeding or investigation, such Indemnified Person shall, if
a claim for indemnification in respect thereof is to be made against the
Servicer under this Section 5.02, notify the Servicer in writing of such
involvement. Failure by an Indemnified Person to so notify the Servicer shall
relieve the Servicer from the obligation to indemnify and hold harmless such
Indemnified Person under this Section 5.02 only to the extent that the
Servicer suffers actual prejudice as a result of such failure. With respect to
any action, proceeding or investigation brought by a third party for

                                      15
<PAGE>

which indemnification may be sought under this Section 5.02, the Servicer
shall be entitled to assume the defense of any such action, proceeding or
investigation. Upon assumption by the Servicer of the defense of any such
action, proceeding or investigation, the Indemnified Person shall have the
right to participate in such action or proceeding and to retain its own
counsel (including local counsel), and the Servicer shall bear the reasonable
fees, costs and expenses of such separate counsel. The Indemnified Person
shall not settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought under this Section 5.02
(whether or not the Servicer is an actual or potential party to such claim or
action) unless the Servicer agrees in writing to such settlement, compromise
or consent and such settlement, compromise or consent includes an
unconditional release of the Servicer from all liability arising out of such
claim, action, suit or proceeding.

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

     (d) Any Servicer that is not subject to retail electric rate regulation
by the BPU shall indemnify electric ratepayers in the historic service
territory of PSE&G for any and all Losses (including, but not limited to,
increased BGS Transition Bond Charges) that may be imposed upon or incurred by
such retail electric ratepayers as a result of:

              (i) any such Servicer's willful misconduct, recklessness or
         gross negligence in the performance of its obligations, duties and
         covenants under this Agreement;

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

              (iii) litigation and related expenses relating to any such
         Servicer's status and obligations as Servicer.

The BPU shall be entitled to enforce this Section 5.02(d) for the benefit of
retail electric ratepayers in the historic service territory of PSE&G. If so
directed by the BPU, any successor Servicer that is not subject to retail
electric rate regulation by the BPU and that is obligated to make payments
pursuant to this Section 5.02(d) shall make such payments either to the
Trustee, for deposit to the Collection Account and for allocation to the
Reserve Subaccount therein, or to such other person or account as shall be
specified by the BPU.

     (e) The Servicer's indemnification obligations under Section 5.02(b) and
(c) for events occurring prior to the removal or resignation of the Trustee or
the termination of this Agreement shall survive the resignation or removal of
the Trustee or the termination of this

                                      16
<PAGE>

Agreement and shall include reasonable costs, fees and expenses of
investigation and litigation (including the Issuer's and the Trustee's
reasonable attorneys' fees and expenses).

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

     (g) The Servicer will not indemnify any person for any loss, damages,
liability, obligation, claim, action, suit or payment resulting solely from a
downgrade in the ratings on the BGS Transition Bonds or for any consequential
damages, including any loss of market value of the BGS Transition Bonds,
resulting from any default or any downgrade of the ratings on the BGS
Transition Bonds.

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

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

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

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

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

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

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

              (i) immediately after giving effect to such transaction, no
         representation or warranty made pursuant to Section 5.01 shall have
         been

                                      17
<PAGE>

         breached and no Servicer Default, and no event that, after notice or
         lapse of time, or both, would become a Servicer Default, shall have
         occurred and be continuing;

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

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

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

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

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

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

The Servicer shall not consummate any transaction referred to in subclauses
(a), (b), (c), (d) or (e) above except upon execution of the above described
agreement of assumption and compliance with subclauses (i), (ii), (iii), (iv)
and (v) above. When any Person acquires the properties and assets of the
Servicer substantially as a whole and becomes the successor to the Servicer in
accordance with the terms of this Section 5.03, then upon the satisfaction of
all of the other conditions of this Section 5.03, the Servicer shall
automatically and without further notice be released from its obligations
hereunder.

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

     Section 5.05. Limitation on Liability of Servicer and Others. The
Servicer shall not be liable to the Issuer or the Trustee, except as provided
under this Agreement, for any action taken or for refraining from the taking
of any action pursuant to this Agreement or for errors in

                                      18
<PAGE>

judgment; provided, however, that this provision shall not protect the
Servicer against any liability that would otherwise be imposed by reason of
willful misconduct, bad faith or gross negligence in the performance of its
duties or by reason of reckless disregard of obligations and duties under this
Agreement. The Servicer and any director, officer, employee or agent of the
Servicer may rely in good faith on the advice of counsel reasonably acceptable
to the Trustee or on any document of any kind, prima facie properly executed
and submitted by any Person, respecting any matters arising under this
Agreement.

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

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

     Section 5.07. Monthly Servicing Fee. The Issuer agrees to pay the
Servicer the Monthly Servicing Fee with respect to all Series of BGS
Transition Bonds. On any Monthly Remittance Date, the Servicer shall be
entitled to withhold the amount of the Monthly Servicing Fee from TBC
Collections as compensation under this Agreement unless the Trustee has
notified the Servicer in writing that the Issuer does not hold sufficient
funds to pay amounts owed in such month to the Trustee. For so long as PSE&G
is the Servicer, the Monthly Servicing Fee shall be $__________. The Servicer
shall be entitled to retain as additional compensation net investment income
on TBC Collections related to the Transferred BGS Bondable Transition Property
received by the Servicer during any Collection Period prior to remittance to
the Collection Account and the late fees, if any, paid by Customers to the
Servicer. The foregoing fees constitute a fair and reasonable price for the
obligations to be performed by the Servicer.

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

     Section 5.09. Subservicing. The Servicer may at any time appoint a
subservicer to perform all or any portion of its obligations as Servicer
hereunder; provided, however, the Rating Agency Condition shall have been
satisfied in connection therewith; and provided further that

                                      19
<PAGE>

the Servicer shall remain obligated and be liable to the Issuer, the Trustee
and the BGS Transition Bondholders for the servicing and administering of the
Transferred BGS Bondable Transition Property in accordance with the provisions
hereof without diminution of such obligation and liability by virtue of the
appointment of such subservicer and to the same extent and under the same
terms and conditions as if the Servicer alone were servicing and administering
the Transferred BGS Bondable Transition Property. The fees and expenses of the
subservicer shall be as agreed between the Servicer and its subservicer from
time to time, and none of the Issuer, the Trustee or the BGS Transition
Bondholders shall have any responsibility therefor. Any such appointment shall
not constitute a Servicer resignation under Section 5.06.

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

     Section 5.11. Remittances.

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

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

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

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

              (iii) with respect to Moody's and Fitch only, PSE&G maintains a
         long-term rating on its senior, unsecured debt of "Baa2" by Moody's
         and "BBB" by Fitch, or better, or, if the senior, unsecured debt of
         PSE&G is downgraded to "Baa3" by Moody's or "BBB-" by Fitch, PSE&G
         shall received within 30 days of such downgrading, confirmation from
         Moody's and Fitch that remittances in accordance with Section
         3.03(a)(i) will not adversely affect their respective ratings on the
         BGS Transition Bonds, or if the long-term, unsecured debt of PSE&G is
         downgraded below "Baa3" by Moody's or "BBB-" by Fitch, PSE&G shall
         have received within 48 hours of such downgrading, confirmation from
         Moody's and Fitch that remittances in accordance with Section
         3.03(a)(i) will not adversely affect their respective ratings on the
         BGS Transition Bonds,

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

     Section 5.12. Protection of Title. The Servicer shall execute and file
such filings and cause to be executed and filed such filings, all in such
manner and in such places as may be

                                      20
<PAGE>

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

                                  ARTICLE VI

                               SERVICER DEFAULT

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

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

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

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

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

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

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

then, and in each and every case, so long as the Servicer Default shall not
have been remedied, either the Trustee may, or shall upon the written
instruction of the BPU (acting on behalf of Customers) or the Holders of a
majority of the outstanding principal amount of the BGS Transition Bonds of
all Series, by notice then given in writing to the Servicer and to the Trustee
if given by the Holders (a "Termination Notice") may terminate all the rights
and obligations (other than the indemnification obligations set forth in
Section 5.02 hereof and the obligation under Section 6.04 to continue
performing its functions as Servicer until a successor Servicer is appointed)
of the Servicer under this Agreement. In addition, upon a Servicer Default,
the Issuer

                                      21
<PAGE>

and the Trustee shall be entitled to apply to the BPU or any court of
competent jurisdiction for sequestration and payment to the Trustee of
revenues arising with respect to the Transferred BGS Bondable Transition
Property.

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

     Section 6.02. Notice of Servicer Default. The Servicer shall deliver to
the Issuer, the BPU, the Trustee and each Rating Agency promptly after having
obtained knowledge thereof, but in no event later than five Business Days
thereafter, written notice in an Officer's Certificate of any event or
circumstance which, with the giving of notice or the passage of time, would
become a Servicer Default under Section 6.01.

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

     Section 6.04. Appointment of Successor.

                                      22
<PAGE>

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

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

              (ii) the Rating Agency Condition has been satisfied; and

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

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

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

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

                                 ARTICLE VII

                           MISCELLANEOUS PROVISIONS

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

     Prior to the execution of any amendment to this Agreement, the Issuer and
the Trustee shall be entitled to receive and rely upon an Opinion of Counsel
stating that the execution of such amendment is authorized or permitted by
this Agreement and the Opinion of Counsel

                                      23
<PAGE>

referred to in Section 3.11. The Issuer and the Trustee may, but shall not be
obligated to, enter into any such amendment which affects their own rights,
duties or immunities under this Agreement or otherwise.

     (a) Notwithstanding anything to the contrary in this paragraph, no
amendment or modification of this Agreement shall be effective except upon
satisfaction of the conditions precedent in this paragraph (b).

              (i) At least fifteen days prior to the effectiveness of any such
         amendment or modification and after obtaining the other necessary
         approvals set forth in paragraph (a) above (except that the consent
         of the Trustee may be subject to the consent of Holders if such
         consent is required or sought by the Trustee in connection with such
         amendment or modification), the Servicer shall have delivered to the
         BPU's executive director and general counsel written notification of
         any proposed amendment, which notification shall contain:

                   (A) a reference to Docket No. EF03070532;

                   (B) an officer's certificate stating that the proposed
              amendment or modification has been approved by all parties to
              this Agreement; and

                   (C) a statement identifying the person to whom the BPU or
              its staff is to address any response to the proposed amendment
              or to request additional time.

              (ii) If the BPU or its staff, within fifteen days (subject to
         extension as provided in clause (iii) below) of receiving a
         notification complying with paragraph (a) above, shall have delivered
         to the office of the person specified in paragraph (i)(C) above a
         written statement that the BPU might object to the proposed amendment
         or modification, then such proposed amendment or modification shall
         not be effective unless and until the BPU subsequently delivers a
         written statement that it does not object to such proposed amendment
         or modification.

              (iii) If the BPU or its staff, within fifteen days of receiving
         a notification complying with paragraph (a) above, shall have
         delivered to the office of the person specified in paragraph (i)(C)
         above a written statement requesting an additional amount of time not
         to exceed thirty days in which to consider such proposed amendment or
         modification, then such proposed amendment or modification shall not
         be effective if, within such extended period, the BPU shall have
         delivered to the office of the person specified in paragraph (i)(C)
         above a written statement as described in clause (ii) above, unless
         and until the BPU subsequently delivers a written statement that it
         does not object to such proposed amendment or modification.

              (iv) If the BPU or its staff shall not have delivered written
         notice that the BPU might object to such proposed amendment or
         modification within the time periods described in clause (ii) or
         clause (iii) above, whichever is applicable, then the BPU shall be
         conclusively deemed not to have any objection to the proposed
         amendment or modification and such amendment or modification may
         subsequently become effective upon satisfaction of the other
         conditions specified in paragraph (a) above.

                                      24
<PAGE>

              (v) Following the delivery of a notice to the BPU by the
         Servicer under clause (ii) above, the Servicer and the Issuer shall
         have the right at any time to withdraw from the BPU further
         consideration of any proposed amendment.

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

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

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

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

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

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

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

     (g) in the case of the BPU, at [____________];

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

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

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

                                      25
<PAGE>

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

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

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

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

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

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

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

                                      26
<PAGE>

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

                                 PSE&G TRANSITION FUNDING II LLC,
                                    as Issuer

                                 By:___________________________________________
                                     Name:
                                     Title:  Manager

                                 PUBLIC SERVICE ELECTRIC AND GAS
                                   COMPANY, as Servicer

                                  By:__________________________________________
                                     Name:
                                     Title:

                                  Acknowledged and Accepted:

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

                                  By:  ________________________________________
                                       Name:
                                       Title:

<PAGE>

                                    ANNEX 1

                                      to

                              SERVICING AGREEMENT

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

     SECTION 1. Definitions. Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in Appendix A to the Servicing
Agreement dated as of _________, 2005, between the Issuer and PSE&G, as
Servicer.

     SECTION 2. Trustee and Servicer Payment Date Statements. At least one
Business Day before each date on which distributions to the Trustee and
Servicer are to be made pursuant to Sections 8.2(d) and (e) of the Indenture,
the Servicer shall provide the Trustee and the BPU with a statement setting
forth the amounts to be distributed to each of the Trustee and Servicer
pursuant to such Sections.

     SECTION 3. Payment Date Statements. At least one Business Day before each
Payment Date, the Servicer shall provide to the Issuer, the Trustee, each
Rating Agency and the BPU, a statement indicating:

     1.   the amount to be paid to BGS Transition Bondholders of each Series
          and Class in respect of principal on such Payment Date in accordance
          with Section 8.2 of the Indenture and each Series Supplement
          thereto;

     2.   the amount to be paid to BGS Transition Bondholders of each Series
          and Class in respect of interest on such Payment Date in accordance
          with Section 8.2 of the Indenture and each Series Supplement
          thereto;

     3.   the Projected BGS Transition Bond Balance and the BGS Transition
          Bond Balance for each Series and Class as of that Payment Date
          (after giving effect to the payments on such Payment Date);

     4.   the amount on deposit in the Overcollateralization Subaccount for
          each Series and the Scheduled Overcollateralization Level for each
          Series, as of that Payment Date (after giving effect to the
          transfers to be made from or into the Overcollateralization
          Subaccount on such Payment Date);

     5.   the amount on deposit in the Capital Subaccount for each Series as
          of that Payment Date (after giving effect to the transfers to be
          made from or into the Capital Subaccount on such Payment Date);

     6.   the amount, if any, on deposit in the Reserve Subaccount as of that
          Payment Date (after giving effect to the transfers to be made from
          or into the Reserve Subaccount on such Payment Date);

<PAGE>

     7.   the amounts paid to the Trustee since the preceding Payment Date
          pursuant to Section 8.2(d) of the Indenture;

     8.   the amounts paid to or withheld by the Servicer since the preceding
          Payment Date pursuant to Section 8.2(e) of the Indenture; and

     9.   the amount of any other transfers and payments to be made on such
          Payment Date pursuant to Sections 8.2(d), (e), (f), (g) and (i) of
          the Indenture.

     SECTION 4. Remittance Date Statements. At least one Business Day before
each Remittance Date, and in the case of Daily Remittances, on the last
Remittance Date of such month, the Servicer shall prepare and furnish to the
Issuer, the BPU and the Trustee a statement setting forth the aggregate amount
to be remitted by the Servicer to the Trustee (net of any unreimbursed Excess
Curve Payments) for deposit on such Remittance Date pursuant to the Indenture.

     SECTION 5. BGS Transition Bond Charge Adjustments.

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

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

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

                    (A)     the BGS Transition Bond Balance on the Payment
                            Date immediately preceding the next Adjustment
                            Date will equal the Projected BGS Transition Bond
                            Balance as of such date or, if earlier with
                            respect to any Series or Class of BGS Transition
                            Bonds, as of the Payment Date immediately
                            preceding the Expected Final Payment Date
                            therefor,

                    (B)     the amount on deposit in the Overcollateralization
                            Subaccount on the Payment Date immediately
                            preceding the next Adjustment Date, or if earlier
                            with respect to any Series or Class of BGS
                            Transition Bonds, as of the Payment Date
                            immediately preceding the Expected Final Payment
                            Date therefor, will equal the Scheduled
                            Overcollateralization Level for such date,

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

<PAGE>

                    (D)     the amount on deposit in the Reserve Subaccount on
                            the Payment Date immediately preceding the next
                            January 1 Adjustment Date, will equal zero, and

                    (E)     the TBC Collections will provide for (i)
                            amortization of the remaining outstanding
                            principal amount of each Series in accordance with
                            the Expected Sinking Fund Amortization Schedule
                            therefor, (ii) payment of interest on each Series
                            when due, (iii) payment of all Operating Expenses
                            of the Issuer when due in accordance with the
                            Indenture, and (iv) deposits to the
                            Overcollateralization Subaccount such that the
                            balance therein will equal the Calculated
                            Overcollateralization Level on each Payment Date.

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

     (c)______On each Adjustment Date, the Servicer shall

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

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

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

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

     (f)______The Servicer is also required to determine, no sooner than May 1
and not later than May 15 of each year, whether the TBC Collections, without
taking into account amounts in the Capital Subaccount and
Overcollateralization Subaccount, will be sufficient to pay scheduled debt
service and expenses related to the BGS Transition Bonds throughout the end of
the then current calendar year, and to file for an upward Adjustment Request
of the BGS Transition Bond Charge no later than June 1 if a deficiency exists.Exhibit 10.3

IN THE  MATTER  OF THE  PETITION  OF  PUBLIC      STATE OF NEW JERSEY
SERVICE  ELECTRIC  AND  GAS  COMPANY  FOR  A
BONDABLE   STRANDED   COST  RATE   ORDER  IN      BOARD OF PUBLIC UTILITIES
ACCORDANCE WITH N.J.S.A.  48:3-49 ET SEQ. TO
RECOVER   ITS   BASIC   GENERATION   SERVICE
TRANSITION COSTS (INCLUDING  FEDERAL,  STATE
AND LOCAL TAX  LIABILITIES  ASSOCIATED  WITH      DOCKET NO.:  E_______________
SUCH   RECOVERY)   PROVIDING   FOR  (1)  THE
IMPOSITION  OF A  NON-BYPASSABLE  TRANSITION
BOND  CHARGE;  (2) THE SALE OF THE  RIGHT TO
RECEIVE  SUCH  CHARGE TO A  SPECIAL  PURPOSE      PETITION
FINANCING ENTITY;  (3) THE ISSUANCE AND SALE
IN A PUBLIC  OFFERING  OR PRIVATE  PLACEMENT
OF NOT  MORE  THAN  $150  MILLION  AGGREGATE
PRINCIPAL  AMOUNT OF TRANSITION BONDS IN ONE
OR   MORE    SERIES    WITH   A    SCHEDULED
AMORTIZATION  UPON ISSUANCE OF UP TO FIFTEEN
(15) YEARS;  (4) THE USE OF TRANSITION  BOND
PROCEEDS TO REFINANCE OR RETIRE  OUTSTANDING
DEBT  AND/OR  EQUITY AND (5) THE FORMULA FOR
THE   CALCULATION   AND  ADJUSTMENT  OF  THE
TRANSITION    BOND    CHARGE    AND   MARKET
TRANSITION BOND CHARGE -TAX RELATED THERETO.

            Public Service Electric and Gas Company (the "Petitioner"), a New
      Jersey corporation organized under the provisions of Chapter 185 of the
      Laws of 1896, as amended and supplemented, with its principal office at
      80 Park Plaza, Newark, New Jersey, respectfully shows that:

1.    Petitioner is a public utility engaged in the electric and gas
      distribution business, subject to the jurisdiction of your Honorable
      Board.

2.    This Petition for the issuance of a Bondable Stranded Costs Rate Order
      ("BSCRO" or "Financing Order") is filed pursuant to the Electric
      Discount and Energy Competition Act, Chapter 23 of the Laws of 1999,
      N.J.S.A. 48:3-49 et seq. (the "EDECA"), as amended by P.L. 2002, Ch. 84
      (the "2002 Amendments", and together with the EDECA,

<PAGE>

      the "Act"). Capitalized terms used herein and not specifically defined
      shall have the meanings as defined in the Act.

3.    RECOVERY OF BASIC GENERATION SERVICE TRANSITION COSTS.

            Basic Generation Service ("BGS"), as defined in N.J.S.A. 48:3-51,
      is a regulated electric generation service provided, pursuant to
      N.J.S.A. 48:3-57, to any electric utility customer of an electric
      utility that has not chosen an alternative power supplier. BGS
      transition costs ("BGS Transition Costs", as defined in N.J.S.A.
      48:3-51) is the amount by which payments by an electric public utility
      for the procurement of power for BGS and related ancillary and
      administrative costs exceed the net revenues from the BGS charge
      established by the Board ("Deferred Balance") pursuant to N.J.S.A
      48:3-57, during the Transition Period, together with interest on the
      Deferred Balance at the Board-approved rate, that is reflected in a
      Deferred Balance account approved by the Board in an Order addressing
      the electric public utility's rates, stranded costs, and restructuring
      filings pursuant to the Act. BGS Transition Costs include, but are not
      limited to payments by an electric public utility pursuant to a
      competitive procurement process for BGS supply during the Transition
      Period, and the costs of any such payments used to procure the BGS
      supply. The Transition Period commenced August 1, 1999 and will end July
      31, 2003. The BGS Transition Costs that are the subject matter of this
      Petition is the Deferred Balance (the "Year Four Deferred Balance")
      incurred by Petitioner for the period August 1, 2002 through July 31,
      2003 ("Year Four") pursuant to the rate unbundling stranded cost and
      restructuring Orders issued by the Board in Docket Nos. E097070461,
      E097070462 and E097070463 dated April 21, 1999 (Summary Order) and
      August 24, 1999 (Final Order) (collectively, the "Restructuring Order").

                                      2

<PAGE>

            By Order dated December 11, 2001 in Docket Nos. EO01100654,
      EO01100655, EO01100656 and EO001100657, the Board approved an auction
      process for BGS supply, including supply for Year Four, and directed
      electric public utilities, including Petitioner, to make an auction
      process compliance filing ("Compliance Filing") in response thereto. On
      December 12, 2001, Petitioner made the Compliance Filing which included,
      among other things, a request for approval of Petitioner's accounting
      and cost recovery proposal for BGS Transition Costs, including, but not
      limited to, a determination (i) that the BGS Deferred Balance will be
      determined as the difference between Petitioner's recorded BGS revenue
      and total BGS Cost, (ii) interest on the Deferred Balance at a monthly
      rate based on the seven (7) year constant maturity treasuries as shown
      in the Federal Reserve Statistical Release on or closest to August 1,
      2003 plus 60 basis points and (iii) a presumption of prudence with
      respect to Petitioner's BGS Transition Costs. At its special public
      agenda meeting held on December 14, 2001, the Board approved
      Petitioner's Compliance Filing after finding it to be consistent with
      its December 11, 2001 Order.

            On August 28, 2002, Petitioner filed its electric deferral case
      ("BGS Deferral Case"), Docket No. ER02080604, with respect to recovery
      of its Year Four Deferred Balance pursuant to the Restructuring Orders
      and the Board's July 22, 2002 Order Directing Supplemental Testimony
      ("Testimony Order"). The BGS Deferral Case was transmitted by the Board
      to the New Jersey Office of Administrative Law ("OAL"), which case was
      later consolidated with Docket No. ER02050303 for separate hearings. The
      Board also, pursuant to the Testimony Order, retained an independent
      auditor ("Independent Auditor") to perform an audit of Petitioner's Year
      Four Deferred Balance. Public hearings in the BGS Deferral Case were
      conducted by an OAL, Administrative

                                      3

<PAGE>

      Law Judge ("ALJ"), on December 10, 11 and 16 of 2002, respectively.
      Evidentuary Hearings on the BGS Deferral Case were conducted on March 3,
      5 and 6, 2003.

            On June 6. 2003, the ALJ rendered his written decision ("ALJ
      Decision") to the Board, adopting the terms of a settlement among
      Petitioner and certain Parties to the BGS Deferral Case, which ALJ
      Decision, if adopted, will resolve all matters in the consolidated
      dockets, including the BGS Deferral Case. Petitioner is awaiting a final
      decision by the Board ("BGS Cost Order" or "Recovery Order"), including
      a finding that Petitioner's Year Four BGS Transition Costs, were
      reasonably and prudently incurred and that the Year Four Deferred
      Balance upon verification by the Independent Auditor is properly
      recoverable by Petitioner, with interest, under the Act . As set forth
      in the ALJ Decision, Petitioner's Year Four Deferred Balance is
      estimated to be approximately $241.5 million pre-tax at July 31, 2003.
      Petitioner accordingly seeks authority to securitize its verified Year
      Four Deferral Balance.

4.    REQUEST FOR BSCRO

            The 2002 Amendments, and specifically, N.J.S.A. 48:3-62(c)(3)
      authorizes an electric public utility to securitize the full amount of
      its reasonably and prudently incurred BGS Transition Costs pursuant to
      the provisions of the Act if the recovery of the BGS Transition Costs
      through the securitization would provide benefits to ratepayers based
      upon the "criteria" consisting of the lowest transition bond charge
      consistent with market conditions and the terms of the BSCRO when
      certified by the Board's designee.

            On September 17, 1999, your Honorable Board issued a BSCRO to
      Petitioner in Docket No. EF99060390 (the "Original Financing Order")
      authorizing, among other things, the issuance and sale of up to $2.525
      billion aggregate principal amount of

                                      4

<PAGE>

      Transition Bonds by a special purpose financing subsidiary of
      Petitioner, the sale of Bondable Transition Property and the imposition
      of a non-bypassable Transition Bond Charge ("TBC"), the imposition of a
      Market Transition Charge-Tax ("MTC-Tax"), a formula for the calculation
      and adjustment of the TBC and the MTC-Tax. On January 31, 2001, PSE&G
      Transition Funding LLC, a subsidiary of Petitioner, issued and sold
      $2.525 billion of its Transition Bonds, Series 2001-1 (the "Original
      Transition Bond Transaction"). The terms and conditions approved by your
      Honorable Board in the Original Financing Order are substantially the
      same to those proposed herein.

            For purposes of recovering its BGS Transition Costs incurred in
      Year Four ("Year Four BGS Transition Costs") by Petitioner pursuant to
      the Restructuring Order and the BGS Cost Order to be issued in the BGS
      Deferral Case, and pursuant to N.J.S.A. 48:3-62(a), N.J.S.A. 48:3-62(c)
      and N.J.S.A. 48:3-62(g), Petitioner hereby requests the Board to issue a
      BSCRO authorizing Petitioner to securitize (the "BGS Transition Bond
      Transaction") its Year Four BGS Transition Costs, including its net of
      tax Year Four Deferred Balance incurred with respect to Year Four as
      verified by the Independent Auditor ); to impose a transition bond
      charge ("BGS Transition Bond Charge" or "BGS TBC") related thereto; and
      to sell Petitioner's right to receive the BGS TBC, together with related
      rights, to a bankruptcy-remote, special purpose financing entity ("SPE")
      to be formed as a subsidiary of Petitioner for such purpose
      substantially identical to the SPE authorized in the Original Financing
      Order. Petitioner also requests approval of a formula ("Formula") for
      the calculation and adjustment of the BGS TBC and the MTC-Tax related
      thereto substantially identical to the Formula authorized in the
      Original Financing Order which Formula is incorporated herein by
      reference thereto. A

                                      5

<PAGE>

      proposed form of Financing Order, substantially in the form of the
      Original Financing Order will be separately provided to Board Staff by
      Petitioner.

            The Financing Order will provide, among other things, (i) for the
      imposition of a non-bypassable TBC as provided in N.J.S.A. 48:3-64(a);
      (ii) the transfer of the BGS Bondable Transition Property (as defined
      herein) related to such TBC to an SPE; (iii) the issuance of transition
      bonds ("BGS Transition Bonds") by the SPE up to $150 million aggregate
      principal amount to recover such BGS Transition Costs, all as further
      described below, and (iv) a determination that the structure and pricing
      of the BGS Transition Bonds be conclusively deemed, as provided in
      N.J.S.A 48:3-62(g), as assuring the lowest TBC consistent with market
      conditions and the terms of such BSCRO. In the same manner as authorized
      in the Original Financing Order, Petitioner requests authority to impose
      an MTC-Tax to recover its Federal Income and State Corporate Business
      Tax associated with the collection of the BGS TBC until the related BGS
      Transition Bonds and other BGS Transition Costs have been paid in full,
      and to adjust the MTC-Tax in the same manner and at the same time as the
      BGS TBC is adjusted as described in this Petition.

            The entire amount of the net proceeds of the BGS Transition Bonds
      received by Petitioner shall be utilized by Petitioner to refinance or
      retire its outstanding debt or equity or both.

5.    BGS TRANSITION BOND TRANSACTION

      a.    Proposed Structure

            A general description of the BGS Transition Bond Transaction
      structure follows. The proposed structure is subject to modification
      depending upon the requirements of tax

                                      6

<PAGE>

      authorities, input from underwriters in connection with the marketing of
      the BGS Transition Bonds, and negotiations with nationally recognized
      statistical rating organizations (the "Rating Agencies") selected by
      Petitioner to assign credit ratings to the BGS Transition Bonds. The
      proposed structure is intended to minimize debt service costs and
      maximize ratepayer savings by obtaining the best possible rating for the
      BGS Transition Bonds as asset-backed securities. In the same manner as
      the Original Financing Transaction, the final structure of the
      transaction, pricing and terms of the BGS Transition Bonds will be
      determined by Petitioner at the time BGS Transition Bonds are priced and
      approved by a designee (the "Designee") of the Board as provided in the
      Act and as described herein.

            The Petitioner requests in this current Petition the authority to
      recover related BGS Transition Costs, including (1) the net amount of
      its tax Year Four Deferred Balance, as verified by the Independent
      Auditor; (2) the costs (currently estimated at $2.7 million) incurred to
      issue Transition Bonds (the "Upfront Transaction Costs"); (3) principal
      and interest on the Transition Bonds, together with the costs of paying,
      refinancing, administering and servicing, credit enhancing,
      overcollateralizing, the Transition Bonds ("Ongoing Transition Bond
      Costs"); and (4) taxes related to securitization, which reflect the
      grossed up revenue requirement associated with the net of tax stranded
      costs being securitized (the "Tax Component"), as more fully described
      herein. Pursuant to the proposed Financing Order, and as authorized in
      the Original Financing Order, Petitioner requests authority to recover
      from the proceeds of the BGS Transition Bonds, up to $150 million of its
      BGS Transition Costs, including its Upfront Transaction Costs. The
      remaining BGS Transition Costs, being the Ongoing Transition

                                      7

<PAGE>

      Bond Costs, will be recovered through the assessment and collection of
      the BGS Transition Bond Charge. In the same manner as authorized in the
      Original Financing Order the BGS Transition Bond Charge will be a
      separate, non-bypassable charge assessed and collected from all
      customers of Petitioner and/or any successor distribution company within
      Petitioner's existing service territory as of the date of this Petition,
      except as provided in N.J.S.A 48:3-77.

            The principal asset to be used to support Transition Bonds is the
      BGS Bondable Transition Property , a property right created under the
      Act, which includes the irrevocable right to charge and collect
      Transition Bond Charges and to obtain periodic adjustments of such
      Transition Bond Charges, and all revenues, collections, payments, money
      and proceeds thereof. Pursuant to N.J.S.A. 48:3-65 the Financing Order
      and the Transition Bond Charges are irrevocable upon the Financing Order
      becoming effective under the Act, and the Financing Order cannot be
      rescinded, altered, repealed, modified or amended by the Board or any
      other governmental entity, nor can it be impaired by the State of New
      Jersey, as provided in N.J.S.A. 48:3-66.

            In the same manner as provided in the Original Financing Order to
      implement the BGS Transition Bond Transaction, Petitioner will form a
      new non-utility, special-purpose bankruptcy-remote entity ("SPE") to be
      wholly-owned by Petitioner, and will provide the capitalization for such
      SPE. Petitioner will sell the Bondable Transition Property to the SPE in
      the BGS Transition Bond Transaction which, in accordance with the Act,
      will be a legal true sale and absolute transfer to the SPE. The SPE will
      constitute a financing entity for purposes of the Act. Board approval of
      the SPE and the BGS Transition Bond

                                      8

<PAGE>

      Transaction will constitute a finding that the SPE's activities will not
      violate any affiliate relation standards currently in effect or that the
      Board may adopt in the future.

            In the same manner as provided in the Original Financing Order to
      raise the funds to pay to Petitioner the purchase price of the BGS
      Bondable Transition Property, the SPE will issue and sell BGS Transition
      Bonds. The SPE will issue the BGS Transition Bonds in the form of
      asset-backed securities ("ABS") and sell the securities in a negotiated,
      fully underwritten public or private offering. All prior securitizations
      of utility stranded costs or BGS Transition Costs in New Jersey,
      including the Original Transition Bond Transaction approved by your
      Honorable Board in the Original Financing Order, have been or are
      proposed to be structured as ABS and sold on a negotiated basis. To the
      extent that it may be more cost-effective to structure the BGS
      Transition Bond Transaction as a private offering under Rule 144A of the
      Securities and Exchange Commission, Petitioner will do so. The expertise
      of an underwriter is critical to the structuring, pricing and marketing
      of securities in the ABS market. For such purpose, Petitioner has
      engaged Citigroup Global Markets, Inc. As in the Original Transition
      Bond Transaction, Petitioner continues to believe that a negotiated sale
      will assure that the Transition Bonds will receive the highest possible
      rating and will obtain the lowest possible interest and transaction
      costs, ensuring compliance with the requirements of the Act that
      Petitioner's customers pay the lowest transition bond charges consistent
      with market conditions at time of pricing.

            In the same manner as provided in the Original Financing Order,
      all of the assets of the SPE, including, without limitation, the BGS
      Bondable Transition Property and the other collateral of the SPE (the
      "Other SPE Collateral"), will be pledged as collateral to

                                      9

<PAGE>

      secure the BGS Transition Bonds. The Other SPE Collateral will include,
      without limitation: (1) the rights of the SPE under the BGS Transition
      Bond Transaction documents, including the purchase agreement by which
      each SPE acquires the Bondable Transition Property; (2) a servicing
      agreement by which Petitioner or any successor Servicer acts as servicer
      of the Bondable Transition Property; (3) an administration agreement by
      which the SPE will be administered; (4) various trust accounts of the
      SPE into which the proceeds of BGS TBC, together with the pledged funds
      of the SPE, will be deposited; (5) any investment earnings on amounts
      held by the Bond Trustee; and (6) the equity capital of the SPE.

            While the Board is requested to approve BGS Transition Bonds with
      scheduled amortization upon issuance not exceeding 15 years in
      accordance with N.J.S.A.48: 3-62(d)(3), and with a final legal maturity
      of up to 17 years in order to minimize overcollateralization
      requirements and to enhance the prospects of securing the highest
      possible credit rating for the BGS Transition Bonds, Petitioner expects
      that the actual amortization schedule upon issuance and final legal
      maturity of the BGS Transition Bonds will not exceed that of the
      Transition Bonds issued pursuant to the Original Financing Order in the
      Original Transition Bond Transaction. These objectives should result in
      lower interest costs and thus benefit to ratepayers.

            In the same manner as provided in the Original Financing Order,
      Petitioner requests that the duration of the MTC-Tax be identical to the
      duration of the Transition Bond Charge. The following schematic
      illustrates the proposed transaction:

                                      10

<PAGE>

<TABLE>
<CAPTION>

<S>                                            <C>                                                       <C>

PARTIES TO TRANSACTION                                                          Sale of BGS Transition
                                                                             Bonds for cash, pursuant to
-----------------                              -----------------------------    Underwriting Agreement
|               |                              |            SPE            |                             -----------------
|     PSE&G     |<---------------------------->|   PSE&G Securitization    |<--------------------------->|               |
|               |    Sale of rights to BGS     | Limited Liability Company |                             | UNDERWRITERS  |
|               | Bondable Transition Property |   Sole Member, PSE&G      |-----------|      |----------|               |
-----------------     for net proceeds of      |                           |           |      |          -----------------
                       Transition Bonds        -----------------------------           |      |            ^
                                                     |  |                              |      |            |
                                                     |  |   Parties to Indenture       |      |            |
-----------------    Servicing BGS Bondable          |  |   governing issuance of      |      |            |       Sale of BGS
|               | Transition Property for servicing  |  |   BGS Transition Bonds;      |      |            |   Transition Bonds for
|   SERVICER    |    fee, pursuant to Servicing      |  |    BGS Transition Bonds      |      |            |          cash
|    PSE&G      |            Agreement               |  |      secured by BGS          |      |            v
|               |-------------------------------------  |    Bondable Transition       |      |          -----------------
-----------------                                       |   Property and Other SPE     |      |          |               |
                                                        |          Collateral          |      |          |   INVESTORS   |
                       Administration of SPE for        |                              |      |          |               |
                     Administration Fee, pursuant to    |                              |      |          -----------------
-----------------       Administration Agreement        |                         -----------------
|               |                                       |                         |               |
| ADMINISTRATOR |----------------------------------------                         |     BOND      |
|     PSE&G     |                                                                 |    TRUSTEE    |
|               |                                                                 |               |
-----------------                                                                 -----------------

</TABLE>

                                      11
<PAGE>

      b.    Recovery of Upfront BGS  Transaction Costs

            In the same manner as the Original Financing Transaction, in order
      to issue BGS Transition Bonds and to produce benefit for its customers,
      Petitioner will incur Upfront Transaction Costs related to the issuance
      of BGS Transition Bonds. Based on the current estimated initial offering
      of $150 million of Transition Bonds, Petitioner currently estimates that
      such amount will include Upfront Transaction Costs of approximately $2.5
      million which may vary, in part, based on the factors described below.
      Upfront Transaction Costs of issuing BGS Transition Bonds will include,
      among other items, the underwriting spread, rating agency fees,
      accounting fees, any Securities and Exchange Commission registration
      fees printing and marketing expenses, trustees' fees, legal fees, the
      servicing set-up fee and the administrative cost of forming the SPE.

            In the same manner as provided in the Original Financing
      Transaction, the Petitioner requests authority to recover the Upfront
      Transaction Costs from the proceeds of the sale of the BGS Transition
      Bonds and to include such costs as BGS Transition Costs, the right to
      recover such amounts to constitute a portion of the Bondable Transition
      Property. To the extent prior payment is required, such costs will be
      paid by Petitioner and reimbursed from the proceeds of the BGS
      Transition Bonds.

      c.    Ongoing BGS Transition Bond Costs

            Petitioner requests recovery of the Ongoing Transition Bond Costs
      through the BGS TBC. The primary Ongoing Transition Bond Costs are the
      principal and interest on the BGS Transition Bonds. Other Ongoing
      Transition

                                      12

<PAGE>

      Bond Costs include principally the servicing fee (the "Servicing Fee")
      paid to Petitioner, as the Servicer (as defined below) and the ongoing
      cost of credit enhancement and overcollateralization.

            In the same manner as provided in the Original Financing Order, it
      is anticipated that there will be a small amount of additional Ongoing
      Transition Bond Costs associated with the BGS Transition Bond
      Transaction, such as an administration fee, legal and accounting fees,
      directors or managers' fees, rating agency fees, trustee fees and other
      costs of operating the SPE. These Costs are BGS Transition Costs and
      will be recovered through the BGS TBC in accordance with the Act, and
      the right to recover these costs as BGS Transition Costs will be
      included as a portion of the BGS Bondable Transition Property.

      d.    Approval of Final Terms and Conditions: BGS Transition Bond
            Transaction

            In the same manner as provided in the Original Financing Order,
      upon the pricing of the BGS Transition Bonds, the Board's Designee under
      the Act will file with the Board a certificate to the effect that the
      structure and pricing of the BGS Transition Bonds assures that
      Petitioner's customers pay the lowest BGS TBC consistent with market
      conditions and the terms of the Financing Order, and approving the terms
      and conditions of the BGS Transition Bonds, including scheduled
      amortization up to 15 years and final legal maturities of up to 17
      years, as required to obtain the highest possible credit ratings.
      Payments on the BGS Transition Bonds will be semi-annual or quarterly,
      depending upon input from rating agencies, tax considerations and market
      conditions at the time of the

                                      13
<PAGE>

      pricing of BGS Transition Bonds. Debt service on the BGS Transition
      Bonds will be scheduled upon issuance so that the sum, for each annual
      period, of the Period Payment Requirement (as defined below) and the
      associated MTC-Tax collections will be substantially equal. So long as
      the structure, pricing, terms and conditions meet such parameters,
      Petitioner will be authorized under the Financing Order to undertake the
      BGS Transition Bond Transaction.

            In the same manner as provided in the Original Financing Order, if
      the structure, pricing, terms and conditions meet the requirements
      discussed above, the Company will be authorized under the Financing
      Order to undertake the BGS Transition Bond Transaction. Prior to the
      pricing of the BGS Transition Bonds, the Designee may obtain from the
      Board's financial advisors recent secondary market trading levels of
      existing utility stranded cost securitization bonds, to the extent such
      is available through public sources. To the extent such information is
      available, it is anticipated that such information may, in part, be
      considered in connection with the pricing of the Transition Bonds. The
      Designee may also conduct conference calls and meetings with the Board's
      financial advisors to discuss the background of the ABS market, current
      market conditions, investor perception of recent utility stranded cost
      securitization bond issues, pricing levels of ABS and recent secondary
      market trading levels, to the extent available. Finally, the Designee
      may elect to be present at pricing, either in person or by telephone.

            In the same manner as provided in the Original Financing Order,
      not later than five business days after the issuance and sale of the BGS
      Transition Bonds,

                                      14
<PAGE>

      Petitioner will be required to confirm to the Board, in an ("Issuance
      Advice Letter"), the actual interest rates on the BGS Transition Bonds,
      the expected principal amortization schedule (the "Expected Amortization
      Schedule") and the initial BGS Transition Bond Charge and MTC-Tax, which
      will be calculated in accordance with the Formula. The Issuance Advice
      Letter will also include a calculation of the benefit to Petitioner's
      Customers from the issuance of the BGS Transition Bonds as provided in
      N.J.S.A. 48:3-62 (c) (3) using the methodology employed in Exhibit A
      attached hereto applied to the actual structure and terms of the
      Transition Bonds. The initial BGS Transition Bond Charge and MTC-Tax
      shall become effective immediately when the Issuance Advice Letter is
      filed, without further action by the Board.

      e.    BGS Transition Bond Charge

            In the same manner as provided in the Original Financing Order,
      when the BGS Transition Bond Transaction is completed upon the issuance
      of the BGS Transition Bonds, Petitioner will impose the BGS TBC upon its
      ratepayers. While the new BGS TBC will be separate Bondable Transition
      Property and for purposes of Petitioner's tariff, separate and distinct
      from the Transition Bond Charge ("Original TBC")that the Board
      authorized in the Original Financing Order and that has been imposed
      upon ratepayers as a result of the Original Transition Bond Transaction,
      the Original TBC and the BGS TBC will be combined for customer billing
      and administration, provided that such amounts are separately recorded
      on the books of Petitioner pending payment to the Trustee.

                                      15
<PAGE>

            In the same manner as provided in the Original Financing Order,
      BGS TBC will be set by the Formula, from time to time, at a level
      intended to recover the sum of the Ongoing Transition Bond Costs,
      including, without limitation: (i) the principal of (in accordance with
      the Expected Amortization Schedule approved by the Designee at the time
      of pricing of the BGS Transition Bonds), and interest on, BGS Transition
      Bonds authorized by the Board in the Financing Order; (ii) the costs of
      operating and administering the SPE; (iii) the costs of servicing the
      BGS Transition Bonds, including servicing and trustee fees, expenses and
      indemnities; (iv) amounts required to fund or replenish the
      overcollateralization account in accordance with overcollateralization
      schedule approved at pricing of the BGS Transition Bonds, including the
      reimbursement of any amounts drawn from the capital account, and (v) the
      ongoing expenses of any other credit enhancement agreement (the required
      periodic payment of all such amounts, including deficiencies on past due
      amounts for any reason, is herein called the "Periodic Payment
      Requirement" and the total of such requirements until paid in full, the
      "Total Payment Requirements").

              The BGS TBC and the MTC-Tax will be set and adjusted in
      accordance with the Formula, based on the same assumptions as applicable
      to, and approved in the Original Financing Transaction, as those
      assumptions are adjusted from time to time, including but not limited to
      energy sales forecasts, customer payment and charge-off patterns,
      defaults by third party suppliers (as described herein), the Periodic
      Payment Requirement and, with respect to the MTC-Tax, the applicable
      state and Federal income tax rates in effect from time to time. BGS

                                      16
<PAGE>

      Transition Bond Charges shall remain in effect until the SPE owner of
      the BGS Bondable Transition Property has received Transition Bond
      Charges sufficient to discharge the Total Payment Requirements.

            Each customer's monthly bill will contain a single, line item
      containing the then current combined Original Transition Bond Charge,
      the BGS Transition Bond Charge and their related MTC-Tax Charges for all
      issued and outstanding Transition Bonds, and will, in addition, contain
      a note in text or a footnote that a portion of such combined charge
      represents Bondable Transition Property being collected on behalf of the
      SPEs as owners of their respective Bondable Transition Property.

      f.    Periodic Adjustments to the BGS Transition Bond Charge and MTC-Tax

            The Board is required by the Act to make mandatory periodic
      adjustments (the "True-Up Mechanism") to the BGS TBC upon petition of
      Petitioner, its assignee or financing entity, to ensure receipt of
      revenues sufficient to satisfy, on a timely basis, the Periodic Payment
      Requirement. Mandatory periodic adjustments must be made at least
      annually, and, as described earlier, using the Formula. As Servicer, the
      Petitioner will be responsible for filing documentation with the Board
      for any necessary periodic adjustments in the same manner as the
      Original Transition Bond Transaction. (Petitioner, as servicer under the
      Service Agreement and any successor to Petitioner as servicer are herein
      referred to as the "Servicer".) Although the Servicer expects to file
      for periodic adjustments annually, it is also requesting, in the same
      manner as provided in the Original Financing Order, authorization to
      file for adjustments as often as quarterly as

                                      17
<PAGE>

      determined necessary for credit rating purposes. Each periodic
      adjustment shall become effective 30 days after filing thereof with the
      Board absent a determination by the Board of manifest error. Under the
      Act, Petitioner, as initial Servicer, shall propose such adjustments in
      a filing with the Board at least 30 days in advance of the date upon
      which it is requested to be effective. In the same manner as provided in
      the Original Financing Order, the proposed adjustment shall become
      effective on an interim basis on such date and, in the absence of a
      Board order to the contrary finding a manifest error, shall become final
      60 days thereafter.

            In the same manner as provided in the Original Financing Order,
      Petitioner shall be entitled to request and the Board shall approve
      mandatory periodic adjustments of the MTC-Tax. The adjustment is to be
      made at least annually to reconcile the income tax recovered to the
      income taxes required to be paid on the taxable net revenue from the
      Transition Bond Charges. The reconciliation is to be made in the same
      manner as the True-Up Mechanism for BGS Transition Bond Charges in order
      to ensure receipt of revenues sufficient to assure recovery of the
      MTC-Tax. Upon petition of Petitioner, the MTC-Tax will be adjusted based
      upon assumptions described in the Formula , as those assumptions are
      adjusted from time to time in accordance with the Formula. No delay in
      the mandatory adjustment of the MTC-Tax will in any way adversely affect
      the mandatory periodic adjustment of the Transition Bond Charge
      described in the preceding paragraph.

                                      18
<PAGE>

            In the same manner as provided in the Original Financing Order,
      the Petitioner also requests that the Board grant the Petitioner
      authority to make "non-routine" adjustments. Non-routine filings for
      adjustments would be made to accommodate changes to the Formula
      described therein if deemed appropriate by Petitioner to remedy a
      significant and recurring variance between actual and expected
      Transition Bond Charge collections. Any such filing would be required to
      be made at least 90 days prior to the proposed effective date, and would
      be subject to Board approval.

            Petitioner intends to make routine annual true-up filings for the
      TBC and MTC Charge at the same time, and in the same manner that it
      makes such filings with respect to the Original Securitization
      Transaction, except during the last year before the scheduled maturity
      of the Original Transition Bonds or the Transition Bonds as proposed
      herein, where more frequent true-ups may be required as authorized in
      the Original Financing Order and as proposed herein.

      g.    Remittance of Transition Bond Charges

            The Servicer will remit, in the same manner as provided in the
      Original Financing Order, at least monthly, to the Transition Bond
      trustee ("Bond Trustee") the Transition Bond Charges, based on the
      collection methodology approved in the Original Financing Order, which
      methodology is incorporated herein by reference thereto.

            The Servicer will receive the BGS Transition Bond Charge
      collections daily and may, as authorized by the Act, commingle BGS
      Transition Bond Charge collections with Original Transition Bond Charge
      collections and with other

                                      19
<PAGE>

      customer payments until the remittance date to the Bond Trustee.
      Collections from each customer will be applied first to sales taxes
      (which Petitioner will collect as trustee for the State and not for its
      own account or that of the SPE, and which are not "charges" for purposes
      of the following allocations), then to charges in arrears, if any, and
      then to current charges. With respect to each billing period, partial
      payments of charges will be allocated to the Transition Bond Charges for
      all series of Transition Bonds, to the MTC-Tax and to the Petitioner's
      other charges, pro rata, based on the proportions that the aggregate
      Transition Bond Charges, the related MTCs-Tax and the Petitioner's other
      charges bear to the total charges collected. Partial payments of
      Transition Bond Charges will be allocated to the owners of Bondable
      Transition Property, pro rata, based on the proportions that the
      Transition Bond Charge representing the Bondable Transition Property
      created under the Original Financing Order, the BGS Transition Bond
      Charges as proposed for creation herein and any Transition Bond Charges
      created pursuant to other subsequent financing orders bear to the total
      Transition Bond Charges collected.

            The Bond Trustee will retain BGS Transition Bond Charge
      collections received from the Servicer until it makes scheduled
      principal and interest payments and all servicing fees and ongoing
      expense payments to the appropriate parties. These distributions are
      expected to be made on a quarterly or semiannual basis. The Bond Trustee
      will hold all BGS Transition Bond Charge collections received from the
      Petitioner between the remittance date and distribution date in a
      collection account. The Bond Trustee will invest the funds in the
      collection

                                      20
<PAGE>

      account in investment grade short-term securities that mature on or
      before the next distribution date.

            Investment income earned in the trust accounts held by the Bond
      Trustee may be used to satisfy currently scheduled interest and
      principal payments on the BGS Transition Bonds and related expenses and
      to reimburse the SPE's equity and to satisfy scheduled
      overcollateralization amount. Investment income on the capital account
      not used currently for this purpose will be released to the SPE. Any
      earnings in excess of required amounts in such trust accounts (other
      than the capital account) will reduce the BGS TBC through the True-Up
      Mechanism.

            Upon retirement of all outstanding Transition Bonds and any
      related Ongoing Transition Bond Costs, any remaining amounts held by the
      Bond Trustee will be released to the SPE. Petitioner's equity in the SPE
      (and any investment earnings thereon) may be distributed to Petitioner,
      and Petitioner will credit an amount equal to any overcollected BGS TBC,
      less any amount of any unpaid MTC-Tax, to its customers against its
      distribution charges.

      h.    Credit Enhancement

            The BGS Transition Bond documents will incorporate the True-Up
      Mechanism authorized by the Act as described above and
      overcollateralization amounts or other means of credit enhancement as
      required by the rating agencies or taxing authorities.

            In the same manner as provided in the Original Financing Order,
      the BGS TBC will be set to collect an overcollateralization amount over
      time in addition to the principal (in accordance with the expected
      amortization schedule) and interest

                                      21
<PAGE>

      payable on the Transition Bonds and the other Ongoing Transition Bond
      Costs. The overcollateralization amount needed to satisfy the rating
      agencies will be determined by Petitioner, with input from the rating
      agencies and tax authorities prior to the time Transition Bonds are
      priced, and approved by the Designee at the time of pricing of the
      Transition Bonds in the same manner as authorized in the Original
      Financing Order. As with other components of the BGS TBC, the
      overcollateralization component will be incorporated into each periodic
      adjustment to the extent necessary using the True-Up Mechanism.

            Customers will receive credit from Petitioner against rates then
      in effect equal to the amount of any collateral remaining after
      satisfaction of the Total Payment Requirements less any amount of any
      unpaid MTC-Tax charges (and after return of Petitioner's equity,
      together with interest earnings thereon). As a result,
      overcollateralization will not reduce customer benefits from the BGS
      Transition Bond Transaction.

      i.    Formation of SPE

            A new SPE will be formed by the Petitioner prior to the issuance
      of the Transition Bonds as a wholly-owned, non-utility special purpose
      subsidiary of the Petitioner and is expected to be a limited liability
      company.

            The fundamental organizational documents of the SPE will be
      substantially the same in all material respects as PSE&G Transition
      Funding LLC created in connection with the Original Securitization
      Transaction, imposing significant limitations upon the activities of the
      SPE and the ability of Petitioner to take actions as the holder of the
      equity interest therein. For example, the SPE

                                      22
<PAGE>

      will be formed for the limited purpose of acquiring the BGS Bondable
      Transition Property and Other SPE Collateral and issuing and selling the
      BGS Transition Bonds. It will not be permitted to engage in any other
      activities, and will have no assets other than the BGS Bondable
      Transition Property (as defined below) and Other SPE Collateral.

      j.    Bondable Transition Property

            Petitioner's bondable BGS transition property (the "BGS Bondable
      Transition Property") will consist of (a) the irrevocable right to
      charge, collect and receive, and be paid from collections of BGS
      Transition Bond Charges the amount necessary to provide for the full
      recovery of Total Payment Requirements, (b) all rights of Petitioner
      under the Financing Order, including without limitation all rights to
      obtain periodic adjustments of the BGS TBC pursuant to the True-Up
      Mechanism and (c) all revenues, collections, payments, money and
      proceeds arising under, or with respect to, all of the BGS Transition
      Bond Charges. Pursuant to the Act, upon receipt of payment for the BGS
      Bondable Transition Property by the Petitioner from the SPE, the BGS
      Bondable Transition Property will constitute a vested presently existing
      property right which will continuously exist as property for all
      purposes as provided in the Act and the Financing Order, whether or not
      the revenues and proceeds arising with respect thereto have accrued and
      notwithstanding the fact that the value of the property right may depend
      upon consumers using electricity or Servicer performing services; and
      the validity of any sale, assignment or other transfer of the BGS
      Bondable Transition Property will not be defeated or adversely affected
      by the commingling by

                                      23
<PAGE>

      Petitioner of revenues recovered from amounts charged, collected and
      received on account of the BGS Bondable Transition Property with other
      funds of Petitioner.

      k.    Sale of BGS Bondable Transition Property to SPE

            The Board is requested to approve the sale by Petitioner of the
      BGS Bondable Transition Property to the SPE in a transaction which,
      under the Act, will be a legal true sale and absolute transfer to each
      SPE, notwithstanding any other characterization for tax, accounting or
      other purposes. The SPE will have all of the rights, among others, to
      exercise, through Petitioner or its successor electric public utility,
      any and all rights and remedies to collect any amounts payable by any
      customer in respect of the BGS Bondable Transition Property. The SPE
      will thus have the right to direct Petitioner or any successor utility
      to shut-off electric power to the extent permitted in accordance with
      law and any applicable regulations. The SPE and other third parties,
      however, will not have any right to exercise any direct control over the
      distribution and transmission system of Petitioner.

            The agreement in connection with the sale and transfer of the BGS
      Bondable Transition Property to an SPE may include representations and
      warranties with respect to, among other things, the validity of the
      Financing Order, the BGS Bondable Transition Property and the title
      thereto, and provide specific covenants, indemnities and repurchase
      obligations in connection with such transfer for the benefit of the
      holders of BGS Transition Bonds.

                                      24
<PAGE>

      l.    Issuance of BGS Transition Bonds

            The Board is requested to approve the issuance of BGS Transition
      Bonds by the SPE. The BGS Transition Bonds will, by their terms, be
      recourse only to the SPE's credit and assets, and will be secured by a
      pledge of all of the right, title and interest of the SPE in its BGS
      Bondable Transition Property and Other SPE Collateral. BGS Transition
      Bonds may be issued in series and classes with different terms.

      m.    Non-bypassable BGS Transition Bond Charge

            Under the Act and as authorized in the Original Financing Order,
      the BGS Transition Bond Charge will be non-bypassable and will be
      assessed against and collected from all customers of the Petitioner or
      any successor electric public utility, except as provided in the Act,
      within the Petitioner's service area at the date of this Petition until
      the Total Payment Requirements are discharged in full. The BGS
      Transition Bond Charge shall apply equally to each customer, regardless
      of class, based on the amount of electricity delivered to the customer
      through the transmission and distribution system of Petitioner or any
      successor electric public utility that may take over all or a portion of
      the Petitioner's service area at the date of this Petition, including
      electricity sold to customers by any third party supplier, as described
      below.

      n.    Third Party Suppliers

            Billing, collection and remittance of BGS Transition Bond Charges
      by a third party supplier ("TPS") may increase the risk of shortfalls in
      the BGS Transition Bond Charge or MTC-Tax collections by exposing the
      cash flow to

                                      25
<PAGE>

      potential interruption due to the default, bankruptcy or insolvency of
      the TPS. This risk of interruption will increase risks to investors,
      potentially increasing the required credit enhancement or reducing the
      credit rating and increasing the rate of interest on Transition Bonds
      that would be required by investors. Such TPS billing may increase the
      BGS Transition Bond Charge or MTC-Tax component resulting from
      interruption or delay in payment.

            In order to mitigate against these risks, satisfy rating agency
      concerns and reduce the cost to ratepayers, Petitioner requests that any
      TPS should be required, in the same manner as provided in the Original
      Financing Order, to comply with the billing, collection and remittance
      procedures and information access requirements set forth below.
      Petitioner requests that the Board will, consistent with the Original
      Financing Order, only authorize a TPS to bill and collect the BGS
      Transition Bond Charge and associated MTC-Tax with respect to power sold
      by it for remittance to the Servicer if (i) such TPS agrees to remit the
      full amount of all charges it bills to customers for services provided
      by Petitioner, together with BGS Transition Bond Charges and MTC-Tax,
      regardless of whether payments are received from such customers, within
      15 days of Petitioner's (or any successor Servicer's) bill for such
      charges; (ii) such TPS provides the Servicer with total monthly kWh
      usage information for each customer in a timely manner for the Servicer
      to fulfill its obligations, as such information is the basis of such
      remittance; and (iii) the Servicer is entitled, within seven days after
      a default by the TPS in remitting any charges payable to Petitioner,
      including BGS Transition Bond Charges and MTC-Tax billed, to assume
      responsibility for billing all

                                      26
<PAGE>

      charges for services provided by Petitioner or any Servicer, including
      the Transition Bond Charges and MTC-Tax, or to transfer responsibility
      to a qualifying third party. In addition, if and so long as such TPS
      does not maintain at least a "Baa2" and "BBB" (or the equivalent) long
      term unsecured credit rating from Moody's Investors Service or Standard
      & Poor's Rating Services, such TPS should be required to maintain, with
      the Servicer or as directed by the Servicer, a cash deposit or
      comparable security equal to two months' maximum estimated collections
      of all charges payable to the Petitioner, including the BGS Transition
      Bond Charges and MTC-Tax, as agreed upon by Petitioner (or any successor
      Servicer) and the TPS. In the event of a default in the remittance of
      any such charges by a TPS, any shortfall in the BGS Transition Bond
      Charge or MTC-Tax collections by a TPS would be included in the periodic
      adjustment of the BGS Transition Bond Charge and MTC-Tax.

      o.    Servicing

            Pursuant to the Act and in the same manner as authorized in the
      Original Financing Order, Petitioner will enter into a servicing
      agreement with the SPE to perform servicing functions on behalf of the
      SPE. Pursuant to the servicing agreement with the SPE (to be
      substantially the same in all material respects as the Service Agreement
      authorized in the Original Financing Order), Petitioner will act as
      Servicer of the Bondable Transition Property. Petitioner will be
      responsible for customer kWh billing and usage information, and for
      billing, collecting and remitting the Transition Bond Charges.
      Petitioner's proposed

                                      27
<PAGE>

      procedures for remittance of Transition Bond Charges will be
      substantially the same as authorized in the Original Financing Order.

            Petitioner, as Servicer, will contract with the SPE to collect
      amounts in respect of the BGS Transition Bond Charges for the benefit
      and account of such SPE, and to account for and remit these amounts to
      or for the account of such SPE. The servicing agreement will provide
      that Petitioner, as initial Servicer, may not voluntarily resign its
      duties as Servicer without obtaining the prior approval of the Board or
      if such resignation will result in the reduction or withdrawal of the
      credit ratings of Transition Bonds. In the event that the Petitioner
      defaulted in its servicing functions, as set forth in the servicing
      agreement, or were required to discontinue its billing and collecting
      functions, a successor Servicer acceptable to the Bond Trustee and the
      rating agencies, and meeting such criteria as the Board may establish,
      would replace the Petitioner, as Servicer, and assume such billing and
      collecting functions. Criteria for appointing a successor Servicer
      include, among other things, credit and data-processing quality and
      expertise in performing servicing functions relating to the BGS
      Transition Bond Transaction.

            If the Petitioner no longer performs servicing functions, the
      Servicing Fee will be paid directly to the successor Servicer and
      Petitioner's future rates will not be adjusted to reflect the amount of
      the Servicing Fee.

            The servicing agreement will include Petitioner's representations,
      warranties, agreements, covenants and indemnities for the benefit of the
      holders

                                      28
<PAGE>

      of BGS Transition Bonds and will be substantially the same as
      Petitioner's servicing agreement in the Original Financing Transaction.

            In the same manner as provided in the Original Financing Order, an
      annual Servicing Fee equaling 0.005% (five (5) basis points) of the
      initial principal balance of the BGS Transition Bonds, which may be
      payable in semiannual or more frequent installments, will be a part of
      the servicing agreement and will be recovered through BGS Transition
      Bond Charges. The Servicing Fee represents a reasonable good faith
      estimate of Petitioner's incremental cost to service the BGS Transition
      Bonds, including billing, monitoring, collecting, receiving, accounting
      for and remitting BGS Transition Bond Charges, systems modifications to
      bill, monitor, collect and remit BGS Transition Bond Charges, reporting
      requirements imposed by the servicing agreement, procedures required to
      coordinate with each TPS, required audits related to Petitioner's role
      as Servicer and legal and accounting fees related to the servicing
      obligation, together with a reasonable return. In the same manner as
      authorized in the Original Financing Order, the size of the Servicing
      Fee has been calculated in a manner to protect the "bankruptcy remote"
      nature of the transaction. The Servicing Fee paid to Petitioner, as
      Servicer, will be lower than the Servicing Fee paid to a successor
      Servicer which does not bill the BGS Transition Bond Charge concurrently
      with charges for other services to reflect the higher costs incurred by
      such successor. The rating agencies would expect an annual Servicing Fee
      as high as 1.25% of the original Transition Bond principal amount to be
      authorized in the Financing Order for a successor Servicer which

                                      29
<PAGE>

      does not bill and collect charges other than the Transition Bond Charge.
      This higher Servicing Fee would assure that a successor Servicer could
      be found.

      p.    Tax Component Recoveries - Accounting and Related Issues

            Petitioner will recover the Tax Component of the recoverable
      stranded costs through the ongoing collection of the MTC-Tax, until full
      payment of principal and interest of the Transition Bonds. As authorized
      in the Original Financing Order, the MTC-Tax will be subject to
      mandatory periodic adjustment (at the same time and in the same manner
      as the BGS Transition Bond Charges) to reconcile the MTC-Tax collections
      with the income tax required to be paid on the taxable revenue from the
      BGS Transition Bond Charge and the MTC-Tax. The Petitioner will maintain
      separate accounting for the MTC-Tax collections and the BGS Bondable
      Transition Property. As provided in the Act, Petitioner's retention of
      the MTC-Tax will in no way affect or impair the legal true sale and
      absolute transfer of the BGS Bondable Transition Property to the SPE, or
      otherwise affect the legal rights and attributes of the BGS Bondable
      Transition Property under the Act,

6.    RATEPAYER BENEFITS

            As illustrated by Exhibit A, the BGS Transition Bond Transaction
      will produce ratepayer benefits in the form of lower interest rates than
      would have been achieved without the issuance of the Transition Bonds.

            The actual amount of ratepayer benefit resulting from the
      Transition Bond Transaction will depend upon the actual amount of
      Transition Bonds issued, prevailing interest rates, market conditions at
      the time of Transition Bond pricing,

                                      30
<PAGE>

      and the actual amount of BGS Transition Costs. Pricing, structure, terms
      and conditions of the Transition Bonds are to be approved by the
      Designee pursuant to the Financing Order in the same manner as provided
      in the Original Financing Order.

7.    USE OF PROCEEDS

            The proceeds, net of underwriting discount, from the sale of BGS
      Transition Bonds will be remitted to Petitioner in consideration of
      Petitioner's sale of its BGS Bondable Transition Property. In accordance
      with N.J.S.A. 48:3-62(a), Petitioner will use such proceeds, after
      paying of Upfront Transaction Costs, to reduce the amount of its BGS
      Transition Costs through the refinancing or retirement of its debt or
      equity, or both including transactions completed prior to the date and
      in anticipation issuance of the Financing Order.

8.    RELATED ISSUES

            There are several related issues that have a potentially
      significant impact on the Transition Bond Transaction as described
      below.

      a.    Tax Considerations

            The benefits of the BGS Transition Bond Transaction depend in
      large part on recognizing taxable income in respect of BGS Transition
      Costs as BGS Transition Bond Charges are paid by customers, rather than
      such income being accelerated into current income upon issuance of the
      BGS Transition Bonds.

            As a result, in connection with the Original Financing Order,
      Petitioner applied for and received a private letter ruling ("Original
      Ruling") from the Internal Revenue Service ("IRS") confirming that (a)
      the issuance of the Original

                                      31
<PAGE>

      Financing Order by the Board would not result in gross income to
      Petitioner; (b) the issuance of the Original Transition Bonds would not
      result in gross income to Petitioner; and (c) the Original Transition
      Bonds would be treated as obligations of Petitioner for Federal income
      tax purposes. For the BGS Transition Bond Transaction, Petitioner
      expects to rely upon IRS Revenue Procedure 202-49 (the "Revenue
      Procedure"). While Petitioner believes that the Revenue Procedure is
      applicable to the BGS Transition Bond Transaction, Petitioner reserves
      the right to seek a private letter ruling if, in Petitioner's judgment,
      such a ruling would be advantageous and to request the Board to
      authorize changes in the terms of the BGS Transition Bond Transaction,
      if necessary, to comply with the Revenue Procedure or to obtain such a
      ruling.

      b.    Accounting and Financial Reporting

            The amount financed is expected to be recorded in accordance with
      generally accepted accounting principles ("GAAP") as long term debt on
      the balance sheet of the SPE for financial reporting purposes. Because
      such SPE will be a wholly-owned subsidiary of Petitioner, it is required
      that such SPE be consolidated with Petitioner for financial reporting
      purposes under GAAP. Therefore, the SPE's debt will appear on the
      consolidated balance sheet of Petitioner in its financial statements
      filed with the Securities and Exchange Commission in the same manner as
      debt of Petitioner's wholly-owned sudsidiary, PSE&G Transition Funding
      LLC incurred in the Original Transition Bond Transaction.

                                      32
<PAGE>

            For purposes of financial reporting to the Board, Petitioner will
      exclude the SPE's debt from its capital structure and exclude interest
      on the BGS Transition Bonds and other Ongoing Transition Bond Costs from
      its regulated cost of service.

            The BGS Transition Bond Transaction is not expected to adversely
      impact Petitioner's credit ratings, as it is expected that the rating
      agencies will again determine that BGS Transition Bonds, which are not
      supported by Petitioner's general revenue stream and not collateralized
      by its assets, do not adversely affect Petitioner's creditworthiness.
      Therefore, as in the Original Transition Bond Transaction, it is
      anticipated that the rating agencies will exclude the BGS Transition
      Bonds as debt for purposes of calculating financial ratios.

      c.    Rating Agency Considerations

            (i)   Bankruptcy-Related Opinions

            As in the Original Transiton Bond Transaction, the rating agencies
      continue to expect acceptable opinions of bankruptcy counsel at the time
      BGS Transition Bonds are issued for assurance that the BGS Bondable
      Transition Property will be bankruptcy-remote from Petitioner. To obtain
      such opinions, the transfer of the BGS Bondable Transition Property from
      Petitioner to the SPE must constitute a legal "true sale" such that if
      Petitioner were to become the subject of a bankruptcy or insolvency
      case, the BGS Bondable Transition Property would not be part of its
      bankruptcy estate and therefore would not be subject to the claims of
      its creditors.

                                      33
<PAGE>

            As in the Original Transition Bond Transaction, another element of
      the bankruptcy analysis focuses on the separate legal status of
      Petitioner and the SPE. Although Petitioner will wholly own the SPE, the
      Transition Bond Transaction will be structured so that, in the event of
      a bankruptcy of Petitioner, the SPE's separate legal existence would be
      respected and the assets and liabilities of the SPE would remain
      separate from the estate of Petitioner. The structural elements
      supporting such separate existence include requirements that the SPE be
      adequately capitalized, that Petitioner be adequately compensated on an
      arms-length basis for the servicing functions it performs in billing,
      collecting and remitting the BGS Transition Bond Charges and that
      Petitioner and the SPE take steps to ensure that creditors are not
      misled as to their separate existence. These structural protections are
      very important because, without such protections, a bankruptcy court
      might invoke the doctrine of "substantive consolidation" and disregard
      the SPE's separate existence.

            (ii)  Credit Enhancement

            Credit enhancements are mechanisms that provide investors with
      added assurance that they will timely recover their principal and
      interest as scheduled. In the same manner as authorized in the Original
      Financing Order, Petitioner proposes to provide credit enhancement in
      the form of capitalization of the SPE, true-up mechanisms,
      overcollateralization amounts and liquidity reserves. The BGS Transition
      Bond Transaction will incorporate the True-Up Mechanism authorized by
      N.J.S.A. 48:3-64(b) and authorized in the Original Financing Order

                                      34
<PAGE>

      as described above and overcollateralization amounts or other means of
      credit enhancement as required by the rating agencies or taxing
      authorities.

            As in the Original Transition Bond Transaction, the purpose of the
      overcollateralization amount is to provide security to investors and to
      enhance the credit rating of BGS Transition Bonds by providing an
      additional amount to cover shortfalls in BGS TBC. As a result, the BGS
      Transition Bond Charge will be set to collect an overcollateralization
      amount over time in addition to the principal (in accordance with the
      expected amortization schedule) and interest payable on the BGS
      Transition Bonds, together with the other Periodic Payment Requirements.
      In the same manner as authorized in the Original Financing Order, the
      overcollateralization amount needed to satisfy the rating agencies will
      be determined by Petitioner with input from the rating agencies and tax
      authorities prior to the time BGS Transition Bonds are priced and will
      be submitted to the Designee for approval at the time of pricing of the
      BGS Transition Bonds. As with other components of the BGS TBC , in the
      same manner as authorized in the Original Financing Order, the
      overcollateralization component, any deficiencies on past due payments
      and any excess in BGS TBC collections accumulated under the Indenture
      will be incorporated into each periodic adjustment to the extent
      necessary using the True-Up Mechanism.

            Customers will receive credit equal to the amount of any BGS
      Bondable Transition Property overcollateralization remaining upon
      discharge of the Total Payment Requirements (excluding Petitioner's
      equity and investment earnings

                                      35
<PAGE>

      thereon). As a result, overcollateralization will not reduce customer
      benefits from the Transition Bond Transaction.

      d.    Allocation of Collection Shortfalls

            As in the Original Transition Bond Transaction, in order to
      preserve the bankruptcy-remote status of the BGS Bondable Transition
      Property and Other SPE Collateral once it is transferred to the SPE,
      Petitioner cannot have any claim on the Bondable Transition Property. In
      its capacity as Servicer, Petitioner will bill BGS Transition Bond
      Charges, along with Original Transition Bond Charges, and other charges
      for services rendered to customers obligated to pay such charges, in a
      single bill. If Petitioner collects less than the full amount that is
      billed to such customers, it is not permitted to favor itself over the
      SPE, as owner of Bondable Transition Property. As described earlier and
      as provided in the Original Transition Bond Transaction, upon the
      issuance of BGS Transition Bonds, amounts collected from a customer will
      be applied first to sales taxes (which Petitioner will collect as
      trustee for the State and not for its own account or that of the SPE,
      and which are not "charges" for purposes of the following allocations),
      then to charges in arrears, if any, and then to current charges. With
      respect to each billing period, partial payments of customer billings
      will be allocated to the aggregate Transition Bond Charges (including
      both the Original Transition Bond Charge and BGS TBC), the aggregate
      related MTC-Tax charges and to the Petitioner's other charges, pro rata,
      based on the proportions that such aggregate Transition Bond Charges and
      BGS Transition Bond Charges, the aggregate MTC-Tax and the Petitioner's
      other charges bear as the total charges

                                      36
<PAGE>

      collected. Partial payments of the aggregate Transition Bond Charge will
      be allocated to the owners of Bondable Transition Property, pro rata,
      based on the proportion that the original Transition Bond Charge
      established pursuant to the Original Financing Order and the BGS
      Transition Bond Charges proposed to be established pursuant to the
      Financing Order requested hereby, together with any Transition Bond
      Charges established pursuant to other subsequent financing orders bear
      to the total Transition Bond Charges collected.

      e.    SPE Administration and Other Transactions With the SPE

            In the same manner as in the Original Transition Bond Transaction,
      the SPE will enter into an administration agreement with Petitioner
      pursuant to which Petitioner will perform ministerial services and
      provide facilities for the SPE to ensure that it is able to perform such
      day-to-day operations as are necessary to maintain its existence and
      perform its obligations under the BGS Transition Bond Transaction
      documents. The Petitioner will be paid an administration fee in an
      amount commensurate with its costs, which will be included in the
      Periodic Payment Requirements.

9.    CORRESPONDENCE OR COMMUNICATIONS WITH RESPECT TO THIS PETITION MAY BE
      ADDRESSED TO:

      James T. Foran, Esq., General Corporate Counsel
      Public Service Electric and Gas Company
      80 Park Plaza, T5B
      P.O. Box 570
      Newark, New Jersey 07101

            Petitioner therefore prays that your Honorable Board approve the
      Petitioner's proposal by issuing an irrevocable Bondable Stranded Costs
      Rate Order to authorize (1) the imposition of a non-bypassable
      transition bond charge

                                      37
<PAGE>

      and the collection of such charge, (2) the sale of the right to receive
      such charge to an approved financing entity, (3) the issuance of
      transition bonds by the financing entity to recover Petitioner's
      deferred BGS Costs as BGS Transition Costs and to apply the proceeds of
      such bonds to refinance or retire Petitioner's outstanding debt and/or
      equity and (4) a formula for the calculation and adjustment of the
      transition bond charge and the market transition charge-tax related
      thereto, all as described more fully in this Petition.

                              Public Service Electric and Gas Company

                              By /s/ James T. Foran
                                 ---------------------------------------------
                                 (James T. Foran)
                                  General Corporate Counsel
                                  80 Park Plaza
                                  Newark, New Jersey 07101

Dated:  July 9, 2003
        Newark, New Jersey

                                      38
<PAGE>

STATE OF NEW JERSEY        )
                           )
COUNTY OF ESSEX            )

      MORTON A. PLAWNER,  of full age, being duly sworn, upon his oath deposes
and says:

      I am a Vice President and Treasurer of Public Service Electric and Gas
Company, the Petitioner named in the foregoing Petition.

      The facts stated in said Petition and the Exhibit attached thereto are
true to the best of my knowledge and belief.

                                    By /s/ Morton A. Plawner
                                       ---------------------------------------
                                       Morton A. Plawner

Subscribed and sworn to before me this 9th day of July, 2003.

By /s/ Karina Boto
   ------------------------------
   Karina Boto
   A Notary Public of New Jersey
   My Commission Expires March 24, 2008

                                      39
<PAGE>

                                                                     EXHIBIT A
                                                                   Page 1 of 4

<TABLE>
<CAPTION>

    METHODOLOGY TO CALCULATE RATEPAYER BENEFITS FROM SECURITIZATION SUMMARY
                               ($ in thousands)

                                                                                  Present
                                                                                  Value @
Period            RB-ROR             Securitization         Benefit/(Cost)         6.52%
------         ------------          --------------        ---------------       -----------
<S>            <C>                   <C>                   <C>                   <C>
  1            $     31,843          $     18,358          $    13,485           $    12,660
  2                  30,794                18,595               12,199                10,752
  3                  29,744                18,839               10,905                 9,023
  4                  28,695                19,091                9,604                 7,461
  5                  27,645                19,350                8,296                 6,050
  6                  26,596                19,604                6,992                 4,787
  7                  25,546                19,711                5,835                 3,751
  8                  24,497                19,783                4,714                 2,845
  9                  23,448                19,857                3,591                 2,034
 10                  22,398                19,933                2,465                 1,311
 11                  21,349                20,011                1,338                   668
 12                  20,299                20,092                  208                    97
 13                  19,250                20,175                 (925)                 (407)
 14                  18,200                20,260               (2,060)                 (851)
 15                  17,151                20,348               (3,197)               (1,240)
               ------------          --------------        ---------------       -----------
               $    367,454          $    294,005          $    73,450           $    58,940
</TABLE>

<PAGE>

                                                                     EXHIBIT A
                                                                   Page 2 of 4

        METHODOLOGY TO CALCULATE RATEPAYER BENEFITS FROM SECURITIZATION
                                Rate of Return

<TABLE>
<CAPTION>

                                                           Weighted      After-tax WAC
                                    %          Cost          Cost        Discount Rate
                                -------       ------       --------      -------------
<S>                             <C>            <C>            <C>             <C>
Long term debt                  53.6402        7.11%          3.81            2.26
Tax deductible preferred         2.8425        8.36%          0'.24           0.14
Customers' deposits              0.6052        1.82%          0.01            0.01
Preferred stock                  1.4671        5.03%          0.07            0.07
Common equity                   41.4451        9.75%          4.04            4.04
                                -------                    --------      -------------
                                 100.00                       8.18            6.52
</TABLE>

<PAGE>

                                                                     EXHIBIT A
                                                                   Page 3 of 4

        METHODOLOGY TO CALCULATE RATEPAYER BENEFITS FROM SECURITIZATION
                          Rate Base - Rate of Return
                               ($ in Thousands)

<TABLE>
<CAPTION>

BGS
Deferral
Estimate    $   241,522

  A            B               C                   D              E                F                 G            H
                                                                                Accum.
Period       Amount       Amortization       Accum Amort.        Net          Deferred IT         Rate Base       ROR
------     ---------      ------------       ------------     ---------       -----------       -----------    ---------
<S>        <C>              <C>                <C>            <C>              <C>               <C>           <C>
   0       $ 241,522               -                 -        $ 241,522        $ 98,662          $ 142,860
   1               -        $ 16,101           $ 16,101         225,421          92,084            133,336     $  11,682
   2               -          16,101             32,203         209,319          85,507            123,812        10,903
   3               -          16,101             48,304         193,218          78,929            114,288        10,124
   4               -          15,101             64,406         177,116          72,352            104,764         9,346
   5               -          16,101             80,507         161,015          65,774             95,240         8,567
   6               -          16,101             96,609         144,913          59,197             85,716         7,788
   7               -          16,101            112,710         128,812          52,620             76,192         7,009
   8               -          16,101            128,812         112,710          46,042             66,668         6,230
   9               -          16,101            144,913          96,609          39,465             57,144         5,452
  10               -          16,101            161,015          80,507          32,867             47,620         4,673
  11               -          16,101            177,116          64,406          26,310             38,096         3,894
  12               -          16,101            193,21B          48,304          19,732             28,572         3,115
  13               -          16,101            209,319          32,203          13,155             19,048         2,336
  14               -          16,101            225,421          16,101           6,577              9,524         1,558
  15               -          16,101            241,522               -               -                  -           779

<CAPTION>

  A            I                  J                K                    L

Period      Interest          Deferred IT      Current IT      Revenue Requirement
------     ---------         ------------      ----------      -------------------
<S>        <C>               <C>               <C>                <C>
   0                         $  98,662
   1       $   5,804            (6,577)        $   10,637         $   31,843
   2           5,417            (6,577)            10,366             30,794
   3           5,030            (6,577)            10,096             29,744
   4           4,643            (6,577)             9,825             28,695
   5           4,256            (6,577)             9,555             27,645
   6           3,869            (6,577)             9,284             26,596
   7           3,482            (6,577)             9,013             25,546
   8           3,095            (6,577)             8,743             24,497
   9           2,708            (6,577)             8,472             23,446
  10           2,321            (6,577)             8,201             22,398
  11           1,935            (6,577)             7,931             21,349
  12           1,548            (6,577)             7,660             20,299
  13           1,161            (6,577)             7,389             19,250
  14             774            (6,577)             7,119             18,200
  15             387            (6,577)             6,848             17,151
                                                               -------------------
                                                                  $  367,454
</TABLE>

Column
------
H =      Col. G *8.18%
I =      (Col. G *3.81%) + (Col. G * 0.24%) + (Col. G * 0.01%)
J =      (Col. B - Col. C) * 40.85%
K =      (Col. H - Col. I + Col. C + Col. J) * (40.85% / 59.15%)
L =      Col. C + Col. H + Col. J + Col. K

<PAGE>

                                                                     EXHIBIT A
                                                                   Page 4 of 4

<PAGE>

       METHODOLOGY TO CALCULATE RATE PAYER BENEFITS FROM SECURITIZATION
                             Securitization Costs
                               ($ in thousands)

================================================================================
Securitization Costs
--------------------

Underwriting (0.5% of Principal)                          $           735
Advisor's fee                                                         500
Registration Statement                                                 14
Printing and Engraving                                                100
Trustees                                                               50
Legal                                                                 850
Accountants                                                            75
Rating Agency                                                         300
SPV Set-up fee                                                         25
Miscellaneous                                                          51
Total                                                     $         2,700
================================================================================

Principal:
BGS Deferral After-tax-Estimate             $    142,860
Discount, fees & expenses                          2,700
                                            ------------
                                            $    145,560

                                                   Income,
Period        Principal          Interest           Taxes              Total
------       -----------        ----------        ----------        -----------
  0
  1          $    7,819         $   5,140         $   5,400         $    18,358
  2               8,054             4,978             5,562              18,595
  3               8,297             4,812             5,730              18,839
  4               8,547             4,641             5,903              19,091
  5               8,804             4,465             6,080              19,350
  6               9,070             4,270             6,264              19,604
  7               9,343             3,916             6,452              19,711
  8               9,625             3,511             6,647              19,783
  9               9,915             3,095             6,847              19,857
 10              10,213             2,666             7,054              19,933
 11              10,521             2,224             7,266              20,011
 12              10,838             1,768             7,485              20,092
 13              11,165             1,299             7,711              20,175

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00089-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00089-of-00352.parquet"}]]