Document:

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                                                                   EXHIBIT 10.23

                        ASSET PURCHASE AND SALE AGREEMENT

                                       FOR
                      GENERATING PLANTS AND RELATED ASSETS

                                 By and Between

                         POTOMAC ELECTRIC POWER COMPANY

                                       and

                              SOUTHERN ENERGY, INC.

                            Dated as of June 7, 2000
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                        TABLE OF CONTENTS
<TABLE>
                                                          Page
<S>                                                       <C>
ARTICLE I - Definitions                                      1
      Section 1.1  Definitions                               1
      Section 1.2  Accounting Terms                          1
ARTICLE II -  Purchase and Sale; Assumption of Certain
              Liabilities                                    1
      Section 2.1  Purchase and Sale                         1
      Section 2.2  Auctioned Assets and Retained Assets      2
      Section 2.3  Assumed Obligations and Retained
                   Liabilities                               6
      Section 2.4  Third Party Consents                      11
ARTICLE III - Purchase Price                                 11
      Section 3.1  Purchase Price                            11
      Section 3.2  Certain Post-Closing Adjustments          12
      Section 3.3  Allocation of Purchase Price              13
      Section 3.4  PPA-Related Purchase Price Adjustments    14
ARTICLE IV - The Closing                                     15
      Section 4.1  Time and Place of Closing                 15
      Section 4.2  Payment of Estimated Purchase Price       16
ARTICLE V - Representations and Warranties of Seller         16
      Section 5.1  Organization; Qualification               17
      Section 5.2  Authority Relative to This Agreement      17
      Section 5.3  Consents and Approvals; No Violation      17
      Section 5.4  Personal Property                         18
      Section 5.5  Real Estate                               18
      Section 5.6  Leases                                    18
      Section 5.7  Certain Contracts and Arrangements        18
      Section 5.8  Legal Proceedings                         18
      Section 5.9  Permits; Compliance with Law              19
      Section 5.10 Environmental Matters                     19
      Section 5.11 Labor Matters                             20
      Section 5.12 ERISA; Benefit Plans                      20
      Section 5.13 Taxes                                     21
      Section 5.14 Undisclosed Liabilities                   21
      Section 5.15 Brokers                                   22
      Section 5.16 Insurance                                 22
      Section 5.17 Disclaimers                               22
ARTICLE VI - Representations and Warranties of Buyer         23
      Section 6.1  Organization                              23
      Section 6.2  Authority Relative to This Agreement      23
      Section 6.3  Consents and Approvals; No Violation      23
      Section 6.4  Availability of Funds                     24
</TABLE>

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<TABLE>

<S>                                                          <C>
      Section 6.5  Brokers                                   24
      Section 6.6  No Knowledge of Seller's Breach           24
      Section 6.7  Qualified Buyer                           25
      Section 6.8  WARN Act                                  25
      Section 6.9  Financial Representations                 25
      Section 6.10 Legal Proceedings                         25
ARTICLE VII - Covenants of the Parties                       25
      Section 7.1  Conduct of Business Relating to
                   the Auctioned Assets                      25
      Section 7.2  Access to Information                     28
      Section 7.3  Consents and Approvals; Transferable
                   Permits                                   29
      Section 7.4  Further Assurances                        30
      Section 7.5  Public Statements                         31
      Section 7.6  Tax Matters                               31
      Section 7.7  Bulk Sales or Transfer Laws               31
      Section 7.8  Witness Services                          31
      Section 7.9  Control of Litigation                     32
      Section 7.10 Confidentiality                           32
      Section 7.11 Risk of Loss                              32
      Section 7.12 Tax Exempt Financing                      33
      Section 7.13 Compliance with Governmental Agreements   36
      Section 7.14 PJM; MAAC                                 36
      Section 7.15 Trade Names                               36
      Section 7.16 Enforcement of Retained Rights            37
      Section 7.17 Conduct of Business Relating to PPAs      37
ARTICLE VIII - Conditions                                    37
      Section 8.1  Conditions Precedent to Each  Party's
                   Obligation To Effect the Purchase
                   and Sale                                  37
      Section 8.2  Conditions Precedent to Obligation
                   of Buyer To Effect the Purchase and Sale  38
      Section 8.3  Conditions Precedent to Obligation
                   of Seller To Effect the Purchase and Sale 39
ARTICLE IX - Employee Matters                                41
      Section 9.1  Employee Matters                          41
      Section 9.2  Pension Plans                             43
      Section 9.3  Buyer's Savings Plan                      43
      Section 9.4  Severance Liabilities                     45
      Section 9.5  COBRA                                     45
      Section 9.6  WARN Act                                  45
ARTICLE X - Indemnification and Dispute Resolution           46
      Section 10.1 Indemnification                           46
      Section 10.2 Third Party Claims Procedures             48
ARTICLE XI - Termination                                     50
      Section 11.1 Termination                               50
ARTICLE XII - Miscellaneous Provisions                       50
      Section 12.1 Expenses                                  50
</TABLE>

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<TABLE>
      <S>                                                    <C>
      Section 12.2 Amendment and Modification; Extension;
                   Waiver                                    51
      Section 12.3 No Survival of Representations or
                   Warranties                                51
      Section 12.4 Notices                                   51
      Section 12.5 Assignment; No Third Party Beneficiaries  52
      Section 12.6 Governing Law                             53
      Section 12.7 Counterparts                              53
      Section 12.8 Interpretation                            53
      Section 12.9 Jurisdiction and Enforcement              54
      Section 12.10 Entire Agreement                         55
      Section 12.11 Severability                             55
      Section 12.12 Conflicts                                55
</TABLE>

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                             SCHEDULES AND EXHIBITS

<TABLE>
<CAPTION>
Schedules                                 Title
=========                                 ======
<S>                                       <C>
Schedule 1.1(a)                           Definitions
Schedule 1.1(c)                           Seller's Severance Plans
Schedule 2.2(a)(ii)                       Spare Parts
Schedule 2.2(a)(iii)                      Personal Property
Schedule 2.2(a)(iv)                       Assigned Contracts
Schedule 2.2(a)(v)                        Transferable Permits
Schedule 2.2(a)(vi)                       Transferred SO2 Allowances
Schedule 2.2(a)(vii)                      Transferred NOx Allowances
Schedule 2.2(b)(i)                        Retained Transmission and
                                          Distribution Facilities
Schedule 2.2(b)(ii)(B)                    Communications Equipment/Related
                                          Support Equipment
Schedule 2.3(a)(iv)                       Assumed Consent Order Obligations
Schedule 2.4                              Retained Rights/Unassigned PPAs
Schedule 5.3(a)                           Contracts Approvals; No Violation
Schedule 5.3(b)                           Seller Required Regulatory Approvals
Schedule 5.5(a)                           Real Estate Legal Description
Schedule 5.5(b)                           Title Surveys
Schedule 5.7                              Material Contract Defaults
Schedule 5.8                              Legal Proceedings
Schedule 5.9                              Permits
Schedule 5.10(a)                          Environmental Matters
Schedule 5.10(b)                          Environmental Notification
Schedule 5.10(c)                          Environmental Reports
Schedule 5.12                             Benefit Plans
Schedule 6.3(b)                           Buyer Required Regulatory Approvals
Schedule 7.1(b)(viii)                     Capital Expenditures
Schedule 7.12                             Exempt Facilities/Revenue Bonds
</TABLE>

<TABLE>
<CAPTION>

Exhibits                                  Title
========                                  =====
<S>                                       <C>
Exhibit A                                 Assignment and Assumption Agreement
Exhibit B                                 Bill of Sale

Exhibit C-1, C-2, C-3 and C-4             Easements Agreements
Exhibit D                                 Guarantee Agreement
Exhibit E-1, E-2, E-3 and E-4             Interconnection Agreements
Exhibit F                                 Local Area Support Agreement
Exhibit G                                 Operating Agreement
Exhibit H                                 Potomac River Lease
Exhibit I-1 and I-2                       Transition Power Agreements
Exhibit J                                 Deeds of Conveyance
Exhibit K                                 Opinion of Seller's Counsel
Exhibit L                                 Opinion of Buyer's Counsel
Exhibit M                                 Opinion of Guarantor's Counsel
</TABLE>

<PAGE>   6

         ASSET PURCHASE AND SALE AGREEMENT (including the Schedules hereto, this
"Agreement"), dated as of June 7, 2000, by and between POTOMAC ELECTRIC POWER
COMPANY, a District of Columbia and Virginia corporation ("Seller"), and
SOUTHERN ENERGY, INC., a Delaware corporation ("Buyer," collectively with
Seller, the "Parties").

         WHEREAS, Seller owns certain power generating facilities (described
herein as the "Generating Facilities") and other assets associated therewith;
and

         WHEREAS, Buyer desires to purchase and assume, and Seller desires to
sell and assign, the Auctioned Assets (as defined in Section 2.2 below) and
certain associated liabilities, upon the terms and conditions hereinafter set
forth.

         NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements hereinafter set forth, and intending
to be legally bound hereby, the Parties agree as follows:

                                    ARTICLE I

                                   Definitions

         SECTION  1.1   Definitions. Any capitalized terms which are used but
not defined in this Agreement shall have the meaning given to such terms in the
attached Schedule 1.1.

         SECTION 1.2    Accounting Terms. Any accounting terms used in this
Agreement or the Ancillary Agreements shall, unless otherwise specifically
provided, have the meanings customarily given them in accordance with United
States generally accepted accounting principles ("GAAP") and all financial
computations hereunder or thereunder shall, unless otherwise specifically
provided, be computed in accordance with GAAP consistently applied.

                                   ARTICLE II

              Purchase and Sale; Assumption of Certain Liabilities

         SECTION 2.1    Purchase and Sale. Upon the terms and subject to the
satisfaction of the conditions contained in this Agreement, at the Closing,
Seller agrees to sell, assign, convey, transfer and deliver to Buyer (or Buyer's
permitted assignees pursuant to Section 12.5(a)), and Buyer agrees to purchase
and acquire from Seller (or shall cause Buyer's permitted assignees pursuant to
Section 12.5(a) to purchase and acquire from Seller) all of the Auctioned
Assets. In the case of any Auctioned Assets

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not located at the Generating Facilities (including supplies, materials and
spare parts inventory), Buyer agrees that from and after the Closing, Buyer will
bear all risk of casualty or loss with regard to such Auctioned Assets
(regardless of whether they remain on Seller's Real Estate or otherwise in
Seller's possession).

         SECTION 2.2    Auctioned Assets and Retained Assets.

         (a)      Auctioned Assets. The term "Auctioned Assets" means all of the
assets, real and personal property, goodwill and rights of Seller of whatever
kind and nature, whether tangible or intangible, in each case, primarily
relating to the power generation operations of the Generating Facilities and the
Support Operations, other than the Retained Assets, including the following:

                  (i)      except with respect to the Potomac River Real
Property, all real property and leaseholds and other interests in real property
of Seller, together with all buildings, improvements, structures and fixtures
thereon, including the Chalk Point/Morgantown Fuel Pipeline, the Ryceville
Pumping Station, the Production Service Center, and the Ash Storage Sites,
subject to any Permitted Exceptions (the "Buyer Real Estate");

                  (ii)     all inventories of fuels, supplies, materials and
spare parts, together with and subject to (A) all Permitted Exceptions, and (B)
all warranties against manufacturers and vendors relating thereto, including the
spare parts listed on Schedule 2.2(a)(ii), in each case, other than assets that
become obsolete or that are used, consumed, replaced or disposed of in the
ordinary course of business consistent with past practice or as permitted by
this Agreement;

                  (iii)    the machinery, equipment (including any Revenue
Meters), facilities, furniture and other tangible personal property on the Buyer
Real Estate or the Potomac River Station Site, including any items of personal
property located on the Buyer Real Estate, the Potomac River Station Site or
temporarily removed from the Buyer Real Estate or the Potomac River Station Site
for repairs, servicing or maintenance and listed on Schedule 2.2(a)(iii),
together with and subject to (A) any Permitted Exceptions, and (B) all
warranties against manufacturers or vendors relating thereto, in each case,

<PAGE>   8

other than assets that become obsolete or that are used, consumed, replaced or
disposed of in the ordinary course of business consistent with past practice or
as permitted by this Agreement;

                  (iv)     subject to Sections 2.2(b)(xi) and 2.4, all right,
title and interest of Seller in, to and under all contracts, agreements,
personal property leases (whether Seller is lessor or lessee thereunder),
commitments and all other legally binding arrangements (including any rights of
Seller under any PPA to sell energy to any third party power supplier) whether
oral or written, which are (A) set forth on Schedule 2.2(a)(iv), (B) not
material to the ownership and operation of the Generating Facilities, or (C)
otherwise entered into by Seller in accordance with Section 7.1 (collectively,
the "Contracts"), in each case, to the extent in full force and effect on the
Closing Date;

                  (v)      the Permits and Environmental Permits that are
transferred or transferable by Seller to Buyer (collectively, the "Transferable
Permits"), including the Transferable Permits set forth on Schedule 2.2(a)(v),
in each case, to the extent in full force and effect on the Closing Date;

                  (vi)     the amount of SO2 Allowances listed on Schedule
2.2(a)(vi) attached hereto ("Transferred SO2 Allowances");

                  (vii)    the amount of NOx Allowances listed on Schedule
2.2(a)(vii) attached hereto ("Transferred NOx Allowances");

                  (viii)   (A) all data, information, books, operating records,
operating, safety and maintenance manuals, engineering design plans, blueprints
and as-built plans, specifications, procedures, facility compliance plans,
environmental procedures and similar records, to the extent in Seller's
possession or readily available (collectively, the "Operating Records"), and (B)
to the extent permitted by law, all personnel files relating to the Transferred
Employees, to the extent in Seller's possession and readily available and to the
extent such files pertain to (1) skill and development training and resumes, (2)
seniority histories, (3) salary and benefit information, (4) Occupational Safety
and Health Act medical reports, (5) active medical restriction forms and (6) any
other matters, disclosure

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of which by Seller to Buyer is permitted under applicable law without the
consent of the Transferred Employee, but not including any performance
evaluations or disciplinary records (collectively, the "Transferred Employee
Records"); provided, however, that Seller shall be permitted to retain copies,
or originals to the extent it provides Buyer with copies of same, of all
Operating Records and Transferred Employee Records;

                  (ix)     (A) except as provided in Section 2.2(b)(iv), the
software (provided, however, that Buyer acknowledges that it will require
licenses from third parties in order to be legally entitled to use such
software), and (B) a non-exclusive, royalty-free license to use solely in
connection with the Auctioned Assets the software or other copyrighted material
owned by Seller located at Buyer Real Estate; and

                  (x)      all claims, causes of action, choses in action,
rights of recovery and rights of set-off of any kind in favor of the Seller
arising prior to the Closing Date relating to the Auctioned Assets other than
those pertaining to the Retained Assets.

         (b)      Retained Assets. The term "Retained Assets" means:

                  (i)      the electric transmission and distribution facilities
owned, controlled or operated by Seller for purposes of providing point-to-point
transmission service, network integration service and distribution service and
other related purposes, used in controlling continuity between the Generating
Facilities and the transmission and distribution facilities and for other
purposes (including the Seller's undivided ownership interest in the Conemaugh
Switchyard and the Conemaugh Transmission Line), including those described on
Schedule 2.2(b)(i) attached hereto (the "Transmission System");

                  (ii)     (A) except as set forth in Section 2.2(a)(iii), all
Interconnection Facilities and other transmission, distribution and substation
machinery, equipment and facilities and related support equipment located on
Buyer Real Estate or Seller Real Estate or temporarily removed from Buyer Real
Estate

<PAGE>   10

or Seller Real Estate for repairs, servicing or maintenance; (B) Communications
Equipment and related support equipment (1) located on Buyer Real Estate or
temporarily removed from Buyer Real Estate for repairs, servicing or maintenance
and listed on Schedule 2.2(b)(ii)(B) or acquired by Seller after the date of
this Agreement and designated by Seller as a Retained Asset or (2) located on
Seller Real Estate or temporarily removed from Seller Real Estate for repairs,
servicing or maintenance; and (C) all Protective Relaying Systems not located on
Buyer Real Estate;

                  (iii)    all cash, cash equivalents, bank deposits and
accounts receivable;

                  (iv)     (A) all mainframe computer systems of Seller and (B)
all software, copyrights, know-how or other proprietary information not
primarily relating to the power generation operations of the Generating
Facilities, including software, copyrights, know-how or other proprietary
information licensed to Buyer pursuant to Section 2.2(a)(ix)(B);

                  (v)      the names "Pepco," "Potomac Electric Power Company,"
and any related or similar trade names, trademarks, service marks or logos (and
any rights to and in the same, including any right to use the same);

                  (vi)     any refunds or credits related to Taxes attributable
to taxable periods (or portions thereof) prior to the Closing Date, and any
other rents, charges, liabilities or obligations paid prior to the Closing Date
in respect of the Auctioned Assets;

                  (vii)    personnel records (other than Transferred Employee
Records) and all other records (other than Operating Records);

                  (viii)   (A) all Emission Reduction Credits or Greenhouse Gas
Emission Reduction Credits that are attributable to any emission reduction
activities of the Seller which occur following the Closing Date at any
locations, (B) any SO2 Allowances that are not Transferred SO2 Allowances, and

<PAGE>   11

(C)      any NOx Allowances that are not Transferred NOx Allowances;

                  (ix)     the Seller Real Estate (including a fee interest in
the Potomac River Real Property);

                  (x)      all master station voltage control equipment within
and including the master station voltage control cabinets located at the
Generating Facilities;

                  (xi)     the Retained Rights;

                  (xii)    the Conemaugh Interest;

                  (xiii)   all claims, causes of action, choses in action,
rights of recovery and rights of set-off of any kind in favor of the Seller
arising prior to the Closing Date other than those pertaining to the Assumed
Obligations; and

                  (xiv)    any other asset that is not described with
particularity in this Agreement as an Auctioned Asset.

         SECTION 2.3    Assumed Obligations and Retained Liabilities.

           (a)      Assumed Obligations. At the Closing, Buyer shall assume, and
from and after the Closing, shall discharge, all of the liabilities and
obligations, direct or indirect, known or unknown, absolute or contingent, which
relate to the Auctioned Assets, the Potomac River Station Site or are otherwise
specified below, other than the Retained Liabilities (collectively, the "Assumed
Obligations"), including the following:

                  (i)      except as set forth in Section 2.3(b)(ii), any
liabilities and obligations under the Contracts (including any obligations of
Seller under any PPA to sell energy to any third party power supplier);

            (ii) any liabilities and obligations for goods delivered or services
rendered on or after the Closing Date relating to the Auctioned Assets;

<PAGE>   12

                  (iii)    except as set forth in Section 2.3(b)(iii), (iv) or
(v), any Environmental Liability including any Environmental Liability (A)
arising out of or in connection with any violation or alleged violation of, or
noncompliance or alleged noncompliance with, any Environmental Laws, prior to,
on or after the Closing Date, relating to or arising in connection with the
Auctioned Assets and the Potomac River Station Site, (B) arising out of or in
connection with the condition of any Auctioned Assets and the Potomac River
Station Site prior to, on or after the Closing Date, including any actual or
alleged presence, Release or threatened Release of any Hazardous Substances at,
on, in, under or migrating onto or from, the Auctioned Assets and the Potomac
River Station Site, prior to, on or after the Closing Date, (C) arising out of
or in connection with any Release or threatened Release of any Hazardous
Substance prior to, on or after the Closing Date relating to any equipment,
Hazardous Substance, product or recyclable or recycled material (collectively,
the "Disposed Items") which remains on or has been removed from the Auctioned
Assets and the Potomac River Station Site, (D) in respect of any personal injury
or property damage relating to or arising from the presence, exposure to, or
proximity to any Hazardous Substance, prior to, on or after the Closing Date,
and (E) of any sort whatsoever arising or occurring on or after the Closing
Date;

                  (iv)     any liabilities and obligations under all consent
orders including those listed on Schedule 2.3(a)(iv) (the "Assumed Consent Order
Obligations");

                  (v)      except as set forth in Section 2.3(b)(iv), any
liabilities and obligations with respect to the Permits to the extent arising or
accruing on or after the Closing Date;

                  (vi)     (A) all wages, overtime, employment taxes, workers
compensation benefits, occupational safety and health liabilities or other
similar liabilities and obligations in respect of Transferred Employees arising
or accruing on or after the Closing Date, and (B) all other liabilities and
obligations with respect to the Transferred Employees for which Buyer is
responsible pursuant to Article IX;

                  (vii)    (A) any liabilities and obligations in respect of any
personal injury or property (real or personal) damage claim (including any claim
based on wrongful death) relating to, resulting from, or arising out of the
Auctioned Assets and the Potomac River Station Site, arising or occurring on or
after the Closing Date, or (B) any liabilities and obligations in respect of any
discrimination, wrongful discharge or unfair labor practice claim by any
Transferred Employee arising out of or relating to acts or omissions occurring
on or after the Closing Date;

                  (viii)   any liabilities and obligations, with respect to the
periods that include the Closing Date, with respect to real or personal property
rent, Taxes based on the ownership or use of property, utilities charges and
similar charges that primarily relate to the Generating Facilities
(collectively, the "Prorated Items"), including (A) personal property taxes,
real estate and occupancy taxes, assessments and other charges, (B) rent and all
other items payable by Seller under any Contract, (C) any fees with respect to
any Transferable Permit and (D) sewer rents and charges for water, telephone,
electricity and other utilities, in each case calculated by multiplying the
amount of any such Prorated Item by a fraction the numerator of which is the
number of days in such period beginning on and after the Closing Date and the
denominator of which is the number of days in such period;

                  (ix)     any liabilities and obligations in respect of Taxes
(other than as provided for by Section 2.3 (a)(viii)) attributable to the
Auctioned Assets arising or accruing during taxable periods (or portions
thereof) beginning on or after the Closing Date;

                  (x)      any severance costs payable under Seller's Severance
Plans with respect to those Non-Union Employees who do not receive a Qualified
Offer by the Buyer pursuant to Section 9.1 (such liabilities are the "Closing
Severance Expenses");

                  (xi)     any liabilities and obligations of the Buyer relating
to the Potomac River Station Site as contemplated by the Potomac River Lease;

<PAGE>   13

                  (xii)    all liabilities and obligations of Seller under the
loan agreements set forth on Schedule 7.12 attached hereto (the "Loan
Agreements") with respect to the Revenue Bonds; and

                  (xiii)   any liabilities and obligations under the Ancillary
Agreements in respect of the Auctioned Assets arising on or after the Closing
Date.

         (b)      Retained Liabilities. Buyer shall not assume or be obligated
to pay, perform or otherwise discharge the following liabilities or obligations
(the "Retained Liabilities"):

                  (i)      any liabilities and obligations of Seller exclusively
relating to any Retained Assets (other than as set forth in Section 2.3(a)(xi));

                  (ii)     any liabilities and obligations under the Contracts
which relate to (A) goods delivered or services rendered prior to the Closing
Date, and (B) breaches by the Seller of its obligations thereunder occurring
prior to the Closing Date;

                  (iii)    (A) any Environmental Liability of Seller arising out
of or in connection with the disposal by, or on behalf of, Seller and Release or
threatened Release, prior to the Closing Date of Hazardous Substances at any
Off-Site location, (B) any Environmental Liability of Seller arising out of or
in connection with any Release or threatened Release of any Hazardous Substance
on or after the Closing Date from the Seller Facilities or otherwise originating
from, or relating to, any equipment owned or used by Seller that is located on
Buyer Real Estate, and (C) any liability in respect of any personal injury
claims relating to the exposure of a third party to asbestos at the Auctioned
Assets or the Potomac River Station Site which have been filed with any state or
federal court having jurisdiction prior to the Closing Date;

                  (iv)     notwithstanding the Assumed Obligations set forth in
Section 2.3(a)(iii)(A), any monetary fines or penalties (including fines or
penalties from violations of any Environmental Law) imposed by a Governmental
Authority to the extent arising out of or relating to acts or omissions of
Seller

<PAGE>   14

in respect of the Auctioned Assets prior to the Closing Date;

                  (v)      any Environmental Liability whatsoever arising out
of, related to, or otherwise associated with the Release of fuel oil from the
Ryceville-Piney Point Pipeline described in Schedule 5.10(a);

                  (vi)     (A) all wages, overtime, employment taxes, workers
compensation benefits, occupational safety and health liabilities or other
similar liabilities and obligations in respect of Transferred Employees to the
extent arising or accruing prior to the Closing Date and (B) all other
liabilities and obligations with respect to the Transferred Employees for which
Seller is responsible pursuant to Article IX;

                  (vii)    any liabilities and obligations (A) in respect of any
personal injury or property damage claim (other than any Environmental
Liabilities which are Assumed Obligations pursuant to Section 2.2(a)(iii) above)
relating to the Auctioned Assets arising or occurring prior to the Closing Date,
or (B) in respect of any discrimination, wrongful discharge or unfair labor
practice claim by any Transferred Employee arising out of or relating to acts or
omissions of Seller prior to the Closing Date;

                  (viii)   any liabilities and obligations, with respect to
periods prior to the Closing Date, for the Prorated Items, calculated as set
forth in Section 2.3(a)(viii);

                  (ix)     any liabilities and obligations in respect of Taxes
(other than as provided for by Section 2.3(b)(viii)) attributable to the
Auctioned Assets or trades or businesses associated with the Auctioned Assets
arising or accruing during taxable periods (or portions thereof) ending before
the Closing Date; and

                  (x)      any liabilities and obligations of Seller under the
Ancillary Agreements in respect of the Retained Assets.

<PAGE>   15

         SECTION 2.4    Third Party Consents.

           (a)      Notwithstanding Section 2.2(a)(ii), (iii) or (iv), to the
extent that Seller's rights under any Contract or warranty may not be assigned
without the consent of another person which consent has not been obtained, this
Agreement shall not constitute an agreement to assign the same if an attempted
assignment would constitute a breach thereof or be unlawful, and Seller, at its
expense, shall use its reasonable best efforts to obtain prior to the Closing
any such required consents with respect to any Material Contracts or material
warranties.

         (b)      Seller and Buyer agree that if any consent to an assignment of
any such Material Contract or material warranty shall not be obtained or if any
attempted assignment would in Seller's reasonable opinion be ineffective or
would impair any material rights and obligations of Buyer under such Material
Contract or material warranty, as applicable, so that Buyer would not in effect
acquire the benefit of all such rights and obligations, Seller, to the maximum
extent permitted by law and such Material Contract or material warranty, as
applicable, shall after the Closing appoint Buyer to be Seller's representative
and agent with respect to such Material Contract or material warranty, as
applicable, and Seller shall, to the maximum extent permitted by law and such
Material Contract or material warranty, as applicable, enter into such
reasonable arrangements with Buyer as are necessary to provide Buyer with the
benefits and obligations of such Material Contract or material warranty, as
applicable. Notwithstanding any of the foregoing, in the event that Seller is
unable to obtain a consent from a Power Seller to an assignment of a PPA, such
PPA shall be governed by Section II of Schedule 2.4 attached hereto. Seller and
Buyer shall cooperate and shall each use their reasonable best efforts after the
Closing to obtain an assignment of each such Material Contract or material
warranty, as applicable, to Buyer.

                              ARTICLE III

                             Purchase Price

         SECTION  3.1   Purchase Price. Subject to adjustment pursuant to
Sections 3.2 and 3.4, the amount payable by Buyer to Seller for the Auctioned
Assets shall be the sum of (a) Two Billion Six Hundred Fifty Million Dollars
($2,650,000,000.00) (the "Purchase Price"), (b) an amount equal to the Final
Fuel Related Adjustment Amount, (c) an amount equal to the Final Non-Fuel
Related Adjustment Amount, and (d) an amount expended by Seller between the date
hereof and the Closing Date for Permitted Capital Expenditures pursuant to
Section 7.1(b)(viii).

<PAGE>   16

       SECTION 3.2      Certain Post-Closing Adjustments.

         (a)      Within 60 Business Days after the last day of the month in
which Closing occurs, Seller shall prepare and deliver to Buyer a statement (an
"Adjustment Statement") which reflects (i) the book cost, as reflected on the
books of Seller as of the Closing Date, of all inventories, materials, spare
parts and supplies (excluding any fuel supplies) included in the Auctioned
Assets (the "Final Non-Fuel Related Adjustment Amount") and (ii) the book value,
as determined using Seller's historical weighted average method, of all fuel
supplies included in the Auctioned Assets (the "Final Fuel Related Adjustment
Amount"). The Final Fuel Related Adjustment Amount will be based on the actual
fuel inventory on the Closing Date, and the Final Non-Fuel Related Adjustment
Amount will be based on an inventory survey conducted within 30 Business Days
prior to the Closing Date, in each case, consistent with the inventory
procedures of Seller in effect as of the date of this Agreement (the "Inventory
Survey"). Seller will permit an employee, or representative, of Buyer to observe
the Inventory Survey. The Adjustment Statement shall be prepared using (i) GAAP
and (ii) with respect to the Final Non-Fuel Related Adjustment Amount the same
system average price that Seller has historically used to calculate the book
cost of its supplies, materials and spare parts inventory. Buyer agrees to
cooperate with Seller in connection with the preparation of the Adjustment
Statement and related information, and shall provide to Seller such access,
books, records and information as may be reasonably requested from time to time.

         (b)      Buyer may dispute the quantity delivered or quality of any
inventory item shown on the Adjustment Statement, or the mathematical
calculations reflected therein, by notifying Seller in writing of the disputed
amount, and the basis of such dispute, within 20 Business Days of Buyer's
receipt of the Adjustment Statement; provided, however, that in respect of the
quality of any inventory item, Buyer may not dispute Seller's normal and
customary methods for accounting for excess inventory. Buyer shall have no right
to dispute any other matter in respect of the Adjustment Statement, including
historical system average price used to calculate the book cost of the inventory
and the Final Non-Fuel Related Adjustment Amount or the appropriateness, under
GAAP or otherwise, of using such historical system average price to determine
the book cost of any particular item of inventory. In the event of a dispute
with respect to the quantity or quality of any inventory item shown on the
Adjustment Statement, or the mathematical calculations reflected therein, Buyer
and Seller shall attempt to reconcile their differences and any resolution by
them as to any disputed amounts shall be final, binding and conclusive on the
Parties. If Buyer and Seller are unable to reach a resolution of such
differences within 20 Business Days of receipt of Buyer's written notice of
dispute to Seller, Buyer and Seller shall submit the amounts remaining in
dispute for determination and resolution to KPMG Peat Marwick or any other
accounting firm of recognized national standing

<PAGE>   17

reasonably acceptable to Seller and Buyer (the "Accountants"), which shall be
instructed to determine and report to the Parties, within 20 Business Days after
such submission, upon such remaining disputed amounts, and such report shall be
final, binding and conclusive on the Parties with respect to the amounts
disputed. Buyer and Seller shall each pay an amount, if any, equal to that
percentage of the fees and disbursements of the Accountants incurred in
connection with the resolution of such disputed amounts that corresponds to the
percentage of disputed amounts awarded to the other Party by the Accountants
hereunder.

         (c)      For purposes of this Agreement, the "Closing Adjustment
Amount" shall be the sum of (A) the amount of the Final Non-Fuel Related
Adjustment Amount, and (B) the amount of the Final Fuel Related Adjustment
Amount minus (ii) the amount of the Estimated Non-Fuel Related Adjustment
Amount. If the Closing Adjustment Amount is a positive number, then on the
Adjustment Date (as defined below), Buyer shall pay to Seller the amount of such
positive number. If the Closing Adjustment Amount is a negative number, then on
the Adjustment Date, Seller shall pay to Buyer the amount of such negative
number. For purposes of this Agreement, the "Adjustment Date" means (1) if Buyer
does not disagree in any respect with the Adjustment Statement, the 23rd
Business Day following Buyer's receipt of the Adjustment Statement or (2) if
Buyer shall disagree in any respect with the Adjustment Statement, the third
Business Day following either the resolution of such disagreement by the Parties
or a final determination by the Accountants in accordance with Section 3.2(b).
Any amount paid under this Section 3.2(c) shall be paid with interest for the
period commencing on the Closing Date up to but not including the date of
payment, calculated at the prime rate of The Chase Manhattan Bank in effect on
the Closing Date, and in cash by wire transfer of immediately available funds.

         SECTION  3.3   Allocation of Purchase Price. Buyer shall deliver to
Seller at Closing a preliminary allocation among the Auctioned Assets of the
amount payable by Buyer to Seller pursuant to Section 3.1 hereof, and, as soon
as practicable following the Closing (but in any event within 30 days following
the final determination of the Closing Adjustment Amount), Buyer shall prepare
and deliver to Seller a final allocation of the amount payable by Buyer to
Seller pursuant to Section 3.1 hereof, and the post-closing adjustment pursuant
to Section 3.2, among the Auctioned Assets (the "Allocation"). The Allocation
shall be consistent with Section 1060 of the Code and the Treasury Regulations
thereunder. Seller hereby agrees to accept Buyer's Allocation unless Seller
determines that such Allocation was not prepared in accordance with Section 1060
of the Code and the regulations thereunder ("Applicable Law"). If Seller so
determines, Seller shall within 20 Business Days thereafter propose any changes
necessary to cause the Allocation to be prepared in accordance with Applicable
Law. Within 10

<PAGE>   18

Business Days following delivery of such proposed changes, Buyer shall provide
Seller with a statement of any objections to such proposed changes, together
with a reasonably detailed explanation of the reasons therefor. If Buyer and
Seller are unable to resolve any disputed objections within 10 Business Days
thereafter, such objections shall be referred to the Accountants, whose review
will be limited to whether Buyer's Allocation of such disputed items regarding
the Allocation was prepared in accordance with Applicable Law. The Accountants
shall be instructed to deliver to Seller and Buyer a written determination of
the proper allocation of such disputed items within 20 Business Days. Such
determination shall be conclusive and binding upon the parties hereto for all
purposes, and the Allocation shall be so adjusted (the Allocation, including the
adjustment, if any, to be referred to as the "Final Allocation"). Fees and
disbursements of the Accountants attributable to the Allocation shall be shared
by Buyer and Seller on the basis of their respective percentages of the disputed
items which were allocated by the Accountants to the other Party hereunder. Each
of Buyer and Seller agrees to timely file Internal Revenue Service Form 8594,
and all Federal, state, local and foreign Tax Returns, in accordance with such
Final Allocation and to report the transactions contemplated by this Agreement
for Federal Income Tax and all other tax purposes in a manner consistent with
the Final Allocation. Each of Buyer and Seller agrees to promptly provide the
other party with any additional information and reasonable assistance required
to complete Form 8594, or compute Taxes arising in connection with (or otherwise
affected by) the transactions contemplated hereunder. Each of Buyer and Seller
shall timely notify the other Party and each shall timely provide the other
Party with reasonable assistance in the event of an examination, audit or other
proceeding regarding the Final Allocation.

       SECTION 3.4      PPA-Related Purchase Price Adjustments.

         (a)      In the event Closing occurs hereunder with respect to the
Auctioned Assets other than the Panda PPA as contemplated by Section 4.1,

                  (i)      at the Closing, Buyer shall deposit Two Hundred
Fifty-Nine Million Eight Hundred Twenty-Seven Thousand Dollars ($259,827,000.00)
in immediately available funds in an interest-bearing escrow account pursuant to
an escrow agreement mutually satisfactory to the Parties, providing for the
release to Seller of the remaining balance of such escrow account after the
release, if any, to Buyer pursuant to Section 3.4(a)(ii) (together with all
earnings on such remaining balance) upon the earlier to occur of completion of
the post-Closing consummation of this Agreement with respect to the Panda PPA
(the "Panda Release") or the twelve (12) month period following the Closing

<PAGE>   19

(after which the Panda PPA shall no longer be an "Assigned Contract" under
Schedule 2.2(a)(iv)) ; and

                  (ii)     at the time of the Panda Release, subject to Section
3.4(b), the escrow agent shall release to Buyer the funds deposited in the
escrow account described in Section 3.4(a)(i) (together with all earnings on the
principal released).

         (b)      In the event the Closing or the Panda Release occurs after
October 31, 2000, Buyer shall pay Seller at Closing or at the time of the Panda
Release, as applicable, by wire transfer of immediately available funds (or in
the case of the Panda Release, the escrow agent shall reduce the amount released
to Buyer pursuant to Section 3.4(a)(ii) above by) an amount in United States
Dollars equal to One Million Two Hundred Thousand Dollars ($1,200,000.00) per
month with respect to the Panda PPA, and Two Million Seven Hundred Thousand
Dollars ($2,700,000.00) per month with respect to the OE PPA, as applicable,
(the "Adjustment Amounts") for each calendar month (prorated for any portion of
a calendar month) occurring between October 31, 2000 and the Closing Date or the
time of the Panda Release, as applicable. In the event that the Panda Release
does not occur within the twelve (12) month period described in Section
3.4(a)(i), the escrow agent shall release to Seller the entire amount in such
escrow account (together with all earnings thereon). The foregoing amounts shall
be adjustments to the Purchase Price.

                              ARTICLE IV

                              The Closing

       SECTION 4.1      Time and Place of Closing.

         (a)      Upon the terms and subject to the satisfaction of the
conditions contained in Article VIII, the closing of the sale of the Auctioned
Assets contemplated by this Agreement (the "Closing") will take place on such
date as the Parties may agree, which date shall be as soon as practicable, but
no later than ten Business Days, following the date on which all of the
conditions set forth in Article VIII have been satisfied or waived, at the
Washington, D.C. offices of Dickstein Shapiro Morin & Oshinsky LLP, or at such
other place or time as the Parties may agree. Notwithstanding the foregoing, in
the event all conditions set forth in Article VIII are satisfied other than the
condition set forth in Section 8.3(h), Closing will take place with respect to
all of the Auctioned Assets as set forth above, provided, however, the Panda
Release shall occur only upon satisfaction or waiver of the condition set forth
in Section 8.3(h)(which condition may only be waived by Seller if the MDPSC has
either issued an order determining that the Panda

<PAGE>   20

Release does not violate the Panda PPA or dismissed the proceeding listed at
Item 1 of Schedule 5.8). The date and time at which the Closing actually occurs
is hereinafter referred to as the "Closing Date".

         (b)      The Parties agree that in the event there is a post-Closing
Panda Release, the effect hereunder shall be limited to (i) the Purchase Price
adjustments and other payments contemplated by Section 3.4; (ii) delivery by the
Parties at the time of the Panda Release of a Novation or other instruments of
assignment and assumption in respect of the Panda PPA, or an acknowledgement of
the applicability as of the time of the Panda Release of the provisions of
Section II of Schedule 2.4 hereto to the Panda PPA; (iii) exclusion of the Panda
PPA from the scope of all representations, warranties and opinions delivered at
Closing (which representations, warranties and opinions as to the Panda PPA will
be required to be delivered at the time of the Panda Release); and (iv)
references in this Agreement and the Ancillary Agreements to the Closing Date
relating to the Panda PPA shall be deemed references to the date of the Panda
Release.

       SECTION  4.2      Payment of Estimated Purchase Price. (a) At the
Closing, Buyer will pay or cause to be paid to Seller by wire transfer of
immediately available funds to an account previously designated in writing by
Seller an amount in United States dollars equal to the sum of (a) Two Billion
Six Hundred Fifty Million Dollars ($2,650,000,000.00), (b) an amount equal to
the Estimated Non-Fuel Related Adjustment Amount, (c) an amount expended by
Seller between the date hereof and the Closing Date for Permitted Capital
Expenditures pursuant to Section 7.1(b)(viii) (the "Estimated Purchase Price").
In addition, at the Closing, Buyer will promptly pay Seller an amount equal to
the Closing Severance Expenses, as contemplated by Section 2.3(a)(x) hereof.

         (b)      At least 5 Business Days prior to the Closing Date, Seller
shall provide to Buyer its good faith estimate of the Final Non-Fuel Related
Adjustment Amount as of the last day of the month preceding the Closing Date,
which estimate shall be certified in writing by an appropriate officer of Seller
(the "Estimated Non-Fuel Related Adjustment Amount"). On or before the Closing
Date, Seller shall provide to Buyer a report which details the amounts expended
by Seller between the date hereof and the Closing Date for Permitted Capital
Expenditures pursuant to Section 7.1(b)(viii) (the "Permitted Capital
Expenditure Report").

                              ARTICLE V

                  Representations and Warranties of Seller

         Seller represents and warrants to Buyer as follows:

<PAGE>   21

         SECTION  5.1   Organization; Qualification. Seller is a corporation
duly incorporated, validly existing and in good standing under the laws of the
Commonwealth of Virginia and the District of Columbia and has all requisite
corporate power and authority to own, lease and operate the Auctioned Assets and
to carry on the business of the Auctioned Assets as currently conducted.

         SECTION  5.2   Authority Relative to This Agreement. Seller has all
necessary corporate power and authority to execute and deliver this Agreement
and the Ancillary Agreements and to consummate the transactions contemplated
hereby and thereby. The execution and delivery by Seller of this Agreement and
the Ancillary Agreements and the consummation by Seller of the transactions
contemplated hereby and thereby have been duly and validly authorized by the
Board of Directors of Seller or by a committee thereof to whom such authority
has been delegated and no other corporate proceedings on the part of Seller are
necessary to authorize this Agreement or the Ancillary Agreements or the
consummation of the transactions contemplated hereby or thereby. This Agreement
and the Ancillary Agreements have been duly and validly executed and delivered
by Seller and, assuming that this Agreement and the Ancillary Agreements
constitute valid and binding agreements of Buyer and each other party thereto,
subject to the receipt of the Seller Required Regulatory Approvals and the Buyer
Required Regulatory Approvals, constitute valid and binding agreements of
Seller, enforceable against Seller in accordance with their respective terms.

         SECTION  5.3   Consents and Approvals; No Violation.

           (a)    Subject to obtaining the Seller Required Regulatory Approvals
and the Buyer Required Regulatory Approvals, neither the execution and delivery
of this Agreement or the Ancillary Agreements by Seller nor the consummation of
the transactions contemplated hereby or thereby or the sale by Seller of the
Auctioned Assets pursuant to this Agreement will (i) conflict with or result in
any breach of any provision of the Certificate of Incorporation or By-laws of
Seller, (ii) except as set forth on Schedule 5.3(a), result in a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
license, agreement, lease or other instrument or obligation to which Seller is a
party or by which Seller, or any of the Auctioned Assets, may be bound, except
for such defaults (or rights of termination, cancellation or acceleration) as to
which requisite waivers or consents have been obtained or which would not,
individually or in the aggregate, create a Material Adverse Effect, or (iii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Seller, or the Auctioned Assets, except for such violations which
would not, individually or in the aggregate, create a Material Adverse Effect.

<PAGE>   22

         (b)      Except for (i) the filings by Seller and Buyer required by the
HSR Act and the expiration or earlier termination of all waiting periods under
the HSR Act, and (ii) the Required Regulatory Approvals set forth on Schedule
5.3(b) attached hereto (collectively, the "Seller Required Regulatory
Approvals"), no declaration, filing or registration with, or notice to, or
authorization, consent or approval of any Governmental Authority is necessary
for the consummation by Seller of the transactions contemplated hereby or by the
Ancillary Agreements, other than such declarations, filings, registrations,
notices, authorizations, consents or approvals (A) which, if not obtained or
made, would not individually or in the aggregate, create a Material Adverse
Effect or (B) which relate to the Transferable Permits.

       SECTION 5.4         Personal Property. Except for Permitted Exceptions,
Seller has good and marketable title, free and clear of all Encumbrances, to all
personal property included in the Auctioned Assets.

         SECTION 5.5    Real Estate. Except for Permitted Exceptions, Seller
has good and marketable title, free and clear of all Encumbrances, to all Buyer
Real Estate. Schedule 5.5(a) contains legal descriptions of the Buyer Real
Estate. The most recent real property surveys in the possession of Seller with
respect to the Buyer Real Estate or any portion thereof are listed on Schedule
5.5(b).

         SECTION 5.6    Leases. As of the date of this Agreement, Seller is
not a tenant under any real property leases which are material to the Auctioned
Assets.

         SECTION 5.7    Certain Contracts and Arrangements. (a) Except for
(i) any contract or agreement listed on Schedule 2.2(a)(iv) (the "Material
Contracts") and (ii) Contracts which will expire prior to the Closing Date or
that are permitted to be entered into under this Agreement, Seller is not a
party to any contract which is material to the business or operations of the
Auctioned Assets.

         (b)      Each Contract (i) constitutes a valid and binding obligation
of Seller, and, to the Knowledge of Seller, of the other parties thereto, and
(ii) to the Knowledge of Seller, is in full force and effect.

         (c)      Except as set forth on Schedule 5.7 attached hereto, to the
Knowledge of the Seller, there is not, under any of the Contracts, any default
or event which, with notice or lapse of time or both, would constitute a
material default by Seller, except for such events of default and other events
as to which requisite waivers or consents have been obtained or which would not,
individually or in the aggregate, create a Material Adverse Effect.

         SECTION 5.8    Legal Proceedings. Except as set forth on Schedule
5.8 or in the Filed Seller SEC Documents, as of the date of this Agreement,
there are no claims, actions, proceedings or investigations pending or, to the

<PAGE>   23

Knowledge of Seller, threatened against or relating to Seller with respect to
the business or operations of the Auctioned Assets, before any Governmental
Authority which would, individually or in the aggregate, be reasonably expected
to create a Material Adverse Effect. With respect to the business or operations
of the Auctioned Assets, Seller is not, as of the date of this Agreement,
subject to any outstanding judgment, rule, order, writ, injunction or decree of
any Governmental Authority which could create a Material Adverse Effect. The
representations and warranties of Seller set forth in this Section 5.8 shall not
apply to, and do not cover, any environmental matters which, with respect to any
representations and warranties of Seller, are exclusively governed by Section
5.10.

         SECTION 5.9    Permits; Compliance with Law. Except as set forth on
Schedule 5.9 or in the Filed Seller SEC Documents, Seller is in current
compliance with all Permits necessary to conduct the business and operations of
the Auctioned Assets as currently conducted, and, to the Knowledge of Seller,
Seller is otherwise in current compliance with all laws, statutes, orders,
rules, regulations, ordinances or judgments of any Governmental Authority
applicable to the business and operations of the Auctioned Assets, except for
such failures to comply with such Permits, or such failures to be in compliance
with such laws, statutes, orders, rules, regulations, ordinances or judgments,
which would not, individually or in the aggregate, create a Material Adverse
Effect. The representations and warranties of Seller set forth in this Section
5.9 shall not apply to, and do not cover, any environmental matters which, with
respect to any representations and warranties of Seller, are exclusively
governed by Section 5.10.

         SECTION 5.10   Environmental Matters.

         (a)      Except as set forth in Schedule 5.10(a) or disclosed in the
Filed Seller SEC Documents, Seller holds, and is in compliance with all
Environmental Permits required for Seller to conduct the business and operations
of the Auctioned Assets as currently conducted under applicable Environmental
Laws, and, to the Knowledge of Seller, Seller is otherwise in current compliance
with all applicable Environmental Laws on the date hereof with respect to the
business and operations of the Auctioned Assets, except for such failures to
hold or comply with such Environmental Permits, or such failures to be in
compliance with such applicable Environmental Laws on the date hereof, which
would not, individually or in the aggregate, create a Material Adverse Effect.

         (b)      Except as set forth in Schedule 5.10(b) or disclosed in the
Filed Seller SEC Documents, Seller has not received any written notice of a
violation of any Environmental Law, or been notified that it is a potentially
responsible party under the Federal Comprehensive Environmental Response,
Compensation, and Liability Act or any similar state law with respect to any
real property included in the

<PAGE>   24

Buyer Real Estate or any Off-Site location, except for such matters under such
Environmental Laws as would not, individually or in the aggregate, create a
Material Adverse Effect.

         (c)      To the Knowledge of Seller, no Release of Hazardous Substances
has occurred at, from, in, on, or under the real property included in the Buyer
Real Estate that has given, or could give rise to Environmental Liabilities
under Environmental Laws, except for such Environmental Liabilities which (i)
are disclosed in the environmental reports set forth on Schedule 5.10(c)
attached hereto, or (ii) would not, individually or in the aggregate, have a
Material Adverse Effect.

For purposes of the representations and warranties made in this Article V, the
Seller specifically disclaims any representations and warranties with respect to
standards of performance for new stationary sources promulgated under Section
111 of the Federal Clean Air Act, 42 U.S.C. Section 7411. The representations
and warranties made in this Section 5.10 are the exclusive representations and
warranties of the Seller relating to environmental matters as of the date
hereof.

         SECTION 5.11   Labor Matters. Seller has previously made available
to Buyer copies of all collective bargaining agreements to which Seller is a
party or is subject and which relate to the business or operations of the
Auctioned Assets. With respect to the business and operations of the Auctioned
Assets, as of the date of this Agreement, (a) Seller is in compliance with all
applicable laws regarding employment and employment practices, terms and
conditions of employment and wages and hours, (b) Seller has not received
written notice of any unfair labor practice complaint against Seller pending
before the National Labor Relations Board, (c) there is no labor strike,
slowdown or stoppage actually pending or, to the Knowledge of Seller, threatened
against or affecting Seller, (d) Seller has not received notice that any
representation petition respecting the employees of Seller has been filed with
the National Labor Relations Board, (e) no arbitration proceeding arising out of
or under collective bargaining agreements is pending against Seller and (f)
Seller has not experienced any primary work stoppage since December 31, 1998,
except, in the case of each of the foregoing clauses, for such matters as would
not, individually or in the aggregate, create a Material Adverse Effect.

         SECTION 5.12   ERISA; Benefit Plans. Schedule 5.12 sets forth a list of
all material deferred compensation, profit-sharing, retirement and pension plans
and all material bonus and other material employee benefit or fringe benefit
plans maintained, or with respect to which contributions have been made, by
Seller with respect to current or former employees employed in connection with
the power generation operations of the Generating Facilities (collectively,
"Benefit Plans").

<PAGE>   25

Seller and each trade or business (whether or not incorporated) which are or
have ever been under common control, or which are or have ever been treated as a
single employer, with Seller under Section 414(b), (c), (m) or (o) of the Code
(an "ERISA Affiliate") have fulfilled their respective obligations under the
minimum funding requirements of Section 302 of ERISA, and Section 412 of the
Code, with respect to each Benefit Plan which is an "employee pension benefit
plan" as defined in Section 3(2) of ERISA and each such plan is in compliance in
all respects with the presently applicable provisions of ERISA and the Code,
except for such failures to fulfill such obligations or comply with such
provisions which would not, individually or in the aggregate, create a Material
Adverse Effect. Neither Seller nor any ERISA Affiliate has incurred any
liability under Section 4062(b) of ERISA, or any withdrawal liability under
Section 4201 of ERISA, to the Pension Benefit Guaranty Corporation in connection
with any Benefit Plan which is subject to Title IV of ERISA which liability
remains outstanding, and there has not been any reportable event (as defined in
Section 4043 of ERISA) with respect to any such Benefit Plan (other than a
reportable event with respect to which the 30-day notice requirement has been
waived by the PBGC). Neither Seller nor any ERISA Affiliate or parent
corporation, within the meaning of Section 4069(b) or Section 4212(c) of ERISA,
has engaged in any transaction, within the meaning of Section 4069(b) or Section
4212(c) of ERISA. No Benefit Plan and no "employee pension benefit plan" (as
defined in Section 3(2) of ERISA) maintained by Seller or any ERISA Affiliate or
to which Seller or any ERISA Affiliate has contributed is a multiemployer plan.

         SECTION 5.13   Taxes. With respect to the Auctioned Assets and trades
or businesses associated with the Auctioned Assets, (a) all Tax Returns required
to be filed have been filed and (b) all Taxes shown to be due on such Tax
Returns, and all Taxes otherwise owed, have been paid in full, except to the
extent that any failure to file or any failure to pay any Taxes would not,
individually or in the aggregate, create a Material Adverse Effect. No written
notice of deficiency or assessment has been received from any taxing authority
with respect to liabilities for Taxes of Seller in respect of the Auctioned
Assets which has not been fully paid or finally settled or which is not being
contested in good faith through appropriate proceedings, except for any such
notices regarding Taxes which would not, individually or in the aggregate,
create a Material Adverse Effect. There are no outstanding agreements or waivers
extending the applicable statutory periods of limitation for Taxes associated
with the Auctioned Assets for any period, except for any such agreements or
waivers which would not, individually or in the aggregate, create a Material
Adverse Effect.

         SECTION 5.14   Undisclosed Liabilities. With respect to the Auctioned
Assets, there are no liabilities or obligations of any nature or kind (absolute,
accrued, contingent or otherwise) that would have been required to be set forth
on a balance sheet in respect of the Auctioned Assets or in the notes thereto
prepared in

<PAGE>   26

accordance with GAAP, as applied by Seller in connection with its December 31,
1999 balance sheet, except for any such liabilities or obligations which (a) are
disclosed in or contemplated or permitted by this Agreement or the Ancillary
Agreements (including the Assumed Obligations), (b) are disclosed in the
Information Memorandum, (c) are disclosed in the Filed Seller SEC Documents, (d)
have been incurred in the ordinary course of business, or (e) which would not,
individually or in the aggregate, create a Material Adverse Effect.

         SECTION 5.15   Brokers. No broker, finder or other person is entitled
to any brokerage fees, commissions or finder's fees in connection with the
transaction contemplated hereby by reason of any action taken by Seller, except
Navigant Consulting, Inc. and Merrill Lynch & Co., which are acting for and at
the expense of Seller.

         SECTION 5.16   Insurance. Seller carries policies of insurance covering
fire, workers' compensation, property all-risk, comprehensive bodily injury,
property damage liability, automobile liability, product liability, completed
operations, explosion, collapse, contractual liability, personal injury
liability and other forms of insurance relating to the Auctioned Assets, or
otherwise self-insures in accordance with all statutory and regulatory criteria
against any such liabilities, which insurance is in such amounts, has such
deductibles and retentions and is underwritten by such companies as would be
obtained by a reasonably prudent electric power business.

         SECTION 5.17   Disclaimers. EXCEPT FOR THE REPRESENTATIONS AND
WARRANTIES EXPRESSLY SET FORTH IN THIS ARTICLE V, THE AUCTIONED ASSETS ARE BEING
SOLD AND TRANSFERRED "AS IS, WHERE IS", AND SELLER IS NOT MAKING ANY OTHER
REPRESENTATIONS OR WARRANTIES WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED,
CONCERNING SUCH AUCTIONED ASSETS (INCLUDING ANY RELATING TO LIABILITIES,
OPERATIONS OF THE GENERATING FACILITIES, CONDITION, VALUE OR QUALITY OF THE
AUCTIONED ASSETS OR THE PROSPECTS (FINANCIAL OR OTHERWISE), RISKS OR OTHER
INCIDENTS OF THE AUCTIONED ASSETS) OR WITH RESPECT TO THIS AGREEMENT OR THE
ANCILLARY AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SELLER
SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE,
SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE AUCTIONED
ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF
ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL
REQUIREMENTS, OR THE APPLICABILITY OF ANY GOVERNMENTAL REQUIREMENTS, INCLUDING
BUT NOT LIMITED

<PAGE>   27

TO ANY ENVIRONMENTAL LAWS, OR WHETHER SELLER POSSESSES SUFFICIENT REAL PROPERTY
OR PERSONAL PROPERTY TO OPERATE THE AUCTIONED ASSETS. EXCEPT AS OTHERWISE
EXPRESSLY PROVIDED IN SECTION 5.10 HEREOF, SELLER FURTHER SPECIFICALLY DISCLAIMS
ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR
LIABILITY OR POTENTIAL LIABILITY ARISING UNDER ENVIRONMENTAL LAWS WITH RESPECT
TO THE AUCTIONED ASSETS, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY BUYER.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SELLER MAKES NO REPRESENTATION
OR WARRANTY WITH RESPECT TO THE INFORMATION SET FORTH IN, OR CONTEMPLATED BY,
THE INFORMATION MEMORANDUM.

                              ARTICLE VI

                  Representations and Warranties of Buyer

            Buyer represents and warrants to Seller as follows:

         SECTION 6.1    Organization. Buyer is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its business as is now being conducted.

         SECTION 6.2    Authority Relative to This Agreement. Buyer has all
necessary corporate power and authority to execute and deliver this Agreement
and the Ancillary Agreements to which it is party and to consummate the
transactions contemplated hereby and thereby. The execution and delivery by
Buyer of this Agreement and such Ancillary Agreements and the consummation by
Buyer of the transactions contemplated hereby and thereby have been duly and
validly authorized by the Board of Directors of Buyer and no other corporate
proceedings on the part of Buyer are necessary to authorize this Agreement or
such Ancillary Agreements or the consummation of the transactions contemplated
hereby or thereby. This Agreement and such Ancillary Agreements have been duly
and validly executed and delivered by Buyer and, assuming that this Agreement
and the Ancillary Agreements constitute valid and binding agreements of Seller
and each other party thereto, subject to the receipt of the Buyer Required
Regulatory Approvals and the Seller Required Regulatory Approvals, this
Agreement and the Ancillary Agreements constitute valid and binding agreements
of Buyer, enforceable against Buyer in accordance with their respective terms.

         SECTION 6.3    Consents and Approvals; No Violation.

<PAGE>   28

         (a)      Subject to obtaining the Buyer Required Regulatory Approvals
and the Seller Required Regulatory Approvals, neither the execution and delivery
of this Agreement or the Ancillary Agreements to which it is party by Buyer nor
the consummation of the transactions contemplated hereby or thereby or the
purchase by Buyer of the Auctioned Assets pursuant to this Agreement will (i)
conflict with or result in any breach of any provision of the [Organizational
Documents] of Buyer, (ii) result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement, lease or
other instrument or obligation to which Buyer or any of its subsidiaries is a
party or by which any of their respective assets may be bound or (iii) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
Buyer, or any of its assets, except, in the case of clause (ii) and (iii), for
such failures to obtain a necessary consent, defaults and violations which would
not, individually or in the aggregate, have a Buyer Material Adverse Effect.

         (b)      Except for (i) the filings by Buyer and Seller required by the
HSR Act and the expiration or earlier termination of all waiting periods under
the HSR Act, and (ii) the Required Regulatory Approvals set forth on Schedule
6.3(b) attached hereto (collectively, the "Buyer Required Regulatory
Approvals"), no declaration, filing or registration with, or notice to, or
authorization, consent or approval of any Governmental Authority is necessary
for the consummation by Buyer of the transactions contemplated hereby or by the
Ancillary Agreements, other than such declarations, filings, registrations,
notices, authorizations, consents or approvals which relate to the Transferable
Permits.

         SECTION 6.4    Availability of Funds. Buyer has sufficient funds
available to it or has received binding written commitments (copies of which
have heretofore been delivered to Seller) from one or more nationally recognized
financial institutions to provide sufficient funds on the Closing Date to pay
the Estimated Purchase Price.

         SECTION 6.5    Brokers. No broker, finder or other person is entitled
to any brokerage fees, commissions or finder's fees in connection with the
transaction contemplated hereby by reason of any action taken by Buyer, except
Credit Suisse First Boston Corporation, which is acting for and at the expense
of Buyer.

         SECTION 6.6    No Knowledge of Seller's Breach. Buyer has no Knowledge
of any breach by Seller of any representation or warranty of Seller, or of any
other condition or circumstance that would excuse Buyer from its timely
performance of its obligations hereunder. Buyer shall notify promptly Seller,
with respect to Seller's representations and warranties or such other conditions
or

<PAGE>   29

circumstances, if any such information comes to Buyer's attention prior to the
Closing.

         SECTION 6.7    Qualified Buyer. Buyer is qualified to obtain any
Permits and Environmental Permits necessary for Buyer to own and operate the
Auctioned Assets as of the Closing Date. Without limiting the foregoing, Buyer
is not aware of any reason or circumstance that would prevent Buyer from
procuring the Buyer Required Regulatory Approvals.

         SECTION 6.8    WARN Act. Buyer does not intend to engage in a "Plant
Closing" or "Mass Lay-off" as such terms are defined in the WARN Act within
sixty days of the Closing Date.

         SECTION 6.9    Financial Representations. Buyer has provided Seller
with the most recent balance sheet, income statement and statement of changes in
cash flows and independent auditors reports for each of the preceding three
fiscal years and most recent interim period. Such financial statements have been
prepared in accordance with GAAP and fairly reflect the financial position and
results of operations of Buyer as at and for the periods therein.

         SECTION 6.10   Legal Proceedings. There are no claims, actions,
proceedings or investigations pending or, to the Knowledge of Buyer threatened
against or relating to Buyer before any Governmental Authority which would,
individually or in the aggregate, be reasonably expected to create a Buyer
Material Adverse Effect. Buyer is not subject to any outstanding judgment, rule,
order, writ, injunction or decree of any Governmental Authority which could
create a Buyer Material Adverse Effect.

                              ARTICLE VII

                        Covenants of the Parties

         SECTION 7.1    Conduct of Business Relating to the Auctioned Assets.

           (a)    Except with the prior written consent of Buyer (such consent
not to be unreasonably withheld) or as required to effect the purchase and sale
of the Auctioned Assets and related transactions contemplated by this Agreement,
during the period from the date of this Agreement to the Closing Date, Seller
will operate the Auctioned Assets in the usual, regular and ordinary course and
in accordance with Good Utility Practices, and continue to pay accounts payable
which relate to the Auctioned Assets in a timely manner, consistent with past
practice.

<PAGE>   30

         (b)      Notwithstanding the foregoing, except as contemplated in this
Agreement or the Ancillary Agreements, prior to the Closing Date, without the
prior written consent of Buyer (such consent not to be unreasonably withheld),
Seller will not:

                  (i)      except for Permitted Exceptions, grant any
Encumbrance on the Auctioned Assets securing any indebtedness for borrowed money
or guarantee or other liability for the obligations of any Person;

                  (ii)     make any material change in the levels of fuel
inventory and supplies, materials and spare parts inventory customarily
maintained by Seller with respect to the Auctioned Assets, other than consistent
with past practice;

                  (iii)    sell, lease (as lessor), transfer or otherwise
dispose of, any of the Auctioned Assets, other than assets that become obsolete
or assets used, consumed or replaced in the ordinary course of business
consistent with past practice;

                  (iv)     except as contemplated by Sections 7.9 and 7.17 with
respect to the Unassigned PPAs, terminate, materially extend or otherwise
materially amend any of the Material Contracts (other than in accordance with
their respective terms) or waive any default by, or release, settle or
compromise any material claim against, any other party thereto;

                  (v)      amend any of the Transferable Permits, other than (A)
Transferable Permits not material to the operations of the Auctioned Assets as
currently conducted, (B) as reasonably necessary to complete the transfer of
Transferable Permits as contemplated hereby, and (C) routine renewals or
non-material modifications or amendments;

                  (vi)     enter into any Contract for the purchase, sale or
storage of fuel (other than in the ordinary course of business) with respect to
the Auctioned Assets (whether commodity or transportation) with a term in excess
of 12 months and not terminable on or before the Closing Date either (A)
automatically, or (B) by option of Seller (or, after the

<PAGE>   31

Closing, by Buyer) in its sole discretion, if the aggregate payments under such
commitment for fuel and all other outstanding commitments for fuel (not
previously approved by Buyer) would exceed $5,000,000;

                  (vii)    except in the case of capital expenditures covered by
clause (viii) below, enter into any Contract with respect to the Auctioned
Assets for goods or services not addressed in clauses (i) through (vi) with a
term in excess of 12 months, if the aggregate future liability or receivable
outstanding on the date for measurement for the purpose of this covenant for all
such Contracts would be in excess of $1,000,000, not including any such Contract
terminable by notice of not more than 30 days without penalty or cost (other
than de minimis administrative costs); provided, however, that notwithstanding
any other provision of this Agreement to the contrary, Seller may enter into any
Contract reasonably necessary to effect the physical, legal or operational
separation of the sites on which the Auctioned Assets are located or to
otherwise implement the change of ownership contemplated hereby, or subdivision,
of such sites or implement the provisions of the Ancillary Agreements;

                  (viii)   make, or commit to make, any capital expenditures
except (A) those capital expenditures described on Schedule 7.1(b)(viii), (B)
those capital expenditures which do not exceed in the aggregate $2,000,000 (in
addition to those other capital expenditures permitted under this subsection
(viii)), (C) those capital expenditures which are approved by Buyer, or (D)
those capital expenditures which are mandated by a law or regulation of a
Governmental Authority; provided, however, that, in the case of clause (D),
Seller will not make any such mandated capital expenditures (unless the failure
by Seller to make such capital expenditures would have an adverse impact upon
the Auctioned Assets) if (y) such mandated capital expenditures are not required
to be made by Seller prior to the Closing Date, and (z) the Buyer assumes
responsibility, at its sole cost, to make such mandated capital expenditures
after the Closing (any capital expenditures described above are the "Permitted
Capital Expenditures");

<PAGE>   32

                  (ix)     enter into any Contract with Affiliates of Seller the
term of which are not indicative of arms-length negotiations;

                  (x)      (A) amend any Benefit Plans, or (B) grant any
Employee an increase in compensation, except in the ordinary course of business
consistent with past practice;

                  (xi)     make any tax election with respect to the Auctioned
Assets; or

                  (xii)    enter into any Contract with respect to the Auctioned
Assets relating to any of the transactions set forth in the foregoing clauses
(i) through (xi).

         (c)      Without limiting the generality of Sections 7.1(a) and (b), to
the extent Section 7.1(a) or (b) prohibits Seller from entering into any
Contract for goods and services in connection with maintenance or capital
expenditures, Buyer agrees that Seller may request Buyer's consent to enter into
such Contract, such consent not to be unreasonably withheld, and to the extent
Buyer so consents, all liabilities and obligations under such Contract shall
constitute Assumed Obligations and Buyer shall otherwise reimburse Seller for
all its expenditures thereunder.

         (d)      Notwithstanding anything in this Section 7.1 to the contrary,
Seller may take any action, incur any expense or enter into any obligation with
respect to the Auctioned Assets to the extent that (i) all obligations and
liabilities arising with respect thereto do not constitute Assumed Obligations,
(ii) such actions are at Seller's expense and are deemed by Seller to be
necessary, or (iii) Seller otherwise provides that such obligations and
liabilities shall not be assumed or retained by Buyer.

         SECTION 7.2    Access to Information.

            (a)   Between the date of this Agreement and the Closing Date,
Seller will, subject to the Confidentiality Agreement, during ordinary business
hours and upon reasonable notice (i) give Buyer and its representatives
reasonable access to all books, records, personnel, plants, offices and other
facilities and properties constituting the Auctioned Assets, including for the
purpose of observing the operation by Seller of the Auctioned Assets, (ii)
permit Buyer to make such reasonable inspections thereof as Buyer may reasonably
request, (iii) furnish Buyer with such financial and operating data and other
information with respect to the Auctioned Assets as Buyer may from time to time
reasonably request, (iv) furnish

<PAGE>   33
Buyer upon request a copy of each material report, schedule or other document
with respect to the Auctioned Assets filed by Seller with, or received by Seller
from, any PSC or FERC; provided, however, that (A) any such activities shall be
conducted in such a manner as not to interfere unreasonably with the operation
of the Auctioned Assets, (B) Seller shall not be required to take any action
which would constitute a waiver of the attorney-client privilege and (C) Seller
need not supply Buyer with (1) any information or access which Seller is under a
legal obligation not to supply or (2) any information which Seller has
previously supplied to Buyer. Notwithstanding anything in this Section 7.2 to
the contrary, (i) Seller will not be required to provide such information or
access to any employee records other than Transferred Employee Records, (ii)
Buyer shall not have the right to perform or conduct any environmental sampling
or testing at, in, on, around or underneath the Auctioned Assets and (iii)
Seller shall not be required to provide such access or information with respect
to any Retained Asset or Retained Liabilities.

                  (b)      From and after the Closing Date, for a period of no
less than 7 years, Buyer shall retain all Operating Records (whether in
electronic form or otherwise) relating to the Auctioned Assets on or prior to
the Closing Date. Buyer also agrees that, from and after the Closing Date,
Seller shall have the right, upon reasonable request to Buyer, to have access
to, or receive from Buyer copies of, any Operating Records or other information
in Buyer's possession relating to the Auctioned Assets on or prior to the
Closing Date and required by Seller in order to comply with applicable law.
Seller shall reimburse Buyer for its reasonable costs and expenses incurred in
connection with the foregoing sentence. If the Buyer shall desire to dispose of
any Operating Records or other information contemplated above, Buyer shall,
prior to such disposition, give Seller a reasonable opportunity to segregate and
remove such records and information as it may select.

       SECTION 7.3      Consents and Approvals; Transferable Permits.

                  (a)      Seller and Buyer shall cooperate with each other and
(i) prepare and file (or otherwise effect) as soon as practicable all
applications, notices, petitions and filings with respect to and (ii) use their
reasonable best efforts to obtain (A) the Seller Required Regulatory Approvals
and the Buyer Required Regulatory Approvals and (B) any other consents,
approvals or authorizations of any other Governmental Authorities or third
parties that are necessary to consummate the transactions contemplated by this
Agreement or the Ancillary Agreements other than such consents, individually or
in the aggregate, create a Material Adverse Effect. Without limiting the
generality of the foregoing, (1) each Party agrees to, upon the other party's
request, support such other Party's applications for regulatory approvals of the
purchase and sale of the Auctioned Assets contemplated by this Agreement, and
(2) Buyer and Seller agree to defend any lawsuits or other legal proceedings,
<PAGE>   34

whether judicial or administrative, challenging this Agreement or the Ancillary
Agreements, or the consummation of the transactions contemplated hereby or
thereby, including seeking to have any stay or temporary restraining order
entered by any Governmental Authority vacated or reversed.

                  (b)      Upon execution of this Agreement, Seller shall
commence the process of transferring to Buyer the Transferable Permits,
including completing and filing applications and related documents with the
appropriate Governmental Authorities. Seller hereby reserves the right to
modify, alter or amend any Transferable Permit or to refuse to correct
violations or deficiencies in respect of any Transferable Permit as long as such
modification, alteration, amendment or refusal would not, individually or in the
aggregate, create a Material Adverse Effect.

                  (c)      Seller shall use its reasonable best efforts to
cooperate with Buyer in the transfer of Transferable Permits to Buyer by
Closing. If in the sole discretion of Seller, the transfer of any Transferable
Permit cannot be completed by Closing, Buyer is hereby authorized, but not
required, to act as Seller's representative and agent in respect of such
Transferable Permit and to do all things necessary for effecting transfer of
such Transferable Permit as soon after the Closing as is practicable, with
Seller remaining the Transferable Permit "holder of record" in such case until
such transfer is completed. In the case of each such Transferable Permit, Seller
shall, to the maximum extent permitted by law and such Transferable Permit,
enter into such reasonable arrangements with Buyer as are necessary to provide
Buyer with the benefits and obligations of such Transferable Permit. If in the
sole discretion of Seller, Buyer is able to complete the transfer of any
Transferable Permit after Closing without the occurrence of any event that, if
such event had occurred between the execution of this Agreement and the Closing,
would have created, individually or in the aggregate, a Material Adverse Effect,
Seller may substitute Buyer in its place and stead as the Party responsible for
completing the transfer of such Transferable Permit.

         SECTION 7.4    Further Assurances. Subject to the terms and conditions
of this Agreement, each of the Parties will use its reasonable best efforts to
take, or cause to be taken, as soon as possible, all action, and to do, or cause
to be done, as soon as possible, all things necessary, proper or advisable under
applicable laws and regulations to consummate the sale of the Auctioned Assets
pursuant to this Agreement as soon as possible, including using its reasonable
best efforts to ensure satisfaction of the conditions precedent to each Party's
obligations hereunder. Prior to Buyer's submission of any application with a
Governmental Authority for a regulatory approval, Buyer shall submit such
application to Seller for review and comment and Buyer shall incorporate into
such application any revisions reasonably requested by Seller. Neither of the
Parties will, without prior written consent of the other Party, take or fail to
take, or permit their respective Affiliates to take or fail to
<PAGE>   35

take, any action, which would reasonably be expected to prevent or materially
impede, interfere with or delay the consummation, as soon as possible, of the
transactions contemplated by this Agreement or the Ancillary Agreements.

         SECTION 7.5    Public Statements. The Parties shall consult with each
other prior to issuing any public announcement, statement or other disclosure
with respect to this Agreement, the Ancillary Agreements or the transactions
contemplated hereby or thereby, and shall not issue any such public
announcement, statement or other disclosure prior to such consultation, except
as may be required by law.

         SECTION 7.6    Tax Matters.

                  (a)      All transfer and sales taxes (including (i) sales tax
on the sale or purchase of the Auctioned Assets imposed by Governmental
Authorities, (ii) transfer tax on the conveyance of interest in real property
imposed by Governmental Authorities, and (iii) any petroleum business taxes and
similar excise taxes on sales of petroleum based products imposed by
Governmental Authorities) incurred in connection with this Agreement and the
transactions contemplated hereby shall be borne by Buyer. Buyer shall prepare
and file in a timely manner any and all Tax Returns or other documentation
relating to such taxes; provided, however, that, to the extent required by
applicable law, Seller will join in the execution of any such Tax Returns or
other documentation relating to any such taxes. Buyer shall provide to Seller
copies of each Tax Return described in the proviso in the preceding sentence at
least 30 days prior to the date such Tax Return is required to be filed.

                  (b)      At Seller's election, but on no less than 10 Business
Days' notice to Buyer, the transfer of some or all of the Auctioned Assets and
the receipt of the amount payable by Buyer to Seller pursuant to Section 3.1
hereof shall be made through a qualified intermediary in a manner satisfying the
requirements of Treasury Regulation Section 1.1031(k)-1(g); provided, however,
that Seller shall pay and be responsible for any incremental costs associated
with such use of a qualified intermediary.

         SECTION 7.7    Bulk Sales or Transfer Laws. Buyer acknowledges that
Seller will not comply with the provisions of any bulk sales or transfer laws of
any jurisdiction in connection with the transactions contemplated by this
Agreement. Buyer hereby waives compliance by Seller with the provisions of the
bulk sales or transfer laws of all applicable jurisdictions.

         SECTION 7.8    Witness Services. At all times from and after the
Closing Date, each Party shall use reasonable best efforts to make available to
the other
<PAGE>   36

Party, upon reasonable written request, its and its subsidiaries' then current
or former officers, directors, employees (including former employees of Seller)
and agents as witnesses to the extent that (i) such persons may reasonably be
required by such requesting Party in connection with any claim, action,
proceeding or investigation in which such requesting Party may be involved and
(ii) there is no conflict between Buyer and Seller in such claim, action,
proceeding or investigation. Such other Party shall be entitled to receive from
such requesting Party, upon the presentation of invoices for such witness
services, payments for such amounts, relating to supplies, disbursements and
other out-of-pocket expenses and direct and indirect costs of employees who are
witnesses, as may be reasonably incurred in providing such witness services.

         SECTION 7.9    Control of Litigation. The Buyer and Seller agree and
acknowledge that Seller shall be entitled exclusively to control, defend and
settle any litigation, administrative or regulatory proceeding, and any
investigation or remediation activity arising out of or related to any
Unassigned PPAs, Retained Assets or Retained Liabilities, and Buyer agrees to
cooperate fully in connection therewith. Without Buyer's prior written consent,
Seller shall not settle any litigation, administrative or regulatory proceeding
relating to an Unassigned PPA that would result in a material adverse effect on
the rights of Buyer hereunder. Buyer and Seller agree and acknowledge that Buyer
shall be entitled to participate at its expense and assume control of any
litigation, administrative or regulatory proceeding, exclusively arising out of
or related to any Assumed Obligations, and Seller agrees to cooperate fully in
connection therewith. Anything contained in this Agreement to the contrary
notwithstanding, no Party shall be entitled to assume the defense of any
litigation, administrative or regulatory proceeding or investigation if such
litigation, administrative or regulatory proceeding or investigation seeks an
order, injunction or other equitable relief for other than monetary damages
against the other Party which, if successful, would materially adversely affect
the business of such other Party.

         SECTION 7.10   Confidentiality. Buyer hereby agrees to comply with its
obligations to keep confidential certain information in accordance with the
terms set forth in the Confidentiality Agreement.

         SECTION 7.11   Risk of Loss.

                  (a)      Except as otherwise provided for in this Section
7.11, from the date hereof through the Closing Date, all risk of loss or damage
to the assets and properties included in the Auctioned Assets shall be borne by
Seller (other than loss or damage caused by the acts or negligence of Buyer or
any of its employees, officers, agents or representatives, which loss or damage
shall be the responsibility of Buyer).
<PAGE>   37

                  (b)      If, before the Closing Date, all or any portion of
the Auctioned Assets are (1) taken by eminent domain or are the subject of a
pending or (to the Knowledge of the Seller) contemplated taking which has not
been consummated, or (2) damaged or destroyed by fire or other casualty, Seller
shall notify Buyer promptly in writing of such fact. If the fair market value of
the Auctioned Assets that are the subject of, or are adversely affected by, such
taking or loss is one percent (1%) or less of the fair market value of the
Auctioned Assets (as estimated in good faith by Seller), Buyer and Seller agree
that such taking or loss shall not have any effect on (or otherwise impede in
any manner) the transactions contemplated hereby, and Buyer shall be entitled to
an assignment of all of Seller's right, title and interest in and to any related
award or insurance proceeds. If (1) the fair market value of the Auctioned
Assets that are the subject of, are adversely affected by such taking or loss is
in excess of one percent (1%) of the fair market value of the Auctioned Assets
(as estimated in good faith by Seller in accordance with the preceding sentence)
and (2) Seller has not notified Buyer of its intention to cure such taking or
loss within 30 days after its occurrence, Buyer and Seller shall negotiate in
good faith a fair and equitable adjustment to the Purchase Price and, upon such
settlement, consummate the transactions contemplated by this Agreement pursuant
to the terms of this Agreement. If no such settlement is reached within 60 days
after Seller has notified Buyer of such taking or casualty, Buyer or Seller may
terminate this Agreement pursuant to Section 11.1.

         SECTION 7.12   Tax Exempt Financing.

                  (a)      Buyer understands and agrees that:

                           (i)      those certain facilities of the Seller
listed on Schedule 7.12 attached hereto (the "Exempt Facilities") have been
financed, and refinanced, in whole or in part, with the proceeds of the issuance
and sale by various Governmental Authorities of industrial development revenue
bonds or private activity bonds as set forth on Schedule 7.12 attached hereto
(collectively, the "Revenue Bonds") the interest on which, with certain
exceptions, is excluded from gross income for purposes of federal income
taxation; and Seller is the economic obligor in respect of such bonds;

                           (ii)     The basis for such exclusion is the use of
the Exempt Facilities for the purpose of (A) the abatement or control of
atmospheric or water pollution or contamination and/or (B) the collection,
storage, treatment, utilization, processing or final disposal of solid waste
and/or (C) the collection, storage, treatment, utilization, processing or
<PAGE>   38

final disposal of sewage, such qualifying purposes being discussed in more
detail in (b) below;

                           (iii)    The use of the Exempt Facilities for a
purpose other than a qualifying purpose indicated in subsection (ii) above could
impair (A) such exclusion from gross income of the interest on such bonds,
possibly with retroactive effect, unless appropriate remedial action were taken
(which could include prompt defeasance or redemption of such bonds) and/or (B)
the deductibility of payment by Seller of interest based on the restrictions in
Section 150 (b) of the Code; and

                           (iv)     Any breach by Buyer of its obligations
under this Section 7.12 could result in the incurrence by Seller of additional
costs and expenses, including without limitation, increased interest costs, loss
of the interest deduction for tax purposes and transaction costs relating to any
refinancing, redemption and/or defeasance of all or part of the Revenue Bonds,
and Buyer will be liable to Seller for such additional costs and expenses.

                           (b)      i)       Buyer agrees that it shall not use,
or permit the use of, the Exempt Facilities for any purpose other than the
continuing use of such Exempt Facilities for

                                    (A)      abating or controlling atmospheric
or water pollution or contamination by removing, altering, disposing of or
storing pollutants, contaminants, waste or heat, all as contemplated in U.S.
Treasury Regulations Section 1.103-8(g);

                                    (B)      the collection, storage, treatment,
utilization, processing or final disposal of solid waste, all as contemplated in
U.S. Treasury Regulations Section 1.103-8(f); or

                                    (C)      the collection, storage, treatment,
utilization, processing or final disposal of sewage, all as contemplated in U.S.
Treasury Regulations Section 1.103-8(f)
<PAGE>   39

unless Buyer has obtained at its own expense an opinion addressed to Seller of
nationally recognized bond counsel reasonably acceptable to Seller ("Bond
Counsel") that such use will not impair (x) the exclusion from gross income of
the interest on any issue of Revenue Bonds for Federal income tax purposes or
(y) the deductibility of Seller's payments of interest based on the restrictions
in Section 150(b) of the Code.

                           (ii)     Buyer reasonably expects, as of the date of
this Agreement, that the Exempt Facilities will continue to be used for the
qualifying purposes set forth in subsection (i) above, and for no other purpose,
for the remainder of their useful lives.

                  (c)      It is expressly understood and agreed that the
provisions of clause (b) above shall not prohibit Buyer from (i) suspending the
operation of the Exempt Facilities on a temporary basis, and/or (ii) selling
exclusively for cash Exempt Facilities consisting of personal property, in whole
or in part, including any sale for scrap, provided that the operation of the
Generating Plant served by such Exempt Facilities shall not theretofore have
been, and is not then being, terminated on a permanent basis, and provided
further that the proceeds of such sale of the Exempt Facilities shall within six
months from the date of sale be expended to acquire replacement property to be
used for the same qualifying purpose as the Exempt Facilities so sold, and/or
(iii) any other suspension or termination of operation or sale, exchange,
transfer or other disposition of Exempt Facilities, provided that Buyer has
obtained at its own expense an opinion addressed to Seller of Bond Counsel that
the failure to take this action will not impair (x) the exclusion from gross
income of the interest on any issue of Revenue Bonds for Federal income tax
purposes or (y) the deductibility of Seller's payments of interest based on the
restrictions in Section 150(b) of the Code.

                  (d)      Buyer agrees that it shall not issue, or have issued
on its behalf, any tax-exempt bonds to finance or refinance its acquisition of
the Exempt Facilities; provided that it is expressly understood and agreed that
this clause (d) shall not prohibit the use of tax-exempt bonds to finance or
refinance any improvement to the Exempt Facilities made after the date of
acquisition or to any assets other than the Exempt Facilities.

                  (e)      Buyer agrees that it shall give Seller at least 180
days' prior written notice of any suspension or termination of the operation of
the Exempt Facilities, or any part thereof, and of any sale, exchange, transfer
or other disposition of the Exempt Facilities, or any part thereof, including,
but not limited to, a sale for scrap, such written notice to be provided whether
or not an opinion of Bond Counsel is required to be obtained in accordance with
clause (c).
<PAGE>   40

                  (f)      If Seller shall desire to refund any Revenue Bonds,
Buyer shall cooperate with Seller and with Bond Counsel with respect to such
refunding bonds and shall provide upon request any representations, agreements
or covenants that are reasonably requested concerning its compliance to such
date and/or in the future with the representations, agreements and covenants
made herein.

                  (g)      If Buyer shall sell, exchange, transfer or otherwise
dispose of the Exempt Facilities to a third party, Buyer shall cause to be
included in the documentation relating to such transaction covenants and
agreements on the part of such third party for the benefit of the Seller, and as
requested by the Seller, the trustee for the holders of any Revenue Bonds
substantially identical to those on the part of Buyer contained in this Section
7.12.

                  (h)      The covenants and agreements on the part of Buyer
contained in this Section 7.12 shall continue in effect so long as any of the
Revenue Bonds, including any refunding bonds issued hereafter to refund any
Revenue Bonds, shall remain outstanding. Seller shall notify Buyer promptly when
there shall be no Revenue Bonds outstanding and, at the request of the Seller,
the Buyer shall execute further documentation to provide that such covenants and
agreements are also for the benefit of the trustee for the holders of any
Revenue Bonds.

                  (i)      Notwithstanding any provision in this Agreement to
the contrary, from and after the Closing Date, Seller agrees that it will remain
primarily liable for, and promptly pay when due, all obligations to pay
principal and interest under the Loan Agreements.

         SECTION 7.13   Compliance with Governmental Agreements. From and after
the Closing Date, Buyer agrees that it will abide by, and comply with, all
existing permit conditions, provisions in the Certificates of Public Convenience
and Necessity issued to the Seller by any PSC, and any other agreements or
arrangements between the Seller and the District of Columbia or the State of
Maryland (or any political subdivision thereof), including provisions or
agreements relating to environmental compliance and mitigation.

         SECTION 7.14   PJM; MAAC. From and after the Closing Date, Buyer shall
maintain membership in good standing in PJM and MAAC, and shall submit to the
governance of the independent system operator established and administered under
the PJM Agreement.

         SECTION 7.15   Trade Names. Seller shall not object to the use by Buyer
of any trade names, trademarks, service marks or logos (and any rights to and in
the same, including any right to use the same) which are not Retained Assets in
<PAGE>   41

connection with its ownership and operation of the Generating Facilities. In
addition, Buyer hereby acknowledges the right of Seller to use such trade names,
trademarks, service marks or logos in connection with Seller's ownership and
operation of the Retained Assets.

         SECTION 7.16   Enforcement of Retained Rights. Notwithstanding any
provision of the Agreement to the contrary, Seller shall be entitled to enforce
all rights and remedies in respect of the Retained Rights in accordance with the
terms and conditions of each PPA, including termination of interconnection and
related services to the applicable Power Seller.

         SECTION 7.17   Conduct of Business Relating to PPAs. Prior to Closing,
except as expressly contemplated by this Agreement, required by the terms of any
PPA or consented to by Buyer (which shall not be unreasonably withheld), Seller
shall not amend, modify or extend any PPA, or waive performance of the
obligations of any party thereunder, which, would have a material adverse effect
on the rights of Buyer hereunder.

                                  ARTICLE VIII

                                   Conditions

         SECTION 8.1    Conditions Precedent to Each Party's Obligation To
Effect the Purchase and Sale. The respective obligations of each Party to effect
the purchase and sale of the Auctioned Assets shall be subject to the
satisfaction or waiver by such Party on or prior to the Closing Date of the
following conditions:

                  (a)      all Seller Required Regulatory Approvals and Buyer
Required Regulatory Approvals shall have been obtained by Seller and Buyer, as
the case may be, and all conditions to effectiveness prescribed therein or
otherwise by law, regulation or order shall have been satisfied by such Parties;
provided, that the Seller will not be required to close if any Seller Required
Regulatory Approval contains terms and conditions that create a Regulatory
Material Adverse Effect;

                  (b)      no preliminary or permanent injunction or other order
or decree by any Federal or state court of competent jurisdiction and no statute
or regulation enacted by any Governmental Authority prohibiting the consummation
of the purchase and sale of the Auctioned Assets (collectively, "Restraints")
shall be in effect; and

                  (c)      the execution and delivery of each Ancillary
Agreement, by each Party thereto.
<PAGE>   42

         SECTION 8.2    Conditions Precedent to Obligation of Buyer To Effect
the Purchase and Sale. The obligation of Buyer to effect the purchase and sale
of the Auctioned Assets contemplated by this Agreement shall be subject to the
satisfaction or waiver by Buyer on or prior to the Closing Date of the following
additional conditions:

                  (a)      Seller shall have performed its covenants and
agreements contained in this Agreement which are required to be performed on or
prior to the Closing Date, except where the failure to perform such covenants
and agreements would not, individually or in the aggregate, create a Material
Adverse Effect;

                  (b)      the representations and warranties of Seller which
are set forth in this Agreement shall be true and correct as of the date of this
Agreement and as of the Closing Date, as if made at and as of such time (except
to the extent expressly made as of an earlier date, in which case as of such
date), except where the failure of such representations and warranties to be so
true and correct (without giving effect to any limitation as to "materiality" or
"Material Adverse Effect" set forth therein) would not, individually or in the
aggregate, create a Material Adverse Effect;

                  (c)      Buyer shall have received a certificate from an
authorized officer of Seller, dated the Closing Date, to the effect that, to the
best of such officer's Knowledge, the conditions set forth in Section 8.2(a) and
(b) have been satisfied;

                  (d)      all material Permits and Environmental Permits
required for Buyer to conduct the business and operations of the Auctioned
Assets as currently conducted shall have been transferred or will be
transferable to Buyer, or shall have been obtained or will be obtained by Buyer,
except where the failure to obtain such material Permits or Environmental
Permits will not have, individually or in the aggregate, a Material Adverse
Effect;

                  (e)      Buyer shall have received (i) the deeds of conveyance
substantially in the form of Exhibit J, and (ii) an opinion from Dickstein
Shapiro Morin & Oshinsky LLP or other counsel reasonably acceptable to Buyer,
dated the Closing Date, and reasonably satisfactory in form and substance to
Buyer covering the matters set forth in Exhibit K;

                  (f)      Buyer shall have received a Foreign Investment in
Real Property Tax Act Certification and Affidavit, executed by Seller; and

                  (g)      Seller shall have delivered to Buyer all such other
instruments as shall, in the reasonable opinion of the Buyer and its counsel, be
(i) necessary to transfer to
<PAGE>   43

Buyer the Auctioned Assets in accordance with this Agreement or (ii) required to
consummate the transactions contemplated by this Agreement.

         SECTION 8.3    Conditions Precedent to Obligation of Seller To Effect
the Purchase and Sale. The obligation of Seller to effect the purchase and the
sale of the Auctioned Assets contemplated by this Agreement shall be subject to
the satisfaction or waiver by Seller on or prior to the Closing Date of the
following additional conditions:

                  (a)      Buyer shall have performed its covenants and
agreements contained in this Agreement which are required to be performed on or
prior to the Closing Date, except where the failure to perform such covenants
and agreements would not, individually or in the aggregate, create a Buyer
Material Adverse Effect;

                  (b)      the representations and warranties of Buyer which are
set forth in this Agreement shall be true and correct as of the date of this
Agreement and as of the Closing Date, as if made at and as of such time (except
to the extent expressly made as of an earlier date, in which case as of such
date), except where the failure of such representations and warranties to be so
true and correct (without giving effect to any limitation as to "materiality" or
"Buyer Material Adverse Effect" set forth therein) would not, individually or in
the aggregate, create a Buyer Material Adverse Effect;

                  (c)      Seller shall have received a certificate from an
authorized officer of Buyer, dated the Closing Date, to the effect that, to the
best of such officer's Knowledge, the conditions set forth in Section 8.3(a) and
(b) have been satisfied;

                  (d)      Seller shall have received an opinion from Troutman
Sanders LLP or other counsel reasonably acceptable to Seller, dated the Closing
Date, and reasonably satisfactory in form and substance to Seller covering the
matters set forth in Exhibit L;

                  (e)      Buyer shall have provided evidence in form and
substance reasonably satisfactory to Seller of compliance by Buyer with its
obligations under Article IX (including, without limitation, a certificate from
an authorized officer of Buyer, dated the Closing Date, which identifies the
Non-Union Employees who did not receive from the Buyer a Qualified Offer
pursuant to Section 9.1(d));

                  (f)      If a Guarantee Agreement has been entered into:

                           (i)      the Guarantee Agreement shall be in full
force and effect;
<PAGE>   44

                           (ii)     the Guarantor shall have performed in all
material respects its covenants and agreements contained in the Guarantee
Agreement which are required to be performed on or prior to the Closing Date;

                           (iii)    the representations and warranties of the
Guarantor which are set forth in the Guarantee Agreement shall be true and
correct as of the date of the Guarantee Agreement and as of the Closing Date, as
if made at and as of such time (except to the extent expressly made as of an
earlier date, in which case as of such date), except where the failure of such
representations and warranties to be so true and correct (without giving effect
to any limitation as to "materiality" or "Guarantor Material Adverse Effect" set
forth therein) would not, individually or in the aggregate, create a Guarantor
Material Adverse Effect (as defined therein);

                           (iv)     Seller shall have received a certificate
from an authorized officer of the Guarantor, dated the Closing Date, to the
effect that, to the best of such officer's Knowledge, the conditions set forth
in Sections 8.3(f)(ii) and (iii) have been satisfied;

                           (v)      Seller shall have received an opinion from
Troutman Sanders LLP or other counsel reasonably acceptable to Seller, dated the
Closing Date, and reasonably satisfactory in form and substance to Seller
covering the matters set forth in Exhibit M.

                  (g)      Buyer shall have delivered to Seller all such other
instruments as shall, in the reasonable opinion of the Seller and its counsel,
be (i) necessary for the Buyer to assume the Assumed Obligations in accordance
with this Agreement or (ii) required to consummate the transactions contemplated
by the Agreement.

                  (h)      Panda shall have consented to a Novation of the Panda
PPA satisfactory in form and substance to Seller, or Seller shall have received
an order from the MDPSC determining that the transactions contemplated by
Section II of Schedule 2.4 hereto with respect to the Panda PPA do not violate
the Panda PPA, which order shall have become final and non-appealable, and which
is satisfactory in form and substance to Seller.
<PAGE>   45

                                   ARTICLE IX

                                Employee Matters

         SECTION 9.1    Employee Matters.

                  (a)      Buyer shall offer employment, effective as of the
Closing Date, to all employees of Seller employed at the Generating Facilities
and the Support Operations as of the Closing Date who are covered by the IBEW
Collective Bargaining Agreement, including those employees absent from active
service due to illness or leave of absence, whether paid or unpaid, other than
those employees on long term disability as of the Closing Date who have received
written notice from Seller approving requests for long term disability as of the
Closing Date (the "Union Employees"), pursuant to and in accordance with the
IBEW Collective Bargaining Agreement and applicable law. Each Union Employee who
becomes employed by Buyer pursuant to this Section 9.1(a) is referred to herein
as a "Transferred Union Employee".

                  (b)      Any Union Employee who refuses an offer of employment
from Buyer made in accordance with the terms of this Section 9.1 shall be
treated by Seller as a terminated employee and shall not be entitled to any
severance or other benefits from Buyer in connection therewith.

                  (c)      Buyer shall provide benefits to Transferred Union
Employees substantially equivalent to those provided under the IBEW Collective
Bargaining Agreement. In doing so, Buyer may use different providers, establish
its own benefit plans or use its existing plans. There shall be no duplication
of benefits. Buyer shall recognize service with Seller for purposes of
eligibility and vesting and benefit calculations in any benefit plan, program,
or fringe benefit arrangement. For purposes of health care coverage, Buyer shall
waive all limitations regarding pre-existing condition exclusions, actively at
work exclusions and waiting periods for Transferred Union Employees. During the
calendar year in which Closing occurs, all health care expenses incurred by
Transferred Union Employees that were qualified to be taken into account for
purposes of satisfying any deductible or out-of-pocket limit under Seller's
health care plans shall be taken into account for purposes of satisfying any
deductible or out-of-pocket limit under Buyer's health care plans for such
calendar year. Buyer shall give all Transferred Union Employees full credit for
all vacation, sick leave or comp time benefits accrued and not used as of the
Closing. The Buyer shall provide substantially equivalent retiree medical
benefits to the Transferred Union Employees only with no duplication of benefits
and such benefits shall be subject to any limitations in existing plan documents
and the IBEW Collective Bargaining Agreement and related documents.
<PAGE>   46

                  (d)      Buyer may, but shall not be required to, offer
employment, effective as of the Closing Date, to employees of Seller (other than
Union Employees) who are (i) employed at the Generating Facilities or (ii)
corporate support personnel engaged in the Support Operations (collectively, the
"Non-Union Employees" and, together with Union Employees, "Employees"). Within
sixty (60) days after the date hereof, Buyer shall notify Seller as to the
identity of those Non-Union Employees to whom it intends to offer employment,
provided that, during such period, Seller shall, upon reasonable notice and to
the extent not disruptive to the operation of the Auctioned Assets, provide
Buyer with reasonable access to Non-Union Employees and, to the extent permitted
by applicable law, their respective Transferred Employee Records. In the event
that Buyer does not make a Qualified Offer to any Non-Union Employees, the Buyer
shall be solely responsible for the payment to such Non-Union Employees of all
severance costs payable under the Seller's 1998 Reorganization Severance Plan
(treating the consummation of the sale of the Auctioned Assets hereunder as an
event entitling such Non-Union Employee to severance benefits thereunder). The
Buyer shall have no other obligations with respect to any Non-Union Employees to
which it does not make a Qualified Offer. Each Non-Union Employee who becomes
employed by Buyer pursuant to this Section 9.1(d) shall be referred to herein as
a "Transferred Non-Union Employee" and, together with Transferred Union
Employees, the "Transferred Employees." Any offer of employment to a Non-Union
Employee that satisfies all of the following requirements is referred to herein
as a "Qualified Offer":

                           (1)      Buyer shall pay and provide such Transferred
Non-Union Employee annual compensation, bonus and other incentive opportunities
(the "Total Cash Compensation") at a rate substantially equivalent to such
Transferred Non-Union Employee's Total Cash Compensation in the most recent
calendar year ending prior to the Closing (which shall include cash compensation
in respect of such calendar year paid or payable after such calendar year).

                           (2)      The location of such Transferred Non-Union
Employee's workplace must be within a fifty (50) mile radius of the District of
Columbia metropolitan area; provided, however, that if any Non-Union Employee's
commute to the Buyer's workplace following the Closing will be increased by more
than fifty (50) miles (as compared to the number of miles traveled by such
Non-Union Employee to the Seller's work place immediately prior to the Closing),
the Buyer shall be required to pay such Non-Union Employee a $3,500 relocation
allowance.

                  (e)      Buyer shall provide benefits to Transferred Non-Union
Employees substantially equivalent to those provided by Seller as of the Closing
Date. In doing so, Buyer may use different providers, establish its own benefit
plans or use its existing plans. There shall be no duplication of benefits.
Buyer shall recognize service with Seller for purposes of eligibility and
vesting and benefit calculations in
<PAGE>   47

any benefit plan, program, or fringe benefit arrangement. For purposes of health
care coverage, Buyer shall waive all limitations regarding pre-existing
condition exclusions, actively at work exclusions and waiting periods for
Transferred Non-Union Employees. During the calendar year in which Closing
occurs, all health care expenses incurred by Transferred Non-Union Employees
that were qualified to be taken into account for purposes of satisfying any
deductible or out-of-pocket limit under Seller's health care plans shall be
taken into account for purposes of satisfying any deductible or out-of-pocket
limit under Buyer's health care plans for such calendar year. Buyer shall give
all Transferred Non-Union Employees full credit for all vacation, sick leave or
comp time benefits accrued and not used as of the Closing. The Buyer shall
provide substantially equivalent retiree medical benefits to the Transferred
Non-Union Employees only with no duplication of benefits and such benefits shall
be subject to any limitations in existing plan documents.

         SECTION 9.2    Pension Plans. With respect to each Transferred
Employee's accrued benefit (based on service and compensation as of the Closing
Date) (the "Closing Date Benefits"), Seller shall, effective as of the Closing
Date, amend the General Retirement Plan ("Seller's Pension Plan") to (i)
recognize service with Buyer for purposes of vesting the Closing Date Benefits
in such Seller's Pension Plan; (ii) recognize service with Buyer toward
eligibility for receipt of subsidized early retirement and optional benefit
forms with respect to the Closing Date Benefits under Seller's Pension Plan;
(iii) provide that retirement from Buyer's service shall be deemed retirement
from active employment with Seller for purposes of eligibility for receipt of
subsidized early retirement and optional benefit forms with respect to the
Closing Date Benefits under Seller's Pension Plan; and (iv) provide that Closing
Date Benefits cannot commence until the earlier of such Transferred Employee's
actual retirement from Buyer's employment or attainment of age 65. The pension
plan of Buyer ("Buyer's Pension Plan") shall recognize all prior service with
Seller for purposes of eligibility for participation, vesting, early retirement
subsidies and benefit accrual for Transferred Employees, and may offset the
Closing Date Benefits from benefit accruals thereunder. Buyer and Seller shall
provide each other with such records and information as may be necessary or
appropriate to carry out their respective obligations under this Section 9.2 for
the purposes of administration of Buyer's Pension Plan and Seller's Pension
Plan.

         SECTION 9.3    Buyer's Savings Plan. As soon as practicable, and in any
event within 90 days after the Closing Date, Buyer shall establish a defined
contribution pension plan (or plans) and trust (or trusts) intended to qualify
under Sections 401(a) and 501(a) of the Code or amend an existing plan or plans
satisfying such requirements (such plan or plans referred to as "Buyer's Savings
Plan") in which all Transferred Employees shall be eligible to participate as of
the later of the Closing Date or the Buyer's Savings Plan's effective date.
Buyer's Savings Plan shall provide for deferral options and employer matching
contributions
<PAGE>   48

with respect to the Transferred Employees who are participants (or eligible to
be participants) in the Potomac Electric Power Company Savings Plan ("Seller's
Savings Plan") as of the Closing Date (such employees, the "Transferred Savings
Employees") that are no less favorable than those provided immediately prior to
the Closing Date to the Transferred Savings Employees under Seller's Savings
Plans (including an opportunity to make up for any lost deferrals and/or
employer matching contributions that were unavailable because of a delay between
the Closing Date and the effective date of Buyer's Savings Plan). Contributions
to the Seller's Savings Plans with respect to the Transferred Savings Employees
shall cease effective as of the Closing Date. Each Transferred Savings Employee
shall be afforded the option of transferring his or her account balance into the
Buyer's Savings Plan, including any outstanding loan balances attributable to
such accounts; provided, however, that if Seller is able to obtain a favorable
ruling from the Internal Revenue Service to the effect that the consummation of
the transactions contemplated hereby shall constitute a sale of substantially
all of the assets used in a trade or business within the meaning of Section
401(k)(10) of the Code, or that there has been a separation from service as a
non-continuation of the same trade or business within the meaning of Section
401(k)(2)(B)(i)(I) of the Code, each Transferred Savings Employee shall be
afforded the option of maintaining his or her account balance under Seller's
Savings Plan, rolling over his or her account balance, including any outstanding
loan balances attributable to such accounts into the Buyer's Savings Plan,
rolling over his or her account balance into an individual retirement account or
cashing in his or her account balance (subject to applicable withholding taxes
and penalties). Any such transfers or rollovers shall satisfy the requirements
of Section 414(l) of the Code and Section 208 of ERISA and shall be in the form
of cash or other property, as Seller and Buyer shall mutually agree prior to
such transfer or rollover (which Buyer agrees shall include promissory notes
evidencing loans from Seller's Savings Plan to Transferred Savings Employees
that are outstanding on the Closing Date). Prior to such transfer or rollover,
Buyer will provide Seller with such documents and other information as Seller
shall reasonably request to assure itself that Buyer's Savings Plan and the
trust or trusts established pursuant thereto (i) provide for voluntary
participant after-tax contributions and (ii) contain participant loan provisions
and procedures necessary to effect the orderly transfer of participant loan
balances associated with the transfer or rollover. In the event that a
Transferred Savings Employee shall elect to leave his or her account balance in
Seller's Savings Plans, Buyer shall cooperate with Seller in providing that any
outstanding loan attributable to such account balance shall be repaid through
payroll deductions from Buyer's payroll. Upon such transfer, Buyer's Savings
Plan shall assume all liabilities and obligations whatsoever with respect to all
amounts transferred from Seller's Savings Plan to Buyer's Savings Plan in
respect of the Transferred Savings Employees and Seller and its Affiliates and
Seller's Savings Plan shall be relieved of all such liabilities and obligations.
Notwithstanding anything in this Article IX to the contrary, no such transfer or
rollover shall take place unless and until Seller has received written evidence
of the adoption of Buyer's Savings Plan
<PAGE>   49

and the trust (or trusts) thereunder by Buyer and either (A) a copy of a
favorable determination letter issued by the Internal Revenue Service and
satisfactory to Seller's counsel with respect to Buyer's Savings Plan or (B) an
opinion, satisfactory to Seller's counsel, of Buyer's counsel to the effect that
the terms of Buyer's Savings Plan and its related trust or trusts qualify under
Sections 401(a) and 501(a) of the Code. Buyer and Seller shall provide each
other with such records and information as may be necessary or appropriate to
carry out their obligations under this Section 9.3 for the purposes of
administration of Buyer's Savings Plan, and they shall cooperate in the filing
of documents required by the transactions described herein.

         SECTION 9.4    Severance Liabilities. Buyer shall provide severance
benefits (i) as contemplated by Schedule 1.1(c) attached hereto, and (ii) as set
forth in Seller's 1998 Reorganization Severance Plan (treating the consummation
of the sale of the Auctioned Assets hereunder and the events specified in this
Section as events entitling such Non-Union Employee to severance benefits
thereunder) to any Transferred Non-Union Employee (i) who, within the 12-month
period immediately following the Closing Date, is terminated by Buyer or any of
its Affiliates other than for cause (as defined on Schedule 1.1(c)) or (ii) with
respect to such Persons who have received and accepted Qualifying Offers, whose
terms and conditions of employment with Buyer or any of its Affiliates are
changed during the 12-month period immediately following the Closing Date, such
that such terms and conditions fail to satisfy all of the requirements set forth
in Section 9.1(d) above.

         SECTION 9.5    COBRA. Buyer shall provide notice of and the opportunity
to purchase continuation coverage as required by COBRA to any dependent or
former dependent of a Transferred Union Employee or Transferred Non-Union
Employee who incurs a "qualifying event" (as such term is defined in COBRA) on
or after the Closing Date, or who incurs a "qualifying event" prior to the
Closing Date (other than a termination of employment or death of the employee)
as to which notice is not provided to Seller or Buyer until the Closing Date or
thereafter.

         SECTION 9.6    WARN Act. Buyer shall be responsible, with respect to
the Auctioned Assets, for performing and disclosing all requirements under the
WARN Act and applicable state and local laws and regulations for the
notification of its employees of any "employment loss" within the meaning of the
WARN Act which occurs following the Closing Date.
<PAGE>   50

                                   ARTICLE X

                     Indemnification and Dispute Resolution

         SECTION 10.1   Indemnification.

                  (a)      Seller will indemnify and hold harmless Buyer and its
Affiliates and their respective directors, officers, employees and agents
(collectively with Buyer and its Affiliates, the "Buyer Indemnitees") from and
against any and all claims, demands or suits by any person, and all losses,
liabilities, damages, obligations, payments, costs and expenses (including
reasonable legal fees and expenses and including costs and expenses incurred in
connection with investigations and settlement proceedings) (each, an
"Indemnifiable Loss"), as incurred, asserted against or suffered by any Buyer
Indemnitee relating to, resulting from or arising out of:

                           (i)      any breach by Seller of any covenant or
agreement of Seller contained in this Agreement or, prior to their expiration in
accordance with Section 12.3, the representations and warranties contained in
Sections 5.1, 5.2, 5.3 and 5.15 hereof;

                           (ii)     any breach by Seller of its obligations
under Section 7.12(i) hereof;

                           (iii)    the Retained Liabilities;

                           (iv)     the Panda Litigation; or

                           (v)      any breach by Seller of any Ancillary
Agreement.

                  (b)      Buyer will indemnify and hold harmless Seller and
its Affiliates and their respective directors, officers, trustees, employees and
agents (collectively with Seller and its Affiliates, the "Seller Indemnitees")
from and against any and all Indemnifiable Losses, as incurred, asserted against
or suffered by any Seller Indemnitee relating to, resulting from or arising out
of:

                           (i)      any breach by Buyer of any covenant or
agreement of Buyer contained in this Agreement or, prior to their expiration in
accordance with Section 12.3, the representations and warranties contained in
Sections 6.1, 6.2, 6.3 and 6.5 hereof;
<PAGE>   51

                           (ii)     the Assumed Obligations (other than any
Indemnifiable Losses resulting from any breach by Seller of its obligations
under Section 7.12(i) hereof);

                           (iii)    any obligation resulting from any action or
inaction of Buyer (A) under any Contract or warranty pursuant to Section 2.4(b)
or Schedule 2.4 attached hereto (whether acting as principal or representative
and agent for Seller or otherwise) or (B) pursuant to any Transferable Permit in
respect of which Seller remains the holder of record after the Closing Date
pursuant to Section 7.3(c);

                           (iv)     any transfer, sales or excise tax
obligations imposed on the Seller arising from the sale or transfer of the
Auctioned Assets; or

                           (v)      any breach by Buyer of any Ancillary
Agreement.

                  (c)      The amount of any Indemnifiable Loss shall be reduced
to the extent that the relevant Buyer Indemnitee or Seller Indemnitee (each, an
"Indemnitee") receives any insurance proceeds with respect to an Indemnifiable
Loss and shall be (i) increased to take account of any Tax Cost incurred by the
Indemnitee arising from the receipt of indemnity payments hereunder and (ii)
reduced to take account of any Tax Benefit realized by the Indemnitee arising
from the incurrence or payment of any such Indemnifiable Loss. If the amount of
any Indemnifiable Loss, at any time subsequent to the making of an indemnity
payment in respect thereof, is reduced by recovery, settlement or otherwise
under or pursuant to any insurance coverage, or pursuant to any claim, recovery,
settlement or payment by or against any other person, the amount of such
reduction, less any costs, expenses or premiums incurred in connection
therewith, will promptly be repaid by the Indemnitee to the Party required to
provide indemnification hereunder (the "Indemnifying Party") with respect to
such Indemnifiable Loss.

                  (d)      To the fullest extent permitted by law, neither Party
nor any Buyer Indemnitee or any Seller Indemnitee shall be liable to the other
Party or any other Buyer Indemnitee or Seller Indemnitee for any claims, demands
or suits for consequential, incidental, special, exemplary, punitive, indirect
or multiple damages connected with or resulting from any breach after the
Closing Date of this Agreement or the Ancillary Agreements (other than breach of
this Article X or as otherwise expressly set forth in any Ancillary Agreement),
or any actions undertaken in connection with or related hereto or thereto,
including any such damages which are based upon breach of contract, tort
(including negligence and
<PAGE>   52

misrepresentation), breach of warranty, strict liability, statute, operation of
law or any other theory of recovery.

                  (e)      The rights and remedies of Seller and Buyer under
this Article X are, solely as between Seller and Buyer, exclusive and in lieu of
any and all other rights and remedies which Seller and Buyer may have under this
Agreement, the Ancillary Agreements (except as otherwise expressly set forth in
any Ancillary Agreement) or otherwise for monetary relief with respect to (i)
any breach of, or failure to perform, any covenant or agreement set forth in
this Agreement or the Ancillary Agreements by Seller or Buyer, (ii) any breach
of any representation or warranty by Seller or Buyer, (iii) the Assumed
Obligations or the Retained Liabilities, and (iv) any obligation in respect of
Section 2.4 or Section 7.3. Each Party agrees that the previous sentence shall
not limit or otherwise affect any non-monetary right or remedy which Party may
have under this Agreement or the Ancillary Agreements or otherwise limit or
affect either Party's right to seek equitable relief, including the remedy of
specific performance.

                  (f)      Buyer and Seller agree that, notwithstanding
Section 10.1(e), each Party shall retain, subject to the other provisions of
this Agreement, including Sections 10.1(d) and 12.3, all remedies at law or in
equity with respect to (i) fraud or willful or intentional breaches of this
Agreement or the Ancillary Agreements and (ii) gross negligence or willful or
wanton acts or omissions to act of any Indemnitee (or any contractor or
subcontractor thereof) on or after the Closing Date.

                  (g)      Seller and Buyer agree that neither Party shall be
responsible to the other Party for any Indemnifiable Loss (relating to the
breach of representations and warranties made by such Party hereunder) pursuant
to Section 10.1(a)(i) or Section 10.1(b)(i), as the case may be, unless and
until the aggregate amount of such Party's Indemnifiable Losses exceeds
$5,000,000. Notwithstanding the foregoing, the aggregate maximum liability of
the Seller to indemnify the Buyer for Indemnifiable Losses (relating to the
breach of representations and warranties made by the Seller hereunder) pursuant
to Section 10(a)(i) shall not exceed an amount in excess of the Purchase Price
paid by the Buyer to the Seller.

         SECTION 10.2   Third Party Claims Procedures.

                  (a)      If any Indemnitee receives notice of the assertion of
any claim or of the commencement of any claim, action, or proceeding made or
brought by any person who is not a Party or an Affiliate of a Party (a "Third
Party Claim") with respect to which indemnification is to be sought from an
Indemnifying Party, the Indemnitee will give such Indemnifying Party reasonably
prompt written notice thereof, but in any event not later than 20 Business Days
after the Indemnitee's receipt of notice of such Third Party Claim; provided,
however, that a failure to give
<PAGE>   53

timely notice will not affect the rights or obligations of any Indemnitee except
if, and only to the extent that, as a result of such failure, the Indemnifying
Party was actually prejudiced. Such notice shall describe the nature of the
Third Party Claim in reasonable detail and will indicate the estimated amount,
if practicable, of the Indemnifiable Loss that has been or may be sustained by
the Indemnitee.

                  (b)      If a Third Party Claim is made against an Indemnitee,
the Indemnifying Party will be entitled to participate in the defense thereof
and, if it so chooses, to assume the defense thereof with counsel selected by
the Indemnifying Party; provided, however, that such counsel is not reasonably
objected to by the Indemnitee; and provided further that the Indemnifying Party
first admits in writing its liability to the Indemnitee with respect to all
material elements of such claim. Should the Indemnifying Party so elect to
assume the defense of a Third Party Claim, the Indemnifying Party will not be
liable to the Indemnitee for any legal expenses subsequently incurred by the
Indemnitee in connection with the defense thereof. If the Indemnifying Party
elects to assume the defense of a Third Party Claim, the Indemnitee will (i)
cooperate in all reasonable respects with the Indemnifying Party in connection
with such defense, (ii) not admit any liability with respect to, or settle,
compromise or discharge, any Third Party Claim without the Indemnifying Party's
prior written consent and (iii) agree to any settlement, compromise or discharge
of a Third Party Claim which the Indemnifying Party may recommend and which by
its terms obligates the Indemnifying Party to pay the full amount of the
liability in connection with such Third Party Claim and releases the Indemnitee
completely in connection with such Third Party Claim. In the event the
Indemnifying Party shall assume the defense of any Third Party Claim, the
Indemnitee shall be entitled to participate in (but not control) such defense
with its own counsel at its own expense. If the Indemnifying Party does not
assume the defense of any such Third Party Claim, the Indemnitee may defend the
same in such manner as it may deem appropriate, including settling such claim or
litigation after giving notice to the Indemnifying Party of the terms of the
proposed settlement and the Indemnifying Party will promptly reimburse the
Indemnitee upon written request. Anything contained in this Agreement to the
contrary notwithstanding, no Indemnifying Party shall be entitled to assume the
defense of any Third Party Claim if such Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than monetary damages
against the Indemnitee which, if successful, would materially adversely affect
the business of the Indemnitee.
<PAGE>   54

                                   ARTICLE XI

                                   Termination

         SECTION 11.1   Termination.

                  (a)      This Agreement may be terminated at any time prior to
the Closing by an instrument in writing signed on behalf of each of the Parties.

                  (b)      This Agreement may be terminated by Seller or Buyer
if the Closing shall not have occurred on or before the date that is 12 months
from the date of this Agreement (the "Termination Date"); provided, however,
that the right to terminate this Agreement pursuant to this Section 11.1(b)
shall not be available (1) to any Party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Closing to occur on or before such date, or (2) to Buyer if the Seller has
provided the Buyer with written notice of its election to postpone the Closing
for up to an eighteen month period from the execution date of this Agreement in
the event that all conditions precedent to Closing set forth in Article VIII
have been satisfied except with respect to those conditions set forth in Section
8.1(a).

                  (c)      This Agreement may be terminated by either Seller or
Buyer if any Restraint having any of the effects set forth in Section 8.1(b)
shall be in effect and shall have become final and nonappealable; provided,
however, that the Party seeking to terminate this Agreement pursuant to this
Section 11.1(c) shall have used its reasonable best efforts to prevent the entry
of and to remove such Restraint.

                  (d)      This Agreement may be terminated by the Party
entitled to do so under the provisions of Section 7.11(b).

                                   ARTICLE XII

                            Miscellaneous Provisions

         SECTION 12.1   Expenses. Except to the extent specifically provided
herein, all costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be borne by the Party incurring such
costs and expenses, whether or not the transactions contemplated hereby are
consummated.
<PAGE>   55

         SECTION 12.2   Amendment and Modification; Extension; Waiver. This
Agreement may be amended, modified or supplemented only by an instrument in
writing signed on behalf of each of the Parties. Either Party may (i) extend the
time for the performance of any of the obligations or other acts of the other
Party, (ii) waive any inaccuracies in the representations and warranties of the
other Party contained in this Agreement or (iii) waive compliance by the other
Party with any of the agreements or conditions contained in this Agreement. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such Party.
The failure of a Party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such rights.

         SECTION 12.3   No Survival of Representations or Warranties. Each and
every representation and warranty contained in this Agreement, other than the
representations and warranties contained in Sections 5.1, 5.2, 5.3 and 5.15 and
6.1, 6.2, 6.3 and 6.5 (which representations and warranties shall survive for 12
months from the Closing Date), shall expire with, and be terminated and
extinguished by the Closing and no such representation or warranty shall survive
the Closing Date. From and after the Closing Date, none of Seller, Buyer or any
officer, director, trustee or Affiliate of any of them shall have any liability
whatsoever with respect to any such representation or warranty. The expiration
of the representations and warranties contained in Sections 5.1, 5.2, 5.3 and
5.15 and 6.1, 6.2, 6.3 and 6.5 shall not affect the Parties' obligations under
Article X if the Indemnitee provided the Indemnifying Party with proper notice
of the claim or event for which indemnification is sought prior to such
expiration.

         SECTION 12.4   Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given (as of the time of delivery or, in
the case of a telecopied communication, of confirmation) if delivered
personally, telecopied (which is confirmed) or sent by overnight courier
(providing proof of delivery) to the Parties at the following addresses (or at
such other address for a Party as shall be specified by like notice):

                  if to Seller, to:

                           Potomac Electric Power Company
                           1900 Pennsylvania Avenue, N.W.
                           Washington, D.C.  20068
                           Telecopier: (202) 261-7889
                           Attention: William T. Torgerson, General Counsel
<PAGE>   56

                  with a copy on or prior to the Closing Date to:

                           Dickstein Shapiro Morin & Oshinsky LLP
                           2101 L Street, N.W.
                           Washington, D.C. 20037
                           Telecopier: (202) 887-0689
                           Attention: Kenneth M. Simon, Esq.

                  if to Buyer, to:

                           Southern Energy, Inc.
                           900 Ashwood Parkway
                           Suite 500
                           Atlanta, Georgia  30338-4780
                           Telecopier: (770) 821-6575
                           Attention: Anne Cleary

                  with a copy on or prior to the Closing Date to:

                           Troutman Sanders LLP
                           1300 I Street, NW
                           Suite 500 East
                           Washington, DC  20005
                           Telecopier: (202) 274-2994
                           Attention: Benjamin L. Israel, Esq.

         SECTION 12.5   Assignment; No Third Party Beneficiaries.

                  (a)      This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the Parties and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any Party,
including by operation of law, without the prior written consent of the other
Party, except (i) in the case of Seller (A) to an Affiliate of Seller or a third
party in connection with the transfer of the Transmission System to such
Affiliate or third party or (B) to a lending institution or trustee in
connection with a pledge or granting of a security interest in all or any part
of the Transmission System and this Agreement and (ii) in the case of Buyer (A)
prior to the Closing, to one or more wholly-owned subsidiaries of Buyer or
lending institutions or other institutional investors acting as lessor to Buyer
or one or more wholly-owned subsidiaries of Buyer, so long as Buyer shall have
duly executed and delivered the Guarantee Agreement and such assignment is for
all of Buyer's rights, interests and obligations hereunder associated with the
asset(s) subject to any such assignment, (B) to an Affiliate of Buyer in
connection with the
<PAGE>   57

transfer of all or part of the Auctioned Assets to such Affiliate and (C) to a
lending institution or trustee in connection with a pledge or granting of a
security interest in the Auctioned Assets and this Agreement; provided, however,
that no assignment or transfer of rights or obligations by either Party shall
relieve it from the full liabilities and the full financial responsibility, as
provided for under this Agreement, unless and until the transferee or assignee
shall agree in writing to assume such obligations and duties and the other Party
has consented in writing to such assumption.

                  (b)      Nothing in this Agreement is intended to confer upon
any other person except the Parties any rights or remedies hereunder or shall
create any third party beneficiary rights in any person, including, with respect
to continued or resumed employment, any employee or former employee of Seller
(including any beneficiary or dependent thereof). No provision of this Agreement
shall create any rights in any such persons in respect of any benefits that may
be provided, directly or indirectly, under any employee benefit plan or
arrangement except as expressly provided for thereunder.

         SECTION 12.6   Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the District of Columbia (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).

         SECTION 12.7   Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         SECTION 12.8   Interpretation. When a reference is made in this
Agreement to an Article, Section, Schedule or Exhibit, such reference shall be
to an Article or Section of, or Schedule or Exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation" or equivalent words. The words
"hereof", "herein" and "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. All terms defined in this Agreement shall have the
defined meanings when used in the Ancillary Agreements and any certificate or
other document made or delivered pursuant hereto or thereto unless otherwise
defined therein. The definitions contained in this Agreement are applicable to
the singular as well as the plural forms of such terms and to the masculine as
well as to the feminine and neuter genders of such term. Any agreement,
instrument, statute, regulation, rule or order defined or referred to herein or
in any agreement or instrument that is referred to herein means such agreement,
instrument, statute, regulation, rule or order as from time to time
<PAGE>   58

amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes, regulations,
rules or orders) by succession of comparable successor statutes, regulations,
rules or orders and references to all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns. Each Party acknowledges that it has been represented by
counsel in connection with the review and execution of this Agreement and,
accordingly, there shall be no presumption that this Agreement or any provision
hereof be construed against the Party that drafted this Agreement.

         SECTION 12.9   Jurisdiction and Enforcement.

                  (a)      Each of the Parties irrevocably submits to the
exclusive jurisdiction of (i) the Superior Court of the District of Columbia and
(ii) the United States District Court for the District of Columbia, for the
purposes of any suit, action or other proceeding arising out of this Agreement
or any transaction contemplated hereby. Each of the Parties agrees to commence
any action, suit or proceeding relating hereto either in the United States
District Court for the District of Columbia or, if such suit, action or
proceeding may not be brought in such court for jurisdictional reasons, in the
Superior Court of the District of Columbia. Each of the Parties further agrees
that service of process, summons, notice or document by hand delivery or U.S.
registered mail at the address specified for such Party in Section 12.4 (or such
other address specified by such Party from time to time pursuant to Section
12.4) shall be effective service of process for any action, suit or proceeding
brought against such Party in any such court. Each of the Parties irrevocably
and unconditionally waives any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in (i) the Superior Court of the District of Columbia and
(ii) the United States District Court for the District of Columbia, and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.

                  (b)      The Parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement or any Ancillary
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the Parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement or any
Ancillary Agreement and to enforce specifically the terms and provision of this
Agreement or any Ancillary Agreement, this being in addition to any other remedy
to which they are entitled at law or in equity.
<PAGE>   59

         SECTION 12.10  Entire Agreement. This Agreement, the Confidentiality
Agreement and the Ancillary Agreements including the Exhibits, Schedules,
documents, certificates and instruments referred to herein or therein and other
contracts, agreements and instruments contemplated hereby or thereby, embody the
entire agreement and understanding of the Parties in respect of the transactions
contemplated by this Agreement. There are no restrictions, promises,
representations, warranties, covenants or undertakings other than those
expressly set forth or referred to herein or therein. This Agreement and the
Ancillary Agreements supersede all prior agreements and understandings between
the Parties with respect to the transactions contemplated by this Agreement
other than the Confidentiality Agreement.

         SECTION 12.11  Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the Parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.

         SECTION 12.12  Conflicts. Except as expressly otherwise provided herein
or therein, in the event of any conflict or inconsistency between the terms of
this Agreement and the terms of any Ancillary Agreement, the terms of this
Agreement shall prevail.
<PAGE>   60

            IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.

                              POTOMAC ELECTRIC POWER COMPANY

                              By: /s/    MARY SHARPE-HAYES
                                  ----------------------------------------
                                  Name:  Mary Sharpe-Hayes
                                  Title: Vice President

                              SOUTHERN ENERGY, INC.

                              By: /s/    ANNE CLEARY
                                  ----------------------------------------
                                  Name:  Anne Cleary
                                  Title: Vice President, Southern
                                         Energy North America,
                                         Inc., as authorized agent
<PAGE>   61

                              Schedule 1.1

                              Definitions

         "Accountants" shall have the meaning set forth in Section 3.2(b).

         "Adjustment Amount" shall have the meaning set forth in Section 3.4.

         "Adjustment Date" shall have the meaning set forth in Section 3.2(c).

         "Adjustment Statement" shall have the meaning set forth in Section
3.2(a).

         "Affiliate" shall have the meaning set forth in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended.

         "Agreement" shall have the meaning set forth in the Preamble.

         "Allocation" shall have the meaning set forth in Section 3.3.

         "Ancillary Agreements" means the Potomac River Lease, the Local Area
Support Agreement, the Transition Power Agreements, the Interconnection
Agreements, the Assignment and Assumption Agreement, Bill of Sale, Guarantee
Agreement, Operating Agreement, the deeds contemplated by Section 8.2(e)(i) and
any other agreement to which Buyer and Seller are party and which is expressly
identified by its terms as an Ancillary Agreement hereunder.

         "Applicable Law" shall have the meaning set forth in Section 3.3.

         "Ash Storage Sites" mean those certain ash storage sites of the Seller
located in Charles County, Maryland, Prince George's County, Maryland, and
Montgomery County, Maryland, as more fully described on Schedule 2.2(a)(iii) and
Schedule 5.5(a) attached to the Agreement.

         "Assignment and Assumption Agreement" means that Assignment and
Assumption Agreement, to be entered into at the Closing by Buyer and Seller, in
substantially the form as Exhibit A attached to the Agreement.

          "Assumed Consent Order Obligations" shall have the meaning set forth
in Section 2.3(a)(iv).
<PAGE>   62

         "Assumed Obligations" shall have the meaning set forth in Section
2.3(a).

         "Auctioned Assets" shall have the meaning set forth in Section
2.2(a).

         "Benefit Plans" shall have the meaning set forth in Section 5.12.

         "Bill of Sale" means that certain Bill of Sale, to be entered into at
the Closing by Buyer (or Buyer's permitted assignees pursuant to Section
12.5(a)) and Seller, in substantially the form as Exhibit B attached to the
Agreement.

         "Business Day" means any day other than Saturday, Sunday and any day
which is a legal holiday or a day on which banking institutions in Washington,
DC are authorized or required by law or other action of a Governmental Authority
to close.

         "Buyer" shall have the meaning set forth in the Preamble to the
Agreement.

         "Buyer Facilities" shall have the meaning given to such term in the
Easements Agreement.

         "Buyer Indemnitees" shall have the meaning set forth in Section
10.1(a).

         "Buyer Material Adverse Effect" means any change or event which would
have a material adverse effect on the ability of the Buyer to consummate the
transactions contemplated by, and discharge its obligations under, the Agreement
and the Ancillary Agreements.

         "Buyer Real Estate" shall have the meaning set forth in Section
2.2(a)(i).

         "Buyer Required Regulatory Approvals" shall have the meaning set forth
in Section 6.3(b).

         "Buyer's Pension Plans" shall have the meaning set forth in Section
9.2.

         "Buyer's Savings Plan" shall have the meaning set forth in Section
9.3.

         "Chalk Point/Morgantown Fuel Pipeline" means the (i) 16" pipeline,
including all components, between the Piney Point petroleum terminal and the
Ryceville Pumping Station and (ii) the 12" pipelines, including all components,
between the Ryceville Pumping Station and the Chalk Point Station
<PAGE>   63
and Morgantown Station, as more fully described on Schedule 5.5(a) attached to
the Agreement.

         "Chalk Point Station" means that certain coal, oil and gas-fueled
generating facility of the Seller located on the Patuxent River in Aquasco,
Maryland (excluding that certain combustion turbine and related assets owned by
Southern Maryland Electric Cooperative, Inc.), as more fully described on
Schedule 2.2(a)(iii) and Schedule 5.5(a) attached to the Agreement.

         "Closing" shall have the meaning set forth in Section 4.1.

         "Closing Adjustment Amount" shall have the meaning set forth in
Section 3.2(c).

         "Closing Date" shall have the meaning set forth in Section 4.1.

         "Closing Date Benefits" shall have the meaning set forth in Section
9.2.

         "Closing Severance Expenses" shall have the meaning set forth in
Section 2.3(a)(x).

         "Code" means the Internal Revenue Code of 1986, as amended.

         "Communications Equipment" means the equipment, systems, switches and
lines used in connection with voice, data and other communications activities.

         "Conemaugh Interest" means the 9.72% undivided ownership interest
held by Seller, as a tenant-in-common, in the Conemaugh Station, together with
the Seller's undivided ownership interest in any related assets held in
undivided ownership with the other Persons having an undivided ownership
interest in the Conemaugh Station (except in the case of Seller's undivided
ownership interest in the Conemaugh Switchyard and the Conemaugh Transmission
Line).

         "Conemaugh Station" means that certain coal-fired generating facility
located on the Conemaugh River in Indiana County, Pennsylvania.

         "Conemaugh Switchyard" means that certain 500kV switchyard, as
described on Schedule 2.2(b)(i) attached to the Agreement.

         "Conemaugh Transmission Line" means that certain 500kV transmission
line, as described on Schedule 2.2(b)(i) attached to the Agreement.

<PAGE>   64
         "Confidentiality Agreement" means the Confidentiality Agreement dated
February 10, 2000 between Seller and Buyer.

         "Contracts" shall have the meaning set forth in Section 2.2(a)(iv).

         "DCPSC" means the Public Service Commission of the District of
Columbia.

         "Dickerson Station" means that certain coal, oil and gas-fuel fired
generating facility of the Seller located on the Potomac River near Dickerson,
Maryland, as more fully described on Schedule 2.2(a)(iii) and Schedule 5.5(a)
attached to the Agreement.

         "Disposed Items" shall have the meaning set forth in Section
2.3(a)(iii).

         "Easements Agreements" mean those certain Easements Agreements, to be
entered into at the Closing by Buyer and Seller, in substantially the form as
Exhibits C-1, C-2, C-3 and C-4 attached to the Agreement.

         "Emission Reduction Credits" means credits, in units that are
established by the environmental regulatory agency with jurisdiction over the
source or facility that has obtained the credits, resulting from a reduction
in the emissions of air pollutants from an emitting source or facility
(including, and to the extent allowable under applicable law, reductions from
retirements, control of emissions beyond that required by applicable law and
fuel switching), that:  (i) have been certified by the Maryland Department of
the Environment or the Virginia Department of Environmental Quality, as the
case may be, as complying with the law and regulations of the State of
Maryland or the Commonwealth of Virginia, as the case may be, governing the
establishment of such credits; or (ii) have been certified by any other
applicable regulatory authority as complying with the law and regulations
governing the establishment of such credits.  Emission Reduction Credits
include certified air emissions reductions, as described above, regardless of
whether the regulatory agency certifying such reductions designates such
certified air emissions reductions by a name other than "emissions reduction
credits", but do not include SO2 Allowances or Nox Allowances.

         "Employees" shall have the meaning set forth in Section 9.1(d).

         "Encumbrances" means any mortgages, pledges, liens, security
interests, conditional and installment sale agreements, activity and use
limitations, exceptions, conservation easements, rights-of-way, deed
restrictions, encumbrances and charges of any kind.

         "Entitlements" means all rights of Seller to receive any capacity,
energy, ancillary services and other benefits under any PPA.

<PAGE>   65

         "Environmental Laws" means all former, current and future Federal,
state, local and foreign laws (including common law), treaties, regulations,
rules, ordinances, codes, decrees, judgments, directives or orders (including
consent orders) and Environmental Permits, in each case, relating to pollution
or protection of the environment or natural resources, including laws relating
to Releases or threatened Releases, or otherwise relating to the generation,
manufacture, processing, distribution, use, treatment, storage, arrangement
for disposal, transport, recycling or handling, of Hazardous Substances.

         "Environmental Liability" means all liabilities, obligations,
damages, losses, claims, actions, suits, judgments, orders, fines, penalties,
fees, expenses and costs, including: (i) remediation costs, engineering costs,
environmental consultant fees, laboratory fees, permitting fees, investigation
costs and defense costs and attorneys' fees and expenses; (ii) any claims,
demands and causes of action relating to or resulting from any personal injury
(including wrongful death, pain, suffering and loss of consortium), property
damage (real or personal) (including nuisance, trespass and diminution of
value) or natural resource damage; and (iii) any penalties, fines or costs
associated with the failure to comply with any Environmental Law.

         "Environmental Permits" means the permits, licenses, consents,
approvals and other governmental authorizations with respect to Environmental
Laws relating primarily to the power generation operations of the Generating
Facilities.

         "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

         "ERISA Affiliate" shall have the meaning set forth in Section 5.12.

         "Estimated Non-Fuel Related Adjustment Amount" shall have the meaning
set forth in Section 4.2(b).

         "Estimated Purchase Price" shall have the meaning set forth in
Section 4.2.

         "Exempt Facilities" means those certain facilities included in the
Auctioned Assets which are listed on Schedule 7.12 attached to the Agreement.

         "FERC" means the Federal Energy Regulatory Commission.

         "Filed Seller SEC Documents" means the reports, schedules, forms,
statements and other documents filed by Seller with the Securities and
Exchange Commission, and publicly available prior to the date of the
Agreement.

         "Final Allocation" shall have the meaning set forth in Section 3.3.

<PAGE>   66

         "Final Fuel Related Adjustment Amount" shall have the meaning set
forth in Section 3.2(a).

         "Final Non-Fuel Related Adjustment Amount" shall have the meaning set
forth in Section 3.2(a).

         "GAAP" shall have the meaning set forth in Section 1.2.

         "Generating Facilities" means the Generating Plants and related
facilities (including the Chalk Point/Morgantown Fuel Pipeline, the Ryceville
Pumping Station, the Production Service Center, and the Ash Storage Sites), as
more fully described on Schedule 2.2(a)(iii) and Schedule 5.5(a) attached to
the Agreement.

         "Generating Plants" means the following power generating plants of
the Seller:  the Potomac River Station; the Dickerson Station; the Chalk Point
Station; and the Morgantown Station.

         "Good Utility Practice" means any of the applicable practices,
methods and acts:

            (i)   required by FERC, NERC, MAAC, PJM Interconnection LLC,
                  the PJM System Operator, or the successor of any of
                  them, whether or not the Party whose conduct is at
                  issue is a member thereof;

            (ii)  required by applicable law or regulations;

            (iii) required by the Pepco Interconnection Standards or
                  the policies and standards of the Seller relating
                  to emergency operations;

            (iv)  otherwise engaged in or approved by a significant
                  portion of the electric utility industry during
                  the relevant time period;

which, in the exercise of reasonable judgment in light of the facts known at
the time the decision was made, could have been expected to accomplish the
desired result at a reasonable cost consistent with law, regulation, good
business practices, reliability, safety, and expedition.  Good Utility
Practice is not intended to be limited to the optimum practice, method, or act
to the exclusion of all others, but rather to be acceptable practices,
methods, or acts generally accepted in the region.

<PAGE>   67
         "Governmental Authority" means any court, administrative or
regulatory agency or commission or other governmental entity or
instrumentality, domestic, foreign or supranational or any department thereof.

         "Greenhouse Gas Emission Reduction Credits" mean with respect to a
Federal or state law or regulation that imposes, or may at any time after the
Closing Date impose, a quantitative limitation on greenhouse gas emissions, or
taxes such emissions, an authorization to emit a unit of greenhouse gases or a
credit against such quantitative limit or taxes with respect to recognized
reductions in greenhouse gases, where greenhouse gases include carbon dioxide,
methane, nitrous oxide, hydrofluorcarbons, perfluorocarbons, and/or sulfur
hexafluoride.

         "Guarantee Agreement" means the Guarantee Agreement to be entered
into at Closing by Guarantor and Seller, substantially in the form of Exhibit
D attached to the Agreement.

         "Guarantor" means any credit-worthy entity, acceptable to Seller,
which agrees to provide an unconditional guarantee to Seller of the full and
punctual payment of Buyer's obligations hereunder and under the Ancillary
Agreements.

         "Hazardous Substances" means (i) any petrochemical or petroleum
products, crude oil or any fraction thereof, ash, radioactive materials, radon
gas, asbestos in any form, urea formaldehyde foam insulation or
polychlorinated biphenyls, (ii) any chemicals, materials, substances or wastes
defined as, included in, or that are alleged or determined by any Person or
Governmental Authority to be included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "restricted hazardous
materials," "extremely hazardous substances," "toxic substances," "PCBs,"
"contaminants," "asbestos" or "pollutants" or similar term in any
Environmental Law, (iii) any other chemical, material, substance or waste
which is prohibited, limited or regulated by any Environmental Law, or (iv)
any noise, electromagnetic radiation, and any other substance or energy which
causes or is alleged to cause personal injury (including wrongful death, pain,
suffering and loss of consortium) or property damage (including nuisance,
trespass and diminution of value).

         "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.

         "IBEW" means Local Union #1900 of the International Brotherhood of
Electrical Workers.

         "IBEW Collective Bargaining Agreement" means that certain Collective
Bargaining Agreement, between the Seller and the IBEW, effective December 8,
1998, as amended from time to time.

<PAGE>   68
         "Income Tax" means any Federal, state, local or foreign Tax or surtax
(i) based upon, measured by or calculated with respect to income, profits or
receipts or (ii) based upon, measured by or calculated with respect to
multiple bases (including corporate franchise taxes) if one or more of the
bases on which such Tax may be based, measured by or calculated with respect
to, is described in clause (i), in each case, together with any interest,
penalties, or additions to such Tax.

         "Indemnifiable Loss" shall have the meaning set forth in Section
10.1(a).

         "Indemnifying Party" shall have the meaning set forth in Section
10.1(c).

         "Indemnitee" shall have the meaning set forth in Section 10.01(c).

         "Information Memorandum" means the Information Memoranda, prepared on
behalf of the Seller, describing the Generating Facilities and the PPAs, and
the materials delivered with such Information Memoranda, as such Information
Memoranda and such materials may have been amended or supplemented.

         "Interconnection Agreements" means those certain Interconnection
Agreements, to be entered into at the Closing by Seller and Buyer,
substantially in the form of Exhibits E-1, E-2, E-3 and E-4 attached to the
Agreement.

         "Interconnection Facilities" shall have the meaning given to such
term in the Interconnection Agreements.

         "Interconnection Services" shall have the meaning set forth in the
Interconnection Agreements.

         "Inventory Survey" shall have the meaning set forth in Section
3.2(a).

         "Knowledge" means the actual knowledge of the directors and executive
officers of the specified Person, which directors and executive officers are
charged with the responsibility for the particular function as of the date of
the Agreement, or with respect to any certificate delivered pursuant to the
Agreement, the date of delivery of such certificate.

         "Loan Agreements" shall have the meaning set forth in Section
2.3(a)(xii).

         "Local Area Support Agreement" means that Local Area Support
Agreement, to be entered into at Closing by Seller and Buyer, substantially in
the form of Exhibit F attached to the Agreement.

<PAGE>   69
         "MAAC" means the Mid-Atlantic Area Council.

         "Material Adverse Effect" means any change, or effect on the
Auctioned Assets, that, individually or in the aggregate, causes the value of
the Auctioned Assets to decrease by more than ten percent (10%) as compared to
the value of the Auctioned Assets immediately prior to the occurrence of such
change or effect, other than (i) any change or effect resulting from changes
in the international, national, regional or local wholesale or retail energy,
capacity or ancillary services electric power markets, (ii) any change or
effect resulting from changes in the international, national, regional or
local markets for fuel, (iii) any change or effect resulting from changes in
the national, regional or local electric transmission systems, (iv) any change
or effect resulting from any bid cap, price limitation, market power
mitigation measure, or other regulatory or legislative measure in respect of
transmission services or the wholesale or retail energy, capacity or ancillary
services markets adopted or approved by FERC, any PSC or any other
Governmental Authority or proposed by any person, (v) any change or effect
resulting from any regulation, rule, procedure or order adopted or proposed by
or with respect to, or related to, the PJM, (vi) any change or effect
resulting from any action or measure taken or adopted, or proposed to be taken
or adopted, by any local, state, regional, national or international
reliability organization, (vii) any change resulting from the failure of any
Employees not to be employed by the Buyer following the Closing, (viii) any
changes in law, or any judgments, orders or decrees that apply generally to
similarly situated Persons, and (ix) any materially adverse change in or
effect on the Auctioned Assets which is cured by Seller before the Closing
Date.  For purposes of determining the occurrence of a Material Adverse
Effect, the initial value of the Auctioned Assets shall be the amount set
forth in clause (a) of Section 3.1.

         "Material Contracts" shall have the meaning set forth in Section
5.7(a).

         "MDPSC" means the Public Service Commission of the State of Maryland.

         "Morgantown Station" means that certain coal/oil-fueled generating
facility of the Seller located on the Potomac River near Newburg, Maryland, as
more fully described on Schedule 2.2(a)(iii) and Schedule 5.5(a) attached to
the Agreement.

         "NERC" means North American Electric Reliability Council or any
successor thereto.

         "Non-Union Employees" shall have the meaning set forth in Section
9.1(d).

         "Novation" shall have the meaning set forth in Schedule 2.4 attached
hereto.

<PAGE>   70

         "NOx Allowances" means nitrogen oxide allowances that have been
allocated to the Seller for the Generating Plants by (i) the Maryland
Department of the Environment under the State of Maryland's NOx Budget Program
authorizing the emission of one ton of nitrogen oxide during the specified
control period, or (ii) the Virginia Department of Environmental Quality under
any budget program which may be established for the Commonwealth of Virginia.

         "OE PPA" collectively means those agreements identified in Item 4 of
Section I of Schedule 2.2(a)(iv) attached hereto.

         "Off-Site" means any location except (i) the Auctioned Assets, the
Potomac River Station Site, and (ii) any location to or under which Hazardous
Substances present or disposed on the Auctioned Assets or the Potomac River
Station Site have migrated or may migrate in the future.

         "Operating Agreement" means that certain Operating Agreement, to be
entered into at the Closing by Buyer and Seller, in substantially the form as
Exhibit G to the Agreement.

         "Operating Records" shall have the meaning set forth in Section
2.2(a)(viii).

          "Panda Litigation" means (i) the litigation captioned Potomac
Electric Power Company v. Panda-Brandywine, L.P., No. S00-CV-1103, filed in
the United States District Court for the District of Maryland, and (ii) the
legal proceedings referenced in Schedule 5.8 hereto.

         "Panda PPA" means that certain PPA identified in Item 5 of Section I
of Schedule 2.2(a)(vi) attached hereto.

         "Panda Release" shall have the meaning set forth in Section
3.4(a)(i).

         "Party" shall have the meaning set forth in the Preamble.

         "Pepco Interconnection Standards" means Pepco's Interconnection and
Parallel Operating Guideline as amended from time to time.

         "Permits" means the permits, licenses, consents, approvals and other
governmental authorizations (other than with respect to Environmental Laws)
relating primarily to the power generation operations of the Generating
Facilities.

         "Permitted Capital Expenditures" shall have the meaning set forth in
Section 7.1(b)(viii).
<PAGE>   71

         "Permitted Exceptions" means (i) all exceptions, restrictions,
easements, charges, rights-of-way and monetary and nonmonetary encumbrances
which are set forth in any Permits or Environmental Permits, (ii) statutory
liens for current taxes or assessments not yet due or delinquent or the
validity of which is being contested in good faith by appropriate proceedings,
(iii) mechanics', carriers', workers', repairers' and other similar liens
arising or incurred in the ordinary course of business relating to obligations
as to which there is no default on the part of Seller or the validity of which
are being contested in good faith by appropriate proceedings, (iv) purchase
money security interests in respect of personal property arising or incurred
in the ordinary course of business, (v) zoning, entitlement, conservation
restriction and other land use and environmental regulations by Governmental
Authorities, (v)  all matters disclosed on those surveys listed on Schedule
5.5(b) to the Agreement and any other facts that would be disclosed by an
accurate survey and physical inspection of the Buyer Real Estate, (vi)
Encumbrances, easements or other restrictions created pursuant to or
contemplated by any Ancillary Agreement, (vii) Encumbrances of record or
Encumbrances otherwise disclosed to Buyer in the Agreement or the Ancillary
Agreements with respect thereto, (viii) restrictions and regulations imposed
by the PJM, any Governmental Authority or any local, state, regional, national
or international reliability council and (ix) such other Encumbrances or
imperfections in or failure of title which would not, individually or in the
aggregate, create a Material Adverse Effect.

         "Person" means any individual, partnership, limited liability
company, joint venture, corporation, trust, unincorporated organization or
Governmental Authority.

         "PJM" means the Pennsylvania-New Jersey-Maryland interconnected power
pool operated under the PJM Agreement and any successor thereto including any
regional transmission operator, independent system operator, transco, or any
other independent system administrator that possesses operational or planning
control over the Transmission System.

         "PJM Agreement" means the Amended and Restated Operating Agreement of
the PJM Interconnection LLC dated as of June 2, 1997.

         "PJM Control Area" shall mean the control area recognized by NERC as
the PJM Control Area.

         "PJM Interconnection LLC" means the independent system operator  of
the PJM Control Area pursuant to the PJM Agreement and the PJM Tariff.

         "PJM System Operator" means the PJM energy control center staff
responsible for central dispatch as provided in the PJM Agreement.

<PAGE>   72

          "PJM Tariff" means the PJM Open Access Transmission Tariff providing
transmission service  within the PJM Control Area, including schedules,
appendices, or exhibits attached thereto, as in effect from time to time and
as amended or modified.

         "Potomac River Lease" means that Generating Station Lease Agreement,
to be entered into at the Closing by Seller and Buyer, substantially in the
form of Exhibit H attached to the Agreement.

         "Potomac River Real Property" means that certain real property of the
Seller (which includes the Potomac River Station Site) described on Schedule
5.5(a) attached to the Agreement.

         "Potomac River Station" means that certain coal-fueled generating
facility of the Seller located on the Potomac River in Alexandria, Virginia,
as more fully described on Schedule 2.2(a)(iii) and Schedule 5.5(a) attached
to the Agreement.

         "Potomac River Station Site" means that portion of the Potomac River
Real Property to be leased by the Seller to the Buyer pursuant to the terms of
the Potomac River Lease.

         "PPAs" collectively means those power purchase agreements of the
Seller listed in Section I of Schedule 2.2(a)(iv) attached to the Agreement.

         "Production Service Center" means that primary support facility of
the Seller located near Washington, D.C., as more fully described on Schedule
2.2(a)(iii) and Schedule 5.5(a) attached to the Agreement.

         "Prorated Items" shall have the meaning set forth in Section
2.3(a)(viii).

         "Protective Relaying System" means the system relating to the
Generating Facilities comprised of components collectively used to detect
defective power system elements or other conditions of an abnormal nature,
initiate appropriate control circuit action in response thereto and isolate
the appropriate system elements in order to minimize damage to equipment and
interruption to service.

         "PSC" means, either individually or collectively, the MDPSC, VCC, PUC
and DCPSC.

         "Purchase Price" shall have the meaning set forth in Section 3.1.

         "PUC" means the Pennsylvania Utility Commission.
<PAGE>   73
         "Qualified Offer" shall have the meaning set forth in Section 9.1(d).

         "Regulatory Material Adverse Effect" shall occur where the Required
Regulatory Approval contains terms and conditions that are materially adverse
to the Seller taken as a whole.

         "Release" means any release, spill, emission, leaking, dumping,
injection, pouring, deposit, disposal, discharge, dispersal, leaching or
migration into the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata) or within any building,
structure, facility or fixture.

         "Required Regulatory Approvals" means with respect to a Party, any
consent or approval of, filing with, or notice to, any Governmental Authority
that is necessary for the execution and delivery of the Agreement and the
Ancillary Agreements by such Party or the consummation thereby of the
transactions contemplated hereby.

         "Restraints" shall have the meaning set forth in Section 8.1(b).

         "Retained Assets" shall have the meaning set forth in Section 2.2(b).

         "Retained Liabilities" shall have the meaning set forth in Section
2.3(b).

         "Retained Rights" shall have the meaning given to such term in Schedule
2.4 attached hereto.

         "Revenue Bonds" shall have the meaning set forth in Section 7.12(a)(i).

         "Revenue Meters" means all meters measuring demand, energy and
reactive components, and all pulse isolation relays, pulse conversion relays
and associated totalizing and remote access pulse recorder equipment, in each
case, required to measure the transfer of energy between the Parties.

         "Ryceville Pumping Station" means that certain pumping station and
all components located in Ryceville, Maryland, as more fully described on
Schedule 2.2(a)(iii) and Schedule 5.5(a) attached to the Agreement.

         "Seller" shall have the meaning set forth in the Preamble to the
Agreement.

         "Seller Facilities" means those facilities of the Seller which are
described in the Easements Agreement.

<PAGE>   74
         "Seller Indemnitees" shall have the meaning set forth in Section
10.1(b).

         "Seller Real Estate" means all real property and leaseholds or other
interests in real property of Seller (including the Potomac River Real
Property), and other than Buyer Real Estate.

         "Seller Required Regulatory Approvals" shall have the meaning set
forth in Section 5.3(b).

         "Seller's Pension Plans" shall have the meaning set forth in Section
9.2.

         "Seller's Savings Plan" shall have the meaning set forth in Section
9.3.

         "Seller's Severance Plans" mean those certain plans or policies of the
Seller, in effect on the date of Closing, which offer severance benefits to the
Non-Union Employees, as described on Schedule 1.1(c) attached to the Agreement.

         "SO2 Allowances" mean sulfur dioxide allowances that have been
allocated to Seller for the Generating Facilities by the Administrator of the
United States Environmental Protection Agency under Title IV of the Clean Air
Act authorizing the emission of one ton of sulfur dioxide per allowance during
or after a specified calendar year.

         "Support Operations" mean the business operations of the Seller which
are primarily engaged in the provision of support services to the ongoing
operation of the Generating Facilities (including business planning and strategy
services, fuel supply services, bulk power management services, generation
engineering and maintenance services, and environmental services).

         "Tax Benefit" means, with respect to any Indemnifiable Loss for any
person, the positive excess, if any, of the Tax liability of such person without
regard to such Indemnifiable Loss over the Tax liability of such person taking
into account such Indemnifiable Loss, with all other circumstances remaining
unchanged.

         "Tax Cost" means, with respect to any indemnity payment for any
person, the positive excess, if any, of the Tax liability of such person taking
such indemnity payment into account over the Tax liability of such person
without regard to such payment, with all other circumstances remaining
unchanged.

         "Tax Return" means any return, report, information return or other
document (including any related or supporting information) required to be
supplied to any authority with respect to Taxes.

<PAGE>   75

         "Taxes" means all taxes, surtaxes, charges, fees, levies, penalties
or other assessments imposed by any United States Federal, state or local or
foreign taxing authority, including Income Taxes, excise, property, sales,
transfer, franchise, special franchise, payroll, recording, withholding,
social security or other taxes, or any liability for taxes incurred by reason
of joining in the filing of any consolidated, combined or unitary Tax Returns,
in each case including any interest, penalties or additions attributable
thereto; provided, however, that "Taxes" shall not include sewer rents or
charges for water.

         "Termination Date" shall have the meaning set forth in Section
11.1(b).

         "Third Party Claim" shall have the meaning set forth in Section
10.2(a).

         "Total Cash Compensation" shall have the meaning set forth in Section
9.1(d).

         "Transferable Permits" shall have the meaning set forth in Section
2.2(a)(v).

         "Transferred NOx Allowances" shall have the meaning set forth in
Section 2.2(a)(vii).

         "Transferred SO2 Allowances" shall have the meaning set forth in
Section 2.2(a)(vi).

         "Transferred Employee Records" shall have the meaning set forth in
Section 2.2(a)(viii).

         "Transferred Employees" shall have the meaning set forth in Section
9.1(d).

         "Transferred Non-Union Employees" shall have the meaning set forth in
Section 9.1(d).

         "Transferred Savings Employees" shall have the meaning set forth in
Section 9.3.

         "Transferred Union Employees" shall have the meaning set forth in
Section 9.1(a).

         "Transition Power Agreements" means that Transition Power Agreement
(District of Columbia) and Transition Power Agreement (Maryland), to be
entered into at Closing by Seller and Buyer, substantially in the form of
Exhibits J-1 and J-2, respectively, attached to the Agreement.

<PAGE>   76

         "Transmission System" shall have the meaning set forth in Section
2.2(b)(i).

         "Unassigned PPA" shall have the meaning set forth in Schedule 2.4
attached hereto.

         "Union Employees" shall have the meaning set forth in Section 9.1(a).

         "VCC" means the Virginia State Corporation Commission.

         "WARN Act" means the Federal Worker Adjustment Retraining and
Notification Act of 1988, as amended.

<PAGE>   77
                                                                 EXHIBIT A

                      ASSIGNMENT AND ASSUMPTION AGREEMENT

         THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Assignment Agreement")
dated as of _________, 2000 by and between Potomac Electric Power Company, a
District of Columbia and Virginia corporation ("Seller"), and ____________, a
____________ corporation ("Buyer").  Seller and Buyer are referred to
individually as a "Party," and collectively as the "Parties."

                              W I T N E S S E T H:

         WHEREAS, Seller and Buyer are parties to that certain Asset Purchase
and Sale Agreement, dated as of June 7, 2000 (as amended, supplemented or
otherwise modified from time to time, the "Asset Sale Agreement");

         WHEREAS, pursuant to the Asset Sale Agreement, Buyer has agreed to
assume from Seller the Assumed Obligations (as defined in the Asset Sale
Agreement) and Seller has agreed to retain the Retained Liabilities
(as defined in the Asset Sale Agreement); and

         WHEREAS, it is the intention of the Parties that by the execution and
delivery of this Assignment Agreement, Seller will assign to Buyer and Buyer
will assume and agree to discharge when due, without recourse to Seller, all
Assumed Obligations, as more particularly described and set forth in Section
2.3 of the Asset Sale Agreement.

         NOW, THEREFORE, in consideration of the foregoing premises and for
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Seller and Buyer hereby agree as follows:

         1.  Capitalized terms which are used but not defined in this
Assignment Agreement shall have the meaning ascribed to such terms in the
Asset Sale Agreement.

         2.  Seller hereby sells, assigns, conveys, transfers and delivers to
Buyer all of the right, title and interest that Seller possesses and has the
right to transfer in, to, and under the Transferable Permits, the Transferred
SO2 Allowances, the Transferred NOX Allowances, the Contracts, the third-party
warranties and guarantees, and all other intangible personal property included
in the Auctioned Assets.

         3.  Buyer hereby assumes and agrees to discharge when due, without
recourse to Seller, all liabilities and obligations of Seller constituting the
Assumed Obligations.  Notwithstanding anything to the contrary herein, Buyer
shall not assume or perform any of the Retained Liabilities.
<PAGE>   78

         4.  Neither the making nor the acceptance of this Assignment
Agreement shall enlarge, restrict or otherwise modify the terms of the Asset
Sale Agreement or constitute a waiver or release by Seller or Buyer of any
liabilities, duties or obligations imposed upon either of them by the terms of
the Asset Sale Agreement, including, without limitation, the representations and
warranties and other provisions which the Asset Sale Agreement provides shall
survive the date hereof.

         5.  In the event that any provision of this Assignment Agreement be
construed to conflict with a provision of the Asset Sale Agreement, the
provision in the Asset Sale Agreement shall be deemed controlling.

         6.  This Assignment Agreement shall bind and shall inure to the
benefit of the respective Parties and their respective successors and
permitted assigns.

         7. No Third Party Beneficiary.  Nothing in this Assignment Agreement
is intended to confer upon any other person except Buyer and Seller any rights
or remedies hereunder or shall create any third party beneficiary rights in any
person.

         8.  This Assignment Agreement shall be governed and construed in
accordance with the laws of the District of Columbia (regardless of the laws
that might otherwise govern under applicable principles of conflicts of law).

         9.  This Assignment Agreement may be executed in two counterparts,
each of which shall be deemed an original, but both of which together will
constitute one and the same instrument.

         10.  Seller hereby appoints _______________, a _______________ of
Seller, to be its duly authorized Attorney-in-Fact and in Seller's name to
execute, acknowledge and deliver this Assignment Agreement as its act and
deed.
Buyer hereby appoints _____________, its ______________, to be its duly
authorized Attorney-in-Fact and in Buyer's name to execute, acknowledge and
deliver this Assignment Agreement as its act and deed.

         IN WITNESS WHEREOF, this Assignment Agreement has been duly executed
and delivered by the Parties as of the date first above written.

Attest:                                         POTOMAC ELECTRIC POWER
                                                COMPANY

By                                              By
  --------------------------                      ----------------------------
    Secretary                                      Name:
                                                   Title:

 Attest:                                        [BUYER]

By                                              By
  --------------------------                      ----------------------------
     Secretary                                     Name:
                                                   Title:

<PAGE>   79

                              )
DISTRICT OF COLUMBIA          )  SS:
                              )

      The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for
Seller named in the foregoing Instrument, personally appeared before me in said
jurisdiction, and as such attorney-in-fact and by virtue of the authority vested
in him by said Instrument, acknowledged the same to be the act and deed of said
corporation, and that he executed and delivered the same as such.

      WITNESS my hand and official seal this ___ day of ___________, 2000.

                                          -------------------------------------
My Commission Expires:                    Notary Public in and for
                                          the District of Columbia

                              )
DISTRICT OF COLUMBIA          )  SS:
                              )

      The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for Buyer
named in the foregoing Instrument, personally appeared before me in said
jurisdiction, and as such attorney-in-fact and by virtue of the authority vested
in him by said Instrument, acknowledged the same to be the act and deed of said
corporation, and that he executed and delivered the same as such.

      WITNESS my hand and official seal this ___ day of ___________, 2000.

                                          -------------------------------------
My Commission Expires:                    Notary Public in and for
                                          the District of Columbia

<PAGE>   80
                                                               EXHIBIT B

                                  BILL OF SALE

         THIS BILL OF SALE is made as of the ___ day of ____________, 2000 by
Potomac Electric Power Company, a District of Columbia and Virginia
corporation ("Seller"), for the benefit of ________________, a
___________________ ("Buyer").

                               W I T N E S S E T H:

         WHEREAS, pursuant to that certain Asset Purchase and Sale Agreement,
dated as of June 7, 2000 (as amended, supplemented or otherwise modified from
time to time, the "Asset Sale Agreement"), by and between Seller and Buyer,
Seller has agreed to sell, assign, convey, transfer and deliver all of its
right, title and interest in and to the Auctioned Assets (as defined in the
Asset Sale Agreement) to Buyer, and Buyer has agreed to purchase, assume and
acquire such Auctioned Assets from Seller; and

         WHEREAS, pursuant to the Asset Sale Agreement, Seller has entered
into this Bill of Sale as evidence of such conveyance to Buyer.

         NOW, THEREFORE, in consideration of the foregoing premises and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, Seller hereby agrees as follows:

         1.  Defined Terms.  Capitalized terms which are used but not defined
in this Bill of Sale shall have the meaning ascribed to such terms in the
Asset Sale Agreement.

         2.  Assignment.  Seller does hereby sell, assign, convey, transfer
and deliver to Buyer all of Seller's right, title and interest in and to all
of the Auctioned Assets.

         3.  Retained Assets Not Assigned.  Notwithstanding anything expressed
herein to the contrary, the Retained Assets are specifically excluded from the
Auctioned Assets and shall be retained by Seller following the Closing Date.

         4. Disclaimers.  EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES
EXPRESSLY SET FORTH IN ARTICLE V OF THE ASSET SALE AGREEMENT, THE AUCTIONED
ASSETS ARE BEING SOLD AND TRANSFERRED "AS IS, WHERE IS", AND SELLER IS NOT
MAKING ANY OTHER REPRESENTATIONS OR WARRANTIES WRITTEN OR ORAL, STATUTORY,
EXPRESS OR IMPLIED, CONCERNING SUCH AUCTIONED ASSETS (INCLUDING ANY RELATING
TO LIABILITIES, OPERATIONS OF THE GENERATING FACILITIES, CONDITION, VALUE OR
QUALITY OF THE AUCTIONED ASSETS OR THE PROSPECTS (FINANCIAL OR OTHERWISE),
RISKS OR OTHER INCIDENTS OF THE AUCTIONED ASSETS) OR WITH RESPECT TO THE ASSET
SALE AGREEMENT OR THE ANCILLARY AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED

<PAGE>   81
THEREBY.  SELLER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF
MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH
RESPECT TO THE AUCTIONED ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP
THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR
COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR THE APPLICABILITY OF ANY
GOVERNMENTAL REQUIREMENTS, INCLUDING BUT NOT LIMITED TO ANY ENVIRONMENTAL
LAWS, OR WHETHER SELLER POSSESSES SUFFICIENT REAL PROPERTY OR PERSONAL
PROPERTY TO OPERATE THE AUCTIONED ASSETS.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN SECTION 5.10 OF THE ASSET SALE AGREEMENT, SELLER FURTHER
SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF
HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY ARISING UNDER
ENVIRONMENTAL LAWS WITH RESPECT TO THE AUCTIONED ASSETS, ALL OF WHICH ARE
HEREBY EXPRESSLY WAIVED BY BUYER.  WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, SELLER MAKES NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE
INFORMATION SET FORTH IN, OR CONTEMPLATED BY, THE INFORMATION MEMORANDUM.

         5.  Binding Effect; Assignment.  This Bill of Sale and all of the
provisions hereof shall be binding upon Seller and its successors and
permitted assigns and shall inure to the benefit of Buyer and its successors
and permitted assigns.

         6.  No Third Party Beneficiary.  Nothing in this Bill of Sale is
intended to confer upon any other person except Buyer and Seller any rights or
remedies hereunder or shall create any third party beneficiary rights in any
person.

         7.  Governing Law.  This Bill of Sale shall be governed by and
construed in accordance with the laws of the District of Columbia (regardless
of the laws that might otherwise govern under applicable principles of
conflicts of law).

         8.  Construction.  This Bill of Sale is delivered pursuant to and is
subject to the terms of the Asset Sale Agreement.  In the event of any
conflict or ambiguity between the terms of the Asset Sale Agreement and the
terms of this Bill of Sale, the terms of the Asset Sale Agreement shall
control.

         9.  Counterparts.  This Bill of Sale may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

         10. Power-of-Attorney.  Seller hereby appoints _______________, a
_______________ of Seller, to be its duly authorized Attorney-in-Fact and in
Seller's name to execute, acknowledge and deliver this Agreement as its act
and deed.  Buyer hereby appoints _____________, its ______________, to be its
duly authorized Attorney-in-Fact and in Buyer's name to execute, acknowledge
and deliver this Agreement as its act and deed.

<PAGE>   82

         IN WITNESS WHEREOF, this Bill of Sale has been duly executed and
delivered by Seller as of the date first above written.

Attest:                       POTOMAC ELECTRIC POWER COMPANY

By                            By
  ---------------------         -----------------------------
     Secretary                       Name:
                                    Title:

ACCEPTED AND AGREED TO
THIS ____ DAY OF __________, 2000:

      Attest:                 [BUYER]

By                            By
  ---------------------         -----------------------------
     Secretary                      Name:
                                    Title:

<PAGE>   83

                              )
DISTRICT OF COLUMBIA          )  SS:
                              )

      The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for
Seller named in the foregoing Instrument, personally appeared before me in
said jurisdiction, and as such attorney-in-fact and by virtue of the authority
vested in him by said Instrument, acknowledged the same to be the act and deed
of said corporation, and that he executed and delivered the same as such.

      WITNESS my hand and official seal this ___ day of ___________, 2000.

                                          ------------------------------------
My Commission Expires:                    Notary Public in and for
                                          the District of Columbia

<PAGE>   84
                              )
DISTRICT OF COLUMBIA          )  SS:
                              )

      The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for
Buyer named in the foregoing Instrument, personally appeared before me in said
jurisdiction, and as such attorney-in-fact and by virtue of the authority
vested in him by said Instrument, acknowledged the same to be the act and deed
of said corporation, and that he executed and delivered the same as such.

      WITNESS my hand and official seal this ___ day of ___________, 2000.

                                          ______________________________
My Commission Expires:                    Notary Public in and for
                                          the District of Columbia

<PAGE>   85

                                                   EXHIBIT C-1

AFTER RECORDING                                    PARCEL ID#
PLEASE RETURN TO:                                  STREET ADDRESS:
_________________                                  _______________
_________________                                  _______________
_________________                                  _______________

                EASEMENT, LICENSE AND ATTACHMENT AGREEMENT
                               (Potomac River)

          THIS EASEMENT, LICENSE AND ATTACHMENT AGREEMENT (the "Agreement"), is
dated as of ______________, 2000, and is entered into by and between
________________________________________, a corporation organized and existing
under the laws of the State of __________ and having an office at
____________________________ ("Generator") and POTOMAC ELECTRIC POWER COMPANY, a
District of Columbia and Virginia corporation and having an office at 1900
Pennsylvania Avenue, N.W., Washington, DC 20068 ("Pepco"). Generator and Pepco
may hereinafter be referred to individually as a "Party" and collectively as the
"Parties."

                                   RECITALS

         A.       Generator and Pepco have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets (the "Asset Sale Agreement"),
dated June 7, 2000, for the sale of Pepco's generating station known as the
Potomac River Station (as defined in the Asset Sale Agreement), which is located
on that certain parcel of real property which has been leased by Pepco to
Generator pursuant to that certain Site Lease Agreement between Pepco and
Generator of even date herewith (the "Site Lease Agreement") and is more
particularly described in Exhibit "A" attached hereto (the "Generator's
Leasehold Property"). The Generator's Leasehold Property constitutes a portion
of the overall land comprising the Potomac River Station, which overall land is
more particularly described in Exhibit "B" attached hereto (the "Pepco Real
Property"). In connection with Pepco's sale of Potomac River Station pursuant to
the Asset Purchase Agreement, Pepco has sold to the Generator certain
improvement located upon the Generator's Leasehold Property (excluding the
Building Addition, as described in, and leased to Generator pursuant to, the
Site Lease Agreement) (such improvements sold to Generator being referred to
herein as the "Generator's Improvements").

         B.       Pepco intends to continue to operate its transmission and
distribution business on and from that portion of the Pepco Real Property which
is not leased to Generator pursuant to the Site Lease, which portion is more
particularly described in Exhibit "C" attached hereto (the "Non-Leased Pepco
Real Property").

          C.   Pepco will continue to own and operate certain assets used in the
conduct of its transmission and distribution business which are located upon the
Generator's Leasehold Property, and Pepco requires Access (as defined below) to,
and certain other rights with respect to, the Generator's Leasehold Property in
connection therewith.
<PAGE>   86

Generator, in the operation and conduct of its generation business, will require
Access to, and certain other rights with respect to, the Non-Leased Pepco Real
Property. Furthermore, Pepco and Generator have entered into an Interconnection
Agreement (the "Connection Agreement"), dated as of __________, 2000, pursuant
to which Pepco has agreed to provide certain Interconnection Service to
Generator required for Generator's conduct of its generation business at Potomac
River Station.

          D.   In order for the Parties each to (i) enjoy the full benefit of
their respective property rights, real or personal, and conduct their respective
businesses thereat (ii) fulfill legal requirements, and (iii) comply with their
respective agreements under the Connection Agreement, each Party requires
certain easements, licenses, rights-of-way and/or attachment rights in, on, over
and above, or with respect to, real and or personal property of the other Party.

                                 AGREEMENT

          NOW, THEREFORE, the Parties, in consideration of the mutual covenants
and agreements contained herein and in the Asset Sale Agreement and the
Connection Agreement, and for One Dollar ($1.00) and other good and valuable
consideration, the receipt whereof and sufficiency of which are hereby
acknowledged, each intending to be legally bound and to bind their respective
successors and assigns, hereby mutually agree as follows:

          1.   DEFINITIONS

               1.1  Definitions.  Any capitalized terms which are used but not
defined in the body of this Agreement shall have the meanings given to such
terms in the attached Schedule 1.1.

          2.   EASEMENTS

               2.1  Grant of Easements to Pepco.  Generator does hereby give,
grant, bargain, sell, assign and convey unto Pepco, the following easements on
the Generator's Leasehold Property, the Generator's Improvements and the
Building Addition for the following purposes: (a) An easement for the Use,
operation and maintenance of the Retained Assets (as described in the Asset Sale
Agreement) located upon the Generator's Leasehold Property and any other
equipment of any nature or kind retained by Pepco and located upon the
Generator's Leasehold Property, together with any other equipment used in
connection with the foregoing (together with replacements thereof and
substitutions therefor).

                    (b)  An easement which enables Pepco to keep and maintain
in their present locations, and operate, any Transmission Facilities,
Distribution Facilities and

<PAGE>   87

other assets owned by Pepco and located upon the Generator's Leasehold Property,
together with an easement for all purposes reasonably deemed necessary or
convenient by Pepco to exercise any right or fulfill any obligation under the
Connection Agreement, including the right to Use any improvements constructed,
maintained or installed in connection therewith.

                    (c)  An easement and other Generator's Improvements and the
Building Addition of Access to those certain generating buildings (and any
replacements thereof) located upon the Generator's Leasehold Property in and
upon which certain of Pepco's Distribution Facilities and Transmission
Facilities are located. Such easement shall include, without limitation, the
right to have keys, access codes or other access methods necessary to enter any
of such generating buildings. Furthermore, the exercise of the easement right
set forth in this subparagraph shall be subject to the provisions of the
Connection Agreement including, without limitation, Section 3.3 thereof.

                    (d)  An easement of Access to the Generator's Leasehold
Property for the purposes of exercising any of the rights granted in this
Section 2.l, in the Connection Agreement or the Asset Sale Agreement.

                    (e)  An easement of Access to, and the right to use, the
parking lots, access roads, driveways and other such facilities located upon the
Generator's Leasehold Property.

                    (f)  Pepco's exercise of the rights, easements, privileges
and licenses granted to it pursuant to this Section 2.1 shall be limited to
Qualified Personnel or employees of contractors employed by Pepco who, in either
event, are under Pepco's and/or its contractors' direct supervision and whose
duties include, or who are engaged for the purpose of, Use of the rights granted
pursuant to this Section 2.1.

                    (g)  The easements granted pursuant to this Section 2.1
shall expressly include Pepco's right to lease, license or otherwise permit
Affiliates or third parties to use Pepco's facilities upon such terms and for
such purposes as Pepco may determine from time to time, subject to the terms and
conditions of this Agreement.

               2.2  Reservation by Generator of Certain Rights. Generator
reserves to itself, from the easements granted pursuant to Section 2.1 hereof,
the following rights, subject, however, to the provisions of the final paragraph
of this Section 2.2:

                    (a)  the right to (i) keep and maintain Generator's
Leasehold Property and all improvements and facilities owned by Generator and
located upon the Generator's Leasehold Property in their present locations, and
(ii) operate and maintain all improvements and facilities owned by Generator and
located upon the Generator's Leasehold Property in a manner consistent with past
practice; and

<PAGE>   88
                    (b)  the right to have Access to all portions of the
Generator's Leasehold Property for all purposes deemed reasonably necessary or
convenient by Generator in the operation and conduct of its generation business
or in order to perform any act permitted, or fulfill any obligation of
Generator, under the Connection Agreement, including maintenance of the
Generator's Leasehold Property in the manner described in the Connection
Agreement.

                    (c)  Generator's exercise of the rights reserved to
Generator in this Section 2.2, and the rights, privileges and licenses granted
to Generator in Section 2.3 shall be exclusively limited to Qualified Personnel
or employees of contractors employed by Generator who, in either event, are
under Generator's and/or its contractors' direct supervision and whose duties
include, or who are engaged for the purpose of, Use of the property described in
clause (a) of this Section.

               2.3  Grant of Easements, Right, Privilege and
License from Pepco to Generator.

                    (a)  Pepco does hereby grant to Generator the following
easements, rights, privileges and licenses on and with respect to the Non-Leased
Pepco Real Property:

                         (i)  An easement which enables Generator to keep and
maintain in their present locations, and operate, any Generating Facilities and
other assets owned by Generator and located upon the Non-Leased Pepco Real
Property.

                         (ii) An easement of Access to and upon the Non-Leased
Pepco Real Property for the purposes of exercising any of the rights granted in
the Connection Agreement or the Asset Sale Agreement.

                    (b)  In addition, but without limitation of Generator's
rights pursuant to the Connection Agreement, Pepco agrees to make available to
Generator (at no cost to Generator, except as provided below) Pepco's master
station voltage control equipment (the "Equipment") located at Potomac River
Station upon the Generator's Leasehold Property during the term of this
Agreement, subject to the following terms and conditions, and Generator agrees
to comply with such terms and conditions:

                         (i)      Generator's operation of the Equipment shall
at all times be subject to that certain Agreement of Sale and Lease dated as of
November 30, 1994 between NationsBank Trust Company, National Association and
Pepco (the "Control Center Lease"), and Generator shall comply with the terms
and conditions thereof with respect to the use of the Equipment (including
keeping the Equipment free and clear of any liens, claims or encumbrances of
whatever nature, and identifying the Equipment as being owned by Pepco, and
shall not modify, alter, remove or add to the Equipment);

<PAGE>   89

                         (ii)     Generator shall operate and maintain the
Equipment in accordance with Good Utility Practice;

                         (iii)    Generator shall be responsible for all
operating, repair and maintenance costs, taxes and the like with respect to the
Equipment, and shall reimburse Pepco promptly upon invoicing for any such costs
paid by Pepco;

                         (iv)     Generator's Access to the Equipment shall be
in accordance with this Agreement;

                         (v)      Generator's right to operate the Equipment
shall terminate in the event of actual or constructive loss of the Equipment,
damage rendering the Equipment beyond repair or unfit for normal use, the
condemnation or seizure of the Equipment, the obsolescence of the Equipment or
the material breach by Generator of any of its covenants in this Section 2.3(b);

                         (vi)     Pepco shall have no obligation to Generator
with respect to the Equipment other than to permit Access to and operation of
the Equipment in accordance with this Section 2.3(b);

                         (vii)    The obligations of Generator under  Section
7.4 (maintenance of liability insurance coverage) and Section 7.1
(indemnification) shall be applicable to the Equipment; and

                         (viii)   Pepco shall have Access to the Equipment for
purposes of complying with the terms and conditions of the Control Center Lease
and as necessary to perform any of the obligations of Generator pursuant to this
subparagraph (b) above to the extent the same are not timely performed by
Generator.

               2.4  General Scope of Easements.

                    (a)  Except as otherwise provided in Sections 2.2 and 2.3
above and Section 2.4(b) below, each easement and each right, privilege and
license granted hereby is and shall be a perpetual grant, transfer, conveyance
and right of Access to and Use (subject to the terms of this Agreement) to the
Grantee thereof and to any future owner of the real property, improvements and
facilities benefited thereby. Notwithstanding the foregoing, all easements,
rights, privileges and licenses granted by this Agreement are and shall be
subject to the terms and conditions of the Connection Agreement, and in the
event
<PAGE>   90
of any inconsistency between the terms and conditions of the Connection
Agreement and the terms of this Agreement, the terms of the Connection Agreement
shall control.

                    (b)  Any easement or right, privilege and license granted
hereunder for purposes of enabling a Party to exercise any right or fulfill any
obligation set forth in the Connection Agreement will continue for the term of
the Connection Agreement, and thereafter if and to the extent that the right or
obligation (i) shall by its express terms survive the termination or expiration
of the Connection Agreement or (ii) is necessary for the conduct of business by
Grantee. In the event of the termination or expiration of an easement or right,
privilege and license granted hereunder for purposes of enabling a Grantee to
exercise any right or fulfill any obligation set forth in the Connection
Agreement, all equipment and facilities installed or maintained by such Grantee
on the real property of the other Party pursuant to said terminated or expired
easement or right, privilege and license shall, at the request of the other
Party, be removed at the sole cost and expense of such Grantee, and such Grantee
shall, at its sole cost and expense repair any damage to the real property
and/or equipment and facilities of the other Party damaged as a result of such
removal.

                    (c)  All equipment and facilities installed or maintained
by Grantee pursuant to an easement or right, privilege and license granted
hereunder shall be maintained by Grantee in accordance with Good Utility
Practice and the Connection Agreement, and Grantee shall make all repairs and
replacements necessary to keep such equipment and facilities in such condition.

                    (d)  Generator may not Use any portion of Generator's
Leasehold Property burdened by any easement, right or privilege granted to Pepco
hereunder if such Use would materially adversely affect the Use and enjoyment by
Pepco of the rights granted to it hereunder, or materially increase the costs or
risks associated with such Use.

                    (e)  All easements granted herein shall be deemed easements
appurtenant to the parcel of real property benefited thereby and shall run with
such real property and shall be deemed covenants running with the real property
burdened thereby.

               2.5  Interpretation.  The following shall apply in interpreting
any easement and any right, privilege and license granted pursuant to this
Agreement:

                    (a)  Each easement and each right, privilege and license
granted herein is irrevocable except by written agreement of the parties.

                    (b)  With respect to any easement created by this Agreement,
the words "in," "upon," "to," "on," "over," "above," "through" and/or "under"
shall be interpreted to include all of such terms.

<PAGE>   91

                    (c)  Each easement and each right, privilege and license
granted herein may be enjoyed without charge or fee to Grantee of the easement.

                    (d)  Each easement and each right, privilege and license
granted herein is also a grant of the additional right of Access over Grantor's
property to accomplish the purpose of such easement or right, privilege and
license, to perform any obligations hereunder or in the Connection Agreement,
and to comply with any legal requirements affecting Grantee or its property
and/or improvements.

                    (e)  Exercise of any easement or any right, privilege and
license granted hereunder permitting or requiring maintenance, repairs,
alteration, restoration, rebuilding, construction, upgrading, cleaning,
installation, removal, modification, replacement, expansion, or other work by
Grantee upon the property or improvements of Grantor shall be subject to the
following conditions:

                           (i)      Work upon the facilities and properties of
                           either Party subject to this Agreement shall be
                           permitted only to each Party's Qualified Personnel,
                           and Access to such facilities and properties shall be
                           permitted only to a Party's Qualified Personnel and
                           such consultants, agents, contractors, subcontractors
                           and invitees as any Party may select or permit;
                           provided that any consultant, agent, contractor,
                           subcontractor or invitee shall comply with all
                           applicable provisions of this Agreement and the
                           Connection Agreement.

                           (ii)     Work shall be performed using reasonable
                           precautions to avoid unreasonable interference with
                           the Use and enjoyment of Grantor's property and
                           improvements.

                           (iii)    Except only as may be specifically provided
                           to the contrary herein, Grantee shall not be liable
                           for damage, if any, which may be caused by Grantee's
                           normal and reasonable Use of any easement, or right,
                           privilege or license granted hereunder.

                           (iv)     Following completion of the work, Grantee
                           shall restore Grantor's property and improvements to
                           the same or as good a condition as existed before the
                           commencement of the work.

                           (v)      Any easement and any right, privilege and
                           license granted herein which permits a Grantee to
                           maintain its property, equipment, facilities and
                           appurtenances on the property and improvements owned
                           by Grantor also includes the right to maintain in
                           place on Grantor's property and improvements any and
                           all wires and cables, connecting such property,
                           equipment,
<PAGE>   92

                                    facilities, and appurtenances to (i) the
                                    devices, machinery and equipment which they
                                    measure, regulate and/or control, and (ii)
                                    power sources.

                                    (vi)     Generator shall be solely
                                    responsible for the maintenance of any
                                    roads, paths and other means of entry or
                                    exit located upon either the Generator's
                                    Real Generator's Real Property or the Pepco
                                    Real Property that are commonly utilized by
                                    Generator and Pepco, and their respective
                                    employees, agents and contractors pursuant
                                    to this Agreement or the Connection
                                    Agreement.

                                    (f)      Any easement granted pursuant to
Section 2.1(a), (b) or (c) includes the right to (i) trim, cut, treat and/or
remove, by manual, mechanical, and chemical means, any and all trees, brush,
structures and other obstructions within the easement area, as well as such
trees, brush, structures and vegetation outside of the easement area deemed
reasonably necessary or desirable by Pepco for the safe and secure operation of
its facilities; and (ii) obtain Access to Generator's Leasehold Property for the
purpose of performing the aforementioned acts.

                           2.6      Rules and Regulations.

         Each Party may promulgate rules regulating the conduct of the other
Party in the exercise of rights under this Agreement provided such rules and
regulations do not unreasonably interfere with or impede the affected Party's
rights and easements as set forth herein or in the Connection Agreement.

                           2.7      No Obstruction.

                                    (a)      No Party hereto shall obstruct the
easements or the rights, privileges and licenses granted or created pursuant to
this Agreement or render them impassable or unusable in any way or otherwise in
any way interfere with the right to the Use and enjoyment of the easements or
rights, privileges and licenses granted or created pursuant to this Agreement.

                                    (b)      No Party hereto shall make any
changes to the topography or accesses on or to its respective property,
including grading or drainage that could reasonably be expected to adversely
affect another Party's facilities, common use drainage systems, or pollution
control systems, or the exercise of any right or fulfillment of any obligation
in this Agreement or in the Connection Agreement, without the prior written
consent of the other Party which consent shall not unreasonably be withheld,
delayed or conditioned.

<PAGE>   93

                  3.       TAXES, ASSESSMENTS AND OTHER CHARGES

                           3.1      Real Estate Taxes. All matters concerning
the payment of taxes, assessments and other such charges shall be governed by
the provisions of Article 6 of Site Lease, which are incorporated herein by
reference.

                  4.       MECHANICS' LIENS

                           4.1      Notice Regarding Labor and Material. Notice
is hereby given that no Party hereto shall be liable for any labor or materials
furnished or to be furnished to or for another Party hereto or to any other
persons or entities claiming under such other Party on credit, and that no
mechanics' or other lien for any such labor or material furnished to a Party or
such other persons or entities shall attach to or affect any property interest
of any other Party.

                           4.2      Disposition of Liens.

                                    (a)      Pepco shall forthwith take such
action necessary to discharge, remove or satisfy any lien filed against the
Generator's Leasehold Property or any portion thereof for any labor or materials
furnished or to be furnished for or on behalf of Pepco, or any person or entity
holding any portion thereof through or under Pepco.

                                    (b)      Generator shall forthwith take such
action necessary to discharge, remove or satisfy any lien filed against the
Non-Leased Pepco Real Property or any portion thereof for any labor or materials
furnished or to be furnished for or on behalf of Generator, or any person or
entity holding any portion thereof through or under Generator.

                                    (c)      If either Pepco or Generator, as
the case may be, shall fail to discharge, remove or satisfy any such lien which
it is obligated to discharge, remove or satisfy hereunder within ten (10) days
after notice of the existence of the lien has been given to such defaulting
Party, the non-defaulting Party or parties may pay the amount of such lien or
discharge the same by deposit or bonding, and the amount so paid or deposited,
or the premium paid for such bond, with interest at the rate provided for
defaults in Section 6.3 hereof, shall be paid by the defaulting Party upon
demand to the non-defaulting Party who effected such cure.

                                    (d)      The defaulting Party shall defend,
indemnify and save harmless the non-defaulting Party from and against all
liability, loss, cost or expense (including reasonable attorneys' fees) arising
out of any liens which the defaulting Party is obligated to discharge, remove or
satisfy.

<PAGE>   94

                  5.       CONDEMNATION

                           5.1      Condemnation. All matters concerning
condemnation shall be governed by the provisions of Article 17 of the Site
Lease, which are incorporated herein by reference.

                  6.       DEFAULTS

                           6.1      Events of Default. Each and every one of the
following events shall constitute an Event of Default ("Event of Default") under
this Agreement:

                                    (a)      If a Party fails to make any
payment due to the other Party hereto within twenty (20) days of written demand
for such payment;

                                    (b)      If a Party fails, within twenty
(20) days of written notice from a Party, to make any payment due from such
Party to any third party and such failure could result in the imposition of a
lien or other encumbrance on the property or improvements of a Party, unless the
payment of such amount is contested in accordance with Section 3.5 hereof, in
which case, the provisions of Section 3.5 shall control; and

                                    (c)      If a Party fails to perform any
material non-monetary obligations hereunder, and said Party fails to cure such
default within thirty (30) days of receipt of written notice stating with
particularity the nature of the default; provided, however, if such default is
of such a nature that it cannot be cured within thirty (30) days following
receipt of such notice, an Event of Default shall not have occurred if the
defaulting Party shall within such thirty (30) days commence the necessary cure
and shall at all times thereafter diligently and continuously prosecute such
cure to completion.

                           6.2      Right of Self Help. A non-defaulting Party
may at its election following the occurrence of a non-monetary Event of Default
and the thirtieth (30th) day after the receipt of the written notice specified
in paragraph 6.1(c) hereof, undertake the cure of such default on behalf of the
defaulting Party. A non-defaulting Party is granted an easement to enter upon,
through or under the property or improvements of the defaulting Party to effect
such cure. Following the occurrence of an Event of Default involving the payment
of money to a person or entity not Party to this Agreement, a non-defaulting
Party may make such payment on behalf of the defaulting Party. All monies paid
by the non-defaulting Party and all reasonable costs and expenses (including,
reasonable attorneys' fees) incurred by it, as the case may be, in effecting
such cure or payment, shall be paid by the defaulting Party upon written demand,
together with interest from the date of such demand at the rate set forth in
Section 6.3. This Section 6.2 shall not limit Pepco's self-help rights pursuant
to Section 2.3(b).

                           6.3      Interest. Following the occurrence of an
Event of Default involving the nonpayment of money by the defaulting Party to
the non-defaulting Party, all

<PAGE>   95

monies owed to the non-defaulting party shall bear interest at the rate equal to
one and one-half percent (1.5%) per month accruing on the due date, provided,
however, that such late payment charge shall not exceed the maximum charge which
may be collected under State law.

                           6.4      Enforcement Rights. In addition to any other
rights expressly set forth in this Agreement, but without limitation,
enforcement of this Agreement may be had by legal or equitable proceedings
against any defaulting Party either to specifically enforce, restrain or enjoin
the violation of any restriction, covenant, agreement, term, representation or
warranty herein contained or to recover damages. The above notwithstanding,
termination of this Agreement shall not be available as a remedy in any
proceedings against any defaulting Party.

                           6.5      No Forfeiture. Except by enforcement of a
judgment lien against such property, nothing contained in this Agreement shall
create any reversion, condition or right of re-entry or other provisions for
forfeiture under which any Party can be cut off, subordinated or otherwise
disturbed in the possession of its property.

                           6.6      Independent Covenants. None of the rights
and easement granted by this Agreement and none of the performances required by
this Agreement shall be dependent, upon the performance of any other term,
promise, or condition of this Agreement or any documents executed concurrently
or in connection with this Agreement, and such rights, easement and requirements
or performance shall continue in effect irrespective of whether anything else in
this Agreement or such other documents has been breached or has been terminated.
The separateness and independent survival of the right, easements and
requirements of performance under this Agreement are essential terms hereof
without which this Agreement would not have been made.

                  7.       INDEMNIFICATION AND INSURANCE

                           7.1      Generator's Indemnification. Generator shall
indemnify, hold harmless, and defend Pepco and its Affiliates, as the case may
be, and their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between Pepco and a third party or
Generator) for damage to property of unaffiliated third parties, injury to or
death of any person, including Pepco's employees or any third parties, to the
extent caused, by the breach of this Agreement by Generator or the negligence or
willful misconduct of Generator and/or its officers, directors, employees,
agents, contractors, subcontractors or invitees arising out of or connected with
Generator's performance of this Agreement, or the exercise by Generator of its
rights hereunder.

<PAGE>   96

                           7.2      Pepco's Indemnification. Pepco shall
indemnify, hold harmless, and defend Generator and its Affiliates, as the case
may be, and their respective officers, directors, employees, agents,
contractors, subcontractors, invitees, successors and permitted assigns from and
against any and all claims, liabilities, costs, damages, and expenses
(including, without limitation, reasonable attorney and expert fees, and
disbursements incurred by any of them in any action or proceeding between
Generator and a third party or Pepco) for damage to property of unaffiliated
third parties, injury to or death of any person, including Generator's employees
or any third parties, to the extent caused by the breach of this Agreement by
Pepco or the negligence or willful misconduct of Pepco and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Pepco's performance of this Agreement, or the exercise
by Pepco of its rights hereunder.

                           7.3      Survival. The provisions of Sections 7.1 and
7.2 shall survive termination, cancellation, suspension, completion or
expiration of this Agreement.

                           7.4      Insurance Coverage. The Parties shall
maintain at their own cost the following insurance: (a) standard Commercial
General Liability insurance with limitations not less than One Hundred Million
Dollars ($100,000,000.00)in the aggregate; (b) All-Risk Property insurance in
amounts not less than one hundred percent (100%) of the full replacement cost of
the improvements located upon each Party's real property; (c) Worker's
compensation insurance as required by prevailing law and Employer's liability
insurance with limits of not less than Twenty-five Million Dollars
($25,000,000.00); and (d) such other insurance as is customary in the electric
utility industry.

                           7.5      Certificate of Insurance. The Parties agree
to furnish each other with certificates of insurance evidencing the insurance
coverage obtained in accordance with this Article 7, and the Parties agree to
notify and send copies to the other of any policies maintained hereunder upon
written request by a Party. Each Party must notify the other Party within five
(5) business days of receiving notice of cancellation, change, amendment or
renewal of any insurance policy required pursuant to Section 7.4 above.

                           7.6      Additional Insureds and Waiver. Each Party
and its affiliates shall be named as additional insureds on the general
liability insurance policies obtained in accordance with Section 7.4, above, as
regards liability under this Agreement; and each general liability insurance
policy shall contain a waiver of subrogation and each Party shall waive its
rights of recovery against the other for any loss or damage covered by such
policy.

                  8.       MISCELLANEOUS

                           8.1      Effective Date. This Agreement will be
effective on the Closing Date pursuant to the Asset Sale Agreement (the
"Effective Date").

<PAGE>   97

                           8.2      Exhibits. All exhibits attached to this
Agreement are part of this Agreement and the material contained in such exhibits
shall be construed and interpreted as if contained within the text of the
Agreement.

                           8.3      Headings. The Article and Section headings
of this Agreement are for convenience and reference only and in no way define,
limit or describe the scope and intent of this Agreement, nor in any way affect
this Agreement.

                           8.4      Interpretation. When a reference is made in
this Agreement to an Article, Section, Schedule or Exhibit, such reference shall
be to an Article or Section of, or Schedule or Exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation" or equivalent words. The words
"hereof", "herein" and "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. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms and to the
masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument, statute, regulation, rule or order defined or referred to
herein or in any agreement or instrument that is referred to herein means such
agreement, instrument, statute, regulation, rule or order as from time to time
amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes, regulations,
rules or orders) by succession of comparable successor statutes, regulations,
rules or orders and references to all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns. Each Party acknowledges that it has been represented by
counsel in connection with the review and execution of this Agreement and,
accordingly, there shall be no presumption that this Agreement or any provision
hereof be construed against the Party that drafted this Agreement.

                           8.5      GOVERNING LAW. EXCEPT WITH RESPECT TO THE
CREATION, PERFECTION AND ENFORCEMENT OF THE REAL PROPERTY INTERESTS CREATED
HEREUNDER, WHICH SHALL BE GOVERNED AND CONSTRUED BY THE LAWS OF THE STATE, THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
DISTRICT OF COLUMBIA EXCLUSIVE OF ITS CHOICE OF LAW RULES.

                           8.6      Entire Agreement. This Agreement, the Asset
Sale Agreement, the Site Lease, the Confidentiality Agreement (as defined in the
Asset Sale Agreement) and the Ancillary Agreements (as defined in the Asset Sale
Agreement) including the Exhibits, Schedules, documents, certificates and
instruments referred to herein or therein and other contracts, agreements and
instruments contemplated hereby or thereby, embody the entire agreement

<PAGE>   98

and understanding of the Parties in respect of the transactions contemplated by
this Agreement. There are no restrictions, promises, representations,
warranties, covenants or undertakings other than those expressly set forth or
referred to herein or therein.

                           8.7      Amendment and Modification, Extension,
Waiver. This Agreement may be amended, modified or supplemented only by an
instrument in writing signed on behalf of each of the Parties. Either Party may
(i) extend the time for the performance of any of the obligations or other acts
of the other Party, (ii) waive any inaccuracies in the representations and
warranties of the other Party contained in this Agreement or (iii) waive
compliance by the other Party with any of the agreements or conditions contained
in this Agreement. Any agreement on the part of a Party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such Party. The failure of a Party to this Agreement to assert any of
its rights under this Agreement or otherwise shall not constitute a waiver of
such rights.

                           8.8      Binding Effect. The covenants, conditions,
restrictions, encumbrances, easements, license and agreements set forth in this
Agreement shall attach to, burden, and run with the land and the Generator's
Real Property and the Pepco Real Property or the applicable portion or portions
thereof, and shall be appurtenant to the Generator's Property or the Pepco Real
Property, as appropriate and, together with the remainder of this Agreement,
shall be binding upon the Parties hereto and their respective successors,
assigns, grantees, transferees and tenants and, together with the remainder of
this Agreement, shall inure to the benefit and Use of the Parties hereto and
their respective heirs, successors, assigns, grantees, transferees and tenants.
Each Grantee of any portion of or interest in the property and each mortgagee
which succeeds to the fee simple ownership of any portion of the property shall
be deemed, by the acceptance of the deed conveying fee simple title to such
person, to have agreed to perform each and every undertaking created hereunder
attributable to the portion of the property in which such Grantee or mortgagee
has acquired an interest.

                           8.9      Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.

                           8.10     Severability. If any term or other provision
of this Agreement is invalid, illegal or incapable of being enforced by any rule
of law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect. Upon such determination that
any term or other provision is invalid, illegal or incapable of being enforced,
the Parties shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the Parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.

<PAGE>   99

                           8.11     Notices. All notices and other
communications hereunder shall be in writing and shall be deemed given (as of
the time of delivery or, in the case of a telecopied communication, of
confirmation) if delivered personally, telecopied (which is confirmed) or sent
by overnight courier (providing proof of delivery) to the Parties at the
following addresses (or at such other address for a Party as shall be specified
by like notice):

         if to Pepco, to:

               Potomac Electric Power Company
               1900 Pennsylvania Avenue, N.W.
               Washington, D.C.  20068
               Telecopier:  (202) 261-7889
               Attention:  William T. Torgerson, General Counsel

         with a copy to:

               Dickstein Shapiro Morin & Oshinsky LLP
               2101 L Street, N.W.
               Washington, D.C.  20037
               Telecopy No.:  (202) 887-0689
               Attention:  Kenneth M. Simon, Esq.

         if to Generator, to:

               Southern Energy, Inc.
               900 Ashwood Parkway
               Suite 500
               Atlanta, Georgia  30338-4780
               Telecopier:  (770) 821-6575
               Attention:

         with a copy to:

               Troutman Sanders LLP
               1300 I Street, N.W.
               Suite 500 East
               Washington, DC  20005
               Telecopier:  (202) 274-2994
               Attention:  Benjamin L. Israel, Esq.

The names, titles and addresses of either Party in this section may be changed
by written notification to the other Party.

<PAGE>   100

                           8.12     Independent Contractor Status. Nothing in
this Agreement shall be construed as creating any relationship between Pepco and
Generator other than that of independent contractors.

                           8.13     Conflicts. Except with respect to the
amendments, indemnification, liability, default and remedies provisions
contained herein or as otherwise expressly provided herein, in the event of any
conflict or inconsistency between the terms of this Agreement and the terms of
the Asset Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

         IN WITNESS WHEREOF, Pepco and Generator have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.

                                    POTOMAC ELECTRIC POWER COMPANY

                                    By:
                                         --------------------------------------
                                    Name:
                                          -------------------------------------
                                    Title:
                                           ------------------------------------

                                    [GENERATOR]

                                    By:
                                         --------------------------------------
                                    Name:
                                          -------------------------------------
                                    Title:
                                           ------------------------------------

<PAGE>   101

STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State, personally
appeared ____________________________, an ______________________, by
_____________________, its ________ who _________ is personally known to
me/________ and who acknowledged before me that he did sign the foregoing
instrument and that the same is the free act and deed of said _______________,
and his free act and deed personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                                    -------------------------------------------
                                    Notary Public

                                    My Commission Expires:

STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State, personally
appeared _______________________, an ___________________, by ________________
its _____________________ who _______ is personally known to me/________ and who
acknowledged before me that he did sign the foregoing instrument and that the
same is the free act and deed of said corporation, and his free act and deed
personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                                    -------------------------------------------
                                    Notary Public

                                    My Commission Expires:

<PAGE>   102

                                 Schedule 1.1

                                 Definitions

         "Access" means, subject to the conditions set forth in this Agreement
and a Party's right to impose reasonable security and safety restrictions
protecting its officers, employees, agents, consultants, contractors,
subcontractors, invitees, property and confidential information, full and
unimpeded access, in common with Grantor over and through existing roads, paths,
walkways, corridors, hallways, doorways, and other means of entry or exit, as
exist now and from time to time on Grantor's property or, where no means of
access exists, over and through those areas of Grantor's property or
improvements which are (i) reasonably necessary or convenient for achieving
Grantee's underlying purposes, and (ii) least likely, out of the alternatives
reasonably available, to impede or damage the property or operation of any Party
hereto. Access shall also include access and right-of-way for Grantee's
employees, agents, consultants, contractors, subcontractors, vehicles, trucks,
trailers, heavy machinery, equipment, materials, and all other items reasonably
necessary or convenient for achieving Grantee's underlying purposes.

         "Affiliate" has the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934.

         "Agreement" means this Easement, License and Attachment Agreement.

         "Asset Sale Agreement" has the meaning set forth in the first recital
of this Agreement, as such Asset Sale Agreement may be amended or modified.

         "Connection Agreement" means the Interconnection Agreement (Potomac
River), dated as of __________, 2000, between Pepco and Generator.

         "Distribution of Electric Current" means local transmission and
distribution of electricity to Pepco's end users.

         "Distribution Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions, replacements and expansions thereto, now
or hereafter installed or located on the Generator's Real Property for
Distribution of Electric Current. Distribution Facilities do not include
Transmission Facilities.

         "Effective Date" has the meaning set forth in Section 8.l.

         "FERC" means the Federal Energy Regulatory Commission or its
successors.

<PAGE>   103

         "Generating Facilities" means the Station and any additional generating
plants, turbines or other generating facilities constructed by Generator after
the Effective Date at the site of the Station.

         "Generator's Improvements" shall have the meaning given it by the first
recital of the Agreement.

         "Generator" shall have the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors and
assigns.

         "Generator's Leasehold Property" means the real property described in
Exhibit A.

         "Good Utility Practice" shall have the meaning given it by the
Connection Agreement.

         "Grantee" means the Party or Parties who enjoy the principal benefit of
the referenced easement, license, right (including attachment rights) privilege
or right-of-way.

         "Grantor" means the owner or owners of the property and/or improvement
granting the referenced easement, license, right (including attachment rights),
privilege or right-of-way.

         "Interconnection Service" shall have the meaning given it by the
Connection Agreement.

         "Non-Leased Pepco Real Property" means the real property described in
Exhibit C, and any improvements thereto now or hereafter situated thereon.

         "Party" or "Parties" shall have the meaning set forth in the
introductory paragraph of this Agreement.

         "Pepco" shall have the meaning set forth in the introductory paragraph
of this Agreement and shall include its permitted successors and assigns.

         "Pepco Real Property" means the real property described in Exhibit B,
and any improvements or betterments thereto now or hereinafter situated thereon.

         "Qualified Personnel" means individuals who possess any required
licenses and trained for their positions and duties by Generator and/or Pepco
pursuant to Good Utility Practice.

         "State" means the Commonwealth of Virginia.

         "Station" means the Potomac River Station as defined in the Asset Sale
Agreement.

<PAGE>   104

         "Transmission of Electric Current" means the transmission of such
current typically over long distances and at voltages not commonly used for
service to end use customers.

         "Transmission Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions, replacements and expansions thereto, now
or hereafter installed or located on the Generator's Real Property and/or which
Pepco may reasonably require now and from time to time on the Generator's Real
Property for the Transmission of Electric Current. Transmission Facilities do
not include Distribution Facilities.

         "Transmission System" shall have the meaning set forth in the
Connection Agreement.

         "Use" means to operate, maintain, repair, upgrade, clean, install, add
to, alter, remove, inspect, construct, modify, restore, rebuild, replace,
relocate and expand (but if any such addition, relocation or expansion would
unreasonably or materially burden Grantor's Property, in each case, the express,
prior written consent of Grantor shall be required, which consent shall not
unreasonably be withheld, delayed or conditioned) (all of the foregoing to be in
accordance with Good Utility Practice).

<PAGE>   105

                                LIST OF EXHIBITS

Exhibit A   Generator's Leasehold Property
Exhibit B   Pepco Real Property
Exhibit C   Non-Leased Pepco Real Property

<PAGE>   106

                                                                     EXHIBIT C-2

AFTER RECORDING                                   PARCEL ID#
PLEASE RETURN TO:                                 STREET ADDRESS:
_________________                                 ________________
_________________                                 _________________
_________________                                 _________________

                  EASEMENT, LICENSE AND ATTACHMENT AGREEMENT
                              (Dickerson Station)

         THIS EASEMENT, LICENSE AND ATTACHMENT AGREEMENT (the "Agreement"), is
dated as of ______________, 2000, and is entered into by and between
_______________________________________, a corporation organized and existing
under the laws of the State of __________ and having an office at
____________________________ ("Generator") and POTOMAC ELECTRIC POWER COMPANY, a
District of Columbia and Virginia corporation and having an office at 1900
Pennsylvania Avenue, N.W., Washington, DC 20068 ("Pepco"). Generator and Pepco
may hereinafter be referred to individually as a "Party" and collectively as the
"Parties."

                                   RECITALS

         A.       Generator and Pepco have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets (the "Asset Sale Agreement"),
dated June 7, 2000, for the sale of Pepco's generating station known as the
Dickerson Station (as defined in the Asset Sale Agreement), which is located on
that certain parcel of real property which has been conveyed by Pepco to
Generator pursuant to the Asset Sale Agreement by virtue of a deed recorded
immediately prior hereto and is more particularly described in Exhibit "A"
attached hereto (the "Generator's Real Property").

         B.       Pepco intends to continue to operate its transmission and
distribution business on and from that certain parcel of real property adjoining
the Generator's Real Property, which parcel has been retained by Pepco following
the conveyances contemplated by the Asset Sale Agreement, and is more
particularly described in Exhibit "B" attached hereto (the "Pepco Real
Property").

         C.       Pepco will continue to own and operate certain assets used in
the conduct of its transmission and distribution business which are located upon
the Generator's Real Property, and Pepco requires Access (as defined below) to,
and certain other rights with respect to, the Generator's Real Property in
connection therewith. Generator, in the operation and conduct of its generation
business, will require Access to, and certain other rights with respect to, the
Pepco Real Property. Furthermore, Pepco and Generator have entered into an
Interconnection Agreement (the "Connection Agreement"), dated as of __________,
2000, pursuant to which Pepco has agreed to provide certain Interconnection
Service to Generator required for Generator's conduct of its generation business
at Dickerson Station.

<PAGE>   107

         D.       In order for the Parties each to (i) enjoy the full benefit of
their respective property rights, real or personal, and conduct their respective
businesses thereat (ii) fulfill legal requirements, and (iii) comply with their
respective agreements under the Connection Agreement, each Party requires
certain easements, licenses, rights-of-way and/or attachment rights in, on, over
and above, or with respect to, real and or personal property of the other Party.

                                  AGREEMENT

         NOW, THEREFORE, the Parties, in consideration of the mutual covenants
and agreements contained herein and in the Asset Sale Agreement and the
Connection Agreement, and for One Dollar ($1.00) and other good and valuable
consideration, the receipt whereof and sufficiency of which are hereby
acknowledged, each intending to be legally bound and to bind their respective
successors and assigns, hereby mutually agree as follows:

         1.       DEFINITIONS

                  1.1      Definitions. Any capitalized terms which are used but
not defined in the body of this Agreement shall have the meanings given to such
terms in the attached Schedule 1.1.

         2.       EASEMENTS

                  2.1      Grant of Easements to Pepco. Generator does hereby
give, grant, bargain, sell, assign and convey unto Pepco, the following
easements on the Generator's Real Property for the following purposes:

                           (a)      A one hundred twenty-five (125) foot wide
utility easement, as more particularly described in Exhibit "C" attached hereto,
for the installation, operation, repair and maintenance of above and/or below
ground power and other utility lines utilized in connection with the
transmission and distribution business of Pepco (as now or hereafter conducted)
and other functions as Pepco may determine from time to time.

                           (b)      An above ground easement as more
particularly described in Exhibit "D" attached hereto, for connection of a 230kV
circuit to Generator's start-up transformer and the operation, repair and
maintenance of said connection.

                           (c)      An easement for the Use, operation and
maintenance of the Retained Assets (as described in the Asset Sale Agreement)
located upon the Generator's Real Property and any other equipment of any nature
or kind retained by Pepco and located upon the Generator's Real Property,
together with any other equipment used in connection with the foregoing
(together with replacements thereof and substitutions therefor).

<PAGE>   108

                           (d)      An easement which enables Pepco to keep and
maintain in their present locations, and operate, any Transmission Facilities,
Distribution Facilities and other assets owned by Pepco and located upon the
Generator's Real Property, together with an easement for all purposes reasonably
deemed necessary or convenient by Pepco to exercise any right or fulfill any
obligation under the Connection Agreement, including the right to Use any
improvements constructed, maintained or installed in connection therewith.

                           (e)      An easement of Access to those certain
generating buildings (and any replacements thereof) located upon the Generator's
Real Property in and upon which certain of Pepco's Distribution Facilities and
Transmission Facilities are located. Such easement shall include, without
limitation, the right to have keys, access codes or other access methods
necessary to enter any of such generating buildings. Furthermore, the exercise
of the easement right set forth in this subparagraph shall be subject to the
provisions of the Connection Agreement including, without limitation, Section
3.3 thereof.

                           (f)      An easement of Access to the Generator's
Real Property for the purposes of exercising any of the rights granted in this
Section 2.l, in Section 2.3(b)(viii) hereof, in the Connection Agreement or the
Asset Sale Agreement.

                           (g)      An easement of Access to, and the right to
use, the parking lots, access roads, driveways and other such facilities located
upon the Generator's Real Property.

                           (h)      Pepco's exercise of the rights, easements,
privileges and licenses granted to it pursuant to this Section 2.1 shall be
limited to Qualified Personnel or employees of contractors employed by Pepco
who, in either event, are under Pepco's and/or its contractors' direct
supervision and whose duties include, or who are engaged for the purpose of, Use
of the rights granted pursuant to this Section 2.1.

                           (i)      The easements granted pursuant to this
Section 2.1 shall expressly include Pepco's right to lease, license or otherwise
permit Affiliates or third parties to use Pepco's facilities upon such terms and
for such purposes as Pepco may determine from time to time, subject to the terms
and conditions of this Agreement.

                  2.2      Reservation by Generator of Certain Rights. Generator
reserves to itself, from the easements granted pursuant to Section 2.1 hereof,
the following rights, subject, however, to the provisions of the final paragraph
of this Section 2.2:

                           (a)      the right to (i) keep and maintain
Generator's Real Property and all improvements and facilities owned by Generator
and located upon the Generator's Real Property in their present locations, and
(ii) operate and maintain all improvements and facilities owned by Generator and
located upon the Generator's Real Property in a manner consistent with past
practice; and

<PAGE>   109

                           (b)      the right to have Access to all portions of
the Generator's Real Property for all purposes deemed reasonably necessary or
convenient by Generator in the operation and conduct of its generation business
or in order to perform any act permitted, or fulfill any obligation of
Generator, under the Connection Agreement, including maintenance of the
Generator's Real Property in the manner described in the Connection Agreement.

                           (c)      Generator's exercise of the rights reserved
to Generator in this Section 2.2, and the rights, privileges and licenses
granted to Generator in Section 2.3 shall be exclusively limited to Qualified
Personnel or employees of contractors employed by Generator who, in either
event, are under Generator's and/or its contractors' direct supervision and
whose duties include, or who are engaged for the purpose of, Use of the property
described in clause (a) of this Section.

                  2.3      Grant of Easements, Right, Privilege and License from
Pepco to Generator.

                           (a)      Pepco does hereby grant to Generator the
following easements, rights, privileges and licenses on and with respect to the
Pepco Real Property:

                                    (i)      An easement of Access to and upon
the Pepco Real Property from Martinsburg Road (or other public right of way) for
ingress and egress to Dickerson Station and the other Generating Facilities.
(ii) An easement which enables Generator to keep and maintain in their present
locations, and operate, any Generating Facilities and other assets owned by
Generator and located upon the Pepco Real Property.

                                    (ii)     An easement which enables Generator
to keep and maintain in their present locations, and operate, any Generating
Facilities and other assets owned by Generator and located upon the Pepco Real
Property.

                                    (iii)    An easement of Access to and upon
the Pepco Real Property for the purposes of exercising any of the rights granted
in the Connection Agreement or the Asset Sale Agreement.

                           (b)      In addition, but without limitation of
Generator's rights pursuant to the Connection Agreement, Pepco agrees to make
available to Generator (at no cost to Generator, except as provided below)
Pepco's master station voltage control equipment (the "Equipment") located at
Dickerson Station upon the Generator's Real Property during the term of this
Agreement, subject to the following terms and conditions, and Generator agrees
to comply with such terms and conditions:

                                    (i)      Generator's operation of the
Equipment shall at all times be subject to that certain Agreement of Sale and
Lease dated as of November 30, 1994 between NationsBank Trust Company, National
Association and Pepco (the "Control Center Lease"), and Generator shall comply
with the terms and conditions thereof with respect to the use of the Equipment
(including keeping the Equipment free

<PAGE>   110

and clear of any liens, claims or encumbrances of whatever nature, and
identifying the Equipment as being owned by Pepco, and shall not modify, alter,
remove or add to the Equipment);

                                    (ii)     Generator shall operate and
maintain the Equipment in accordance with Good Utility Practice;

                                    (iii)    Generator shall be responsible for
all operating, repair and maintenance costs, taxes and the like with respect to
the Equipment, and shall reimburse Pepco promptly upon invoicing for any such
costs paid by Pepco;

                                    (iv)     Generator's Access to the Equipment
shall be in accordance with this Agreement;

                                    (v)      Generator's right to operate the
Equipment shall terminate in the event of actual or constructive loss of the
Equipment, damage rendering the Equipment beyond repair or unfit for normal use,
the condemnation or seizure of the Equipment, the obsolescence of the Equipment
or the material breach by Generator of any of its covenants in this Section
2.3(b);

                                    (vi)     Pepco shall have no obligation to
Generator with respect to the Equipment other than to permit Access to and
operation of the Equipment in accordance with this Section 2.3(b); and

                                    (vii)    The obligations of Generator under
Section 7.4 (maintenance of liability insurance coverage) and Section 7.1
(indemnification) shall be applicable to the Equipment.

                                    (viii)   Pepco shall have Access to the
Equipment for purposes of complying with the terms and conditions of the Control
Center Lease and as necessary to perform any of the obligations of Generator
pursuant to this subparagraph (b) above to the extent the same are not timely
performed by Generator.

                  2.4      General Scope of Easements.

                           (a)      Except as otherwise provided in Sections 2.2
and 2.3 above and Section 2.4(b) below, each easement and each right, privilege
and license granted hereby is and shall be a perpetual grant, transfer,
conveyance and right of Access to and Use (subject to the terms of this
Agreement) to the Grantee thereof and to any future owner of

<PAGE>   111

the real property, improvements and facilities benefited thereby.
Notwithstanding the foregoing, all easements, rights, privileges and licenses
granted by this Agreement are and shall be subject to the terms and conditions
of the Connection Agreement, and in the event of any inconsistency between the
terms and conditions of the Connection Agreement and the terms of this
Agreement, the terms of the Connection Agreement shall control.

                           (b)      Any easement or right, privilege and license
granted hereunder for purposes of enabling a Party to exercise any right or
fulfill any obligation set forth in the Connection Agreement will continue for
the term of the Connection Agreement, and thereafter if and to the extent that
the right or obligation (i) shall by its express terms survive the termination
or expiration of the Connection Agreement or (ii) is necessary for the conduct
of business by Grantee. In the event of the termination or expiration of an
easement or right, privilege and license granted hereunder for purposes of
enabling a Grantee to exercise any right or fulfill any obligation set forth in
the Connection Agreement, all equipment and facilities installed or maintained
by such Grantee on the real property of the other Party pursuant to said
terminated or expired easement or right, privilege and license shall, at the
request of the other Party, be removed at the sole cost and expense of such
Grantee, and such Grantee shall, at its sole cost and expense repair any damage
to the real property and/or equipment and facilities of the other Party damaged
as a result of such removal.

                           (c)      All equipment and facilities installed or
maintained by Grantee pursuant to an easement or right, privilege and license
granted hereunder shall be maintained by Grantee in accordance with Good Utility
Practice and the Connection Agreement, and Grantee shall make all repairs and
replacements necessary to keep such equipment and facilities in such condition.

                           (d)      Generator may not Use any portion of
Generator's Real Property burdened by any easement, right or privilege granted
to Pepco hereunder if such Use would materially adversely affect the Use and
enjoyment by Pepco of the rights granted to it hereunder, or materially increase
the costs or risks associated with such Use.

                           (e)      All easements granted herein shall be deemed
easements appurtenant to the parcel of real property benefited thereby and shall
run with such real property and shall be deemed covenants running with the real
property burdened thereby.

                  2.5      Interpretation. The following shall apply in
interpreting any easement and any right, privilege and license granted pursuant
to this Agreement:

                           (a)      Each easement and each right, privilege and
license granted herein is irrevocable except by written agreement of the
parties.

<PAGE>   112

                           (b)      With respect to any easement created by this
Agreement, the words "in," "upon," "to," "on," "over," "above," "through" and/or
"under" shall be interpreted to include all of such terms.

                           (c)      Each easement and each right, privilege and
license granted herein may be enjoyed without charge or fee to Grantee of the
easement.

                           (d)      Each easement and each right, privilege and
license granted herein is also a grant of the additional right of Access over
Grantor's property to accomplish the purpose of such easement or right,
privilege and license, to perform any obligations hereunder or in the Connection
Agreement, and to comply with any legal requirements affecting Grantee or its
property and/or improvements.

                           (e)      Exercise of any easement or any right,
privilege and license granted hereunder permitting or requiring maintenance,
repairs, alteration, restoration, rebuilding, construction, upgrading, cleaning,
installation, removal, modification, replacement, expansion, or other work by
Grantee upon the property or improvements of Grantor shall be subject to the
following conditions:

                                    (i)      Work upon the facilities and
properties of either Party subject to this Agreement shall be permitted only to
each Party's Qualified Personnel, and Access to such facilities and properties
shall be permitted only to a Party's Qualified Personnel and such consultants,
agents, contractors, subcontractors and invitees as any Party may select or
permit; provided that any consultant, agent, contractor, subcontractor or
invitee shall comply with all applicable provisions of this Agreement and the
Connection Agreement.

                                    (ii)     Work shall be performed using
reasonable precautions to avoid unreasonable interference with the Use and
enjoyment of Grantor's property and improvements.

                                    (iii)    Except only as may be specifically
provided to the contrary herein, Grantee shall not be liable for damage, if any,
which may be caused by Grantee's normal and reasonable Use of any easement, or
right, privilege or license granted hereunder.

                                    (iv)     Following completion of the work,
Grantee shall restore Grantor's property and improvements to the same or as good
a condition as existed before the commencement of the work.

                                    (v)      Any easement and any right,
privilege and license granted herein which permits a Grantee to maintain its
property,

<PAGE>   113

equipment, facilities and appurtenance on the property and improvements owned by
Grantor also includes the right to maintain in place on Grantor's property and
improvements any and all wires and cables connecting such property, equipment,
facilities, and appurtenances to (i) the devices, machinery and equipment which
they measure, regulate and/or control, and (ii) power sources.

                                    (vi)     Generator shall be solely
responsible for the maintenance of any roads, paths and other means of entry or
exit located upon either the Generator's Real Property or the Pepco Real
Property that are commonly utilized by Generator and Pepco, and their respective
employees, agents and contractors pursuant to this Agreement or the Connection
Agreement.

                           (f)      Any easement granted pursuant to Section
2.1(a), (b), (c) or (d) includes the right to (i) trim, cut, treat and/or
remove, by manual, mechanical, and chemical means, any and all trees, brush,
structures and other obstructions within the easement area, as well as such
trees, brush, structures and vegetation outside of the easement area deemed
reasonably necessary or desirable by Pepco for the safe and secure operation of
its facilities; and (ii) obtain Access to Generator's Real Property for the
purpose of performing the aforementioned acts.

                  2.6      Rules and Regulations.

         Each Party may promulgate rules regulating the conduct of the other
Party in the exercise of rights under this Agreement provided such rules and
regulations do not unreasonably interfere with or impede the affected Party's
rights and easements as set forth herein or in the Connection Agreement.

                  2.7      No Obstruction.

                           (a)      No Party hereto shall obstruct the easements
or the rights, privileges and licenses granted or created pursuant to this
Agreement or render them impassable or unusable in any way or otherwise in any
way interfere with the right to the Use and enjoyment of the easements or
rights, privileges and licenses granted or created pursuant to this Agreement.

                           (b)      No Party hereto shall make any changes to
the topography or accesses on or to its respective property, including grading
or drainage that could reasonably be expected to adversely affect another
Party's facilities, common use drainage systems, or pollution control systems,
or the exercise of any right or fulfillment of any obligation in this Agreement
or in the Connection Agreement, without the prior written consent of the other
Party which consent shall not unreasonably be withheld, delayed or conditioned.

<PAGE>   114

         3.       TAXES, ASSESSMENTS AND OTHER CHARGES

                  3.1      Real Estate Taxes. Generator, with respect to the
Generator's Real Property and Pepco, with respect to the Pepco Real Property,
shall pay and discharge all of the following ("Real Estate Taxes") whether or
not now within the contemplation of the Parties hereto: (i) all real estate
taxes, assessments (both general and special), other governmental impositions
and charges, taxes, rents, levies and sums of every kind or nature whatsoever,
extraordinary as well as ordinary, as shall at any time be imposed by any
governmental or public authority on, or become a lien in respect of, the
Generator's Real Property or the Pepco Real Property, as the case may be, or any
part thereof, or which may become due and payable with respect thereto, and any
and all taxes assessments and charges levied, assessed or imposed upon the
Generator's Real Property or the Pepco Real Property, as the case may be, in
lieu of or in addition to, the foregoing, under or by virtue of any present or
future laws, rules, requirements, orders, directives, ordinances or regulations
of the United States of America or of the State or of any subdivision thereof,
or of any lawful governmental authority whatsoever, and any interest or
penalties thereon, and (ii) all other taxes (excluding gains, sales and income
taxes but including occupancy taxes which are measured by income) measured by
ownership of the Generator's Real Property or the Pepco Real Property, as the
case may be. Generator shall pay and discharge all levies and assessments for
water, water meter (including any expenses incident to the installation, repair
or replacement of any water meter) and sewer and all rents with respect to water
and sewer which provide service to the Generator's Real Property.

                  3.2      Personal Property Taxes. Generator and Pepco shall,
respectively, pay and discharge all of the following ("Personal Property Taxes")
whether or not now within the contemplation of the Parties hereto: all taxes and
assessments which shall or may be charged, levied, assessed or imposed upon, or
become a lien upon, the personal property of Generator or Pepco, as the case may
be, Used in the operation or in connection with the business conducted at the
Generator's Real Property or the Pepco Real Property, as the case may be.

                  3.3      Timing of Payment. Subject to the provisions of
Section 3.5, Generator and Pepco shall each comply with its covenant to pay and
discharge all Real Estate Taxes and Personal Property Taxes by paying all such
taxes directly to the appropriate taxing authorities prior to the expiration of
the period within which payment is permitted without penalty or interest.
Generator and Pepco shall within twenty (20) days of written request of the
other Party, produce the most recent official receipts from the appropriate
taxing authorities evidencing such payment certified by Generator or Pepco, as
the case may be, to the other Party hereto.

                  3.4      Cooperation with respect to Tax Statements. Generator
and Pepco will cooperate with each other in obtaining and/or retaining any tax
abatement for which the Generator's Real Property or Pepco Real Property may be
eligible. Upon written request of the Party seeking an abatement, the other
Party or Parties hereto will

<PAGE>   115

execute and file any and all documents and instruments reasonably necessary to
obtain and retain such abatement, without the assumption of any liabilities or
obligations, provided that the Party seeking such abatement shall reimburse the
cooperating Party or Parties for any reasonable expenses that such cooperating
Party or Parties may incur in connection therewith.

                  3.5      Tax Contests. Generator, with respect to the
Generator's Real Property, and Pepco, with respect to the Pepco Real Property:

                           (a)      May contest in good faith by appropriate
proceedings diligently and continuously conducted, at its or their sole cost and
expense, any Real Estate Tax or charge or Personal Property Tax or charge, or
similar tax or charge and, where permitted by law, pay the same under protest.

                           (b)      Shall pay and discharge such contested items
as finally adjudicated or settled, with interest and penalties, and all other
charges directed to be paid in or by any such adjudication or settlement.

                           (c)      May, in its or their sole discretion,
consolidate any proceeding to obtain a reduction in the assessed valuation with
any similar proceeding or proceedings brought by it or them relating to any one
or more other tax years.

                           (d)      Shall indemnify and hold the non-contesting
Party harmless from and against all liability, loss, cost or expense arising out
of the contest.

                  3.6      Refunds. Any refunds from any contest undertaken
pursuant to Section 3.5 shall belong wholly to the Party or Parties that paid
the tax.

         4.       MECHANICS' LIENS

                  4.1      Notice Regarding Labor and Material. Notice is hereby
given that no Party hereto shall be liable for any labor or materials furnished
or to be furnished to or for another Party hereto or to any other persons or
entities claiming under such other Party on credit, and that no mechanics' or
other lien for any such labor or material furnished to a Party or such other
persons or entities shall attach to or affect any property interest of any other
Party.

                  4.2      Disposition of Liens.

                           (a)      Pepco shall forthwith take such action
necessary to discharge, remove or satisfy any lien filed against the Generator's
Real Property or any portion thereof for any labor or materials furnished or to
be furnished for or on behalf of Pepco, or any person or entity holding any
portion thereof through or under Pepco.

<PAGE>   116

                           (b)      Generator shall forthwith take such action
necessary to discharge, remove or satisfy any lien filed against the Pepco Real
Property or any portion thereof for any labor or materials furnished or to be
furnished for or on behalf of Generator, or any person or entity holding any
portion thereof through or under Generator.

                           (c)      If either Pepco or Generator, as the case
may be, shall fail to discharge, remove or satisfy any such lien which it is
obligated to discharge, remove or satisfy hereunder within ten (10) days after
notice of the existence of the lien has been given to such defaulting Party, the
non-defaulting Party or parties may pay the amount of such lien or discharge the
same by deposit or bonding, and the amount so paid or deposited, or the premium
paid for such bond, with interest at the rate provided for defaults in Section
6.3 hereof, shall be paid by the defaulting Party upon demand to the
non-defaulting Party who effected such cure.

                           (d)      The defaulting Party shall defend, indemnify
and save harmless the non-defaulting Party from and against all liability, loss,
cost or expense (including reasonable attorneys' fees) arising out of any liens
which the defaulting Party is obligated to discharge, remove or satisfy.

         5.       CONDEMNATION

                  5.1      Right to Participate. In the event the Generator's
Real Property or the Pepco Real Property, or any part thereof, shall be taken in
condemnation proceedings or by exercise of any right of eminent domain or any
agreement with those authorized to exercise such right (any such matter being
hereinafter referred to as a "Taking" or property "Taken"), whether such Taking
be a permanent taking or a temporary Taking, any person or entity having an
interest in the award or awards shall have the right to participate in any such
condemnation proceedings or agreement for the purpose of protecting its interest
hereunder. Each Party so participating shall pay its own expenses.

                  5.2      Total Taking. A "Total Taking" shall be deemed to
have occurred as to the property of any Party (which means the Generator's Real
Property, as to Generator, and the Pepco Real Property, as to Pepco) when the
entire property of such Party shall be Taken or a substantial part of such
property shall be Taken and the untaken portion of the property would, following
the completion of restoration, be unsuitable for the operation and the Use
thereof in the manner so operated and Used prior to the Taking. Upon a Total
Taking, this Agreement shall terminate with respect to the property Taken except
with respect to the disposition of the award and this Agreement shall continue
with respect to the property not Taken.

                  5.3      Disposition of Award. In the event of a Taking, each
Party shall be entitled to share in the awards to the extent of its interest in
the property subject to the

<PAGE>   117

Taking, and for consequential damages to and dilution of value of the relevant
property not so Taken.

                  5.4      Notice of Taking. In the event the Generator's Real
Property or the Pepco Real Property, or any part thereof, shall be the subject
of any condemnation proceedings or the subject of any eminent domain
proceedings, and if any Party shall receive actual notice of such proceedings,
the Party receiving such notice shall notify the other Party of the existence of
such proceedings. Such notification shall occur within thirty (30) days of the
receipt of such actual notice.

         6.       DEFAULTS

                  6.1      Events of Default. Each and every one of the
following events shall constitute an Event of Default ("Event of Default') under
this Agreement:

                           (a)      If a Party fails to make any payment due
within twenty (20) days of written demand for such payment;

                           (b)      If a Party fails, within twenty (20) days of
written notice from a Party, to make any payment due from such Party to any
third party and such failure could result in the imposition of a lien or other
encumbrance on the property or improvements of a Party, unless the payment of
such amount is contested in accordance with Section 3.5 hereof, in which case,
the provisions of Section 3.5 shall control; and

                           (c)      If a Party fails to perform any material
non-monetary obligations hereunder, and said Party fails to cure such default
within thirty (30) days of receipt of written notice stating with particularity
the nature of the default; provided, however, if such default is of such a
nature that it cannot be cured within thirty (30) days following receipt of such
notice, an Event of Default shall not have occurred if the defaulting Party
shall within such thirty (30) days commence the necessary cure and shall at all
times thereafter diligently and continuously prosecute such cure to completion.

                  6.2      Right of Self Help. A non-defaulting Party may at its
election following the occurrence of a non-monetary Event of Default and the
thirtieth (30th) day after the receipt of the written notice specified in
paragraph 6.1(c) hereof, undertake the cure of such default on behalf of the
defaulting Party. A non-defaulting Party is granted an easement to enter upon,
through or under the property or improvements of the defaulting Party to effect
such cure. Following the occurrence of an Event of Default involving the payment
of money to a person or entity not Party to this Agreement, a non-defaulting
Party may make such payment on behalf of the defaulting Party. All monies paid
by the non-defaulting Party and all reasonable costs and expenses (including,
reasonable attorneys' fees) incurred by it, as the case may be, in effecting
such cure or payment, shall be paid by the defaulting Party upon written demand,
together with interest from the date of such

<PAGE>   118

demand at the rate set forth in Section 6.3. This Section 6.2 shall not limit
Pepco's self-help rights pursuant to Section 2.3(b).

                  6.3      Interest. Following the occurrence of an Event of
Default involving the nonpayment of money by the defaulting Party to the
non-defaulting Party, all monies owed to the non-defaulting party shall bear
interest at the rate equal to one and one-half percent (1.5%) per month accruing
on the due date, provided, however, that such late payment charge shall not
exceed the maximum charge which may be collected under State law.

                  6.4      Enforcement Rights. In addition to any other rights
expressly set forth in this Agreement, but without limitation, enforcement of
this Agreement may be had by legal or equitable proceedings against any
defaulting Party either to specifically enforce, restrain or enjoin the
violation of any restriction, covenant, agreement, term, representation or
warranty herein contained or to recover damages. The above notwithstanding,
termination of this Agreement shall not be available as a remedy in any
proceedings against any defaulting Party.

                  6.5      No Forfeiture. Except by enforcement of a judgment
lien against such property, nothing contained in this Agreement shall create any
reversion, condition or right of re-entry or other provisions for forfeiture
under which any Party can be cut off, subordinated or otherwise disturbed in the
possession of its property.

                  6.6      Independent Covenants. None of the rights and
easement granted by this Agreement and none of the performances required by this
Agreement shall be dependent, upon the performance of any other term, promise,
or condition of this Agreement or any documents executed concurrently or in
connection with this Agreement, and such rights, easement and requirements or
performance shall continue in effect irrespective of whether anything else in
this Agreement or such other documents has been breached or has been terminated.
The separateness and independent survival of the right, easements and
requirements of performance under this Agreement are essential terms hereof
without which this Agreement would not have been made.

         7.       INDEMNIFICATION AND INSURANCE

                  7.1      Generator's Indemnification. Generator shall
indemnify, hold harmless, and defend Pepco and its Affiliates, as the case may
be, and their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between Pepco and a third party or
Generator) for damage to property of unaffiliated third parties, injury to or
death of any person, including Pepco's employees or any third parties, to the
extent caused, by the breach of this Agreement by Generator or the negligence or
willful misconduct of

<PAGE>   119

Generator's and/or its officers, directors, employees, agents, contractors,
subcontractors or invitees arising out of or connected with Generator's
performance of this Agreement, or the exercise by Generator of its rights
hereunder.

                  7.2      Pepco's Indemnification. Pepco shall indemnify, hold
harmless, and defend Generator and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between Generator and a third party or Pepco) for
damage to property of unaffiliated third parties, injury to or death of any
person, including Generator's employees or any third parties, to the extent
caused by the breach of this Agreement by Pepco or the negligence or willful
misconduct of Pepco and/or its officers, directors, employees, agents,
contractors, subcontractors or invitees arising out of or connected with Pepco's
performance of this Agreement, or the exercise by Pepco of its rights hereunder.

                  7.3      Survival. The provisions of Sections 7.1 and 7.2
shall survive termination, cancellation, suspension, completion or expiration of
this Agreement.

                  7.4      Insurance Coverage. The Parties shall maintain at
their own cost the following insurance: (a) standard Commercial General
Liability insurance with limitations not less than One Hundred Million Dollars
($100,000,000.00)in the aggregate; (b) All-Risk Property insurance in amounts
not less than one hundred percent (100%) of the full replacement cost of the
improvements located upon each Party's real property; (c) Worker's compensation
insurance as required by prevailing law and Employer's liability insurance with
limits of not less than Twenty-five Million Dollars ($25,000,000.00); and (d)
such other insurance as is customary in the electric utility industry.

                  7.5      Certificate of Insurance. The Parties agree to
furnish each other with certificates of insurance evidencing the insurance
coverage obtained in accordance with this Article 7, and the Parties agree to
notify and send copies to the other of any policies maintained hereunder upon
written request by a Party. Each Party must notify the other Party within five
(5) business days of receiving notice of cancellation, change, amendment or
renewal of any insurance policy required pursuant to Section 7.4 above.

                  7.6      Additional Insureds and Waiver. Each Party and its
affiliates shall be named as additional insureds on the general liability
insurance policies obtained in accordance with Section 7.4, above, as regards
liability under this Agreement; and each general liability insurance policy
shall contain a waiver of subrogation and each Party shall waive its rights of
recovery against the other for any loss or damage covered by such policy.

         8.       MISCELLANEOUS

<PAGE>   120

                  8.1      Effective Date. This Agreement will be effective on
the Closing Date pursuant to the Asset Sale Agreement (the "Effective Date").

                  8.2      Exhibits. All exhibits attached to this Agreement are
part of this Agreement and the material contained in such exhibits shall be
construed and interpreted as if contained within the text of the Agreement.

                  8.3      Headings. The Article and Section headings of this
Agreement are for convenience and reference only and in no way define, limit or
describe the scope and intent of this Agreement, nor in any way affect this
Agreement.

                  8.4      Interpretation. When a reference is made in this
Agreement to an Article, Section, Schedule or Exhibit, such reference shall be
to an Article or Section of, or Schedule or Exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation" or equivalent words. The words
"hereof", "herein" and "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. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms and to the
masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument, statute, regulation, rule or order defined or referred to
herein or in any agreement or instrument that is referred to herein means such
agreement, instrument, statute, regulation, rule or order as from time to time
amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes, regulations,
rules or orders) by succession of comparable successor statutes, regulations,
rules or orders and references to all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns. Each Party acknowledges that it has been represented by
counsel in connection with the review and execution of this Agreement and,
accordingly, there shall be no presumption that this Agreement or any provision
hereof be construed against the Party that drafted this Agreement.

                  8.5      GOVERNING LAW. EXCEPT WITH RESPECT TO THE CREATION,
PERFECTION AND ENFORCEMENT OF THE REAL PROPERTY INTERESTS CREATED HEREUNDER,
WHICH SHALL BE GOVERNED AND CONSTRUED BY THE LAWS OF THE STATE, THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE DISTRICT
OF COLUMBIA EXCLUSIVE OF ITS CHOICE OF LAW RULES.

                  8.6      Entire Agreement. This Agreement, the Asset Sale
Agreement, the Confidentiality Agreement (as defined in the Asset Sale
Agreement) and the Ancillary

<PAGE>   121

Agreements (as defined in the Asset Sale Agreement) including the Exhibits,
Schedules, documents, certificates and instruments referred to herein or therein
and other contracts, agreements and instruments contemplated hereby or thereby,
embody the entire agreement and understanding of the Parties in respect of the
transactions contemplated by this Agreement. There are no restrictions,
promises, representations, warranties, covenants or undertakings other than
those expressly set forth or referred to herein or therein..

                  8.7      Amendment and Modification, Extension, Waiver. This
Agreement may be amended, modified or supplemented only by an instrument in
writing signed on behalf of each of the Parties. Either Party may (i) extend the
time for the performance of any of the obligations or other acts of the other
Party, (ii) waive any inaccuracies in the representations and warranties of the
other Party contained in this Agreement or (iii) waive compliance by the other
Party with any of the agreements or conditions contained in this Agreement. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such Party.
The failure of a Party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such rights.

                  8.8      Binding Effect. The covenants, conditions,
restrictions, encumbrances, easements, license and agreements set forth in this
Agreement shall attach to, burden, and run with the land and the Generator's
Real Property and the Pepco Real Property or the applicable portion or portions
thereof, and shall be appurtenant to the Generator's Property or the Pepco Real
Property, as appropriate and, together with the remainder of this Agreement,
shall be binding upon the Parties hereto and their respective successors,
assigns, grantees, transferees and tenants and, together with the remainder of
this Agreement, shall inure to the benefit and Use of the Parties hereto and
their respective heirs, successors, assigns, grantees, transferees and tenants.
Each Grantee of any portion of or interest in the property and each mortgagee
which succeeds to the fee simple ownership of any portion of the property shall
be deemed, by the acceptance of the deed conveying fee simple title to such
person, to have agreed to perform each and every undertaking created hereunder
attributable to the portion of the property in which such Grantee or mortgagee
has acquired an interest.

                  8.9      Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

                  8.10     Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the Parties as closely as possible to the

<PAGE>   122

fullest extent permitted by applicable law in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible.

                  8.11     Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given (as of the time of
delivery or, in the case of a telecopied communication, of confirmation) if
delivered personally, telecopied (which is confirmed) or sent by overnight
courier (providing proof of delivery) to the Parties at the following addresses
(or at such other address for a Party as shall be specified by like notice):

         if to Pepco, to:

               Potomac Electric Power Company
               1900 Pennsylvania Avenue, N.W.
               Washington, D.C.  20068
               Telecopier:  (202) 261-7889
               Attention:  William T. Torgerson, General Counsel

         with a copy to:

               Dickstein Shapiro Morin & Oshinsky LLP
               2101 L Street, N.W.
               Washington, D.C.  20037
               Telecopy No.:  (202) 887-0689
               Attention:  Kenneth M. Simon, Esq.

         if to Generator, to:

               Southern Energy, Inc.
               900 Ashwood Parkway
               Suite 500
               Atlanta, Georgia  30338-4780
               Telecopier:  (770) 821-6575
               Attention:

          with a copy to:

               Troutman Sanders LLP
               1300 I Street, N.W.
               Suite 500 East
               Washington, DC  20005
               Telecopier:  (202) 274-2994
               Attention:  Benjamin L. Israel, Esq.

<PAGE>   123

The names, titles and addresses of either Party in this section may be changed
by written notification to the other Party.

                  8.12     Independent Contractor Status. Nothing in this
Agreement shall be construed as creating any relationship between Pepco and
Generator other than that of independent contractors.

                  8.13     Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

         IN WITNESS WHEREOF, Pepco and Generator have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.

                                    POTOMAC ELECTRIC POWER COMPANY

                                    By:
                                         --------------------------------------
                                    Name:
                                          -------------------------------------
                                    Title:
                                           ------------------------------------

                                    [GENERATOR]

                                    By:
                                         --------------------------------------
                                    Name:
                                          -------------------------------------
                                    Title:
                                           ------------------------------------

<PAGE>   124
STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State, personally
appeared _________________________, an ________________________, by
_____________________, its ________ who _________ is personally known to me/
_______ and who acknowledged before me that he did sign the foregoing instrument
and that the same is the free act and deed of said ______________, and his free
act and deed personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                                       ----------------------------------------
                                       Notary Public

                                       My Commission Expires:

STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State, personally
appeared ________________________, an ___________________, by ________________
its _____________________ who _______ is personally known to me/ ________ and
who acknowledged before me that he did sign the foregoing instrument and that
the same is the free act and deed of said corporation, and his free act and deed
personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                                       ----------------------------------------
                                       Notary Public

                                       My Commission Expires:

<PAGE>   125

                                Schedule 1.1

                                Definitions

         "Access" means, subject to the conditions set forth in this Agreement
and a Party's right to impose reasonable security and safety restrictions
protecting its officers, employees, agents, consultants, contractors,
subcontractors, invitees, property and confidential information, full and
unimpeded access, in common with Grantor over and through existing roads, paths,
walkways, corridors, hallways, doorways, and other means of entry or exit, as
exist now and from time to time on Grantor's property or, where no means of
access exists, over and through those areas of Grantor's property or
improvements which are (i) reasonably necessary or convenient for achieving
Grantee's underlying purposes, and (ii) least likely, out of the alternatives
reasonably available, to impede or damage the property or operation of any Party
hereto. Access shall also include access and right-of-way for Grantee's
employees, agents, consultants, contractors, subcontractors, vehicles, trucks,
trailers, heavy machinery, equipment, materials, and all other items reasonably
necessary or convenient for achieving Grantee's underlying purposes.

         "Affiliate" has the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934.

         "Agreement" means this Easement, License and Attachment Agreement.

         "Asset Sale Agreement" has the meaning set forth in the first recital
of this Agreement, as such Asset Sale Agreement may be amended or modified.

         "Connection Agreement" means the Interconnection Agreement (Dickerson),
dated as of __________, 2000, between Pepco and Generator.

         "Distribution of Electric Current" means local transmission and
distribution of electricity to Pepco's end users.

         "Distribution Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions, replacements and expansions thereto, now
or hereafter installed or located on the Generator's Real Property for
Distribution of Electric Current. Distribution Facilities do not include
Transmission Facilities.

         "Effective Date" has the meaning set forth in Section 8.l.

         "FERC" means the Federal Energy Regulatory Commission or its
successors.

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         "Generating Facilities" means the Station and any additional generating
plants, turbines or other generating facilities constructed by Generator after
the Effective Date at the site of the Station.

         "Generator" shall have the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors and
assigns.

         "Generator's Real Property" means the real property described in
Exhibit A, and any improvements or betterments thereto now or hereinafter
situated thereon

         "Good Utility Practice" shall have the meaning given it by the
Connection Agreement.

         "Grantee" means the Party or Parties who enjoy the principal benefit of
the referenced easement, license, right (including attachment rights) privilege
or right-of-way.

         "Grantor" means the owner or owners of the property and/or improvement
granting the referenced easement, license, right (including attachment rights),
privilege or right-of-way.

         "Interconnection Service" shall have the meaning given it by the
Connection Agreement.

         "Party" or "Parties" shall have the meaning set forth in the
introductory paragraph of this Agreement.

         "Pepco" shall have the meaning set forth in the introductory paragraph
of this Agreement and shall include its permitted successors and assigns.

         "Pepco Real Property" means the real property described in Exhibit B,
and any improvements or betterments thereto nor or hereinafter situated thereon.

         "Qualified Personnel" means individuals who possess any required
licenses and trained for their positions and duties by Generator and/or Pepco
pursuant to Good Utility Practice.

         "State" means the State of Maryland.

         "Station" means the Dickerson Station as defined in the Asset Sale
Agreement.

         "Transmission of Electric Current" means the transmission of such
current typically over long distances and at voltages not commonly used for
service to end use customers.

         "Transmission Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions, replacements and expansions thereto, now
or hereafter installed or located on the Generator's Real Property and/or which
Pepco may reasonably require now and from time to time on the

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Generator's Real Property for the Transmission of Electric Current. Transmission
Facilities do not include Distribution Facilities.

         "Transmission System" shall have the meaning set forth in the
Connection Agreement.

         "Use" means to operate, maintain, repair, upgrade, clean, install, add
to, alter, remove, inspect, construct, modify, restore, rebuild, replace,
relocate and expand (but if any such addition, relocation or expansion would
unreasonably or materially burden Grantor's Property, in each case, the express,
prior written consent of Grantor shall be required, which consent shall not
unreasonably be withheld, delayed or conditioned) (all of the foregoing to be in
accordance with Good Utility Practice).

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                             LIST OF EXHIBITS

Exhibit A   Generator's Real Property
Exhibit B   Pepco Real Property
Exhibit C   125 Foot Utility Easement
Exhibit D   Easement for Connection of 230kV Circuit

<PAGE>   129

                                                                     EXHIBIT C-3

AFTER RECORDING                                PARCEL ID#
PLEASE RETURN TO:                              STREET ADDRESS:
____________________                           ____________________
____________________                           ____________________
____________________                           ____________________

                  EASEMENT, LICENSE AND ATTACHMENT AGREEMENT
                            (Chalk Point Station)

         THIS EASEMENT, LICENSE AND ATTACHMENT AGREEMENT (the "Agreement"), is
dated as of ______________, 2000, and is entered into by and between
________________________________, a corporation organized and existing under the
laws of the State of __________ and having an office at
__________________________________ ("Generator") and POTOMAC ELECTRIC POWER
COMPANY, a District of Columbia and Virginia corporation and having an office at
1900 Pennsylvania Avenue, N.W., Washington, DC 20068 ("Pepco"). Generator and
Pepco may hereinafter be referred to individually as a "Party" and collectively
as the "Parties."

                                   RECITALS

         A.       Generator and Pepco have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets (the "Asset Sale Agreement"),
dated June 7, 2000, for the sale of Pepco's generating station known as the
Chalk Point Station (as defined in the Asset Sale Agreement), which is located
on that certain parcel of real property which has been conveyed by Pepco to
Generator pursuant to the Asset Sale Agreement by virtue of a deed recorded
immediately prior hereto and is more particularly described in Exhibit "A"
attached hereto (the "Generator's Real Property").

         B.       Pepco intends to continue to operate its transmission and
distribution business on and from that certain parcel of real property adjoining
the Generator's Real Property, which parcel has been retained by Pepco following
the conveyances contemplated by the Asset Sale Agreement, and is more
particularly described in Exhibit "B" attached hereto (the "Pepco Real
Property").

         C.       Pepco will continue to own and operate certain assets used in
the conduct of its transmission and distribution business which are located upon
the Generator's Real Property, and Pepco requires Access (as defined below) to,
and certain other rights with respect to, the Generator's Real Property in
connection therewith. Generator, in the operation and conduct of its generation
business, will require Access to, and certain other rights with respect to, the
Pepco Real Property. Furthermore, Pepco and Generator have entered into an
Interconnection Agreement (the "Connection Agreement"), dated as of __________,
2000, pursuant to which Pepco has agreed to provide certain Interconnection
Service to Generator required for Generator's conduct of its generation business
at Chalk Point Station.

<PAGE>   130
         D.       In order for the Parties each to (i) enjoy the full benefit of
their respective property rights, real or personal, and conduct their respective
businesses thereat (ii) fulfill legal requirements, and (iii) comply with their
respective agreements under the Connection Agreement, each Party requires
certain easements, licenses, rights-of-way and/or attachment rights in, on, over
and above, or with respect to, real and or personal property of the other Party.

                                   AGREEMENT

         NOW, THEREFORE, the Parties, in consideration of the mutual covenants
and agreements contained herein and in the Asset Sale Agreement and the
Connection Agreement, and for One Dollar ($1.00) and other good and valuable
consideration, the receipt whereof and sufficiency of which are hereby
acknowledged, each intending to be legally bound and to bind their respective
successors and assigns, hereby mutually agree as follows:

         1.       DEFINITIONS

                  1.1      Definitions. Any capitalized terms which are used but
not defined in the body of this Agreement shall have the meanings given to such
terms in the attached Schedule 1.1.

         2.       EASEMENTS

                  2.1      Grant of Easements to Pepco. Generator does hereby
give, grant, bargain, sell, assign and convey unto Pepco, the following
easements on the Generator's Real Property for the following purposes:

                           (a)      An above ground and underground easement, as
more particularly described in Exhibit "C" attached hereto, for the
installation, operation, repair and maintenance of electrical connections and
other facilities between the existing switchyard on Pepco Real Property and the
existing combustion turbine-generator area on Generator's Real Property.

                           (b)      An easement as more particularly described
in Exhibit "D" attached hereto, for two (2) 69kV overhead transmission lines
from Pepco's switchyard area on Pepco Real Property to an existing Southern
Maryland Electrical Cooperative switchyard on Generator's Real Property and the
operation, repair and maintenance of said transmission lines.

                           (c)      An easement for the Use, operation and
maintenance of the Retained Assets (as described in the Asset Sale Agreement)
located upon the Generator's Real Property and any other equipment of any nature
or kind retained by Pepco and located upon the Generator's Real Property,
together with any other equipment used in

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connection with the foregoing (together with replacements thereof and
substitutions therefor).

                           (d)      An easement which enables Pepco to keep and
maintain in their present locations, and operate, any Transmission Facilities,
Distribution Facilities and other assets owned by Pepco and located upon the
Generator's Real Property, together with an easement for all purposes reasonably
deemed necessary or convenient by Pepco to exercise any right or fulfill any
obligation under the Connection Agreement, including the right to Use any
improvements constructed, maintained or installed in connection therewith.

                           (e)      An easement of Access to those certain
generating buildings (and any replacements thereof) located upon the Generator's
Real Property in and upon which certain of Pepco's Distribution Facilities and
Transmission Facilities are located. Such easement shall include, without
limitation, the right to have keys, access codes or other access methods
necessary to enter any of such generating buildings. Furthermore, the exercise
of the easement right set forth in this subparagraph shall be subject to the
provisions of the Connection Agreement including, without limitation, Section
3.3 thereof.

                           (f)      An easement of Access to the Generator's
Real Property for the purposes of exercising any of the rights granted in this
Section 2.l, in Section 2.3(b)(viii) hereof, in the Connection Agreement or the
Asset Sale Agreement.

                           (g)      An easement of Access to, and the right to
use, the parking lots, access roads, driveways and other such facilities located
upon the Generator's Real Property.

                           (h)      Pepco's exercise of the rights, easements,
privileges and licenses granted to it pursuant to this Section 2.1 shall be
limited to Qualified Personnel or employees of contractors employed by Pepco
who, in either event, are under Pepco's and/or its contractors' direct
supervision and whose duties include, or who are engaged for the purpose of, Use
of the rights granted pursuant to this Section 2.1.

                           (i)      The easements granted pursuant to this
Section 2.1 shall expressly include Pepco's right to lease, license or otherwise
permit Affiliates or third parties to use Pepco's facilities upon such terms and
for such purposes as Pepco may determine from time to time, subject to the terms
and conditions of this Agreement.

                  2.2      Reservation by Generator of Certain Rights. Generator
reserves to itself, from the easements granted pursuant to Section 2.1 hereof,
the following rights, subject, however, to the provisions of the final paragraph
of this Section 2.2:

                           (a)      the right to (i) keep and maintain
Generator's Real Property and all improvements and facilities owned by Generator
and located upon the Generator's Real Property in their present locations, and
(ii) operate and maintain all

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improvements and facilities owned by Generator and located upon the Generator's
Real Property in a manner consistent with past practice; and

                           (b)      the right to have Access to all portions of
the Generator's Real Property for all purposes deemed reasonably necessary or
convenient by Generator in the operation and conduct of its generation business
or in order to perform any act permitted, or fulfill any obligation of
Generator, under the Connection Agreement, including maintenance of the
Generator's Real Property in the manner described in the Connection Agreement.

                           (c)      Generator's exercise of the rights reserved
to Generator in this Section 2.2, and the rights, privileges and licenses
granted to Generator in Section 2.3 shall be exclusively limited to Qualified
Personnel or employees of contractors employed by Generator who, in either
event, are under Generator's and/or its contractors' direct supervision and
whose duties include, or who are engaged for the purpose of, Use of the property
described in clause (a) of this Section.

                  2.3      Grant of Easements, Right, Privilege and License from
Pepco to Generator.

                           (a)      Pepco does hereby grant to Generator the
following easements, rights, privileges and licenses on and with respect to the
Pepco Real Property:

                                    (i)      An easement, as described on
Exhibit "E" attached hereto, for the operation and maintenance of an existing
oil pipeline (to be used solely for the transmission of oil) on, under and
across Pepco Real Property at two (2) locations.

                                    (ii)     An easement, as described on
Exhibit "F" attached hereto, for the operation and maintenance of an existing
oil pipeline (to be used solely for the transmission of oil) on, under and
across the Retained Assets.

                                    (iii)    An easement which enables Generator
to keep and maintain in their present locations, and operate, any Generating
Facilities and other assets owned by Generator and located upon the Pepco Real
Property.

                                    (iv)     An easement of Access to and upon
the Pepco Real Property for the purposes of exercising any of the rights granted
in the Connection Agreement or the Asset Sale Agreement.

                           (b)      In addition, but without limitation of
Generator's rights pursuant to the Connection Agreement, Pepco agrees to make
available to Generator (at no cost to Generator, except as provided below)
Pepco's master station voltage control equipment (the "Equipment") located at
Chalk Point Station upon the Generator's Real Property during the term of this
Agreement, subject to the following terms and conditions, and Generator agrees
to comply with such terms and conditions:

<PAGE>   133

                                    (i)      Generator's operation of the
Equipment shall at all times be subject to that certain Agreement of Sale and
Lease dated as of November 30, 1994 between NationsBank Trust Company, National
Association and Pepco (the "Control Center Lease"), and Generator shall comply
with the terms and conditions thereof with respect to the use of the Equipment
(including keeping the Equipment free and clear of any liens, claims or
encumbrances of whatever nature, and identifying the Equipment as being owned by
Pepco, and shall not modify, alter, remove or add to the Equipment);

                                    (ii)     Generator shall operate and
maintain the Equipment in accordance with Good Utility Practice;

                                    (iii)    Generator shall be responsible for
all operating, repair and maintenance costs, taxes and the like with respect to
the Equipment, and shall reimburse Pepco promptly upon invoicing for any such
costs paid by Pepco;

                                    (iv)     Generator's Access to the Equipment
shall be in accordance with this Agreement;

                                    (v)      Generator's right to operate the
Equipment shall terminate in the event of actual or constructive loss of the
Equipment, damage rendering the Equipment beyond repair or unfit for normal use,
the condemnation or seizure of the Equipment, the obsolescence of the Equipment
or the material breach by Generator of any of its covenants in this Section
2.3(b);

                                    (vi)     Pepco shall have no obligation to
Generator with respect to the Equipment other than to permit Access to and
operation of the Equipment in accordance with this Section 2.3(b);

                                    (vii)    The obligations of Generator under
Section 7.4 (maintenance of liability insurance coverage) and Section 7.1
(indemnification) shall be applicable to the Equipment; and

                                    (viii)   Pepco shall have Access to the
Equipment for purposes of complying with the terms and conditions of the Control
Center Lease and as necessary to perform any of the obligations of Generator
pursuant to this subparagraph (b) above to the extent the same are not timely
performed by Generator.

<PAGE>   134

         2.4      General Scope of Easements.

                  (a)      Except as otherwise provided in Sections 2.2 and 2.3
above and Section 2.4(b) below, each easement and each right, privilege and
license granted hereby is and shall be a perpetual grant, transfer, conveyance
and right of Access to and Use (subject to the terms of this Agreement) to the
Grantee thereof and to any future owner of the real property, improvements and
facilities benefited thereby. Notwithstanding the foregoing, all easements,
rights, privileges and licenses granted by this Agreement are and shall be
subject to the terms and conditions of the Connection Agreement, and in the
event of any inconsistency between the terms and conditions of the Connection
Agreement and the terms of this Agreement, the terms of the Connection Agreement
shall control.

                  (b)      Any easement or right, privilege and license granted
hereunder for purposes of enabling a Party to exercise any right or fulfill any
obligation set forth in the Connection Agreement will continue for the term of
the Connection Agreement, and thereafter if and to the extent that the right or
obligation (i) shall by its express terms survive the termination or expiration
of the Connection Agreement or (ii) is necessary for the conduct of business by
Grantee. In the event of the termination or expiration of an easement or right,
privilege and license granted hereunder for purposes of enabling a Grantee to
exercise any right or fulfill any obligation set forth in the Connection
Agreement, all equipment and facilities installed or maintained by such Grantee
on the real property of the other Party pursuant to said terminated or expired
easement or right, privilege and license shall, at the request of the other
Party, be removed at the sole cost and expense of such Grantee, and such Grantee
shall, at its sole cost and expense repair any damage to the real property
and/or equipment and facilities of the other Party damaged as a result of such
removal.

                  (c)      All equipment and facilities installed or maintained
by Grantee pursuant to an easement or right, privilege and license granted
hereunder shall be maintained by Grantee in accordance with Good Utility
Practice and the Connection Agreement, and Grantee shall make all repairs and
replacements necessary to keep such equipment and facilities in such condition.

                  (d)      Generator may not Use any portion of Generator's Real
Property burdened by any easement, right or privilege granted to Pepco hereunder
if such Use would materially adversely affect the Use and enjoyment by Pepco of
the rights granted to it hereunder, or materially increase the costs or risks
associated with such Use.

                  (e)      All easements granted herein shall be deemed
easements appurtenant to the parcel of real property benefited thereby and shall
run with such real property and shall be deemed covenants running with the real
property burdened thereby.

         2.5      Interpretation. The following shall apply in interpreting any
easement and any right, privilege and license granted pursuant to this
Agreement:

<PAGE>   135

                  (a)    Each easement and each right, privilege and license
granted herein is irrevocable except by written agreement of the parties.

                  (b)    With respect to any easement created by this
Agreement, the words "in," "upon," "to," "on," "over," "above," "through" and/or
"under" shall be interpreted to include all of such terms.

                  (c)    Each easement and each right, privilege
and license granted herein may be enjoyed without charge or fee to
Grantee of the easement.

                  (d)    Each easement and each right, privilege and license
granted herein is also a grant of the additional right of Access over Grantor's
property to accomplish the purpose of such easement or right, privilege and
license, to perform any obligations hereunder or in the Connection Agreement,
and to comply with any legal requirements affecting Grantee or its property
and/or improvements.

                  (e)    Exercise of any easement or any right, privilege and
license granted hereunder permitting or requiring maintenance, repairs,
alteration, restoration, rebuilding, construction, upgrading, cleaning,
installation, removal, modification, replacement, expansion, or other work by
Grantee upon the property or improvements of Grantor shall be subject to the
following conditions:

                           (i)      Work upon the facilities and properties of
                           either Party subject to this Agreement shall be
                           permitted only to each Party's Qualified Personnel,
                           and Access to such facilities and properties shall be
                           permitted only to a Party's Qualified Personnel and
                           such consultants, agents, contractors, subcontractors
                           and invitees as any Party may select or permit;
                           provided that any consultant, agent, contractor,
                           subcontractor or invitee shall comply with all
                           applicable provisions of this Agreement and the
                           Connection Agreement.

                           (ii)     Work shall be performed using reasonable
                           precautions to avoid unreasonable interference with
                           the Use and enjoyment of Grantor's property and
                           improvements.

                           (iii)    Except only as may be specifically provided
                           to the contrary herein, Grantee shall not be liable
                           for damage, if any, which may be caused by Grantee's
                           normal and reasonable Use of any easement, or right,
                           privilege or license granted hereunder.

                           (iv)     Following completion of the work, Grantee
                           shall restore Grantor's property and improvements to
                           the same or as good a

<PAGE>   136

                           condition as existed before the commencement of the
                           work.

                           (v)      Any easement and any right, privilege and
                           license granted herein which permits a Grantee to
                           maintain its property, equipment, facilities and
                           appurtenances on the property and improvements owned
                           by Grantor also includes the right to maintain in
                           place on Grantor's property and improvements any and
                           all wires and cables connecting such property,
                           equipment, facilities, and appurtenances to (i) the
                           devices, machinery and equipment which they measure,
                           regulate and/or control, and (ii) power sources.

                           (vi)     Generator shall be solely responsible for
                           the maintenance of any roads, paths and other means
                           of entry or exit located upon either the Gemerator's
                           Real Property or the Pepco Real Property that are
                           commonly utilized by Generator and Pepco, and their
                           respective employees, agents and contractors pursuant
                           to this Agreement or the Connection Agreement.

                  (f)      Any easement granted pursuant to Section 2.1(a), (b),
(c) or (d) includes the right to (i) trim, cut, treat and/or remove, by manual,
mechanical, and chemical means, any and all trees, brush, structures and other
obstructions within the easement area, as well as such trees, brush, structures
and vegetation outside of the easement area deemed reasonably necessary or
desirable by Pepco for the safe and secure operation of its facilities; and (ii)
obtain Access to Generator's Real Property for the purpose of performing the
aforementioned acts.

                  2.6      Rules and Regulations.

         Each Party may promulgate rules regulating the conduct of the other
Party in the exercise of rights under this Agreement provided such rules and
regulations do not unreasonably interfere with or impede the affected Party's
rights and easements as set forth herein or in the Connection Agreement.

                  2.7      No Obstruction.

                           (a)      No Party hereto shall obstruct the easements
or the rights, privileges and licenses granted or created pursuant to this
Agreement or render them impassable or unusable in any way or otherwise in any
way interfere with the right to the Use and enjoyment of the easements or
rights, privileges and licenses granted or created pursuant to this Agreement.

                           (b)      No Party hereto shall make any changes to
the topography or accesses on or to its respective property, including grading
or drainage that could reasonably be expected to adversely affect another
Party's facilities, common use drainage

<PAGE>   137

systems, or pollution control systems, or the exercise of any right or
fulfillment of any obligation in this Agreement or in the Connection Agreement,
without the prior written consent of the other Party which consent shall not
unreasonably be withheld, delayed or conditioned.

         3.       TAXES, ASSESSMENTS AND OTHER CHARGES

                  3.1      Real Estate Taxes. Generator, with respect to the
Generator's Real Property and Pepco, with respect to the Pepco Real Property,
shall pay and discharge all of the following ("Real Estate Taxes") whether or
not now within the contemplation of the Parties hereto: (i) all real estate
taxes, assessments (both general and special), other governmental impositions
and charges, taxes, rents, levies and sums of every kind or nature whatsoever,
extraordinary as well as ordinary, as shall at any time be imposed by any
governmental or public authority on, or become a lien in respect of, the
Generator's Real Property or the Pepco Real Property, as the case may be, or any
part thereof, or which may become due and payable with respect thereto, and any
and all taxes assessments and charges levied, assessed or imposed upon the
Generator's Real Property or the Pepco Real Property, as the case may be, in
lieu of or in addition to, the foregoing, under or by virtue of any present or
future laws, rules, requirements, orders, directives, ordinances or regulations
of the United States of America or of the State or of any subdivision thereof,
or of any lawful governmental authority whatsoever, and any interest or
penalties thereon, and (ii) all other taxes (excluding gains, sales and income
taxes but including occupancy taxes which are measured by income) measured by
ownership of the Generator's Real Property or the Pepco Real Property, as the
case may be. Generator shall pay and discharge all levies and assessments for
water, water meter (including any expenses incident to the installation, repair
or replacement of any water meter) and sewer and all rents with respect to water
and sewer which provide service to the Generator's Real Property.

                  3.2      Personal Property Taxes. Generator and Pepco shall,
respectively, pay and discharge all of the following ("Personal Property Taxes")
whether or not now within the contemplation of the Parties hereto: all taxes and
assessments which shall or may be charged, levied, assessed or imposed upon, or
become a lien upon, the personal property of Generator or Pepco, as the case may
be, Used in the operation or in connection with the business conducted at the
Generator's Real Property or the Pepco Real Property, as the case may be.

                  3.3      Timing of Payment. Subject to the provisions of
Section 3.5, Generator and Pepco shall each comply with its covenant to pay and
discharge all Real Estate Taxes and Personal Property Taxes by paying all such
taxes directly to the appropriate taxing authorities prior to the expiration of
the period within which payment is permitted without penalty or interest.
Generator and Pepco shall within twenty (20) days of written request of the
other Party, produce the most recent official receipts from the appropriate
taxing authorities evidencing such payment certified by Generator or Pepco, as
the case may be, to the other Party hereto.

<PAGE>   138

                  3.4      Cooperation with Respect to Tax Statements. Generator
and Pepco will cooperate with each other in obtaining and/or retaining any tax
abatement for which the Generator's Real Property or Pepco Real Property may be
eligible. Upon written request of the Party seeking an abatement, the other
Party or Parties hereto will execute and file any and all documents and
instruments reasonably necessary to obtain and retain such abatement, without
the assumption of any liabilities or obligations, provided that the Party
seeking such abatement shall reimburse the cooperating Party or Parties for any
reasonable expenses that such cooperating Party or Parties may incur in
connection therewith.

                  3.5      Tax Contests. Generator, with respect to the
Generator's Real Property, and Pepco, with respect to the Pepco Real Property:

                           (a)      May contest in good faith by appropriate
proceedings diligently and continuously conducted, at its or their sole cost and
expense, any Real Estate Tax or charge or Personal Property Tax or charge, or
similar tax or charge and, where permitted by law, pay the same under protest.

                           (b)      Shall pay and discharge such contested items
as finally adjudicated or settled, with interest and penalties, and all other
charges directed to be paid in or by any such adjudication or settlement.

                           (c)      May, in its or their sole discretion,
consolidate any proceeding to obtain a reduction in the assessed valuation with
any similar proceeding or proceedings brought by it or them relating to any one
or more other tax years.

                           (d)      Shall indemnify and hold the non-contesting
Party harmless from and against all liability, loss, cost or expense arising out
of the contest.

                  3.6      Refunds. Any refunds from any contest undertaken
pursuant to Section 3.5 shall belong wholly to the Party or Parties that paid
the tax.

         4.       MECHANICS' LIENS

                  4.1      Notice Regarding Labor and Material. Notice is hereby
given that no Party hereto shall be liable for any labor or materials furnished
or to be furnished to or for another Party hereto or to any other persons or
entities claiming under such other Party on credit, and that no mechanics' or
other lien for any such labor or material furnished to a Party or such other
persons or entities shall attach to or affect any property interest of any other
Party.

                  4.2      Disposition of Liens.

                           (a)      Pepco shall forthwith take such action
necessary to discharge, remove or satisfy any lien filed against the Generator's
Real Property or any

<PAGE>   139

portion thereof for any labor or materials furnished or to be furnished for or
on behalf of Pepco, or any person or entity holding any portion thereof through
or under Pepco.

                           (b)      Generator shall forthwith take such action
necessary to discharge, remove or satisfy any lien filed against the Pepco Real
Property or any portion thereof for any labor or materials furnished or to be
furnished for or on behalf of Generator, or any person or entity holding any
portion thereof through or under Generator.

                           (c)      If either Pepco or Generator, as the case
may be, shall fail to discharge, remove or satisfy any such lien which it is
obligated to discharge, remove or satisfy hereunder within ten (10) days after
notice of the existence of the lien has been given to such defaulting Party, the
non-defaulting Party or parties may pay the amount of such lien or discharge the
same by deposit or bonding, and the amount so paid or deposited, or the premium
paid for such bond, with interest at the rate provided for defaults in Section
6.3 hereof, shall be paid by the defaulting Party upon demand to the
non-defaulting Party who effected such cure.

                           (d)      The defaulting Party shall defend, indemnify
and save harmless the non-defaulting Party from and against all liability, loss,
cost or expense (including reasonable attorneys' fees) arising out of any liens
which the defaulting Party is obligated to discharge, remove or satisfy.

         5.       CONDEMNATION

                  5.1      Right to Participate. In the event the Generator's
Real Property or the Pepco Real Property, or any part thereof, shall be taken in
condemnation proceedings or by exercise of any right of eminent domain or any
agreement with those authorized to exercise such right (any such matter being
hereinafter referred to as a "Taking" or property "Taken"), whether such Taking
be a permanent taking or a temporary Taking, any person or entity having an
interest in the award or awards shall have the right to participate in any such
condemnation proceedings or agreement for the purpose of protecting its interest
hereunder. Each Party so participating shall pay its own expenses.

                  5.2      Total Taking. A "Total Taking" shall be deemed to
have occurred as to the property of any Party (which means the Generator's Real
Property, as to Generator, and the Pepco Real Property, as to Pepco) when the
entire property of such Party shall be Taken or a substantial part of such
property shall be Taken and the untaken portion of the property would, following
the completion of restoration, be unsuitable for the operation and the Use
thereof in the manner so operated and Used prior to the Taking. Upon a Total
Taking, this Agreement shall terminate with respect to the property Taken except
with respect to the disposition of the award and this Agreement shall continue
with respect to the property not Taken.

<PAGE>   140

                  5.3      Disposition of Award. In the event of a Taking, each
Party shall be entitled to share in the awards to the extent of its interest in
the property subject to the Taking, and for consequential damages to and
dilution of value of the relevant property not so Taken.

                  5.4      Notice of Taking. In the event the Generator's Real
Property or the Pepco Real Property, or any part thereof, shall be the subject
of any condemnation proceedings or the subject of any eminent domain
proceedings, and if any Party shall receive actual notice of such proceedings,
the Party receiving such notice shall notify the other Party of the existence of
such proceedings. Such notification shall occur within thirty (30) days of the
receipt of such actual notice.

         6.       DEFAULTS

                  6.1      Events of Default. Each and every one of the
following events shall constitute an Event of Default ("Event of Default") under
this Agreement:

                           (a)      If a Party fails to make any payment due to
a party hereto within twenty (20) days of written demand for such payment;

                           (b)      If a Party fails, within twenty (20) days of
written notice from a Party, to make any payment due from such Party to any
third party and such failure could result in the imposition of a lien or other
encumbrance on the property or improvements of a Party, unless the payment of
such amount is contested in accordance with Section 3.5 hereof, in which case,
the provisions of Section 3.5 shall control; and

                           (c)      If a Party fails to perform any material
non-monetary obligations hereunder, and said Party fails to cure such default
within thirty (30) days of receipt of written notice stating with particularity
the nature of the default; provided, however, if such default is of such a
nature that it cannot be cured within thirty (30) days following receipt of such
notice, an Event of Default shall not have occurred if the defaulting Party
shall within such thirty (30) days commence the necessary cure and shall at all
times thereafter diligently and continuously prosecute such cure to completion.

                  6.2      Right of Self Help. A non-defaulting Party may at its
election following the occurrence of a non-monetary Event of Default and the
thirtieth (30th) day after the receipt of the written notice specified in
paragraph 6.1(c) hereof, undertake the cure of such default on behalf of the
defaulting Party. A non-defaulting Party is granted an easement to enter upon,
through or under the property or improvements of the defaulting Party to effect
such cure. Following the occurrence of an Event of Default involving the payment
of money to a person or entity not Party to this Agreement, a non-defaulting
Party may make such payment on behalf of the defaulting Party. All monies paid
by the non-defaulting Party and all reasonable costs and expenses (including,
reasonable attorneys' fees) incurred by it, as the case may be, in effecting
such cure or payment, shall be paid by

<PAGE>   141

the defaulting Party upon written demand, together with interest from the date
of such demand at the rate set forth in Section 6.3. This Section 6.2 shall not
limit Pepco's self-help rights pursuant to Section 2.3(b).

                  6.3      Interest. Following the occurrence of an Event of
Default involving the nonpayment of money by the defaulting Party to the
non-defaulting Party, all monies owed to the non-defaulting party shall bear
interest at the rate equal to one and one-half percent (1.5%) per month accruing
on the due date, provided, however, that such late payment charge shall not
exceed the maximum charge which may be collected under State law.

                  6.4      Enforcement Rights. In addition to any other rights
expressly set forth in this Agreement, but without limitation, enforcement of
this Agreement may be had by legal or equitable proceedings against any
defaulting Party either to specifically enforce, restrain or enjoin the
violation of any restriction, covenant, agreement, term, representation or
warranty herein contained or to recover damages. The above notwithstanding,
termination of this Agreement shall not be available as a remedy in any
proceedings against any defaulting Party.

                  6.5      No Forfeiture. Except by enforcement of a judgment
lien against such property, nothing contained in this Agreement shall create any
reversion, condition or right of re-entry or other provisions for forfeiture
under which any Party can be cut off, subordinated or otherwise disturbed in the
possession of its property.

                  6.6      Independent Covenants. None of the rights and
easement granted by this Agreement and none of the performances required by this
Agreement shall be dependent, upon the performance of any other term, promise,
or condition of this Agreement or any documents executed concurrently or in
connection with this Agreement, and such rights, easement and requirements or
performance shall continue in effect irrespective of whether anything else in
this Agreement or such other documents has been breached or has been terminated.
The separateness and independent survival of the right, easements and
requirements of performance under this Agreement are essential terms hereof
without which this Agreement would not have been made.

         7.       INDEMNIFICATION AND INSURANCE

                  7.1      Generator's Indemnification. Generator shall
indemnify, hold harmless, and defend Pepco and its Affiliates, as the case may
be, and their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between Pepco and a third party or
Generator) for damage to property of unaffiliated third parties, injury to or
death of any person, including Pepco's employees or any third parties, to the
extent caused,

<PAGE>   142

by the breach of this Agreement by Generator or the negligence or willful
misconduct of Generator and/or its officers, directors, employees, agents,
contractors, subcontractors or invitees arising out of or connected with
Generator's performance of this Agreement, or the exercise by Generator of its
rights hereunder.

                  7.2      Pepco's Indemnification. Pepco shall indemnify, hold
harmless, and defend Generator and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between Generator and a third party or Pepco) for
damage to property of unaffiliated third parties, injury to or death of any
person, including Generator's employees or any third parties, to the extent
caused by the breach of this Agreement by Pepco or the negligence or willful
misconduct of Pepco and/or its officers, directors, employees, agents,
contractors, subcontractors or invitees arising out of or connected with Pepco's
performance of this Agreement, or the exercise by Pepco of its rights hereunder.

                  7.3      Survival. The provisions of Sections 7.1 and 7.2
shall survive termination, cancellation, suspension, completion or expiration of
this Agreement.

                  7.4      Insurance Coverage. The Parties shall maintain at
their own cost the following insurance: (a) standard Commercial General
Liability insurance with limitations not less than One Hundred Million Dollars
($100,000,000.00)in the aggregate; (b) All-Risk Property insurance in amounts
not less than one hundred percent (100%) of the full replacement cost of the
improvements located upon each Party's real property; (c) Worker's compensation
insurance as required by prevailing law and Employer's liability insurance with
limits of not less than Twenty-five Million Dollars ($25,000,000.00); and (d)
such other insurance as is customary in the electric utility industry.

                  7.5      Certificate of Insurance. The Parties agree to
furnish each other with certificates of insurance evidencing the insurance
coverage obtained in accordance with this Article 7, and the Parties agree to
notify and send copies to the other of any policies maintained hereunder upon
written request by a Party. Each Party must notify the other Party within five
(5) business days of receiving notice of cancellation, change, amendment or
renewal of any insurance policy required pursuant to Section 7.4 above.

                  7.6      Additional Insureds and Waiver. Each Party and its
affiliates shall be named as additional insureds on the general liability
insurance policies obtained in accordance with Section 7.4, above, as regards
liability under this Agreement; and each general liability insurance policy
shall contain a waiver of subrogation and each Party shall waive its rights of
recovery against the other for any loss or damage covered by such policy.

<PAGE>   143

         8.       MISCELLANEOUS

                  8.1      Effective Date. This Agreement will be effective on
the Closing Date pursuant to the Asset Sale Agreement (the "Effective Date").

                  8.2      Exhibits. All exhibits attached to this Agreement are
part of this Agreement and the material contained in such exhibits shall be
construed and interpreted as if contained within the text of the Agreement.

                  8.3      Headings. The Article and Section headings of this
Agreement are for convenience and reference only and in no way define, limit or
describe the scope and intent of this Agreement, nor in any way affect this
Agreement.

                  8.4      Interpretation. When a reference is made in this
Agreement to an Article, Section, Schedule or Exhibit, such reference shall be
to an Article or Section of, or Schedule or Exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation" or equivalent words. The words
"hereof", "herein" and "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. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms and to the
masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument, statute, regulation, rule or order defined or referred to
herein or in any agreement or instrument that is referred to herein means such
agreement, instrument, statute, regulation, rule or order as from time to time
amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes, regulations,
rules or orders) by succession of comparable successor statutes, regulations,
rules or orders and references to all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns. Each Party acknowledges that it has been represented by
counsel in connection with the review and execution of this Agreement and,
accordingly, there shall be no presumption that this Agreement or any provision
hereof be construed against the Party that drafted this Agreement.

                  8.5      GOVERNING LAW. EXCEPT WITH RESPECT TO THE CREATION,
PERFECTION AND ENFORCEMENT OF THE REAL PROPERTY INTERESTS CREATED HEREUNDER,
WHICH SHALL BE GOVERNED AND CONSTRUED BY THE LAWS OF THE STATE, THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE DISTRICT
OF COLUMBIA EXCLUSIVE OF ITS CHOICE OF LAW RULES.

<PAGE>   144

                  8.6      Entire Agreement. This Agreement, the Asset Sale
Agreement, the Confidentiality Agreement (as defined in the Asset Sale
Agreement) and the Ancillary Agreements (as defined in the Asset Sale Agreement)
including the Exhibits, Schedules, documents, certificates and instruments
referred to herein or therein and other contracts, agreements and instruments
contemplated hereby or thereby, embody the entire agreement and understanding of
the Parties in respect of the transactions contemplated by this Agreement. There
are no restrictions, promises, representations, warranties, covenants or
undertakings other than those expressly set forth or referred to herein or
therein.

                  8.7      Amendment and Modification, Extension, Waiver. This
Agreement may be amended, modified or supplemented only by an instrument in
writing signed on behalf of each of the Parties. Either Party may (i) extend the
time for the performance of any of the obligations or other acts of the other
Party, (ii) waive any inaccuracies in the representations and warranties of the
other Party contained in this Agreement or (iii) waive compliance by the other
Party with any of the agreements or conditions contained in this Agreement. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such Party.
The failure of a Party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such rights.

                  8.8      Binding Effect. The covenants, conditions,
restrictions, encumbrances, easements, license and agreements set forth in this
Agreement shall attach to, burden, and run with the land and the Generator's
Real Property and the Pepco Real Property or the applicable portion or portions
thereof, and shall be appurtenant to the Generator's Property or the Pepco Real
Property, as appropriate and, together with the remainder of this Agreement,
shall be binding upon the Parties hereto and their respective successors,
assigns, grantees, transferees and tenants and, together with the remainder of
this Agreement, shall inure to the benefit and Use of the Parties hereto and
their respective heirs, successors, assigns, grantees, transferees and tenants.
Each Grantee of any portion of or interest in the property and each mortgagee
which succeeds to the fee simple ownership of any portion of the property shall
be deemed, by the acceptance of the deed conveying fee simple title to such
person, to have agreed to perform each and every undertaking created hereunder
attributable to the portion of the property in which such Grantee or mortgagee
has acquired an interest.

                  8.9      Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

                  8.10     Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this

<PAGE>   145

Agreement so as to effect the original intent of the Parties as closely as
possible to the fullest extent permitted by applicable law in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled to the
extent possible.

                  8.11     Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given (as of the time of
delivery or, in the case of a telecopied communication, of confirmation) if
delivered personally, telecopied (which is confirmed) or sent by overnight
courier (providing proof of delivery) to the Parties at the following addresses
(or at such other address for a Party as shall be specified by like notice):

          if to Pepco, to:

               Potomac Electric Power Company
               1900 Pennsylvania Avenue, N.W.
               Washington, D.C.  20068
               Telecopier:  (202) 261-7889
               Attention:  William T. Torgerson, General Counsel

          with a copy to:

               Dickstein Shapiro Morin & Oshinsky LLP
               2101 L Street, N.W.
               Washington, D.C.  20037
               Telecopy No.:  (202) 887-0689
               Attention:  Kenneth M. Simon, Esq.

          if to Generator, to:

               Southern Energy, Inc.
               900 Ashwood Parkway
               Suite 500
               Atlanta, Georgia  30338-4780
               Telecopier:  (770) 821-6575
               Attention:

          with a copy to:

               Troutman Sanders LLP
               1300 I Street, N.W.
               Suite 500 East
               Washington, DC  20005
               Telecopier:  (202) 274-2994
               Attention:  Benjamin L. Israel, Esq.

<PAGE>   146

The names, titles and addresses of either Party in this section may be changed
by written notification to the other Party.

                  8.12     Independent Contractor Status. Nothing in this
Agreement shall be construed as creating any relationship between Pepco and
Generator other than that of independent contractors.

                  8.13     Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

          IN WITNESS WHEREOF, Pepco and Generator have caused this
Agreement to be signed by their respective duly authorized officers
as of the date first above written.

                              POTOMAC ELECTRIC POWER COMPANY

                              By:
                                    -------------------------------------------
                              Name:
                                    -------------------------------------------
                              Title:
                                    -------------------------------------------

                              [GENERATOR]

                              By:
                                    -------------------------------------------
                              Name:
                                    -------------------------------------------
                              Title:
                                    -------------------------------------------

<PAGE>   147

STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State, personally
appeared __________________________, an ________________________, by
_____________________, its ________ who _________ is personally known to
me/________ and who acknowledged before me that he did sign the foregoing
instrument and that the same is the free act and deed of said ______________,
and his free act and deed personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                                   --------------------------------------------
                                   Notary Public

                                   My Commission Expires:

STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State, personally
appeared ___________________________, an ___________________, by
________________ its _____________________ who _______ is personally known to
me/________ and who acknowledged before me that he did sign the foregoing
instrument and that the same is the free act and deed of said corporation, and
his free act and deed personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                                   --------------------------------------------
                                   Notary Public

                                   My Commission Expires:
<PAGE>   148

                                Schedule 1.1

                                 Definitions

         "Access" means, subject to the conditions set forth in this Agreement
and a Party's right to impose reasonable security and safety restrictions
protecting its officers, employees, agents, consultants, contractors,
subcontractors, invitees, property and confidential information, full and
unimpeded access, in common with Grantor over and through existing roads, paths,
walkways, corridors, hallways, doorways, and other means of entry or exit, as
exist now and from time to time on Grantor's property or, where no means of
access exists, over and through those areas of Grantor's property or
improvements which are (i) reasonably necessary or convenient for achieving
Grantee's underlying purposes, and (ii) least likely, out of the alternatives
reasonably available, to impede or damage the property or operation of any Party
hereto. Access shall also include access and right-of-way for Grantee's
employees, agents, consultants, contractors, subcontractors, vehicles, trucks,
trailers, heavy machinery, equipment, materials, and all other items reasonably
necessary or convenient for achieving Grantee's underlying purposes.

         "Affiliate" has the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934.

         "Agreement" means this Easement, License and Attachment Agreement.

         "Asset Sale Agreement" has the meaning set forth in the first recital
of this Agreement, as such Asset Sale Agreement may be amended or modified.

         "Connection Agreement" means the Interconnection Agreement (Chalk
Point), dated as of __________, 2000, between Pepco and Generator.

          "Distribution of Electric Current" means local
transmission and distribution of electricity to Pepco's end users.

         "Distribution Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions, replacements and expansions thereto, now
or hereafter installed or located on the Generator's Real Property for
Distribution of Electric Current. Distribution Facilities do not include
Transmission Facilities.

         "Effective Date" has the meaning set forth in Section 8.l.

         "FERC" means the Federal Energy Regulatory Commission or its
successors.

<PAGE>   149

         "Generating Facilities" means the Station and any additional generating
plants, turbines or other generating facilities constructed by Generator after
the Effective Date at the site of the Station.

         "Generator" shall have the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors and
assigns.

         "Generator's Real Property" means the real property described in
Exhibit A, and any improvements or betterments thereto now or hereinafter
situated thereon.

         "Good Utility Practice" shall have the meaning given it by the
Connection Agreement.

         "Grantee" means the Party or Parties who enjoy the principal benefit of
the referenced easement, license, right (including attachment rights) privilege
or right-of-way.

         "Grantor" means the owner or owners of the property and/or improvement
granting the referenced easement, license, right (including attachment rights),
privilege or right-of-way.

         "Interconnection Service" shall have the meaning given it by the
Connection Agreement.

         "Party" or "Parties" shall have the meaning set forth in the
introductory paragraph of this Agreement.

         "Pepco" shall have the meaning set forth in the introductory paragraph
of this Agreement and shall include its permitted successors and assigns.

         "Pepco Real Property" means the real property described in Exhibit B,
and any improvements or betterments thereto now or hereinafter situated thereon.

         "Qualified Personnel" means individuals who possess any required
licenses and trained for their positions and duties by Generator and/or Pepco
pursuant to Good Utility Practice.

         "State" means the State of Maryland.

         "Station" means the Chalk Point Station as defined in the Asset Sale
Agreement.

         "Transmission of Electric Current" means the transmission of such
current typically over long distances and at voltages not commonly used for
service to end use customers.

         "Transmission Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions, replacements and expansions thereto, now
or hereafter installed or located on the

<PAGE>   150

Generator's Real Property and/or which Pepco may reasonably require now and from
time to time on the Generator's Real Property for the Transmission of Electric
Current. Transmission Facilities do not include Distribution Facilities.

         "Transmission System" shall have the meaning set forth in the
Connection Agreement.

         "Use" means to operate, maintain, repair, upgrade, clean, install, add
to, alter, remove, inspect, construct, modify, restore, rebuild, replace,
relocate and expand (but if any such addition, relocation or expansion would
unreasonably or materially burden Grantor's Property, in each case, the express,
prior written consent of Grantor shall be required, which consent shall not
unreasonably be withheld, delayed or conditioned) (all of the foregoing to be in
accordance with Good Utility Practice).
<PAGE>   151

                           LIST OF EXHIBITS

Exhibit A   Generator's Real Property
Exhibit B   Pepco Real Property
Exhibit C  Easement for Electrical Connections between Switchyard
and Combustion Turbine-Generator
Exhibit D   Easement for Oil Pipeline on Pepco Real Property
Exhibit E   Easement for Oil Pipeline on Retained Assets

<PAGE>   152

                                                                    EXHIBIT C-4

AFTER RECORDING                              PARCEL ID#
PLEASE RETURN TO:                            STREET ADDRESS:

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

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

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

                   EASEMENT, LICENSE AND ATTACHMENT AGREEMENT
                              (Morgantown Station)

         THIS EASEMENT, LICENSE AND ATTACHMENT AGREEMENT (the "Agreement"), is
dated as of ______________, 2000, and is entered into by and between
______________________________, a corporation organized and existing under the
laws of the State of __________ and having an office at
_____________________________________ ("Generator") and POTOMAC ELECTRIC POWER
COMPANY, a District of Columbia and Virginia corporation and having an office
at 1900 Pennsylvania Avenue, N.W., Washington, DC 20068 ("Pepco"). Generator
and Pepco may hereinafter be referred to individually as a "Party" and
collectively as the "Parties."

                                  RECITALS

         A.       Generator and Pepco have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets (the "Asset Sale Agreement"),
dated June 7, 2000, for the sale of Pepco's generating station known as the
Morgantown Station (as defined in the Asset Sale Agreement), which is located
on that certain parcel of real property which has been conveyed by Pepco to
Generator pursuant to the Asset Sale Agreement by virtue of a deed recorded
immediately prior hereto and is more particularly described in Exhibit "A"
attached hereto (the "Generator's Real Property").

         B.       Pepco intends to continue to operate its transmission and
distribution business on and from that certain parcel of real property
adjoining the Generator's Real Property, which parcel has been retained by
Pepco following the conveyances contemplated by the Asset Sale Agreement, and
is more particularly described in Exhibit "B" attached hereto (the "Pepco Real
Property").

         C.       Pepco will continue to own and operate certain assets used in
the conduct of its transmission and distribution business which are located
upon the Generator's Real Property, and Pepco requires Access (as defined
below) to, and certain other rights with respect to, the Generator's Real
Property in connection therewith. Generator, in the operation and conduct of
its generation business, will require Access to, and certain other rights with
respect to, the Pepco Real Property. Furthermore, Pepco and Generator have
entered into an Interconnection Agreement (the "Connection Agreement"), dated
as of __________, 2000, pursuant to which Pepco has agreed to provide certain
Interconnection Service to Generator required for Generator's conduct of its
generation business at Morgantown Station.

<PAGE>   153

         D.       In order for the Parties each to (i) enjoy the full benefit
of their respective property rights, real or personal, and conduct their
respective businesses thereat (ii) fulfill legal requirements, and (iii) comply
with their respective agreements under the Connection Agreement, each Party
requires certain easements, licenses, rights-of-way and/or attachment rights
in, on, over and above, or with respect to, real and or personal property of
the other Party.

                                 AGREEMENT

         NOW, THEREFORE, the Parties, in consideration of the mutual covenants
and agreements contained herein and in the Asset Sale Agreement and the
Connection Agreement, and for One Dollar ($1.00) and other good and valuable
consideration, the receipt whereof and sufficiency of which are hereby
acknowledged, each intending to be legally bound and to bind their respective
successors and assigns, hereby mutually agree as follows:

         1.       DEFINITIONS

                  1.1      Definitions. Any capitalized terms which are used
but not defined in the body of this Agreement shall have the meanings given to
such terms in the attached Schedule 1.1.

         2.       EASEMENTS

                  2.1      Grant of Easements to Pepco. Generator does hereby
give, grant, bargain, sell, assign and convey unto Pepco, the following
easements on the Generator's Real Property for the following purposes:

                           (a)      A ten (10) foot wide easement, as more
particularly described in Exhibit "C" attached hereto, for the connection and
extension of overhead and underground utility facilities and other equipment
and facilities utilized in connection with the transmission and distribution
business of Pepco (as now or hereafter conducted) and other functions as Pepco
may determine from time to time.

                           (b)      An easement for the Use, operation and
maintenance of the Retained Assets (as described in the Asset Sale Agreement)
located upon the Generator's Real Property and any other equipment of any
nature or kind retained by Pepco and located upon the Generator's Real
Property, together with any other equipment used in connection with the
foregoing (together with replacements thereof and substitutions therefor).

                           (c)      An easement which enables Pepco to keep and
maintain in their present locations, and operate, any Transmission Facilities,
Distribution Facilities and other assets owned by Pepco and located upon the
Generator's Real Property, together with an easement for all purposes
reasonably deemed necessary or convenient by Pepco to

<PAGE>   154

exercise any right or fulfill any obligation under the Connection Agreement,
including the right to Use any improvements constructed, maintained or
installed in connection therewith.

                           (d)      An easement of Access to those certain
generating buildings (and any replacements thereof) located upon the
Generator's Real Property in and upon which certain of Pepco's Distribution
Facilities and Transmission Facilities are located. Such easement shall
include, without limitation, the right to have keys, access codes or other
access methods necessary to enter any of such generating buildings.
Furthermore, the exercise of the easement right set forth in this subparagraph
shall be subject to the provisions of the Connection Agreement including,
without limitation, Section 3.3 thereof.

                           (e)      An easement of Access to the Generator's
Real Property for the purposes of exercising any of the rights granted in this
Section 2.l, in Section 2.3(b)(viii) hereof, in the Connection Agreement or the
Asset Sale Agreement.

                           (f)      An easement of Access to, and the right to
use, the parking lots, access roads, driveways and other such facilities
located upon the Generator's Real Property.

                           (g)      Pepco's exercise of the rights, easements,
privileges and licenses granted to it pursuant to this Section 2.1 shall be
limited to Qualified Personnel or employees of contractors employed by Pepco
who, in either event, are under Pepco's and/or its contractors' direct
supervision and whose duties include, or who are engaged for the purpose of,
Use of the rights granted pursuant to this Section 2.1.

                           (h)      The easements granted pursuant to this
Section 2.1 shall expressly include Pepco's right to lease, license or
otherwise permit Affiliates or third parties to use Pepco's facilities upon
such terms and for such purposes as Pepco may determine from time to time,
subject to the terms and conditions of this Agreement.

                  2.2      Reservation by Generator of Certain Rights.
Generator reserves to itself, from the easements granted pursuant to Section
2.1 hereof, the following rights, subject, however, to the provisions of the
final paragraph of this Section 2.2:

                           (a)      the right to (i) keep and maintain
Generator's Real Property and all improvements and facilities owned by
Generator and located upon the Generator's Real Property in their present
locations, and (ii) operate and maintain all improvements and facilities owned
by Generator and located upon the Generator's Real Property in a manner
consistent with past practice; and

                           (b)      the right to have Access to all portions of
the Generator's Real Property for all purposes deemed reasonably necessary or
convenient by Generator in the operation and conduct of its generation business
or in order to perform any act permitted, or fulfill any obligation of
Generator, under the Connection Agreement,

<PAGE>   155

including maintenance of the Generator's Real Property in the manner described
in the Connection Agreement.

                           (c)      Generator's exercise of the rights reserved
to Generator in this Section 2.2, and the rights, privileges and licenses
granted to Generator in Section 2.3 shall be exclusively limited to Qualified
Personnel or employees of contractors employed by Generator who, in either
event, are under Generator's and/or its contractors' direct supervision and
whose duties include, or who are engaged for the purpose of, Use of the
property described in clause (a) of this Section.

                  2.3      Grant of Easements, Right, Privilege and License
from Pepco to Generator.

                           (a)      Pepco does hereby grant to Generator the
following easements, rights, privileges and licenses on and with respect to the
Pepco Real Property:

                                    (i)      An easement, as described on
Exhibit "D" attached hereto, for the operation and maintenance of an existing
oil pipeline (to be used solely for the transmission of oil) on, under and
across Pepco Real Property at two (2) locations.

                                    (ii)     An easement, as described on
Exhibit "E" attached hereto, for the operation and maintenance of an existing
oil pipeline (to be used solely for the transmission of oil) on, under and
across the Retained Assets.

                                    (iii)    An easement which enables
Generator to keep and maintain in their present locations, and operate, any
Generating Facilities and other assets owned by Generator and located upon the
Pepco Real Property.

                                    (iv)     An easement of Access to and upon
the Pepco Real Property for the purposes of exercising any of the rights
granted in the Connection Agreement or the Asset Sale Agreement.

                           (b)      In addition, but without limitation of
Generator's rights pursuant to the Connection Agreement, Pepco agrees to make
available to Generator (at no cost to Generator, except as provided below)
Pepco's master station voltage control equipment (the "Equipment") located at
Morgantown Station upon the Generator's Real Property during the term of this
Agreement, subject to the following terms and conditions, and Generator agrees
to comply with such terms and conditions:

                                    (i)      Generator's operation of the
Equipment shall at all times be subject to that certain Agreement of Sale and
Lease dated as of November 30, 1994 between NationsBank Trust Company, National
Association and Pepco (the "Control Center Lease"), and Generator shall comply
with the terms and conditions

<PAGE>   156

thereof with respect to the use of the Equipment (including keeping the
Equipment free and clear of any liens, claims or encumbrances of whatever
nature, and identifying the Equipment as being owned by Pepco, and shall not
modify, alter, remove or add to the Equipment);

                                    (ii)     Generator shall operate and
maintain the Equipment in accordance with Good Utility Practice;

                                    (iii)    Generator shall be responsible for
all operating, repair and maintenance costs, taxes and the like with respect to
the Equipment, and shall reimburse Pepco promptly upon invoicing for any such
costs paid by Pepco;

                                    (iv)     Generator's Access to the
Equipment shall be in accordance with this Agreement;

                                    (v)      Generator's right to operate the
Equipment shall terminate in the event of actual or constructive loss of the
Equipment, damage rendering the Equipment beyond repair or unfit for normal
use, the condemnation or seizure of the Equipment, the obsolescence of the
Equipment or the material breach by Generator of any of its covenants in this
Section 2.3(b);

                                    (vi)     Pepco shall have no obligation to
Generator with respect to the Equipment other than to permit Access to and
operation of the Equipment in accordance with this Section 2.3(b);

                                    (vii)    The obligations of Generator under
Section 7.4 (maintenance of liability insurance coverage) and Section 7.1
(indemnification) shall be applicable to the Equipment; and

                                    (viii)   Pepco shall have Access to the
Equipment for purposes of complying with the terms and conditions of the
Control Center Lease and as necessary to perform any of the obligations of
Generator pursuant to this subparagraph (b) above to the extent the same are
not timely performed by Generator.

                  2.4      General Scope of Easements.

                           (a)      Except as otherwise provided in Sections
2.2 and 2.3 above and Section 2.4(b) below, each easement and each right,
privilege and license granted hereby is and shall be a perpetual grant,
transfer, conveyance and right of Access to and Use

<PAGE>   157

(subject to the terms of this Agreement) to the Grantee thereof and to any
future owner of the real property, improvements and facilities benefited
thereby. Notwithstanding the foregoing, all easements, rights, privileges and
licenses granted by this Agreement are and shall be subject to the terms and
conditions of the Connection Agreement, and in the event of any inconsistency
between the terms and conditions of the Connection Agreement and the terms of
this Agreement, the terms of the Connection Agreement shall control.

                           (b)      Any easement or right, privilege and
license granted hereunder for purposes of enabling a Party to exercise any
right or fulfill any obligation set forth in the Connection Agreement will
continue for the term of the Connection Agreement, and thereafter if and to the
extent that the right or obligation (i) shall by its express terms survive the
termination or expiration of the Connection Agreement or (ii) is necessary for
the conduct of business by Grantee. In the event of the termination or
expiration of an easement or right, privilege and license granted hereunder for
purposes of enabling a Grantee to exercise any right or fulfill any obligation
set forth in the Connection Agreement, all equipment and facilities installed
or maintained by such Grantee on the real property of the other Party pursuant
to said terminated or expired easement or right, privilege and license shall,
at the request of the other Party, be removed at the sole cost and expense of
such Grantee, and such Grantee shall, at its sole cost and expense repair any
damage to the real property and/or equipment and facilities of the other Party
damaged as a result of such removal.

                           (c)      All equipment and facilities installed or
maintained by Grantee pursuant to an easement or right, privilege and license
granted hereunder shall be maintained by Grantee in accordance with Good
Utility Practice and the Connection Agreement, and Grantee shall make all
repairs and replacements necessary to keep such equipment and facilities in
such condition.

                           (d)      Generator may not Use any portion of
Generator's Real Property burdened by any easement, right or privilege granted
to Pepco hereunder if such Use would materially adversely affect the Use and
enjoyment by Pepco of the rights granted to it hereunder, or materially
increase the costs or risks associated with such Use.

                           (e)      All easements granted herein shall be
deemed easements appurtenant to the parcel of real property benefited thereby
and shall run with such real property and shall be deemed covenants running
with the real property burdened thereby.

                  2.5      Interpretation. The following shall apply in
interpreting any easement and any right, privilege and license granted pursuant
to this Agreement:

                           (a)      Each easement and each right, privilege and
license granted herein is irrevocable except by written agreement of the
parties.

<PAGE>   158

                           (b)      With respect to any easement created by
this Agreement, the words "in," "upon," "to," "on," "over," "above," "through"
and/or "under" shall be interpreted to include all of such terms.

                           (c)      Each easement and each right, privilege and
license granted herein may be enjoyed without charge or fee to Grantee of the
easement.

                           (d)      Each easement and each right, privilege and
license granted herein is also a grant of the additional right of Access over
Grantor's property to accomplish the purpose of such easement or right,
privilege and license, to perform any obligations hereunder or in the
Connection Agreement, and to comply with any legal requirements affecting
Grantee or its property and/or improvements.

                           (e)      Exercise of any easement or any right,
privilege and license granted hereunder permitting or requiring maintenance,
repairs, alteration, restoration, rebuilding, construction, upgrading,
cleaning, installation, removal, modification, replacement, expansion, or other
work by Grantee upon the property or improvements of Grantor shall be subject
to the following conditions:

                                    (i)      Work upon the facilities and
properties of either Party subject to this Agreement shall be permitted only to
each Party's Qualified Personnel, and Access to such facilities and properties
shall be permitted only to a Party's Qualified Personnel and such consultants,
agents, contractors, subcontractors and invitees as any Party may select or
permit; provided that any consultant, agent, contractor, subcontractor or
invitee shall comply with all applicable provisions of this Agreement and the
Connection Agreement.

                                    (ii)     Work shall be performed using
reasonable precautions to avoid unreasonable interference with the Use and
enjoyment of Grantor's property and improvements.

                                    (iii)    Except only as may be specifically
provided to the contrary herein, Grantee shall not be liable for damage, if any,
which may be caused by Grantee's normal and reasonable Use of any easement, or
right, privilege or license granted hereunder.

                                    (iv)     Following completion of the work,
Grantee shall restore Grantor's property and improvements to the same or as good
a condition as existed before the commencement of the work.

                                    (v)      Any easement and any right,
privilege and license granted herein which permits a Gramtee to maintain its
property,

<PAGE>   159
equipment, facilities and appurtenances on the property and improvements owned
by Grantor also includes the right to maintain in place on Grantor's property
and improvements any and all wires and cables connecting such property,
equipment, facilities, and appurtenances to (i) the devices, machinery and
equipment which they measure, regulate and/or control, and (ii) power sources.

                                    (vi)     Generator shall be solely
responsible for the maintenance of any roads, paths and other means of entry or
exit exit located upon either the Generator's Real Property or the Pepco Real
Property that are commonly utilized by Generator and Pepco, and their respective
employees, agents and contractors pursuant to this Agreement or the Connection
Agreement.

                           (f)      Any easement granted pursuant to Section
2.1(a), (b) or (c) includes the right to (i) trim, cut, treat and/or remove, by
manual, mechanical, and chemical means, any and all trees, brush, structures
and other obstructions within the easement area, as well as such trees, brush,
structures and vegetation outside of the easement area deemed reasonably
necessary or desirable by Pepco for the safe and secure operation of its
facilities; and (ii) obtain Access to Generator's Real Property for the purpose
of performing the aforementioned acts.

                  2.6      Rules and Regulations.

         Each Party may promulgate rules regulating the conduct of the other
Party in the exercise of rights under this Agreement provided such rules and
regulations do not unreasonably interfere with or impede the affected Party's
rights and easements as set forth herein or in the Connection Agreement.

                  2.7      No Obstruction.

                           (a)      No Party hereto shall obstruct the
easements or the rights, privileges and licenses granted or created pursuant to
this Agreement or render them impassable or unusable in any way or otherwise in
any way interfere with the right to the Use and enjoyment of the easements or
rights, privileges and licenses granted or created pursuant to this Agreement.

                           (b)      No Party hereto shall make any changes to
the topography or accesses on or to its respective property, including grading
or drainage that could reasonably be expected to adversely affect another
Party's facilities, common use drainage systems, or pollution control systems,
or the exercise of any right or fulfillment of any obligation in this Agreement
or in the Connection Agreement, without the prior written consent of the other
Party which consent shall not unreasonably be withheld, delayed or conditioned.

<PAGE>   160

         3.       TAXES, ASSESSMENTS AND OTHER CHARGES

                  3.1      Real Estate Taxes. Generator, with respect to the
Generator's Real Property and Pepco, with respect to the Pepco Real Property,
shall pay and discharge all of the following ("Real Estate Taxes") whether or
not now within the contemplation of the Parties hereto: (i) all real estate
taxes, assessments (both general and special), other governmental impositions
and charges, taxes, rents, levies and sums of every kind or nature whatsoever,
extraordinary as well as ordinary, as shall at any time be imposed by any
governmental or public authority on, or become a lien in respect of, the
Generator's Real Property or the Pepco Real Property, as the case may be, or
any part thereof, or which may become due and payable with respect thereto, and
any and all taxes assessments and charges levied, assessed or imposed upon the
Generator's Real Property or the Pepco Real Property, as the case may be, in
lieu of or in addition to, the foregoing, under or by virtue of any present or
future laws, rules, requirements, orders, directives, ordinances or regulations
of the United States of America or of the State or of any subdivision thereof,
or of any lawful governmental authority whatsoever, and any interest or
penalties thereon, and (ii) all other taxes (excluding gains, sales and income
taxes but including occupancy taxes which are measured by income) measured by
ownership of the Generator's Real Property or the Pepco Real Property, as the
case may be. Generator shall pay and discharge all levies and assessments for
water, water meter (including any expenses incident to the installation, repair
or replacement of any water meter) and sewer and all rents with respect to
water and sewer which provide service to the Generator's Real Property.

                  3.2      Personal Property Taxes. Generator and Pepco shall,
respectively, pay and discharge all of the following ("Personal Property
Taxes") whether or not now within the contemplation of the Parties hereto: all
taxes and assessments which shall or may be charged, levied, assessed or
imposed upon, or become a lien upon, the personal property of Generator or
Pepco, as the case may be, Used in the operation or in connection with the
business conducted at the Generator's Real Property or the Pepco Real Property,
as the case may be.

                  3.3      Timing of Payment. Subject to the provisions of
Section 3.5, Generator and Pepco shall each comply with its covenant to pay and
discharge all Real Estate Taxes and Personal Property Taxes by paying all such
taxes directly to the appropriate taxing authorities prior to the expiration of
the period within which payment is permitted without penalty or interest.
Generator and Pepco shall within twenty (20) days of written request of the
other Party, produce the most recent official receipts from the appropriate
taxing authorities evidencing such payment certified by Generator or Pepco, as
the case may be, to the other Party hereto.

                  3.4      Cooperation with Respect to Tax Statements.
Generator and Pepco will cooperate with each other in obtaining and/or
retaining any tax abatement for which the Generator's Real Property or Pepco
Real Property may be eligible. Upon written request of the Party seeking an
abatement, the other Party or Parties hereto will

<PAGE>   161

execute and file any and all documents and instruments reasonably necessary to
obtain and retain such abatement, without the assumption of any liabilities or
obligations, provided that the Party seeking such abatement shall reimburse the
cooperating Party or Parties for any reasonable expenses that such cooperating
Party or Parties may incur in connection therewith.

                  3.5      Tax Contests. Generator, with respect to the
Generator's Real Property, and Pepco, with respect to the Pepco Real Property:

                           (a)      May contest in good faith by appropriate
proceedings diligently and continuously conducted, at its or their sole cost
and expense, any Real Estate Tax or charge or Personal Property Tax or charge,
or similar tax or charge and, where permitted by law, pay the same under
protest.

                           (b)      Shall pay and discharge such contested
items as finally adjudicated or settled, with interest and penalties, and all
other charges directed to be paid in or by any such adjudication or settlement.

                           (c)      May, in its or their sole discretion,
consolidate any proceeding to obtain a reduction in the assessed valuation with
any similar proceeding or proceedings brought by it or them relating to any one
or more other tax years.

                           (d)      Shall indemnify and hold the non-contesting
Party harmless from and against all liability, loss, cost or expense arising
out of the contest.

                  3.6      Refunds. Any refunds from any contest undertaken
pursuant to Section 3.5 shall belong wholly to the Party or Parties that paid
the tax.

         4.       MECHANICS' LIENS

                  4.1      Notice Regarding Labor and Material. Notice is
hereby given that no Party hereto shall be liable for any labor or materials
furnished or to be furnished to or for another Party hereto or to any other
persons or entities claiming under such other Party on credit, and that no
mechanics' or other lien for any such labor or material furnished to a Party or
such other persons or entities shall attach to or affect any property interest
of any other Party.

                  4.2      Disposition of Liens. (a) Pepco shall forthwith take
such action necessary to discharge, remove or satisfy any lien filed against
the Generator's Real Property or any portion thereof for any labor or materials
furnished or to be furnished for or on behalf of Pepco, or any person or entity
holding any portion thereof through or under Pepco.

<PAGE>   162

                           (b)      Generator shall forthwith take such action
necessary to discharge, remove or satisfy any lien filed against the Pepco Real
Property or any portion thereof for any labor or materials furnished or to be
furnished for or on behalf of Generator, or any person or entity holding any
portion thereof through or under Generator.

                           (c)      If either Pepco or Generator, as the case
may be, shall fail to discharge, remove or satisfy any such lien which it is
obligated to discharge, remove or satisfy hereunder within ten (10) days after
notice of the existence of the lien has been given to such defaulting Party,
the non-defaulting Party or parties may pay the amount of such lien or
discharge the same by deposit or bonding, and the amount so paid or deposited,
or the premium paid for such bond, with interest at the rate provided for
defaults in Section 6.3 hereof, shall be paid by the defaulting Party upon
demand to the non-defaulting Party who effected such cure.

                           (d)      The defaulting Party shall defend,
indemnify and save harmless the non-defaulting Party from and against all
liability, loss, cost or expense (including reasonable attorneys' fees) arising
out of any liens which the defaulting Party is obligated to discharge, remove
or satisfy.

          5.      CONDEMNATION

                  5.1      Right to Participate. In the event the Generator's
Real Property or the Pepco Real Property, or any part thereof, shall be taken
in condemnation proceedings or by exercise of any right of eminent domain or
any agreement with those authorized to exercise such right (any such matter
being hereinafter referred to as a "Taking" or property "Taken"), whether such
Taking be a permanent Taking or a temporary Taking, any person or entity having
an interest in the award or awards shall have the right to participate in any
such condemnation proceedings or agreement for the purpose of protecting its
interest hereunder. Each Party so participating shall pay its own expenses.

                  5.2      Total Taking. A "Total Taking" shall be deemed to
have occurred as to the property of any Party (which means the Generator's Real
Property, as to Generator, and the Pepco Real Property, as to Pepco) when the
entire property of such Party shall be Taken or a substantial part of such
property shall be Taken and the untaken portion of the property would,
following the completion of restoration, be unsuitable for the operation and
the Use thereof in the manner so operated and Used prior to the Taking. Upon a
Total Taking, this Agreement shall terminate with respect to the property Taken
except with respect to the disposition of the award and this Agreement shall
continue with respect to the property not Taken.

                  5.3      Disposition of Award. In the event of a Taking, each
Party shall be entitled to share in the awards to the extent of its interest in
the property subject to the

<PAGE>   163

Taking, and for consequential damages to and dilution of value of the relevant
property not so Taken.

                  5.4      Notice of Taking. In the event the Generator's Real
Property or the Pepco Real Property, or any part thereof, shall be the subject
of any condemnation proceedings or the subject of any eminent domain
proceedings, and if any Party shall receive actual notice of such proceedings,
the Party receiving such notice shall notify the other Party of the existence
of such proceedings. Such notification shall occur within thirty (30) days of
the receipt of such actual notice.

          6.      DEFAULTS

                  6.1      Events of Default. Each and every one of the
following events shall constitute an Event of Default ("Event of Default")
under this Agreement:

                           (a)      If a Party fails to make any payment due to
the other Party hereto within twenty (20) days of written demand for such
payment;

                           (b)      If a Party fails, within twenty (20) days
of written notice from a Party, to make any payment due from such Party to any
third party and such failure could result in the imposition of a lien or other
encumbrance on the property or improvements of a Party, unless the payment of
such amount is contested in accordance with Section 3.5 hereof, in which case,
the provisions of Section 3.5 shall control; and

                           (c)      If a Party fails to perform any material
non-monetary obligations hereunder, and said Party fails to cure such default
within thirty (30) days of receipt of written notice stating with particularity
the nature of the default; provided, however, if such default is of such a
nature that it cannot be cured within thirty (30) days following receipt of
such notice, an Event of Default shall not have occurred if the defaulting
Party shall within such thirty (30) days commence the necessary cure and shall
at all times thereafter diligently and continuously prosecute such cure to
completion.

                  6.2      Right of Self Help. A non-defaulting Party may at
its election following the occurrence of a non-monetary Event of Default and
the thirtieth (30th) day after the receipt of the written notice specified in
paragraph 6.1(c) hereof, undertake the cure of such default on behalf of the
defaulting Party. A non-defaulting Party is granted an easement to enter upon,
through or under the property or improvements of the defaulting Party to effect
such cure. Following the occurrence of an Event of Default involving the
payment of money to a person or entity not Party to this Agreement, a
non-defaulting Party may make such payment on behalf of the defaulting Party.
All monies paid by the non-defaulting Party and all reasonable costs and
expenses (including, reasonable attorneys' fees) incurred by it, as the case
may be, in effecting such cure or payment, shall be paid by the defaulting
Party upon written demand, together with interest from the date of such

<PAGE>   164

demand at the rate set forth in Section 6.3. This Section 6.2 shall not limit
Pepco's self-help rights pursuant to Section 2.3(b).

                  6.3      Interest. Following the occurrence of an Event of
Default involving the nonpayment of money by the defaulting Party to the
non-defaulting Party, all monies owed to the non-defaulting party shall bear
interest at the rate equal to one and one-half percent (1.5%) per month
accruing on the due date, provided, however, that such late payment charge
shall not exceed the maximum charge which may be collected under State law.

                  6.4      Enforcement Rights. In addition to any other rights
expressly set forth in this Agreement, but without limitation, enforcement of
this Agreement may be had by legal or equitable proceedings against any
defaulting Party either to specifically enforce, restrain or enjoin the
violation of any restriction, covenant, agreement, term, representation or
warranty herein contained or to recover damages. The above notwithstanding,
termination of this Agreement shall not be available as a remedy in any
proceedings against any defaulting Party.

                  6.5      No Forfeiture. Except by enforcement of a judgment
lien against such property, nothing contained in this Agreement shall create
any reversion, condition or right of re-entry or other provisions for
forfeiture under which any Party can be cut off, subordinated or otherwise
disturbed in the possession of its property.

                  6.6      Independent Covenants. None of the rights and
easement granted by this Agreement and none of the performances required by
this Agreement shall be dependent, upon the performance of any other term,
promise, or condition of this Agreement or any documents executed concurrently
or in connection with this Agreement, and such rights, easement and
requirements or performance shall continue in effect irrespective of whether
anything else in this Agreement or such other documents has been breached or
has been terminated. The separateness and independent survival of the right,
easements and requirements of performance under this Agreement are essential
terms hereof without which this Agreement would not have been made.

         7.       INDEMNIFICATION AND INSURANCE

                  7.1      Generator's Indemnification. Generator shall
indemnify, hold harmless, and defend Pepco and its Affiliates, as the case may
be, and their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between Pepco and a third party or
Generator) for damage to property of unaffiliated third parties, injury to or
death of any person, including Pepco's employees or any third parties, to the
extent caused, by the breach of this Agreement by Generator or the negligence
or willful misconduct of

<PAGE>   165

Generator and/or its officers, directors, employees, agents, contractors,
subcontractors or invitees arising out of or connected with Generator's
performance of this Agreement, or the exercise by Generator of its rights
hereunder.

                  7.2      Pepco's Indemnification. Pepco shall indemnify, hold
harmless, and defend Generator and its Affiliates, as the case may be, and
their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between Generator and a third party or
Pepco) for damage to property of unaffiliated third parties, injury to or death
of any person, including Generator's employees or any third parties, to the
extent caused by the breach of this Agreement by Pepco or the negligence or
willful misconduct of Pepco and/or its officers, directors, employees, agents,
contractors, subcontractors or invitees arising out of or connected with
Pepco's performance of this Agreement, or the exercise by Pepco of its rights
hereunder.

                  7.3      Survival. The provisions of Sections 7.1 and 7.2
shall survive termination, cancellation, suspension, completion or expiration
of this Agreement.

                  7.4      Insurance Coverage. The Parties shall maintain at
their own cost the following insurance: (a) standard Commercial General
Liability insurance with limitations not less than One Hundred Million Dollars
($100,000,000.00)in the aggregate; (b) All-Risk Property insurance in amounts
not less than one hundred percent (100%) of the full replacement cost of the
improvements located upon each Party's real property; (c) Worker's compensation
insurance as required by prevailing law and Employer's liability insurance with
limits of not less than Twenty-five Million Dollars ($25,000,000.00); and (d)
such other insurance as is customary in the electric utility industry.

                  7.5      Certificate of Insurance. The Parties agree to
furnish each other with certificates of insurance evidencing the insurance
coverage obtained in accordance with this Article 7, and the Parties agree to
notify and send copies to the other of any policies maintained hereunder upon
written request by a Party. Each Party must notify the other Party within five
(5) business days of receiving notice of cancellation, change, amendment or
renewal of any insurance policy required pursuant to Section 7.4 above.

                  7.6      Additional Insureds and Waiver. Each Party and its
affiliates shall be named as additional insureds on the general liability
insurance policies obtained in accordance with Section 7.4, above, as regards
liability under this Agreement; and each general liability insurance policy
shall contain a waiver of subrogation and each Party shall waive its rights of
recovery against the other for any loss or damage covered by such policy.

<PAGE>   166

         8.       MISCELLANEOUS

                  8.1      Effective Date. This Agreement will be effective on
the Closing Date pursuant to the Asset Sale Agreement (the "Effective Date").

                  8.2      Exhibits. All exhibits attached to this Agreement
are part of this Agreement and the material contained in such exhibits shall be
construed and interpreted as if contained within the text of the Agreement.

                  8.3      Headings. The Article and Section headings of this
Agreement are for convenience and reference only and in no way define, limit or
describe the scope and intent of this Agreement, nor in any way affect this
Agreement.

                  8.4      Interpretation. When a reference is made in this
Agreement to an Article, Section, Schedule or Exhibit, such reference shall be
to an Article or Section of, or Schedule or Exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation" or equivalent words. The words
"hereof", "herein" and "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. The definitions contained in this
Agreement are applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter genders of
such term. Any agreement, instrument, statute, regulation, rule or order
defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument, statute, regulation, rule
or order as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes, regulations, rules or orders) by succession of comparable successor
statutes, regulations, rules or orders and references to all attachments
thereto and instruments incorporated therein. References to a person are also
to its permitted successors and assigns. Each Party acknowledges that it has
been represented by counsel in connection with the review and execution of this
Agreement and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

                  8.5      GOVERNING LAW. EXCEPT WITH RESPECT TO THE CREATION,
PERFECTION AND ENFORCEMENT OF THE REAL PROPERTY INTERESTS CREATED HEREUNDER,
WHICH SHALL BE GOVERNED AND CONSTRUED BY THE LAWS OF THE STATE, THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE DISTRICT
OF COLUMBIA EXCLUSIVE OF ITS CHOICE OF LAW RULES.

<PAGE>   167

                  8.6      Entire Agreement. This Agreement, the Asset Sale
Agreement, the Confidentiality Agreement (as defined in the Asset Sale
Agreement) and the Ancillary Agreements (as defined in the Asset Sale
Agreement) including the Exhibits, Schedules, documents, certificates and
instruments referred to herein or therein and other contracts, agreements and
instruments contemplated hereby or thereby, embody the entire agreement and
understanding of the Parties in respect of the transactions contemplated by
this Agreement. There are no restrictions, promises, representations,
warranties, covenants or undertakings other than those expressly set forth or
referred to herein or therein.

                  8.7      Amendment and Modification, Extension, Waiver. This
Agreement may be amended, modified or supplemented only by an instrument in
writing signed on behalf of each of the Parties. Either Party may (i) extend
the time for the performance of any of the obligations or other acts of the
other Party, (ii) waive any inaccuracies in the representations and warranties
of the other Party contained in this Agreement or (iii) waive compliance by the
other Party with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a Party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf
of such Party. The failure of a Party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.

                  8.8      Binding Effect. The covenants, conditions,
restrictions, encumbrances, easements, license and agreements set forth in this
Agreement shall attach to, burden, and run with the land and the Generator's
Real Property and the Pepco Real Property or the applicable portion or portions
thereof, and shall be appurtenant to the Generator's Property or the Pepco Real
Property, as appropriate and, together with the remainder of this Agreement,
shall be binding upon the Parties hereto and their respective successors,
assigns, grantees, transferees and tenants and, together with the remainder of
this Agreement, shall inure to the benefit and Use of the Parties hereto and
their respective heirs, successors, assigns, grantees, transferees and tenants.
Each Grantee of any portion of or interest in the property and each mortgagee
which succeeds to the fee simple ownership of any portion of the property shall
be deemed, by the acceptance of the deed conveying fee simple title to such
person, to have agreed to perform each and every undertaking created hereunder
attributable to the portion of the property in which such Grantee or mortgagee
has acquired an interest.

                  8.9      Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

                  8.10     Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this

<PAGE>   168

Agreement so as to effect the original intent of the Parties as closely as
possible to the fullest extent permitted by applicable law in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled to
the extent possible.

                  8.11     Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given (as of the time of
delivery or, in the case of a telecopied communication, of confirmation) if
delivered personally, telecopied (which is confirmed) or sent by overnight
courier (providing proof of delivery) to the Parties at the following addresses
(or at such other address for a Party as shall be specified by like notice):

          if to Pepco, to:

               Potomac Electric Power Company
               1900 Pennsylvania Avenue, N.W.
               Washington, D.C. 20068
               Telecopier: (202) 261-7889
               Attention:  William T. Torgerson, General Counsel

          with a copy to:

               Dickstein Shapiro Morin & Oshinsky LLP
               2101 L Street, N.W.
               Washington, D.C. 20037
               Telecopy No.:  202) 887-0689
               Attention:  Kenneth M. Simon, Esq.

          if to Generator, to:

               Southern Energy, Inc.
               900 Ashwood Parkway
               Suite 500
               Atlanta, Georgia 30338-4780
               Telecopier: (770) 821-6575
               Attention:

          with a copy to:

               Troutman Sanders LLP
               1300 I Street, N.W.
               Suite 500 East
               Washington, DC  20005
               Telecopier: (202) 274-2994
               Attention:  Benjamin L. Israel, Esq.

<PAGE>   169

The names, titles and addresses of either Party in this section may be changed
by written notification to the other Party.

                  8.12     Independent Contractor Status. Nothing in this
Agreement shall be construed as creating any relationship between Pepco and
Generator other than that of independent contractors.

                  8.13     Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

          IN WITNESS WHEREOF, Pepco and Generator have caused this
Agreement to be signed by their respective duly authorized officers
as of the date first above written.

                              POTOMAC ELECTRIC POWER COMPANY

                              By:
                                     ------------------------------
                              Name:
                                     ------------------------------
                              Title:
                                     ------------------------------

                              [GENERATOR]

                              By:
                                     ------------------------------
                              Name:
                                     ------------------------------
                              Title:
                                     ------------------------------

<PAGE>   170

STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State,
personally appeared __________________________, an ________________________, by
_____________________, its ________ who _________ is personally known to me/
________ and who acknowledged before me that he did sign the foregoing
instrument and that the same is the free act and deed of said
_________________, and his free act and deed personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                                   -------------------------------
                                   Notary Public

                                   My Commission Expires:

STATE OF            )
                    ) SS:
COUNTY OF           )

         BEFORE ME, a Notary Public in and for said County and State,
personally appeared ________________________, an ___________________, by
________________ its _____________________ who _______ is personally known to
me/ ________ and who acknowledged before me that he did sign the foregoing
instrument and that the same is the free act and deed of said corporation, and
his free act and deed personally and as such officer.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
__________, __________, this ____ day of _________, ____.

                              ---------------------------------
                              Notary Public

                              My Commission Expires:

<PAGE>   171

                                  Schedule 1.1

                                  Definitions

         "Access" means, subject to the conditions set forth in this Agreement
and a Party's right to impose reasonable security and safety restrictions
protecting its officers, employees, agents, consultants, contractors,
subcontractors, invitees, property and confidential information, full and
unimpeded access, in common with Grantor over and through existing roads,
paths, walkways, corridors, hallways, doorways, and other means of entry or
exit, as exist now and from time to time on Grantor's property or, where no
means of access exists, over and through those areas of Grantor's property or
improvements which are (i) reasonably necessary or convenient for achieving
Grantee's underlying purposes, and (ii) least likely, out of the alternatives
reasonably available, to impede or damage the property or operation of any
Party hereto. Access shall also include access and right-of-way for Grantee's
employees, agents, consultants, contractors, subcontractors, vehicles, trucks,
trailers, heavy machinery, equipment, materials, and all other items reasonably
necessary or convenient for achieving Grantee's underlying purposes.

         "Affiliate" has the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934.

         "Agreement" means this Easement, License and Attachment Agreement.

         "Asset Sale Agreement" has the meaning set forth in the first recital
of this Agreement, as such Asset Sale Agreement may be amended or modified.

         "Connection Agreement" means the Interconnection Agreement
(Morgantown), dated as of __________, 2000, between Pepco and Generator.

         "Distribution of Electric Current" means local transmission and
distribution of electricity to Pepco's end users.

         "Distribution Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions, replacements and expansions thereto,
now or hereafter installed or located on the Generator's Real Property for
Distribution of Electric Current. Distribution Facilities do not include
Transmission Facilities.

         "Effective Date" has the meaning set forth in Section 8.l.

         "FERC" means the Federal Energy Regulatory Commission or its
successors.

<PAGE>   172

         "Generating Facilities" means the Station and any additional
generating plants, turbines or other generating facilities constructed by
Generator after the Effective Date at the site of the Station.

         "Generator" shall have the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors and
assigns.

         "Generator's Real Property" means the real property described in
Exhibit A, and any improvements or betterments thereto now or hereinafter
situated thereon.

         "Good Utility Practice" shall have the meaning given it by the
Connection Agreement.

         "Grantee" means the Party or Parties who enjoy the principal benefit
of the referenced easement, license, right (including attachment rights)
privilege or right-of-way.

         "Grantor" means the owner or owners of the property and/or improvement
granting the referenced easement, license, right (including attachment rights),
privilege or right-of-way.

         "Interconnection Service" shall have the meaning given it by the
Connection Agreement.

         "Party" or "Parties" shall have the meaning set forth in the
introductory paragraph of this Agreement.

         "Pepco" shall have the meaning set forth in the introductory paragraph
of this Agreement and shall include its permitted successors and assigns.

         "Pepco Real Property" means the real property described in Exhibit B,
and any improvements or betterments thereto now or hereinafter situated
thereon.

         "Qualified Personnel" means individuals who possess any required
licenses and training for their positions and duties by Generator and/or Pepco
pursuant to Good Utility Practice.

         "State" means the State of Maryland.

         "Station" means the Morgantown Station as defined in the Asset Sale
Agreement.

         "Transmission of Electric Current" means the transmission of such
current typically over long distances and at voltages not commonly used for
service to end use customers.

         "Transmission Facilities" means towers, lines of towers, poles, lines
of poles, supporting structures, cables, crossarms, overhead and underground
wires, guys, braces, ducts, conduits, cables, anchors, lightning protective
wires, and all related above-ground and underground facilities, appurtenances
and equipment, including all additions,

<PAGE>   173
replacements and expansions thereto, now or hereafter installed or located on
the Generator's Real Property and/or which Pepco may reasonably require now and
from time to time on the Generator's Real Property for the Transmission of
Electric Current. Transmission Facilities do not include Distribution
Facilities.

         "Transmission System" shall have the meaning set forth in the
Connection Agreement.

         "Use" means to operate, maintain, repair, upgrade, clean, install, add
to, alter, remove, inspect, construct, modify, restore, rebuild, replace,
relocate and expand (but if any such addition, relocation or expansion would
unreasonably or materially burden Grantor's Property, in each case, the express,
prior written consent of Grantor shall be required, which consent shall not
unreasonably be withheld, delayed or conditioned) (all of the foregoing to be in
accordance with Good Utility Practice).

<PAGE>   174

                            LIST OF EXHIBITS

Exhibit A   Generator's Real Property
Exhibit B   Pepco Real Property
Exhibit C   10 Foot Electric Utility Easement
Exhibit D   Easement for Oil Pipeline on Pepco Real Property
Exhibit E   Easement for Oil Pipeline on Retained Assets

<PAGE>   175

                                                                       EXHIBIT D

                          GUARANTEE AGREEMENT

         THIS GUARANTEE AGREEMENT (the "Agreement"), dated as of _____________,
2000, by and between Southern Energy, Inc., a Delaware ("Guarantor"), and
Potomac Electric Power Company, a District of Columbia and Virginia corporation
("Seller"). Guarantor and Seller are referred to herein individually as a
"Party" and collectively as the "Parties."

         WHEREAS, Seller and Guarantor have entered into an Asset Purchase and
Sale Agreement dated the date hereof (as amended, supplemented or otherwise
modified from time to time, the "Asset Sale Agreement"), pursuant to which
Guarantor has agreed to purchase and Seller has agreed to sell certain electric
generating assets, as more particularly set forth therein, and each of Guarantor
and Seller have undertaken certain duties, responsibilities and obligations as
set forth in the Asset Sale Agreement and the Ancillary Agreements (as defined
in the Asset Sale Agreement);

         WHEREAS, subsequent to the execution of the Asset Sale Agreement,
Guarantor has assigned to ________________, [its direct/an indirect]
wholly-owned subsidiary ("Buyer") [all/certain] of its rights under the Asset
Sale Agreement;

         WHEREAS, as a condition precedent to and in consideration of Seller's
entering into the Asset Sale Agreement, Guarantor has agreed to guarantee
payment and performance of those covenants, agreements, obligations,
liabilities, representations and warranties made by Guarantor (and subsequently
assigned to Buyer) under the Asset Sale Agreement, any Ancillary Agreement or
any other agreement or instrument related thereto or entered into in connection
therewith; and

         WHEREAS, Guarantor will benefit from the transactions contemplated by
the Asset Sale Agreement.

         NOW, THEREFORE, the Parties agree as follows:

         SECTION 1.  Definitions. Capitalized terms used herein shall have the
meanings assigned to them herein or, if not defined herein, then such terms
shall have the meanings assigned to them in the Asset Sale Agreement.

         SECTION 2.  Guarantee. Guarantor absolutely, irrevocably and
unconditionally guarantees, as a primary obligor and not merely as a surety, (a)
the due and punctual payment of (i) each payment required to be made by Buyer
under the Asset Sale Agreement or any Ancillary Agreement, when and as due,
including payments in respect of reimbursement of disbursements and interest
thereon and (ii) all other monetary

<PAGE>   176

obligations, including indemnities, fees, costs and expenses, whether primary,
secondary, direct, contingent, fixed or otherwise (including monetary
obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding, regardless of whether allowed or
allowable in such proceeding), of Buyer under the Asset Sale Agreement, any
Ancillary Agreement or any other agreement or instrument related thereto (all
such obligations referred to in this clause (a) being collectively referred to
as the "Monetary Obligations") and (b) the due and punctual performance and
observance of, and compliance with, all covenants, agreements, obligations,
liabilities, representations and warranties of Buyer under or pursuant to the
Asset Sale Agreement, any Ancillary Agreement or any other agreement or
instrument related thereto (all such obligations referred to in the preceding
clauses (a) and (b) being collectively referred to as the "Obligations").
Guarantor further agrees that the Obligations may be extended, amended, modified
or renewed, in whole or in part, without notice to or further assent from it,
and that it will remain bound upon its guarantee notwithstanding any extension,
amendment, modification or renewal of any Obligation by Seller and Buyer.

         SECTION 3.  Obligations Not Waived. To the fullest extent permitted by
applicable law, Guarantor waives all notices whatsoever with respect to this
Agreement or with respect to the Obligations, including presentment to, demand
of payment from and protest to Buyer of any of the Obligations, and notice of
acceptance of its guarantee and notice of protest for nonpayment. To the fullest
extent permitted by applicable law, the obligations of Guarantor hereunder shall
not be affected by (a) the failure of Seller to assert any claim or demand or to
enforce or exercise any right or remedy against Buyer in respect of the
Obligations or otherwise under the provisions of the Asset Sale Agreement, any
Ancillary Agreement or otherwise or, in each case, any delay in connection
therewith, or (b) any rescission, waiver, amendment or modification of, or any
release from any of the terms or provisions of, this Agreement, the Asset Sale
Agreement, any Ancillary Agreement or any other agreement.

         SECTION 4.  Continuing Guarantee of Payment and Performance. Guarantor
further agrees that its guarantee constitutes a continuing guarantee of payment
and performance when due, and not of collection, and Guarantor further waives
any right to require that any resort be had by Seller to any security.

         SECTION 5.  No Discharge or Diminishment of Guarantee.

         (a)      The obligations of Guarantor hereunder shall not be subject to
any reduction, limitation, impairment or termination, or be subject to any
defense or setoff, counterclaim, recoupment or termination whatsoever, or
otherwise be affected, for any reason (other than the performance in full of all
Obligations, including the indefeasible payment in full in cash of all Monetary
Obligations, and the termination of all the Obligations), including:

                  (i)      any claim of waiver, release, surrender, alteration
or compromise of any of the Obligations;

                  (ii)     the invalidity, illegality or unenforceability of the
Obligations;

<PAGE>   177

                  (iii)    the occurrence or continuance of any event of
bankruptcy, reorganization, insolvency, receivership or other similar proceeding
with respect to Buyer or any other person (for purposes hereof, "person" means
any individual, partnership, limited liability company, joint venture,
corporation, trust, unincorporated organization or Governmental Authority), or
the dissolution, liquidation or winding up of Buyer or any other person;

                  (iv)     any permitted assignment or other transfer of this
Agreement by Seller or any permitted assignment or other transfer of the Asset
Sale Agreement or any Ancillary Agreement in whole or in part;

                  (v)      any sale, transfer or other disposition by Guarantor
of any direct or indirect interest it may have in Buyer or any other change in
ownership or control of Buyer; or

                  (vi)     the absence of any notice to, or knowledge on behalf
of, Guarantor of the existence or occurrence of any of the matters or events set
forth in the foregoing clauses.

         (b)      Without limiting the generality of the foregoing, the
obligations of Guarantor hereunder shall not be discharged or impaired or
otherwise affected by the failure of Seller to assert any claim or demand or to
enforce any remedy under the Asset Sale Agreement, any Ancillary Agreement or
any other agreement, by any waiver or modification of any provision thereof, by
any default, failure or delay, willful or otherwise, in the performance of the
Obligations, or by any other act or omission that may or might in any manner or
to any extent vary the risk of Guarantor or that would otherwise operate as a
discharge of Guarantor as a matter of law or equity (other than the performance
in full of all Obligations, including the indefeasible payment in full in cash
of all Monetary Obligations, and the termination of all the Obligations).

         SECTION 6.  Defenses Waived. To the fullest extent permitted by
applicable law, Guarantor waives any defense based on or arising out of the
unenforceability of the Obligations or any part thereof from any cause. Seller
may compromise or adjust any part of the Obligations, make any other
accommodation with Buyer or exercise any other right or remedy available to it
against Buyer, without affecting or impairing in any way the liability of
Guarantor hereunder except to the extent all the Obligations have been fully and
finally performed, including the indefeasible payment in full of all Monetary
Obligations, and terminated. To the fullest extent permitted by applicable law,
Guarantor waives any defense arising out of any such election even though such
election operates, pursuant to applicable law, to impair or to extinguish any
right of reimbursement or subrogation or other right or remedy of Guarantor
against Buyer or any security. Guarantor waives each right and all defenses to
which it may be entitled under applicable law as in effect or construed from
time to time.

         SECTION 7.  Representations and Warranties of Guarantor. Guarantor
represents and warrants to Seller as follows:

         (a)      Organization. Guarantor is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite

<PAGE>   178

corporate power and authority to own, lease and operate its properties and to
carry on its business as is now being conducted.

         (b)      Authority Relative to this Agreement. Guarantor has all
necessary corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder. The execution and delivery by
Guarantor of this Agreement and performance by Guarantor of its obligations
hereunder have been duly and validly authorized by the Board of Directors of
Guarantor and no other corporate proceedings on the part of Guarantor are
necessary to authorize this Agreement or performance by Guarantor of its
obligations hereunder. This Agreement has been duly and validly executed and
delivered by Guarantor and this Agreement constitutes a valid and binding
agreement of Guarantor, enforceable against Guarantor in accordance with its
terms.

         (c)      Consents and Approvals; No Violation.

                  (i)      Subject to obtaining the Buyer Required Regulatory
Approvals, neither the execution and delivery of this Agreement by Guarantor nor
performance by Guarantor of its obligations hereunder will (i) conflict with or
result in any breach of any provision of the organizational or governing
documents or instruments of Guarantor, (ii) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Guarantor or any of
its subsidiaries is a party or by which any of their respective assets may be
bound or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Guarantor, or any of its assets, except in the case of
clauses (ii) and (iii) for such failures to obtain a necessary consent, defaults
and violations which would not, individually or in the aggregate, have a
material adverse effect on the ability of Guarantor to discharge its obligations
under this Agreement (a "Guarantor Material Adverse Effect").

                  (ii)     No declaration, filing or registration with, or
notice to, or authorization, consent or approval of any Governmental Authority
is necessary for performance by Guarantor of its obligations hereunder, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made would not, individually or
in the aggregate, have a Guarantor Material Adverse Effect.

         SECTION 8.  Agreement to Perform and Pay; Subordination. In furtherance
of the foregoing and not in limitation of any other right that Seller has at law
or in equity against Guarantor by virtue hereof, upon the failure of Buyer, to
perform or pay any Obligation when and as the same shall become due, Guarantor
hereby promises to and will forthwith, as the case may be, (a) perform, or cause
to be performed, such unperformed Obligations and (b) pay, or cause to be paid,
to Seller in cash the amount of such unpaid Monetary Obligations. Upon payment
by Guarantor of any sums to Seller as provided above, all rights of Guarantor
against Buyer, arising as a result thereof by way of right of subrogation,
contribution, reimbursement, indemnity or otherwise shall in all respects be
subordinate and junior in right of payment to the prior indefeasible payment in
full in cash of all the Monetary Obligations. If any amount shall erroneously be
paid to Guarantor on account of (i) such subrogation, contribution,
reimbursement, indemnity or similar right or (ii) any such indebtedness of
Buyer, such amount shall be held in trust for the benefit of

<PAGE>   179

Seller and shall forthwith be paid to Seller to be credited against the payment
of the Monetary Obligations or performance in accordance with the terms of the
Asset Sale Agreement or any Ancillary Agreement, as applicable.

         SECTION 9.  Information. Guarantor assumes all responsibility for being
and keeping itself informed of Buyer's financial condition and assets, and of
all other circumstances bearing upon the risk of nonperformance of the
Obligations (including the nonpayment of Monetary Obligations) and the nature,
scope and extent of the risks that Guarantor assumes and incurs hereunder, and
agrees that Seller does not have any duty to advise Guarantor of information
known to it regarding such circumstances or risks.

         SECTION 10. Termination and Reinstatement. The guarantee made hereunder
(a) shall terminate when all the Obligations have been (i) performed in full,
including the indefeasible payment in full in cash of the Monetary Obligations
and (ii) terminated and (b) shall continue to be effective or be reinstated, as
the case may be, if at any time any payment, or any part thereof, of any
Obligation is rescinded or must otherwise be restored by Seller upon the
bankruptcy or reorganization of Buyer or Guarantor or for any other reason.

         SECTION 11. Assignment; No Third Party Beneficiaries. This Agreement
and all of the provisions hereunder shall be binding upon and inure to the
benefit of the Parties and their respective successors and permitted assigns,
and nothing herein express or implied will give or be construed to give any
person any legal or equitable rights hereunder. Neither this Agreement nor any
of the rights, interests and obligations hereunder shall be assigned by
Guarantor, including by operation of law, without the prior written consent of
Seller; provided, however, that no assignment or transfer of rights or
obligations by Guarantor shall relieve it from the full liabilities and the full
financial responsibility, as provided for under this Agreement, unless and until
the transferee or assignee shall agree in writing to assume such obligations and
duties and Seller has consented in writing to such assumption.

         SECTION 12. Amendment and Modification; Extension; Waiver. This
Agreement may be amended, modified or supplemented only by an instrument in
writing signed on behalf of each of the Parties. Any agreement on the part of a
Party to any extension or waiver in respect of this Agreement shall be valid
only if set forth in an instrument in writing signed on behalf of such Party.
The failure of a Party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such rights.

         SECTION 13. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the District of Columbia (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).

         SECTION 14. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given (as of the time of delivery or, in
the case of a telecopied communication, of the times of confirmation) if
delivered personally, telecopied (which is confirmed) or sent by overnight
courier (providing proof of delivery) to the Parties at the following addresses
(or at such other address for a Party as shall be specified by like notice):

<PAGE>   180

     if to Seller, to:

          Potomac Electric Power Company
          1900 Pennsylvania Avenue, N.W.
          Washington, D.C.  20068
          Telecopy No.: (202) 261-7889
          Attention:  William T. Torgerson, General Counsel

     with a copy to:

          Dickstein Shapiro Morin & Oshinsky LLP
          2101 L Street, N.W.
          Washington, D.C.  20037-1526
          Telecopy No.:  (202) 887-0689
          Attention:    Kenneth M. Simon, Esq.

     if to Buyer, to:

          Southern Energy, Inc.
          900 Ashwood Parkway
          Suite 500
          Atlanta, Georgia  30338-4780
          Telecopier:  (770) 821-6575
          Attention:

     with a copy to:

          Troutman Sanders LLP
          1300 I Street, N.W.
          Suite 500 East
          Washington, DC  20005
          Telecopier:  (202) 274-2994
          Attention:  Benjamin L. Israel, Esq.

         SECTION 15. Jurisdiction and Enforcement.

         (a)      Each of the Parties irrevocably submits to the exclusive
jurisdiction of (i) the Superior Court of the District of Columbia and (ii) the
United States District Court for the District of Columbia for the purposes of
any suit, action or other proceeding arising out of this Agreement or any
transaction contemplated hereby. Each of the Parties agrees to commence any
action, suit or proceeding relating hereto either in the United States District
Court for the District of Columbia or, if such suit, action or proceeding may
not be brought in such court for jurisdictional reasons, in the Superior Court
of the District of Columbia. Each of the Parties further agrees that service of
process, summons, notice or

<PAGE>   181

document by hand delivery or U.S. registered mail at the address specified for
such Party in Section 14 (or such other address specified by such Party from
time to time pursuant to Section 14) shall be effective service of process for
any action, suit or proceeding brought against such Party in any such court.
Each of the Parties irrevocably and unconditionally waives any objection to the
laying of venue of any action, suit or proceeding arising out of this Agreement
or the transactions contemplated hereby in (i) the Superior Court of the
District of Columbia and (ii) the United States District Court for the District
of Columbia and hereby further irrevocably and unconditionally waives and agrees
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.

         (b)      The Parties agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the Parties shall be entitled equitable relief,
including without limitation, an injunction or injunctions to prevent breaches
of this Agreement and to specifically enforce the terms and provisions of this
Agreement, this being in addition to any other remedy to which they are justly
entitled to, whether at law or in equity.

         SECTION 16. Survival of Agreement. All covenants, agreements,
representations and warranties made by Guarantor herein and in the certificates
or other instruments prepared or delivered in connection with or pursuant to
this Agreement shall be considered to have been relied upon by Seller and shall
unconditionally survive the consummation of the transactions contemplated by the
Asset Sale Agreement, regardless of any investigation made by Seller or on its
behalf, and shall continue in full force and effect as long as any Obligations
remain outstanding.

         SECTION 17. Effectiveness; Counterparts. This Agreement shall become
effective when executed by Guarantor and Seller. This Agreement may be executed
in two counterparts, each of which shall be deemed an original, but both of
which together shall constitute one and the same instrument.

         SECTION 18. Rules of Interpretation. The rules of interpretation
specified in Section 12.8 of the Asset Sale Agreement shall be applicable to
this Agreement.

         SECTION 19. Severability.

         (a)      If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the Parties as closely as possible to the fullest extent permitted by applicable
law, in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible.

         (b)      In the event that the provisions of this Agreement are claimed
or held to be inconsistent with any other agreement or instrument evidencing the
Obligations, the terms of this Agreement shall remain fully valid and effective.

<PAGE>   182

         SECTION 20. Entire Agreement. This Agreement embodies the entire
agreement and understanding of the Parties in respect of the matters
contemplated hereby. There are no restrictions, promises, representations,
warranties, covenants or undertakings other than those expressly set forth or
referred to herein. This Agreement supersedes all prior agreements and
understandings between the Parties with respect to the matters contemplated
hereby.

         SECTION 21. Seller hereby appoints _______________, a _______________
of Seller, to be its duly authorized Attorney-in-Fact and in Seller's name to
execute, acknowledge and deliver this Agreement as its act and deed. Guarantor
hereby appoints _____________, its ______________, to be its duly authorized
Attorney-in-Fact and in Buyer's name to execute, acknowledge and deliver this
Agreement as its act and deed.

         IN WITNESS WHEREOF, this Guarantee Agreement has been duly executed and
delivered by the Parties as of the date first above written.

Attest:                            POTOMAC ELECTRIC POWER
                                   COMPANY

By                                 By
   -------------------------         -------------------------------
   Secretary                          Name:
                                      Title:

Attest:                            SOUTHERN ENERGY, INC.

By                                 By
   -------------------------         -------------------------------
   Secretary                          Name:
                                      Title:

<PAGE>   183

                         )
DISTRICT OF COLUMBIA     )  SS:
                         )

         The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for
Guarantor named in the foregoing Instrument, personally appeared before me in
said jurisdiction, and as such attorney-in-fact and by virtue of the authority
vested in him by said Instrument, acknowledged the same to be the act and deed
of said corporation, and that he executed and delivered the same as such.

         WITNESS my hand and official seal this ___ day of ___________, 2000.

                              ----------------------------------
My Commission Expires:        Notary Public in and for
                              the District of Columbia

<PAGE>   184

                         )
DISTRICT OF COLUMBIA     )  SS:
                         )

         The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for
Seller named in the foregoing Instrument, personally appeared before me in said
jurisdiction, and as such attorney-in-fact and by virtue of the authority vested
in him by said Instrument, acknowledged the same to be the act and deed of said
corporation, and that he executed and delivered the same as such.

         WITNESS my hand and official seal this ___ day of ___________, 2000.

                                   -------------------------------------
My Commission Expires:             Notary Public in and for
                                   the District of Columbia

<PAGE>   185

                                                                     EXHIBIT E-1

                           INTERCONNECTION AGREEMENT
                                 (Potomac River)

                                 By and Between

                         POTOMAC ELECTRIC POWER COMPANY

                                      and

                        ________________________________

                               Dated ______, 2000

<PAGE>   186

                       INTERCONNECTION AGREEMENT

                          TABLE OF CONTENTS

<TABLE>
<S>                                                             <C>
ARTICLE 1 -  DEFINITIONS                                         1
ARTICLE 2   TERM AND TERMINATION                                 2
  2.1   Term                                                     2
  2.2   Change in Law                                            2
  2.3   Effect after Termination                                 2
ARTICLE 3 - CONTINUING OBLIGATIONS AND RESPONSIBILITIES          2
  3.1   Interconnection Service                                  2
  3.2   New Construction or Modifications                        3
    3.2.1  Pepco Construction or Modifications                   3
    3.2.2  Generator Construction or Modifications               4
    3.2.3  Modifications Affecting the Transmission System
           or the Station                                        5
  3.3   Access, Easements, Conveyances, Licenses, and
        Restrictions                                             6
  3.4   Facility and Equipment Maintenance                       7
  3.5   Pepco Facilities and Generator Facilities                7
  3.6   Equipment Testing Obligations                            7
  3.7   Inspections                                              8
  3.8   Information Reporting Obligations                        9
  3.9   Local Services                                          10
    3.9.1  General                                              10
    3.9.2  Temporary Suspension of Local Services               10
  3.10  Pepco Provided Services                                 11
  3.11  Generator Provided Services                             11
  3.12  Optional Services                                       12
  3.13  Metering and Telemetering                               12
  3.14  Emergency Procedure                                     12
  3.15  Interconnection Service Interruptions                   13
  3.16  Unit Status Notification                                14
  3.17  Scheduled Maintenance Notification and Coordination     14
    3.17.1  Local Routine Inspection and Maintenance            14
    3.17.2  Transmission Sytem Maintenance                      15
  3.18  Safety                                                  15
    3.18.1  General                                             15
    3.18.2  Switching Tagging and Grounding                     15
  3.19  Environmental Compliance and Procedures                 15
  3.20  Operating Committee                                     16
ARTICLE 4 -  OPERATIONS                                         16
  4.1   General                                                 16
  4.2   Generator's Operating Obligations                       17
    4.2.1  General                                              17
    4.2.2  Voltage or Reactive Control Requirements             18
</TABLE>

<PAGE>   187
<TABLE>
<S>                                                             <C>
  4.3   Auditing of Accounts and Records                        19
ARTICLE 5 -- COST RESPONSIBILITIES AND BILLING PROCEDURES       19
  5.1   Cost Responsibilities for Interconnection Service       19
  5.2   Cost Responsibilities for Local Services                19
  5.3   Billing Procedures                                      20
  5.4   Billing Disputes                                        20
ARTICLE 6 - CONFIDENTIALITY                                     21
  6.1   Confidentiality Obligations of Pepco                    21
  6.2   Confidentiality Obligations of Generator                21
  6.3   Confidentiality of Audits                               22
  6.4   Remedies                                                22
ARTICLE 7 - EVENTS OF DEFAULT                                   22
  7.1   Events of Default                                       22
  7.2   Remedies                                                23
ARTICLE 8 - LIMITATION OF LIABILITY                             24
  8.1   Limitation of Pepco's Liability                         24
  8.2   Limitation on Generator's Liability                     24
  8.3   Consequential Damages                                   24
ARTICLE 9 - INDEMNIFICATION FOR THIRD PARTY CLAIMS              25
  9.1   Generator's Indemnification                             25
  9.2   Pepco's Indemnification                                 25
  9.3   Indemnification Procedures                              26
  9.4   Survival                                                26
ARTICLE 10 - INSURANCE                                          26
  10.1  Insurance Coverage                                      26
  10.2  Certificates of Insurance                               26
  10.3  Additional Insureds and Waiver                          26
ARTICLE 11 - FORCE MAJEURE                                      27
  11.1  Effect of Force Majeure                                 27
  11.2  Force Majeure Defined                                   27
  11.3  Notification                                            27
ARTICLE 12 - DISPUTES                                           28
  12.1  Disputes                                                28
  12.2  Arbitration                                             28
  12.3  FERC Dispute Resolution                                 29
ARTICLE 13 - REPRESENTATIONS                                    29
  13.1  Representations of Pepco                                29
  13.2  Representations of Generator                            30
ARTICLE 14 - ASSIGNMENT/CHANGE IN CORPORATE IDENTITY            32
  14.1  Assignment                                              32
  14.2  Release of Rights and Obligations                       32
  14.3  Change in Corporate Identity                            33
  14.4  Successors and Assigns                                  33
</TABLE>

<PAGE>   188
<TABLE>
<S>                                                             <C>
ARTICLE 15 - SUBCONTRACTORS                                     33
ARTICLE 16 - NOTICES                                            34
  16.1  Emergency Notices                                       34
  16.2  Notices                                                 34
ARTICLE 17 - AMENDMENTS                                         34
  17.1  Amendments                                              34
  17.2  FERC Proceedings                                        34
ARTICLE 18 - MISCELLANEOUS PROVISIONS                           35
  18.1  Waiver                                                  35
  18.2  Labor Relations                                         35
  18.3  No Third Party Beneficiaries                            35
  18.4  Governing Law                                           35
  18.5  Counterparts                                            36
  18.6  Interpretation                                          36
  18.7  Jurisdiction and Enforcement                            36
  18.8  Entire Agreement                                        37
  18.9  Severability                                            37
  18.10 Independent Contractor Status                           37
  18.11 Conflicts                                               37
SCHEDULE A  DEFINITIONS                                          2
SCHEDULE B   Pepco Facilities and Generator Facilities           7
SCHEDULE C - Points of Interconnection                           9
SCHEDULE D - Switching, Tagging and Grounding Rules             11
SCHEDULE E - Pepco's Interconnection Standards                  14
SCHEDULE F - Local Services                                     15
SCHEDULE G - Pepco Current Projects                             17
SCHEDULE H - Real Time Telemetry List                           18
</TABLE>

<PAGE>   189

                  INTERCONNECTION AGREEMENT (Potomac River)

         This Interconnection Agreement ("Agreement") dated as of ____________,
2000 by and between Potomac Electric Power Company ("Pepco") a District of
Columbia and Virginia corporation, and __________________ ("Generator") a
___________ [corporation]. Pepco and Generator are each referred to herein as a
"Party," and collectively referred to herein as the "Parties."

                                WITNESSETH:

         WHEREAS, Pepco, and Generator have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets ("Asset Sale Agreement") dated
June 7, 2000, for the sale by Pepco to Generator of certain assets comprising
the Potomac River electric generation station;

         WHEREAS, Pepco intends to continue to operate its transmission and
distribution businesses from their present locations;

         WHEREAS, Generator needs Interconnection Service from Pepco for the
Potomac River electric generating station;

         WHEREAS, Pepco needs access to parts of the Generator's assets, and
Generator needs access to parts of the Pepco's assets; and

         WHEREAS, the Parties have agreed in the Asset Sale Agreement to execute
this Agreement in order to provide Interconnection Service to Generator and to
define continuing responsibilities and obligations of the Parties with respect
to the use of the other Party's property, assets and facilities as set forth
herein.

         NOW THEREFORE, in consideration of the mutual representations,
covenants and agreements hereinafter set forth, and intending to be legally
bound hereby, the Parties hereto agree as follows:

                               ARTICLE 1
                              DEFINITIONS

         Capitalized terms used in this Agreement shall have the meanings
specified or referred to in Schedule A.

<PAGE>   190

                               ARTICLE 2
                         TERM AND TERMINATION

         2.1      Term. This Agreement shall become effective upon consummation
of the Closing ("Effective Date"), and unless terminated sooner in accordance
with the terms of this Agreement, shall continue in full force and effect until
the earlier to occur of (i) the permanent cessation by the Generator of the
power generation functions of the Station or (ii) the permanent cessation of the
interconnection functions of the Transmission System.

         2.2      Change in Law. If (a) the FERC, any state or state regulatory
commission or the PJM Interconnection LLC implements a change in any law,
regulation, rule or practice, or (b) Pepco's compliance with a change in any law
or regulation, which compliance, in either case, affects, or may reasonably be
expected to affect, Pepco's performance under this Agreement, the Parties shall
negotiate in good faith any amendments to this Agreement that are necessary to
adapt the terms of this Agreement to such change, and Pepco shall file such
amendments with the FERC.

If the Parties are unable to reach agreement on such amendments, either Party
shall have the right to make a unilateral filing with the FERC to modify this
Agreement pursuant to Sections 205 or 206 or any other applicable provision of
the Federal Power Act and the FERC rules and regulations thereunder; provided
that the other Party shall have the right to oppose such filing and to
participate fully in any proceeding established by the FERC to address such
amendments.

         2.3      Effect after Termination. The applicable provisions of this
Agreement shall continue in effect after cancellation or termination hereof to
the extent necessary to provide for final billings, billing adjustments and
payments pertaining to liability and indemnification obligations arising from
acts or events that occurred while this Agreement was in effect.

                              ARTICLE 3
              CONTINUING OBLIGATIONS AND RESPONSIBILITIES

         3.1      Interconnection Service

                  3.1.1    Subject to the terms and conditions of the Agreement,
Pepco shall (a) permit the Station to continue to be interconnected to the
Transmission System at the Point of Interconnection, and (b) provide
Interconnection Service at the Point of Interconnection. Pepco agrees to permit
Generator to interconnect

<PAGE>   191

Station as long as Generator continues to operate such facilities pursuant to
PJM Requirements and Good Utility Practice.

                  3.1.2    Interconnection Service shall not include, and Pepco
shall not be responsible under this Agreement for (a) transmission service,
losses or ancillary services associated with the use of the Transmission System
for the delivery of capacity, energy and/or ancillary services produced by the
Generating Facilities, or (b) providing or procuring capacity, energy and/or
ancillary services to the Generator or the Generating Facilities.

                  3.1.3    The Generator's interconnection to the Transmission
System of any new or expanded generating capacity of the Station shall (a) be
subject to PJM Requirements and/or FERC requirements governing interconnections
and (b) require a separate interconnection agreement mutually agreed to by the
Parties in writing.

                  3.1.4    Notwithstanding anything to the contrary in this
Agreement, Pepco's performance of its obligations under this Agreement shall be
subject to Generator entering into, and complying with, any PJM Generator
Connection Agreement which may be required pursuant to PJM Requirements with
respect to Interconnection Service or the Station.

         3.2      New Construction or Modifications

                  3.2.1    Pepco Construction or Modifications

                           (a)      Pepco shall make such additions,
modifications, replacements and improvements to the Interconnection Facilities
as are required by PJM Requirements or Good Utility Practice to enable Pepco to
provide Interconnection Service in compliance with this Agreement. Generator
shall pay all reasonable Costs incurred by Pepco for such additions,
modifications, replacements or improvements.

                           (b)      Except with respect to operation and
maintenance or ordinary maintenance done in the ordinary course of business or
to respond to abnormal or emergency conditions, if any additions, modifications,
replacements or improvements to the Interconnection Facilities undertaken by
Pepco might reasonably be expected to affect Generator's operation of the
Station, Pepco shall provide one hundred twenty (120) days written notice to
Generator prior to undertaking such additions, modifications, replacements or
improvements. Any such additions, modifications, replacements or improvements
shall comply with PJM Requirements and Good Utility Practice. The Parties shall
mutually agree to the

<PAGE>   192

scheduling of such addition, modification, replacement or improvement to
minimize any adverse impact on the Station. Generator shall be deemed to have
accepted Pepco's proposed additions, modifications, replacements or improvements
unless Generator gives Pepco written notice of its objections within thirty (30)
days after receipt of Pepco's notice. Generator's acceptance or deemed
acceptance of Pepco's proposed additions, modifications, replacements or
improvements shall not be construed, with respect thereto, as: (i) confirmation
or endorsement of the design; (ii) a warranty of safety, durability or
reliability; or (iii) responsibility for strength, details of design, adequacy
or capability.

                  3.2.2    Generator Construction or Modifications

                           (a)      In the event Generator plans to increase the
capacity of the Generating Facilities, Generator shall submit to Pepco any and
all plans and specifications that Pepco may reasonably request related to such
increase. Such specifications and plans shall be submitted by Generator to Pepco
at the time that Generator submits its plans under the PJM Tariff related to
such expansion but no later than one hundred twenty (120) days prior to
commencing such proposed increase. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice and
shall be subject to Section 3.1.3 of this Agreement.

                           (b)      If Generator plans any additions,
modifications, or replacements to the Station that will not increase its
capacity, but could reasonably be expected to affect the Transmission System or
the Interconnection Facilities, Generator shall give Pepco reasonable notice,
but not less than one hundred twenty (120) days prior written notice and
Generator shall comply with all applicable PJM Requirements with respect to such
proposed additions, modifications, or replacements. All such additions,
modifications, or replacements shall (i) comply with PJM Requirements and Good
Utility Practice, (ii) be accompanied by appropriate information and operating
instructions, and (iii) be subject to the review and acceptance of Pepco, which
review shall be based on PJM Requirements and Good Utility Practice and which
acceptance shall not unreasonably be withheld or delayed. Pepco shall be deemed
to have accepted Generator's proposed additions, modifications or replacements
unless Pepco gives Generator written notice of its objections within thirty (30)
days after receipt of the Generator's notice.

                           (c)      Pepco's acceptance of Generator's plans and
specifications for any proposed additions, modifications, or replacements to the
Generating Facilities and Pepco's participation in any interconnected operations
with Generator are not and shall not be construed as: (i) confirmation or
endorsement of the design of the Generating Facilities; (ii) a warranty of
safety, durability or reliability of the

<PAGE>   193

Generating Facilities; or (iii) responsibility for strength, details of design,
adequacy, or capability of the Generating Facilities.

                           (d)      Pepco, pursuant to PJM Requirements, shall
inform Generator of any additions, modifications, or replacements to the
Transmission System or Interconnection Facilities, that will be necessary as a
result of the addition, modification, or replacement to Station made pursuant to
Section 3.2.2. Generator shall compensate Pepco for all reasonable Costs it
incurs associated with any modifications, additions, or replacements made to the
Interconnection Facilities or Transmission System related to any additions,
modifications, or replacements to the Generating Facilities. Pepco shall provide
an estimate as early as practicable, but in any event not less than sixty (60)
days prior to the initiation of such addition, modification or replacement.

                           (e)      Generator shall modify, at its sole cost and
expense, the Generating Facilities as may be reasonably required to conform with
PJM Requirements and Good Utility Practice or to conform with additions,
modifications, or replacements of the Transmission System or the Interconnection
Facilities, required by PJM Requirements and Good Utility Practice or
implemented in accordance with this Agreement, (including, without limitation,
changes to the voltages at which the Transmission System is operated) provided,
however, that Generator shall not be obligated under this Agreement to
modernize, expand or upgrade the Generating Facilities unless the failure to
modernize, expand or upgrade is reasonably likely to have a material adverse
effect on the operation of Pepco's Facilities.

                           (f)      Upon completion of any addition,
modification, or replacement to the Generating Facilities that may reasonably be
expected to affect the Transmission System or the Interconnection Facilities,
but no later than ninety (90) days thereafter, Generator shall issue "as built"
drawings to Pepco. Upon completion of any addition, modification, or replacement
to the Interconnection Facilities, that may reasonably be expected to affect the
operation of the Station, but no later than ninety (90) days thereafter, Pepco
shall issue "as built" drawings to the Generator.

                  3.2.3    Modifications Affecting the Transmission System or
                           the Station

                           (a)      Notwithstanding anything herein to the
contrary, except with respect to the projects or construction set forth in
Schedule G, no modifications to or new construction of facilities, or access
thereto, including but not limited to rights of way, fences, gates, shall be
made by either Party which might reasonably be expected to adversely affect the
other Party with respect to such Party's obligations

<PAGE>   194

and responsibilities under this Agreement, without prior written notification as
set forth in Section 3.2.3(b) below, and without providing the other Party with
sufficient information regarding the work prior to commencement to enable such
Party to evaluate the impact of the proposed work on its operations. For all
modifications reasonably expected to adversely affect the operations of the
other Party's facilities, the Party shall provide at least one hundred twenty
(120) days written notice to the other Party prior to undertaking such
additions, modifications or replacements. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice.

                           (b)      The Parties shall mutually agree to the
scheduling of such addition, modification, replacement or improvement proposed
pursuant to Section 3.2.3(a) to minimize any adverse impact on the Station or
the Transmission System. For all construction work, major modifications, or
circuit changes involving new or existing facilities, equipment, systems or
circuits that could reasonably be expected to affect the operation of either
Party, the Party desiring to perform said work shall provide the other Party
with drawings, plans, specifications, and other necessary documentation for
review at least sixty (60) days prior to the beginning of construction provided
that for routine telecommunication work, the Party doing the work shall only be
required to provide 48 hours prior notice. The Party shall be deemed to have
accepted the proposed additions, modifications, replacements or improvements
unless the Party gives written notice of their objections within sixty (60) days
after receipt of such notice. The Party's acceptance or deemed acceptance of the
proposed additions, modifications, replacements or improvements shall not be
construed, with respect thereto, as: (i) confirmation or endorsement of the
design; (ii) a warranty of safety, durability or reliability; or (iii)
responsibility for strength, details of design, adequacy or capability.

         3.3      Access, Easements, Conveyances, Licenses, and Restrictions

                  3.3.1    The Parties hereby grant to each other such licenses,
access and other rights to the Station and the Interconnection Facilities as may
be necessary for either Party's performance of their respective obligations
under this Agreement. Such access shall be provided in a manner so as not to
unreasonably interfere with the ongoing business operations, rights, and
obligations of the other Party and shall be subject to the safety and security
practices of the Party granting such access. Access shall only be granted to
Qualified Personnel.

                  3.3.2    A Party shall not restrict a Party's rights hereunder
to access the other Party's property, facilities, or equipment without prior
written notification except in an Emergency, in which case the restricted access
shall last no longer than three (3) days, unless an alternate means of access is
provided.

<PAGE>   195

                  3.3.3    The Parties' rights with respect to access to their
respective facilities properties shall also be governed by the Easement.

         3.4      Facility and Equipment Maintenance

                  3.4.1    Pepco shall provide Interconnection Service at the
Point of Interconnection in a safe and efficient manner and pursuant to PJM
Requirements and Good Utility Practice. Generator shall be responsible for all
reasonable Costs incurred by Pepco to provide Interconnection Service and to
Maintain the Interconnection Facilities pursuant to the Agreement.

                  3.4.2    Generator shall Maintain the Generating Facilities
(including coordination of its relay protection equipment) in a safe and
efficient manner and as required by and in accordance with PJM Requirements and
Good Utility Practice, provided, however, that Generator shall not be obligated
to modernize, expand or upgrade the Generating Facilities unless the failure to
modernize, expand or upgrade is reasonably likely to have a material adverse
affect on the operation of the Interconnection Facilities or the Transmission
System.

                  3.4.3    Unless otherwise specified herein, or unless the
Parties mutually agree to a different arrangement, neither Party shall be
responsible for the maintenance of the other Party's equipment or property
regardless of its location.

                  3.4.4    In addition to the requirements set forth elsewhere
in this Agreement, each Party shall Maintain its equipment and facilities and
perform its maintenance obligations that could reasonably be expected to affect
the operations of the other Party in a safe and efficient manner and pursuant to
PJM Requirements and Good Utility Practice.

         3.5      Pepco Facilities and Generator Facilities. Unless otherwise
agreed to by the Parties, the Party owning Pepco Facilities or Generator
Facilities shall Maintain those facilities and shall do so pursuant to PJM
Requirements and Good Utility Practice and shall make such additions,
modifications, replacements and improvements as are required by PJM requirements
and Good Utility Practice or which are necessary to maintain Interconnection
Service, provided, however, that the Generator shall not be obligated under this
Agreement to modernize, expand or upgrade the Generator Facilities unless the
failure to modernize, expand or upgrade is reasonably likely to have a material
adverse effect on the operation of the Transmission System or Interconnection
Facilities.

         3.6      Equipment Testing Obligations

<PAGE>   196
                  3.6.1    For reliability purposes with respect to the
Interconnection Facilities and the Transmission System, Pepco may reasonably
request, pursuant to PJM Requirements, or Good Utility Practice, that Generator
test, calibrate, verify, or validate the Generating Facilities or its equipment,
and Generator shall promptly comply with such a request. Generator shall be
responsible for all costs of testing, calibrating, verifying or validating its
facilities.

                  3.6.2    At Pepco's request, Generator shall supply to Pepco
at no cost, copies of inspection reports, installation and maintenance
documents, test and calibration records, verifications, and validations pursuant
to the foregoing Section 3.6.1. Pepco shall supply to Generator, at Generator's
request and at no cost to Generator, copies of inspection reports, installation
and maintenance documents, test and calibration records, verifications, and
validations that Pepco has which are related to the Interconnection Facilities.

         3.7      Inspections

                  3.7.1    Pepco shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work to the Generating Facilities.
Such access by Pepco shall be exercised in a manner which does not unreasonably
interfere with Generator's ongoing business operations, rights and obligations
and shall be subject to Generator's safety and security practices. If Pepco
observes any deficiencies or defects with respect thereto that might reasonably
be expected to adversely affect the Transmission System or the Interconnection
Facilities, Pepco shall notify the Generator, and Generator shall immediately
make any corrections necessitated by PJM Requirements and Good Utility Practice.
Notwithstanding the foregoing in this Section 3.7.1, Pepco shall have no
liability whatsoever for any failure to fully or adequately observe any
deficiency, it being agreed that Generator shall be fully responsible and liable
for all such deficiencies, activities, equipment tests, installation,
construction or modification.

                  3.7.2    Generator shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work conducted by Pepco to the
Interconnection Facilities. Such access by Generator shall be exercised in a
manner which does not unreasonably interfere with Pepco's ongoing business
operations, rights and obligations and shall be subject to Pepco's safety and
security practices. If Generator observes any deficiencies or defects with
respect thereto that might reasonably be expected to adversely affect the
Station, Generator shall notify Pepco, and Pepco shall immediately make any
corrections necessitated by applicable PJM Requirements and Good Utility
Practice. Notwithstanding the foregoing in this

<PAGE>   197

Section 3.7.2, Generator shall have no liability whatsoever for any failure to
fully or adequately observe any deficiency, it being agreed that Pepco shall be
fully responsible and liable for all such deficiencies, activities, equipment
tests, installation, construction or modification.

         3.8      Information Reporting Obligations

                  3.8.1    In order to provide Interconnection Service
hereunder, Pepco may request, and Generator shall promptly provide, all relevant
information, documents, or data regarding the Generating Facilities that would
be expected to materially affect the Transmission System, and which is
reasonably requested by NERC, MAAC, the PJM Interconnection LLC, the MDPSC, the
District of Columbia Public Service Commission and any other state or District
of Columbia agency having jurisdiction over Pepco or Generator, the PJM System
Operator, or the Transmission Operator, which disclosure shall be subject to
Article 6 of this Agreement regarding the disclosure of commercially sensitive
information.

                  3.8.2    Generator shall promptly supply accurate, complete,
and reliable information in response to reasonable information requests for real
time data and other data from Pepco necessary for operations, maintenance,
compliance with PJM Requirements or regulatory requirements, or analysis of the
Interconnection Facilities or the Transmission System. Such information may
include metered values for MW and MVAR, voltage, current, automatic voltage
regulator status, automatic frequency control, dispatch, frequency, breaker
status indication, or any other information reasonably required for reliable
operation of the Transmission System pursuant to PJM Requirements and Good
Utility Practice. At minimum, Generator shall satisfy the telemetry requirements
set forth in Schedule H.

                  3.8.3    Information pertaining to generation operating
parameters shall be gathered and electronically transmitted directly to Pepco's
energy management system using a mutually acceptable communications protocol.

                  3.8.4    Generator shall be responsible for the maintenance,
and any required replacements or upgrades of the field devices and equipment
used to gather information regarding generation operating parameters.

                  3.8.5    Generator shall Maintain, at its expense, operating
telephone links to the PJM Interconnection LLC, PJM System Operator, Pepco and
the Transmission Operator, to provide information deemed necessary by them, or
as reasonably deemed necessary by Pepco in accordance with PJM Requirements or
Good Utility Practice to integrate operation of the Station with the
Transmission

<PAGE>   198

System, provided, however, that Generator shall not be obligated under this
Agreement to modernize, expand or upgrade the Generator's facilities unless the
failure to modernize, expand or upgrade is reasonably likely to have a material
adverse effect on the operation of the Transmission System. Generator shall use
communication links at the Station consisting of the mobile radio low band C
frequency and "all call" and "red phone" systems currently located at the
Station (or successor systems as may reasonably be required by Pepco) and shall
maintain the availability of such systems to operate during abnormal conditions
including blackouts.

         3.9      Local Services

                  3.9.1    General

                           (a)      The Parties agree that, due to the
integration of certain control schemes of the Station and the Transmission
System, it is cost effective to provide each other with the services set forth
in Sections 3.10 and 3.11 in accordance with the terms and conditions set forth
therein.

                           (b)      The Parties shall ensure, in accordance with
Good Utility Practice, that services provided by one Party to the other Party
pursuant to Sections 3.10 and 3.11 shall be available at all times and in the
manner and at the prices specified herein. Notwithstanding the foregoing, either
Party may change the services, provided that (1) there is no cost to the
receiving Party as a result of such change, (2) the quality, reliability and
integrity of the replacement services is equivalent to the existing service, and
(3) there is otherwise no materially adverse effect on the receiving Party.

                           (c)      Neither Party shall terminate any services
set forth in Sections 3.10 and 3.11 below that it agrees to provide to the other
Party, without the other Party's prior written consent, which consent shall not
be unreasonably withheld or delayed, provided, however, if a Party receiving a
service under Sections 3.10 or 3.11 no longer needs or desires a particular
service, said Party shall notify the other Party and the providing Party shall
terminate said services as soon thereafter as practicable.

                  3.9.2    Temporary Suspension of Local Services

                           (a)      The Party providing a service set forth in
Sections 3.10 or 3.11 below shall notify and obtain approval, which approval
shall not be unreasonably withheld or delayed, from the receiving Party of any
scheduled temporary

<PAGE>   199

suspension of services at least five (5) business days in advance of such
suspension. Such notification shall include an estimated time duration for a
return to normal conditions.

                           (b)      In the event of any unplanned or forced
suspension of the services set forth in Sections 3.10 or 3.11, below, the
providing Party shall immediately notify the other Party first verbally and then
in writing. The providing Party shall use all reasonable efforts to minimize the
duration of said suspension.

                           (c)      The Parties agree to complete any repairs,
modifications or corrections, in accordance with Good Utility Practice, that are
necessary to restore to the other Party as soon as reasonably practicable any
services set forth in Sections 3.10 or 3.11 below that have been suspended.

         3.10     Pepco Provided Services: Schedule F sets forth the local
services Pepco shall provide to the Generator pursuant to the terms of this
Agreement. Unless otherwise specified in Schedule F, for a period of three (3)
years after the Effective Date (the "Initial Period") and subject to Section 3.9
above, Pepco shall provide Generator with the local services set forth in
Schedule F at no cost and in consideration of the local services Generator shall
provide Pepco in accordance with Section 3.11 below. If Generator desires the
continuation of any of the services set forth in Schedule F which are subject to
the Initial Period to continue after the Initial Period, upon Generator's
written request to Pepco made at least 60 days prior to the expiration of the
Initial Period, the Parties shall engage in good faith negotiations to reach
mutually agreeable terms and conditions upon which such services will continue,
provided, however, that if such agreement is not reached prior to the expiration
of the Initial Period, Pepco shall cease to provide services under Section 3.10
at the end of the Initial Period.

         3.11     Generator Provided Services. Schedule F sets forth the local
services Generator shall provide to Pepco pursuant to the terms of this
Agreement. Unless otherwise specified in Schedule F, for the Initial Period and
subject to Section 3.9 above, Generator shall provide Pepco with the local
services set forth in Schedule F at no cost and in consideration of the local
services Pepco shall provide Generator in accordance with Section 3.10 above. If
Pepco desires the continuation of any of the services set forth in Schedule F
which are subject to the Initial Period to continue after the Initial Period,
upon Pepco's written request to Generator made at least 60 days prior to the
expiration of the Initial Period, the Parties shall engage in good faith
negotiations to reach mutually agreeable terms and conditions upon which such
services will continue, provided, however, that if such agreement is not reached
prior to the expiration of the Initial Period, Generator shall cease to provide
services under Section 3.11 at the end of the Initial Period.

<PAGE>   200

         3.12     Optional Services: Generator may request that Pepco provide
the following services to the Generator, provided, however, that Pepco shall not
have any obligation to provide such services unless the Parties have mutually
agreed in writing to the price and other terms and conditions of such service:

                  (a)      PJM interface and dispatch services through the Pepco
control center;

                  (b)      use of Pepco's communication services;

                  (c)      maintenance of certain auxiliary and communications
equipment at the Station;

                  (d)      maintenance of high-voltage and medium-voltage
equipment such as power transformers and power circuit breakers;

                  (e)      maintenance of protective relaying, certain control
equipment, such as AGC and MSVC, plant batteries and revenue meters owned by
Generator.

         3.13     Metering and Telemetering

                  3.13.1   Generator shall, at Generator's expense: (a) own,
Maintain, and repair, all Revenue Meters, instrument transformers and
appurtenances associated with Revenue Meters, and real time telemetry, (b)
conduct meter accuracy and tolerance tests, and (c) prepare all calibration
reports required for equipment that measures energy transfers at the Point of
Interconnection. All meter accuracy and tolerance testing hereunder shall be in
accordance with PJM Requirements and Good Utility Practice and shall be
conducted, at Pepco's request, in the presence of Pepco's representative.

                  3.13.2   Generator shall own and Maintain, at the Generator's
expense, equipment for redundant real-time communications and transmission of
telemetry, hourly MWh information, and such other information as required by the
PJM System Operator or Transmission Operator, or as reasonably required by Pepco
in accordance with PJM Requirements and Good Utility Practice.

         3.14     Emergency Procedure

                  3.14.1   Pepco, through the Transmission Operator, shall
provide Generator with prompt verbal notification of Emergencies with regard to
the Transmission System which may reasonably be expected to affect Generator's

<PAGE>   201

immediate operation of the Station or Generator Facilities, and Generator shall
provide Pepco with prompt verbal notification of Emergencies with regard to the
Station which may reasonably be expected to affect Interconnection Service or
the Transmission System. Such notification shall describe the Emergency, the
extent of damage or deficiency, the anticipated length of an outage and the
corrective action taken and/or to be taken. Said verbal notification shall be
followed as soon as practicable (but no later than 24 hours after the verbal
notification) with written notification.

                  3.14.2   If an Emergency in the good faith judgment of a Party
endangers or could endanger life or property, the Party recognizing the problem
shall take such action as may be reasonable and necessary to prevent, avoid, or
mitigate injury, danger, or loss. If however the Emergency involves transmission
or electrical equipment, Generator shall notify the Transmission Operator, and
obtain the consent of such personnel, prior to performing any switching
operations.

                  3.14.3   Pepco may, consistent with PJM Requirements and Good
Utility Practice, have the Transmission System Operator take whatever actions
(including tripping Generator's synchronizing breakers) or inactions it deems
necessary during an Emergency to: (a) preserve public safety; (b) preserve the
integrity of the Transmission System, (c) limit or prevent damage; or (d)
expedite restoration of service. If any action or inaction by Pepco or the
Transmission Operator under this Section 3.14 results in the discontinuation,
curtailment, interruption or reduction of Interconnection Service, Pepco shall
use reasonable efforts consistent with PJM Requirements and Good Utility
Practice to restore Interconnection Service as promptly as practicable and to
minimize the effect of such restoration of service on the Station.

         3.15     Interconnection Service Interruptions

                  3.15.1   If at any time, in the reasonable exercise of the PJM
System Operator's judgment, or the Transmission Operator's judgment exercised in
accordance with PJM Requirements or Good Utility Practice and on a
non-discriminatory basis, a condition exists, including the operation of
Generator's equipment, which might reasonably be expected to have a materially
adverse affect on the quality of service rendered by Pepco (including services
rendered to transmission or distribution customers) or interferes with the safe
and reliable operation of the Transmission System, Pepco may discontinue,
curtail, reduce and/or interrupt Interconnection Service until the condition has
been corrected.

                  3.15.2   Unless the PJM System Operator, the Transmission
Operator or Pepco perceives that an Emergency exists or the risk of one is
imminent, Pepco

<PAGE>   202

shall give Generator reasonable notice of its intention to discontinue, curtail,
interrupt or reduce Interconnection Service in response to the interfering
condition and, where practical, allow suitable time for Generator to remove the
interfering condition if it is the result of Generator's operations, before the
discontinuation, curtailment, interruption or reduction commences. Pepco's
judgment with regard to the interruption of service under this paragraph shall
be made pursuant to PJM Requirements and Good Utility Practice. In the case of
such interruption, Pepco shall immediately confer with Generator regarding the
conditions causing such interruption and its recommendation concerning timely
correction thereof. In the event Interconnection Service is interrupted under
this section due to Generator's failure to operate and Maintain the Generating
Facilities pursuant to PJM Requirements or Good Utility Practice, Generator
shall compensate Pepco for all costs reasonably incurred by Pepco attributable
to the interruption and restoration of Interconnection Service. Pepco shall use
reasonable efforts consistent with PJM Requirements and Good Utility Practice to
restore Interconnection Service interrupted, curtailed or reduced pursuant to
this Section 3.15 as promptly as practicable and to minimize the effect of such
restoration of service on the Station.

         3.16     Unit Status Notification

                  3.16.1   Generator acknowledges that Pepco requires
information regarding the status of the Station for Transmission System
reliability purposes. Accordingly, by 10:00 a.m. of each day, the Generator
shall provide Pepco the following information regarding the status of the
Station for the following day: Station availability to provide energy and
capacity, the Station's scheduled on and off times, Station synchronization,
planned outages or deratings, and generation restrictions and limitations.
Generator shall immediately notify Pepco of any changes to the information
provided pursuant to the foregoing sentence.

                  3.16.2   In circumstances, such as forced outages, Generator
shall notify Pepco of its generating unit's temporary interruption of generation
as soon as practicable; and it shall provide Pepco, as soon as practicable, with
a schedule of when generation will be resumed.

         3.17     Scheduled Maintenance Notification and Coordination

                  3.17.1   Local Routine Inspection and Maintenance. The Parties
agree that, due to the integration of certain control and protective relaying
schemes between the Station and the Interconnection Facilities, it will be
necessary for them to cooperate in the inspection, maintenance and testing of
these areas of integration. Each Party will provide advance notice to the other
Party before undertaking any work in these areas, especially in electrical
circuits involving circuit breaker trip and

<PAGE>   203

close contacts, current transformers or potential transformers and such work
will be performed in accordance with PJM Requirements and Good Utility Practice.

                  3.17.2   Transmission System Maintenance. Pepco shall consult
with Generator regarding timing of scheduled maintenance of the Interconnection
Facilities or the transmission facilities of the Transmission System which Pepco
or the Transmission Operator performs and which might reasonably be expected to
affect the Station. Pepco shall, to the extent practicable, schedule any
testing, shutdown, or withdrawal of said facilities to coincide with Generator's
scheduled outages for the Station. To facilitate such consultation and to the
extent the information is not available from the PJM System Operator in a timely
manner, in June of each year, or on another date mutually acceptable to the
Parties, Generator shall furnish Pepco with non-binding preliminary generator
maintenance schedules covering the upcoming two years and any material changes
thereto. In the event Pepco is unable to schedule the outage of its facilities
to coincide with Generator's schedule, Pepco shall notify Generator as soon as
practicable of the reasons for the facilities' outage, of the time scheduled for
the outage to take place, and of its expected duration.

         3.18     Safety

                  3.18.1   General. Pepco agrees with respect to the
Interconnection Facilities and the Transmission System, and Generator agrees
with respect to the Station, that all work performed by either Party on such
facilities which could reasonably be expected to affect the operations of the
other Party shall be performed in accordance with all applicable PJM
Requirements and Good Utility Practice.

                  3.18.2   Switching Tagging and Grounding . Each Party shall
comply with the Switching, Tagging and Grounding Rules. Pepco will notify
Generator of any changes in its Switching, Tagging and Grounding Rules.
Generator shall be responsible for all switching, tagging and grounding on
Generator's side of the Point of Interconnection and, except for Generator
Facilities, Pepco shall be responsible for all switching, tagging and grounding
on its side of the Point of Interconnection.

         3.19     Environmental Compliance and Procedures

                  3.19.1   Each Party shall be responsible for complying with
all Environmental Laws applicable to it with respect to its facilities or
property.

<PAGE>   204

                  3.19.2   A Party shall notify the other Party first verbally
and then in writing, of any Releases of a Hazardous Substance or any type of
remediation activities related thereto as soon as possible but no later than
twenty-four (24) hours after the occurrence if within the reasonable judgment of
the Party said activities could reasonably be expected to have a material
adverse effect upon the operations of the other Party and shall promptly furnish
to the other Party copies of any reports filed with any governmental agencies
covering such events. This Section 3.19.2 does not effect any allocation of
liability with respect to the Station pursuant to the Asset Sale Agreement.

                  3.19.3   Neither Party shall knowingly take any actions which
might reasonably be expected to have a material adverse environmental impact
upon the operations of the other Party without prior written notification and
agreement between then Parties.

         3.20     Operating Committee. The Parties shall establish an operating
committee consisting of one representative for each Party ("Operating
Committee"). The Operating Committee shall act only by unanimous agreement or
consent. The Parties shall designate their respective representatives to the
Operating Committee, plus an alternate by written notice. Each Party's
representative on the Operating Committee is authorized to act on behalf of such
Party with respect to any matter arising under this Agreement which is to be
decided by the Operating Committee, however, the Operating Committee shall not
have any authority to modify or otherwise alter the rights and obligations of
the Parties hereunder. The Operating Committee shall develop and implement
suitable policies and procedures with which to coordinate the interaction of the
Parties with respect to the performance of their duties and obligations under
this Agreement.

                              ARTICLE 4
                              OPERATIONS

         4.1      General

                  4.1.1    The Parties agree to operate their respective
equipment that could reasonably be expected to have a material effect on the
operations of the other Party in a safe and efficient manner and in accordance
with PJM Requirements and Good Utility Practice, and otherwise in accordance
with the terms of this Agreement.

                  4.1.2    Generator shall comply with the requests, orders, and
directives of Pepco with respect to Interconnection Service to the extent such
requests, orders

<PAGE>   205

or directives are (a) issued pursuant to PJM Requirements or Good Utility
Practice, (b) not discriminatory; and (c) otherwise in accordance with this
Agreement or applicable tariffs.

                  4.1.3    In the event Generator believes that a request,
order, or directive of Pepco exceeds the limitations in this Section 4.1.2, it
shall nevertheless comply with the request, order, or directive pending
resolution of the dispute under Article 12. The Parties agree to cooperate in
good faith to expedite the resolution of any disputes arising under this Section
4.1.

         4.2      Generator's Operating Obligations

                  4.2.1    General. Generator shall request permission from the
Transmission Operator, the PJM System Operator or the PJM Interconnection LLC,
as applicable, prior to opening and/or closing circuit breakers in accordance
with applicable switching and operations procedures and Good Utility Practice.

                           (a)      Generator shall carry out all switching
orders from the Transmission Operator, the PJM System Operator, or the PJM
Interconnection LLC, in a timely manner and in accordance with PJM Requirements
and Good Utility Practice.

                           (b)      Generator shall (i) comply with Pepco's
system restoration plan and black start criteria applicable to the Station as
configured as of the Effective Date or (ii) if the Station's configuration is
modified, provide alternative service restoration and black start capability in
accordance with PJM Requirements. Generator shall ensure that operating
personnel at the Station are trained to implement such system restoration or
black start plans. The Generator shall test the Station's black-start
combustion-turbines annually to confirm that the black-start combustion-turbines
will start without an external power supply. The Generator shall test the
Station's steam turbine-generators and those combustion-turbine generators that
would be required to be black-started in accordance with Pepco's Emergency
Conditions and System Restoration Manual, as revised from time to time, and
plant restoration procedures, at least once every three years. Testing shall
confirm the ability of a generating unit or Station to go from a shut down
condition to an operating condition and start delivering power without
assistance from the Transmission System. These testing requirements shall remain
in place until PJM promulgates specific rules governing black-start testing.

<PAGE>   206

                           (c)      The electricity supplied by Generator to the
Point of Interconnection shall be in the form of three-phase 60 Hertz
alternating current at the nominal system voltage.

                           (d)      Generator's equipment shall conform with
Good Utility Practice for harmonic distortion and voltage fluctuation.

                           (e)      The Generator shall Maintain the equipment
to display and to follow the export/import signal on the export/import meters
when directed to do so by Pepco, the Transmission Operator or the PJM System
Operator for reliability purposes.

                  4.2.2    Voltage or Reactive Control Requirements. Unless
otherwise agreed to by the Parties or authorized or directed by the PJM
Interconnection LLC, Generator shall operate the Station with automatic voltage
regulators in service at all times. The voltage regulators will control voltage
at the Points of Interconnection consistent with the range of voltage prescribed
by Pepco or the Transmission System Operator in accordance with PJM Requirements
and Good Utility Practice.

                           (a)      Generator will operate the Station in
accordance with prescribed voltage schedules pursuant to Section 4.2.2 to the
extent the Station is operating within its reactive generating capability and
not violating any electrical constraints.

Should Generator fail to comply with such voltage schedules, Pepco or the
Transmission Operator, as applicable, shall provide written notice to the
Generator of its intent to remedy that failure. If Generator does not promptly
commence appropriate action after receiving such notice, Pepco or the
Transmission Operator may then take any necessary action at Generator's expense
to remedy such failure, including the installation of capacitor banks or other
reactive compensation equipment necessary to ensure the proper voltage or
reactive supply at the Station including, at a minimum, by installing such
equipment outside any building housing the Generation Facilities. Pepco shall
make, to the extent feasible, reasonable efforts to minimize the impact of such
action on the operation of the Station.

                           (b)      Generator shall notify the Transmission
Operator if (a) any or all generating units at the Station reaches a VAR limit,
(b) there is any deviation from the voltage schedules prescribed pursuant to
Section 4.2.2 which is outside the limits permitted by PJM Requirements or Good
Utility Practice, or (c) any automatic voltage regulator is removed from or
restored to service.

                           (c)      The Transmission Operator may from time to
time, pursuant to PJM Requirements or Good Utility Practice, request or direct
Generator to

<PAGE>   207

adjust generator controls that impact the Transmission System, such as
excitation, droop, and automatic generation control settings and Generator shall
comply with such request or directions.

                           (d)      Generator acknowledges that the Transmission
Operator may have the right, to the extent authorized or directed by the PJM
Interconnection LLC, to require reduced or increased generation of the Station
in accordance with PJM Requirements, or in accordance with applicable rules of
the Transmission Operator.

         4.3      Auditing of Accounts and Records. The Parties shall have the
right, during normal business hours, to audit each other's accounts and records
pertaining to transactions under this Agreement, upon twenty (20) days prior
written notice, at the offices where such accounts and records are maintained,
provided, however, that the audit shall be limited to those portions of the
accounts and records that are related to services provided to the other Party
under this Agreement. Any such audit of a Party's accounts and records will be
at the expense of the auditing Party, shall not be made more frequently than
once in any twelve (12) month period, and no such audit may be made with respect
to accounts and records relating to periods more than twenty-four (24) months
prior to the date of the audit notice. The Party being audited will be entitled
to review the audit report and any supporting materials. The Party conducting
the audit shall maintain the confidentiality of all information obtained during
the audit in compliance with Article 6 of this Agreement. To the extent that
audited information includes confidential information, the auditing Party shall
designate an independent auditor at its expense to perform such audit.

                              ARTICLE 5
              COST RESPONSIBILITIES AND BILLING PROCEDURES

         5.1      Cost Responsibilities for Interconnection Service. Except as
otherwise expressly stated herein, Generator shall not be responsible for any
costs arising from Pepco's provision of Interconnection Service or local
services to Generator, except for those costs specified in Sections 3.2.1,
3.2.2, 3.4.1, and 3.15 or arising from the liability or indemnification
provisions of this Agreement.

         5.2      Cost Responsibilities for Local Services. Except as otherwise
expressly provided herein or agreed to by the Parties, each Party shall be
responsible for the costs for local services provided to the other Party in
Sections 3.10 and 3.11 as set forth in said sections.

<PAGE>   208

         5.3      Billing Procedures

                           (a)      Within ten (10) days after the first day of
each calendar month, each Party shall provide the other Party with a written
invoice for any payments due from the other Party for services provided in the
previous month.

                           (b)      Each invoice shall (i) delineate the month
in which the services were provided, (ii) fully describe the services rendered,
(iii) be itemized to reflect the services performed or provided, and (iv)
provide reasonable detail as to the calculation of the amount involved.

                           (c)      All invoices shall be paid within fifteen
(15) days after receipt, but not earlier than the 25th day of the month in which
the invoice is rendered. All payments shall be made in immediately available
funds payable to the other Party, or by wire transfer to a bank designated in
writing by such Party. Payment of invoices shall not relieve the paying Party
from any responsibilities or obligations it has under this Agreement, nor shall
such payment constitute a waiver of any claims arising hereunder.

                  5.3.2    To the extent that, for any billing period, Generator
is obligated to pay to Pepco amounts due and calculated pursuant to Section 5.3,
Pepco may use such amounts as a set-off against any amounts owed by Pepco to
Generator under this Section 5.3.

                  5.3.3    Interest on any unpaid amounts shall be calculated in
accordance with the methodology specified for interest on refunds in FERC
regulations at 18 C.F.R. Section 35.19a(a)(2)(iii). Interest on delinquent
amounts shall be calculated from the due date of the bill to the date of
payment. When payments are made by mail, bills shall be considered as having
been paid on the date of receipt by the other Party.

         5.4      Billing Disputes. In the event of a billing dispute between
the Parties, each Party shall continue to provide services as long as the other
Party continues to make all payments not in dispute. Payment of invoices by
either Party shall not relieve the paying Party from any responsibilities or
obligations it has under this Agreement; nor shall it constitute a waiver of any
claims arising hereunder.

<PAGE>   209

                              ARTICLE 6
                           CONFIDENTIALITY

         6.1      Confidentiality Obligations of Pepco. Pepco shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or other provisions of law, all documents and information furnished by Generator
in connection with this Agreement marked "Confidential" or "Proprietary." Except
to the extent that such information or documents are (i) generally available to
the public other than as a result of a disclosure by Pepco in breach of this
Agreement, (ii) available to Pepco on a non-confidential basis prior to
disclosure to Pepco by Generator, or (iii) available to Pepco on a
non-confidential basis from a source other than Generator, provided that such
source is not known, and by reasonable effort could not be known, by Pepco to be
bound by a confidentiality agreement with Generator or otherwise prohibited from
transmitting the information to Pepco by a contractual, legal or fiduciary
obligation, Pepco shall not release or disclose such information to any other
person, except to its employees, representatives or agents on a need-to-know
basis, in connection with this Agreement who has not first been advised of the
confidentiality provisions of this Section 6.1 and has agreed in writing to
comply with such provisions. In no event shall such information be disclosed in
violation of the requirements of FERC Orders 889 and 889-A, and any successor
thereto. Pepco shall promptly notify Generator if it receives notice or
otherwise concludes that the production of any information subject to this
Section 6.1 is being sought under any provision of law and Pepco shall use
reasonable efforts in cooperation with Generator to seek confidential treatment
for such confidential information provided thereto.

         6.2      Confidentiality Obligations of Generator. Generator shall hold
in confidence, unless compelled to disclose by judicial or administrative
process or other provisions of law, all documents and information furnished by
Pepco in connection with this Agreement marked "Confidential" or "Proprietary."
Except to the extent that such information or documents are (i) generally
available to the public other than as a result of a disclosure by Generator in
breach of this Agreement, (ii) available to Generator on a non-confidential
basis prior to disclosure to Generator by Pepco, or (iii) available to Generator
on a non-confidential basis from a source other than Pepco, provided that such
source is not known, and by reasonable effort could not be known, by Generator
to be bound by a confidentiality agreement with Pepco or otherwise prohibited
from transmitting the information to Generator by a contractual, legal or
fiduciary obligation, Generator shall not release or disclose such information
to any other person, except to its employees, representatives or agents on a
need-to-know basis, in connection with this Agreement who has not first been
advised of the confidentiality provisions of this Section 6.2 and has agreed in
writing to comply with such provisions. In no

<PAGE>   210

event shall such information be disclosed in violation of the requirements of
FERC Orders 889 and 889-A, and any successor thereto. Generator shall promptly
notify Pepco if it receives notice or otherwise concludes that the production of
any information subject to this Section 6.2 is being sought under any provision
of law and Generator shall use reasonable efforts in cooperation with Pepco to
seek confidential treatment for such confidential information provided thereto.

         6.3      Confidentiality of Audits. The independent auditor performing
any audit, as referred to in Section 4.3, shall be subject to a confidentiality
agreement between the auditor and the Party being audited. Such audit
information shall be treated as confidential except to the extent that its
disclosure is required by regulatory or judicial order, for reliability purposes
pursuant to PJM Requirements or Good Utility Practice, and pursuant to the
FERC's rules and regulations. Except as provided herein, neither Party will
disclose the audit information to any third party, without the other Party's
prior written consent. Audit information in the hands of the Party not being
audited shall be subject to all provisions of Section 6.1 or 6.2, above, as
applicable.

         6.4      Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its obligations
under Section 6.1 or 6.2, above, as applicable. Each Party accordingly agrees,
subject to Article 8, that the other Party shall be entitled to equitable
relief, by way of injunction or otherwise, if the first Party breaches or
threatens to breach its obligations under Section 6.1 or 6.2 of this Agreement,
as applicable, which equitable relief shall be granted without bond or proof of
damages, and the receiving Party shall not plead in defense that there would be
an adequate remedy at law.

                              ARTICLE 7
                          EVENTS OF DEFAULT

         7.1      Events of Default. Each of the following shall constitute an
Event of Default by the a defaulting Party under this Agreement:

                           (a)      The failure by a Party to pay any amount due
within twenty (20) calendar days after receipt of written notice of nonpayment
by the other Party, unless the payment of such amount is disputed in good faith,
in which event Section 5.5 shall apply;

                           (b)      A Party's breach of any material term or
condition of this Agreement, including but not limited to any material breach of
a representation,

<PAGE>   211

warranty or covenant made in this Agreement which, after receiving written
notice of the breach from the non-breaching Party (such notice to set forth in
reasonable detail the nature of the default and, where known and if applicable,
the steps necessary to cure such default), (i)the breaching Party fails to cure,
if curable, within thirty (30) days following receipt of the notice or (ii) if
such default is of such a nature that it cannot be cured within thirty (30) days
following receipt of such notice, the breaching Party fails within such thirty
(30) days to commence the necessary cure and fails at any time thereafter
diligently and continuously to prosecute such cure to completion provided that
the cure is completed no later than 180 days after the receipt of the default
notice;

                           (c)      The appointment of a receiver, liquidator or
trustee for either Party, and such receiver, liquidator or trustee is not
discharged within sixty (60) days;

                           (d)      The entry of a decree or decrees
adjudicating a Party as bankrupt or insolvent, and such decree or decrees are
not stayed or discharged within sixty (60) days; or

                           (e)      The filing of voluntary petitions for
bankruptcy under any federal or state bankruptcy law by a Party.

         7.2      Remedies

                  7.2.1    If the breaching Party disputes that an Event of
Default under Section 7.1.(b) has occurred, the breaching Party shall
nonetheless comply with this Section 7.2 pending the resolution of the dispute.
If it is determined that no breach or Event of Default under Section 7.1(b)
existed, the Party alleging the default shall pay and reimburse the other Party
for all reasonable costs and expenses incurred by it to cure the alleged
default.

                  7.2.2    Upon the occurrence of an Event of Default, the
non-defaulting Party may (i) exercise all such rights and remedies as may be
available to it at law or equity including seeking to recover damages caused by
such Event of Default, subject to Article 8 of this Agreement; and/or (ii)
terminate this Agreement. The Parties shall not discontinue the performance of
any one or more of their obligations hereunder due to the occurrence of an Event
of Default during the pendency of any dispute regarding such Event of Default
and until such dispute is finally resolved except that Pepco may suspend or
interrupt service if necessary for the safe and reliable operation of the
Interconnection Facilities or the Transmission System.

<PAGE>   212

                  7.2.3    Notwithstanding the foregoing, upon the occurrence of
any Event of Default, the non-defaulting Party shall be entitled to commence an
action to require the defaulting Party to remedy such default by specifically
performance of its duties and obligations hereunder in accordance with the terms
and conditions hereof.

                  7.2.4    Notwithstanding anything in this Agreement to the
contrary, in the event the Generator's failure to comply with the provisions of
Sections 4.1 and 4.2 of this Agreement is reasonably likely to have an immediate
and material adverse impact on Pepco or the Transmission System, Pepco shall
have the right to take immediately reasonable steps and/or to exercise
immediately all remedies available under this Agreement, or at law or equity,
including the right, after providing as much notice as is practicable under the
circumstances and complying with the applicable FERC notice requirements
regarding termination of service, to disconnect the Station from the
Transmission System.

                              ARTICLE 8
                        LIMITATION OF LIABILITY

                  8.1      Limitation of Pepco's Liability. Pepco does not
guarantee the non-occurrence of, or warrant against, and will have no liability
hereunder for, and the Generator will release Pepco from all claims or damages
associated with, any interruption in the availability of the Interconnection
Facilities, Interconnection Service or local services pursuant to Section 3.10
or damages to the Generator's facilities, except to the extent such interruption
or damage is caused by Pepco's gross negligence or willful misconduct in the
performance of its obligations under this Agreement.

                  8.2      Limitation on Generator's Liability. Generator does
not guarantee the non-occurrence of, or warrant against, and will have no
liability under this Agreement for, and Pepco will release Generator from all
claims or damages arising under this Agreement which are associated with any
interruption in the availability of the Station or local services pursuant to
Section 3.11, any reduction, curtailment, interruption or reduction of energy
from the Station, or damage to Pepco's facilities, except to the extent such
interruption or damage is caused by Generator's gross negligence or willful
misconduct in the performance of its obligations under the Agreement.

                  8.3      Consequential Damages. Except for indemnity
obligations set forth in Article 9, neither Party, nor their respective
officers, directors, agents, employees, Affiliates, or successors or assigns of
any of them, shall be liable to the other Party or its Affiliates, officers,
directors, agents, employees, successors or assigns for claims,

<PAGE>   213

suits, actions or causes of action for incidental, punitive, special, indirect,
multiple or consequential damages (including, without limitation, replacement
power costs, lost revenues, claims of customers, attorneys' fees and litigation
costs) connected with, or resulting from, performance or non-performance of this
Agreement, or any actions undertaken in connection with or related to this
Agreement, including, without limitation, any such damages which are based upon
causes of action for breach of contract, tort (including negligence and
misrepresentation), breach of warranty or strict liability. The provisions of
this Section 8.3 shall apply regardless of fault and shall survive termination,
cancellation, suspension, completion, or expiration of this Agreement.

                              ARTICLE 9
                INDEMNIFICATION FOR THIRD PARTY CLAIMS

                  9.1      Generator's Indemnification. Generator shall
indemnify, hold harmless, and defend Pepco and its Affiliates, as the case may
be, and their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between Pepco and a third party or
Generator) for damage to property of unaffiliated third parties, injury to or
death of any person, including Pepco's employees or any third parties, to the
extent caused, by the negligence or willful misconduct of Generator's and/or its
officers, directors, employees, agents, contractors, subcontractors or invitees
arising out of or connected with Generator's performance or breach of this
Agreement, or the exercise by Generator of its rights hereunder. In furtherance
of the foregoing indemnification and not by way of limitation thereof, Generator
hereby waives any defense it might otherwise have under applicable workers'
compensation laws.

                  9.2      Pepco's Indemnification. Pepco shall indemnify, hold
harmless, and defend Generator and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between the Generator and a third party or Pepco)
for damage to property of unaffiliated third parties, injury to or death of any
person, including Generator's employees or any third parties, to the extent
caused by the negligence or willful misconduct of Pepco and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Pepco's performance or breach of this Agreement, or the
exercise by Pepco of its rights hereunder. In furtherance of the

<PAGE>   214

foregoing indemnification and not by way of limitation thereof, Pepco hereby
waives any defense it might otherwise have under applicable workers'
compensation laws.

                  9.3      Indemnification Procedures. If either Party intends
to seek indemnification under this Article 9 from the other Party, the Party
seeking indemnification shall give the other Party notice of such claim within
ninety (90) days of the later of the commencement of, or the Party's actual
knowledge of, such claim or action. Such notice shall describe the claim in
reasonable detail, and shall indicate the amount (estimated if necessary) of the
claim that has been, or may be sustained by, said Party. To the extent that the
other Party will have been actually and materially prejudiced as a result of the
failure to provide such notice, such notice will be a condition precedent to any
liability of the other Party under the provisions for indemnification contained
in this Agreement. Neither Party may settle or compromise any claim without the
prior consent of the other Party; provided, however, said consent shall not be
unreasonably withheld or delayed.

                  9.4      Survival. The indemnification obligations of each
Party under this Article 9 shall continue in full force and effect regardless of
whether this Agreement has either expired or been terminated or canceled.

                                   ARTICLE 10
                                   INSURANCE

                  10.1     Insurance Coverage. The Parties shall maintain at
their own cost and expense, fire, liability, worker's compensation, and other
forms of insurance relating to their respective property and facilities subject
to this Agreement in the manner, and amounts, and for the durations as is
customary in the electric utility industry.

                  10.2     Certificates of Insurance. The Parties agree to
furnish each other with certificates of insurance evidencing the insurance
coverage obtained in accordance with this Article 10, and the Parties agree to
notify and send copies to the other of any policies maintained hereunder upon
written request by a Party. Each Party must notify the other Party within ten
(10) business days of receiving notice of cancellation, change, amendment or
renewal of any insurance policy required pursuant to Section 10.1 above.

                  10.3     Additional Insureds and Waiver. Each Party and its
affiliates shall be named as additional insureds on the general liability
insurance policies obtained in accordance with Section 10.1, above, as regards
liability under this Agreement; and

<PAGE>   215

each Party shall waive its rights of recovery against the other for any loss or
damage covered by such policy.

                                   ARTICLE 11
                                 FORCE MAJEURE

                  11.1     Effect of Force Majeure. Notwithstanding anything in
this Agreement to the contrary, Generator and Pepco shall not be liable in
damages or otherwise or responsible to the other for its failure to carry out
any of its obligations under this Agreement (except for the obligation to pay
sums of money due and owing hereunder) to the extent that they are unable to so
perform or are prevented from performing by an event of Force Majeure and has
complied with Section 11.3.

                  11.2     Force Majeure Defined. Force Majeure means those
causes beyond the reasonable control of the Party affected, which by the
exercise of reasonable diligence, including Good Utility Practice, that Party is
unable to prevent, avoid, mitigate, or overcome, including the following: any
act of God, labor disturbance (including a strike), act of the public enemy,
war, insurrection, riot, fire, storm or flood, explosion, breakage or accident
to machinery or equipment, electric system disturbance), order, regulation or
restriction imposed by governmental, military or lawfully established civilian
authorities, or any other cause of a similar nature beyond a Party's reasonable
control.

                  11.3     Notification. A Party shall not be entitled to rely
on the occurrence of an event of Force Majeure as a basis for being excused from
performance of its obligations under this Agreement, unless the Party relying on
the event or condition shall: (a) provide prompt written notice of such Force
Majeure event to the other Party, including an estimation of its expected
duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts in accordance with Good Utility
Practice to continue to perform its obligations under this Agreement; (c)
expeditiously take action to correct or cure the event or condition excusing
performance; (d) exercise all reasonable efforts to mitigate or limit damages to
the other Party; and (e) provide prompt notice to the other Party of the
cessation of the event or condition giving rise to its excuse from performance.
Subject to this Section 11.3, any obligation under this Agreement shall be
suspended only to the extent caused by such Force Majeure and only during the
continuance of any inability of performance caused by such Force Majeure but for
no longer period.

<PAGE>   216

                                   ARTICLE 12
                                    DISPUTES

                  12.1     Disputes

                           12.1.1   A Party with a claim or dispute under this
Agreement shall submit to the Operating Committee a notification of such claim
or dispute within sixty (60) days after the circumstances that gave rise to the
claim or the question or issue in dispute. The notification shall be in writing
and shall include a concise statement of the claim or the issue or question in
dispute, a statement of the relevant facts and documentation to support the
claim. In the event the Operating Committee is unable, in good faith, to resolve
their disagreement in a manner satisfactory to both Parties within thirty (30)
days after receipt by the Operating Committee of a notification specifying the
claim, issue or question in dispute, the Parties shall refer the dispute to
their respective senior management. If, after using their good faith best
efforts to resolve the dispute, senior management cannot resolve the dispute
within thirty (30) days, the Parties shall utilize the arbitration procedures
set forth below in Section 12.2 to resolve a dispute, provided that nothing
herein or therein shall prohibit either Party from at any time requesting from a
court of competent jurisdiction a temporary restraining order, preliminary
injunction, or other similar form of equitable relief to enforce performance of
the provisions of this Agreement.

                  12.2     Arbitration.

                           (a)      Unless the Parties other wise mutually agree
in writing to another form of dispute resolution such as dispute resolution
under the PJM Agreement or the MAAC agreement, any arbitration initiated under
this Agreement shall be conducted before a single neutral arbitrator appointed
by the Parties within thirty (30) days of receipt by respondent of the demand
for arbitration. If the Parties are unable to agree on an arbitrator, such
arbitration shall be appointed by the American Arbitration Association. Unless
the Parties agree otherwise, the arbitrator shall be an attorney or retired
judge with at least fifteen (15) years of experience, and shall not have any
current or past substantial business or financial relationships with any Party
to the arbitration. If possible, the arbitrator shall have experience in the
electric utility industry. Unless otherwise agreed, the arbitration shall be
conducted in accordance with the American Arbitration Association's Commercial
Arbitration Rules, then in effect. Any arbitration proceedings, decision or
award rendered hereunder and the validity, effect and interpretation of this
arbitration agreement shall be governed by the Federal Arbitration Act of the

<PAGE>   217

United States, 9 U.S.C. Section 1 et seq. The location of any arbitration
hereunder shall be in the District of Columbia.

                           (b)      The arbitration shall, if possible, be
concluded not later than six (6) months after the date that it is initiated. The
arbitrator shall be authorized only to interpret and apply the provisions of
this Agreement or any related agreements entered into under this Agreement and
shall have no power to modify or change any of the above in any manner. The
arbitrator shall have no authority to award punitive or multiple damages or any
damages inconsistent with this Agreement. The arbitrator shall, within thirty
(30) days of the conclusion of the hearing, unless such time is extended by
agreement of the Parties, notify the Parties in writing of his or her decision,
stating his or her reasons for such decision and separately listing his or her
findings of fact and conclusions of law. The decision of the arbitrator rendered
in such a proceeding shall be final and binding on the Parties. Judgment on the
award may be entered upon it in any court having jurisdiction.

                  12.3     FERC Dispute Resolution. Nothing in this Agreement
shall preclude, or be construed to preclude, any Party from filing a petition or
complaint with FERC with respect to any arbitrable claim over which FERC has
jurisdiction. In such case, the other Party may request FERC to reject or to
waive jurisdiction. If FERC rejects or waives jurisdiction with respect to all
or a portion of the claim, the portion of the claim not so accepted by FERC
shall be resolved through arbitration, as provided in this Agreement. To the
extent that FERC asserts or accepts jurisdiction over the claim, the decision,
finding of fact or order of FERC shall be final and binding, subject to judicial
review under the Federal Power Act, and any arbitration proceedings that may
have commenced with respect to the claim prior to the assertion or acceptance of
jurisdiction by FERC shall be terminated.

                                   ARTICLE 13
                                REPRESENTATIONS

                  13.1     Representations of Pepco. Pepco hereby represents and
warrants to Generator as follows:

                           (a)      Incorporation. Pepco is a corporation duly
organized, validly existing and in good standing under the laws of the District
of Columbia and the Commonwealth of Virginia, and has all requisite corporate
power and authority to own, lease and operate its material assets and properties
and to carry on its business as now being conducted.

<PAGE>   218

                           (b)      Authority. Pepco has all necessary corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Pepco of this
Agreement and the consummation by Pepco of the transactions contemplated
hereunder have been duly and validly authorized by the Board of Directors of
Pepco or by a committee thereof to whom such authority has been delegated and no
other corporate proceedings on the part of Pepco are necessary to authorize this
Agreement or the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Pepco and, assuming that this Agreement
constitutes a valid and binding agreement of Generator, constitutes a valid and
binding agreement of Pepco, enforceable by Pepco in accordance with its terms.

                           (c)      Consents and Approvals; No Violation.

                                    (i)      Neither the execution and delivery
of this Agreement by Pepco nor performance by Pepco of its obligations hereunder
will (A) conflict with or result in any breach of any provision of the
Certificate of Incorporation or By-laws of Pepco, (B) result in a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
license, agreement, lease or other instrument or obligation to which Pepco or
any of its subsidiaries is a party or by which any of their respective assets
may be bound or (C) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to Pepco, or any of its assets, except in the case of
clauses (B) and (C) for such failures to obtain a necessary consent, defaults
and violations which would not, individually or in the aggregate, have a
material adverse effect on the ability of Pepco to discharge its obligations
under this Agreement (a "Pepco Material Adverse Effect").

                                    (ii)     No declaration, filing or
registration with, or notice to, or authorization, consent or approval of any
governmental authority is necessary for performance by Pepco of its obligations
hereunder, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not obtained or made would not,
individually or in the aggregate, have a Pepco Material Adverse Effect.

                  13.2     Representations of Generator. Generator hereby
represents and warrants to Pepco as follows:

                           (a)      Incorporation. Generator is a [corporation]
duly [incorporated], validly existing and in good standing under the laws of the
State of __________, and has all requisite [corporate] power and authority to
own, lease and

<PAGE>   219

operate its material assets and properties and to carry on its business as now
being conducted.

                           (b)      Authority. Generator has all necessary
[corporate] power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery by
the Generator of this Agreement and the consummation by Generator of the
transactions contemplated hereby have been duly and validly authorized the
[Board of Directors] of Generator or by a committee thereof to whom such
authority has been delegated and no other [corporate] proceedings on the part of
Generator are necessary to authorize this Agreement or the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Generator and, assuming that this Agreement constitutes a valid and
binding agreement of Pepco, constitutes a valid and binding agreement of
Generator, enforceable against Generator in accordance with its terms.

                           (c)      Consents and Approvals.

                                    (i)      Neither the execution and delivery
of this Agreement by Generator nor performance by Generator of its obligations
hereunder will (A) conflict with or result in any breach of any provision of the
[Certificate of Incorporation or By-laws] of Generator, (B) result in a default
(or give rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement, lease or other instrument or obligation to which
Generator or any of its subsidiaries is a party or by which any of their
respective assets may be bound or (C) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Generator, or any of its
assets, except in the case of clauses (B) and (C) for such failures to obtain a
necessary consent, defaults and violations which would not, individually or in
the aggregate, have a material adverse effect on the ability of Generator to
discharge its obligations under this Agreement (a "Generator Material Adverse
Effect").

                                    (ii)     No declaration, filing or
registration with, or notice to, or authorization, consent or approval of any
Governmental Authority is necessary for performance by Generator of its
obligations hereunder, other than such declarations, filings, registrations,
notices, authorizations, consents or approvals which, if not obtained or made
would not, individually or in the aggregate, have a Generator Material Adverse
Effect.

<PAGE>   220

                                   ARTICLE 14
                     ASSIGNMENT/CHANGE IN CORPORATE IDENTITY

         14.1     Assignment.

                  (a)      Except as set forth in this Article 14, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by either Party hereto, without the prior written consent of the other
Party, which consent shall not be unreasonably withheld or delayed.

                  (b)      Subject to Section 14.2, upon ten (10) days prior
written notice to Generator, Pepco may assign this Agreement, and Pepco's
rights, interests and obligations hereunder, to (i) an Affiliate of Pepco that
owns all or part of Pepco's Transmission System or (ii) an independent system
operator or independent transmission company whose control over all or part of
Pepco's Transmission System has been approved by the FERC.

                  (c)      Subject to Section 14.2, Generator may (a) assign any
of its rights and obligations hereunder to an Affiliate to the extent necessary
for the Generator to qualify as an exempt wholesale generator under Section 32
of the Public Utility Holding Company Act of 1935, as amended, and (b) assign,
transfer, pledge or otherwise dispose of its rights and interests hereunder to a
trustee, lending institution, or other Person for the purposes of financing or
refinancing the Station, including upon or pursuant to the exercise of remedies
under such financing or refinancing, or by way of assignments, transfers,
conveyances of dispositions in lieu thereof; provided, however, that no such
assignment shall relieve or in any way discharge Generator from the performance
of its duties and obligations under this Agreement. Pepco agrees to execute and
deliver, at Generator's expense, such documents as may be reasonably necessary
to accomplish any such assignment, transfer, conveyance, pledge or disposition
of rights hereunder for purposes of the financing or refinancing of the
Facility, so long as Pepco's rights under this Agreement are not thereby
altered, amended, diminished or otherwise impaired.

                  (d)      Subject to Section 14.2, either Party may assign this
Agreement to a successor to all or substantially all of the assets of such Party
by way of merger, consolidation, sale or otherwise, provided such successor
assumes in writing and becomes liable for all of such Party's duties and
obligations hereunder.

         14.2     Release of Rights and Obligations. No assignment, transfer,
conveyance, pledge or disposition of rights, interests, duties or obligations
under this Agreement by a Party shall relieve that Party from liability and
financial

<PAGE>   221

responsibility for the performance thereof after any such transfer, assignment,
conveyance, pledge or disposition unless and until (i) the transferee or
assignee shall agree in writing to assume the obligations and duties of that
Party under this Agreement and to impose such obligations on subsequent
permitted transferees and assignees and (ii) the non-assigning Party has
consented in writing to such assumption and to a release of the assigning Party
from such liability, such consent not to be unreasonably withheld or delayed.

         14.3     Change in Corporate Identity. If Generator terminates its
existence as a [corporate] entity by merger, acquisition, sale, consolidation or
otherwise, or if all or substantially all of Generator's assets are transferred
to another person or business entity without complying with this Article 14,
Pepco shall have the right, enforceable in a court of competent jurisdiction, to
enjoin Generator's successor from using the Station in any manner that does not
comply with the requirements of this Agreement or that impedes Pepco's ability
to carry on its ongoing business operations.

         14.4     Successors and Assigns. This Agreement and all of the
provisions hereof are binding upon, and inure to the benefit of, the Parties and
their respective successors and permitted assigns.

                              ARTICLE 15
                            SUBCONTRACTORS

         Nothing in this Agreement shall prevent the Parties from utilizing the
services of subcontractors as they deem appropriate, provided, however, the
Parties agree that, where applicable, all said subcontractors shall comply with
the terms and conditions of this Agreement. The creation of any subcontract
relationship shall not relieve the hiring Party of any of its obligations under
this Agreement. Each Party shall be fully responsible to the other Party for the
acts and/or omission of any subcontractor it hires as if no subcontract had been
made. Any obligation imposed by this Agreement upon the Parties, where
applicable, shall be equally binding upon and shall be construed as having
application to any subcontractor. The Parties shall each be liable for,
indemnify, and hold harmless the other Party, their Affiliates and their
officers, directors, employees, agents, servants, and assigns from and against
any and all claims, demands, or actions, from the other Party's subcontractors;
and shall pay all costs, expenses and legal fees associated therewith and all
judgments, decrees and awards rendered therein. No subcontractor is intended to
be or shall be deemed a third-party beneficiary of this Agreement.

<PAGE>   222

                                   ARTICLE 16
                                     NOTICES

         16.1     Emergency Notices. At or prior to the Effective Date, each
Party shall indicate to the other Party, by notice, the appropriate person
during each eight-hour work shift to contact in the event of an emergency, a
scheduled or forced interruption or reduction in services. The notice last
received by a Party shall be effective until modified in writing by the other
Party.

         16.2     Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (as of the time of delivery or, in the
case of a telecopied communication, of confirmation) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier (providing proof of
delivery) to the Parties at the following addresses (or at such other address
for a Party as shall be specified by like notice):

            if to Pepco, to:

                  Potomac Electric Power Company
                  1900 Pennsylvania Avenue, N.W.
                  Washington, D.C.  20068
                  Telecopier:  (202) ________________
                  Attention:  ___________________

            if to Generator, to:

                  c/o Southern Energy, Inc.
                  900 Ashwood Parkway
                  Suite 500
                  Atlanta, Georgia  30338-4780
                  Telecopier:  (770)  821-6575
                  Attention:

                                   ARTICLE 17
                                   AMENDMENTS

         17.1     Amendments. Except as set forth in Sections 2.2 and 17.2 of
this Agreement, this Agreement may be amended, modified, or supplemented only by
written agreement of both Pepco and Generator.

         17.2     FERC Proceedings

<PAGE>   223

                  (a)      Pepco may unilaterally make application to FERC under
Section 205 of the Federal Power Act and pursuant to the FERC's rules and
regulations promulgated thereunder for, or exercise any rights it may have under
Section 206 of the Federal Power Act and the regulations thereunder with respect
to, a change in any rates, terms and conditions, charges, classification of
service, rule or regulation for any services Pepco provides under this Agreement
over which FERC has jurisdiction.

                  (b)      Generator may exercise its rights under Section 205
or 206 of the Federal Power Act and pursuant to FERC's rules and regulations
promulgated thereunder with respect to any rate, term, condition, charge,
classification of service, rule or regulation for any services provided under
this Agreement over which FERC has jurisdiction.

                                   ARTICLE 18
                            MISCELLANEOUS PROVISIONS

         18.1     Waiver. Except as otherwise provided in this Agreement, any
failure of a Party to comply with any obligation, covenant, agreement, or
condition herein may be waived by the Party entitled to the benefits thereof
only by a written instrument signed by the Party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement, or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.

         18.2     Labor Relations. The Parties agree to immediately notify the
other Party, verbally and then in writing, of any labor dispute or anticipated
labor dispute which may reasonably be expected to affect the operations of the
other Party.

         18.3     No Third Party Beneficiaries. Nothing in this Agreement is
intended to confer upon any other person except the Parties any rights or
remedies hereunder or shall create any third party beneficiary rights in any
person. No provision of this Agreement shall create any rights in any such
persons in respect of any benefits that may be provided, directly or indirectly,
under any employee benefit plan or arrangement except as expressly provided for
thereunder.

         18.4     Governing Law

This Agreement shall be governed by and construed in accordance with the laws of
the District of Columbia (regardless of the laws that might otherwise govern
under applicable principles of conflicts of law).

<PAGE>   224

         18.5     Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         18.6     Interpretation. When a reference is made in this Agreement to
an Article, Section, Schedule or exhibit, such reference shall be to an Article
or Section of, or Schedule or exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation" or equivalent words. The words "hereof", "herein"
and "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. The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such term. Unless otherwise expressly
stated otherwise herein, the word "day" shall mean any calendar day including
weekends and holidays. Any agreement, instrument, statute, regulation, rule or
order defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument, statute, regulation, rule
or order as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes, regulations, rules or orders) by succession of comparable successor
statutes, regulations, rules or orders and references to all attachments thereto
and instruments incorporated therein. References to a person are also to its
permitted successors and assigns. Each Party acknowledges that it has been
represented by counsel in connection with the review and execution of this
Agreement, and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

         18.7     Jurisdiction and Enforcement. Each of the Parties irrevocably
submits to the exclusive jurisdiction of (i) the Superior Court of the District
of Columbia and (ii) the United States District Court for the District of
Columbia, for the purposes of any suit, action or other proceeding arising out
of this Agreement or any transaction contemplated hereby. Each of the Parties
agrees to commence any action, suit or proceeding relating hereto either in the
United States District Court for the District of Columbia or, if such suit,
action or proceeding may not be brought in such court for jurisdictional
reasons, in the Superior Court of the District of Columbia. Each of the Parties
further agrees that service of process, summons, notice or document by hand
delivery or U.S. registered mail at the address specified for such Party in
Section 16.2 (or such other address specified by such Party from

<PAGE>   225

time to time pursuant to Section 16.2) shall be effective service of process for
any action, suit or proceeding brought against such Party in any such court.
Each of the Parties irrevocably and unconditionally waives any objection to the
laying of venue of any action, suit or proceeding arising out of this Agreement
or the transactions contemplated hereby in (i) the Superior Court of the
District of Columbia and (ii) the United States District Court for the District
of Columbia, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.

         18.8     Entire Agreement. This Agreement, Asset Sale Agreement, the
Confidentiality Agreement and the Ancillary Agreements including the Exhibits,
Schedules, documents, certificates and instruments referred to herein or therein
and other contracts, agreements and instruments contemplated hereby or thereby,
embody the entire agreement and understanding of the Parties in respect of the
transactions contemplated by this Agreement. There are no restrictions,
promises, representations, warranties, covenants or undertakings other than
those expressly set forth or referred to herein or therein. This Agreement, the
Asset Sale Agreement and the Ancillary Agreements supersede all prior agreements
and understandings between the Parties with respect to the transactions
contemplated by this Agreement other than the Confidentiality Agreement.

         18.9     Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the Parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the Parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.

         18.10    Independent Contractor Status. Nothing in this Agreement shall
be construed as creating any relationship between Pepco and Generator other than
that of independent contractors.

         18.11    Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

<PAGE>   226

            IN WITNESS WHEREOF, Pepco and Generator have caused this
Interconnection Agreement (Potomac River) to be signed by their respective duly
authorized officers as of the date first above written.

                                POTOMAC ELECTRIC POWER COMPANY

                                By:
                                   ----------------------------------------
                                    Name:
                                    Title:

                                [GENERATOR]

                                By:
                                   ----------------------------------------
                                    Name:
                                    Title:
<PAGE>   227

                                   SCHEDULE A
                                  DEFINITIONS

Part A.  Capitalized terms not defined in the body of the Agreement shall have
         the meaning set forth in Part A of this Schedule A. (Part B of this
         Schedule A sets forth capitalized terms defined within the Agreement.)

         (1)      "Affiliate" has the meaning set forth in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934.

         (2)      "Ancillary Agreements" has the meaning set forth in the Asset
Sale Agreement.

         (3)      "Closing" has the meaning set forth in the Asset Sale
Agreement.

         (4)      "Confidentiality Agreement" has the meaning set forth in the
Asset Sale Agreement.

         (5)      "Costs" means all costs, including without limitation, any
Taxes, costs of acquiring real property, costs and fees for permits,
franchises, licenses and regulatory approvals except to the extent that such
costs are allocated to a party or parties other than the Generator by the PJM
Interconnection LLC or otherwise under the PJM Tariff or PJM Agreement.

         (6)      "Easement" means the Easement Agreement dated __________,
2000, between the Parties with respect to the Station.

         (7)      "Environmental Laws" means all former, current and future
federal, state, local and foreign laws (including common law), treaties,
regulations, rules, ordinances, codes, decrees, judgments, directives or orders
(including consent orders) and environmental permits, in each case, relating to
pollution or protection of the environment or natural resources, including laws
relating to Releases or threatened Releases, or otherwise relating to the
generation, manufacture, processing, distribution, use, treatment, storage,
arrangement for disposal, transport, recycling or handling, of Hazardous
Substances.

         (8)      "Emergency" means (a) with respect to Pepco, a condition or
situation which Pepco, the PJM Interconnection LLC, the PJM System Operator or
the Transmission Operator deem imminently likely to (i) endanger life or
property, or (ii) adversely affect or impair the Transmission System, Pepco's
electrical system or the electrical or transmission systems of others to which
the Transmission System or Pepco's electrical system are directly or indirectly
connected and (b) with respect to the Generator, a condition or situation which
the Generator deems imminently likely to (i) endanger life or property, or (ii)
adversely affect or impair the Station.

         (9)      "FERC" means the Federal Energy Regulatory Commission or its
successors.

<PAGE>   228

         (10)     "Generating Facilities" means the Station and any additional
generating plants, turbines or other generating facilities constructed by
Generator after the Effective Date at the site of the Station.

         (11)     "Generator" has the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors and
assigns.

         (12)     "Generator Facilities" mean the equipment and facilities
owned by the Generator but located on Pepco's property which are identified in
Schedule B of this Agreement.

         (13)     "Good Utility Practice" means any of the applicable
practices, methods and acts.

                  (a)      required by FERC, NERC, MAAC, the PJM
Interconnection LLC, the PJM System Operator, or the successor of any of them,
whether or not the Party whose conduct is at issue is a member thereof,

                  (b)      required by applicable law or regulations,

                  (c)      required by the Pepco Interconnection Standards or
the policies and standards of Pepco relating to emergency operations;

                  (d)      otherwise engaged in or approved by a significant
portion of the electric utility industry during the relevant time period;

which, in the exercise of reasonable judgment in light of the facts known at
the time the decision was made, could have been expected to accomplish the
desired result at a reasonable cost consistent with law, regulation, good
business practices, reliability, safety, and expedition. Good Utility Practice
is not intended to be limited to the optimum practice, method, or act to the
exclusion of all others, but rather to be acceptable practices, methods, or
acts generally accepted in the region.

         (14)     "Hazardous Substances" means (i) any petrochemical or
petroleum products, crude oil or any fraction thereof, ash, radioactive
materials, radon gas, asbestos in any form, urea formaldehyde foam insulation
or polychlorinated biphenyls, (ii) any chemicals, materials, substances or
wastes defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "restricted hazardous materials,"
"extremely hazardous substances," "toxic substances," "contaminants" or
"pollutants" or words of similar meaning and regulatory effect contained in any
Environmental Law or (iii) any other chemical, material, substance or waste
which is prohibited, limited or regulated by any Environmental Law.

         (15)     "Interconnection Facilities" means those facilities or
portions of facilities owned or operated by Pepco to provide Interconnection
Service which shall include, but not be limited to (1) facilities the cost of
which is reasonably allocated to the Interconnection Service provided to the
Station, or (2) Attachment Facilities or Local Upgrade Facilities, as defined
in the PJM Tariff, which are associated with the Interconnection Service and
operated and maintained by Pepco.

<PAGE>   229

         (16)     "Interconnection Service" means the services provided by
Pepco which are necessary to connect the Station to the Transmission System for
parallel operation of the Station and to enable Generator to transmit the
energy and ancillary services produced by the Station to the Transmission
System and receive Station energy service and ancillary services, including
blackstart power, from the Generator's supplier.

         (17)     "MAAC" means the Mid-Atlantic Area Council, a reliability
council under Section 202 of the Federal Power Act established pursuant to the
MAAC Agreement dated August 1, 1994, or any successor thereto.

         (18)     "Maintain" means construct, reconstruct, install, inspect,
repair, replace, operate, patrol, maintain, use, modernize, expand, upgrade, or
other similar activities.

         (19)     "MDPSC" means the Maryland Public Service Commission or any
successor agency thereto.

         (20)     "NERC" means North American Electric Reliability Council or
any successor thereto.

         (21)     "Pepco" has the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors or
assigns.

         (22)     "Pepco Facilities" means the equipment and facilities owned
by Pepco but located on Generator's property which are identified in Schedule B
of this Agreement.

         (23)     "Pepco Interconnection Standards" means Pepco's
Interconnection and Parallel Operating Guidelines as amended, modified or
replaced from time to time. A copy of the existing Pepco Interconnection
Standards is attached hereto as Schedule E.

         (24)     "Point of Interconnection" means each ownership point of
demarcation set forth in Schedule C where capacity, energy and ancillary
services are transferred between the Station and the Transmission System.

         (25)     "Pepco Transmission Facilities" means those transmission,
substation, and communication facilities and related equipment, including the
Interconnection Facilities, and any additions, modifications or replacements
thereto, that are utilized to provide Interconnection Service to the Station.

         (26)     "PJM" means the Pennsylvania New Jersey-Maryland
interconnected power pool operated under the PJM Agreement and any successor
thereto including any regional transmission operator, independent system
operator, transco, or any other independent system administrator that possesses
operational or planning control over the T ransmission System.

         (27)     "PJM Agreement" means the Amended and Restated Operating
Agreement of the PJM Interconnection LLC dated as of June 2, 1997.

<PAGE>   230

         (28)     "PJM Control Area" shall mean the control area recognized by
NERC as the PJM Control Area.

         (29)     "PJM Interconnection LLC" means the independent system
operator of the PJM Control Area pursuant to the PJM Operating Agreement and
the PJM Tariff.

         (30)     "PJM Generator Connection Agreement" means the
interconnection agreement entered into between the Generator and the PJM
Interconnection LLC pursuant to the PJM Tariff with respect to the
interconnection of the Station and the Transmission System.

         (31)     "PJM Reliability Agreement" means the Reliability Assurance
Agreement dated June 2, 1997 among the load serving entities of PJM.

         (32)     "PJM Requirements" means the rules, regulations or other
requirements of PJM or MAAC contained in or adopted pursuant to the PJM
Agreement, the PJM Tariff or the PJM Reliability Agreement which are applicable
to Pepco, with respect to the Transmission System or the Interconnection
Service, and the Generator with respect to the Generating Facilities.

         (33)     "PJM System Operator" shall mean the PJM Interconnection LLC,
energy control center staff responsible for central dispatch as provided in the
PJM Agreement.

         (34)     "PJM Tariff" means the PJM Open Access Transmission Tariff
providing transmission service within the PJM Control Area.

         (35)     "Qualified Personnel" means individuals who possess any
required licenses and are trained for their positions and duties by Generator
and/or Pepco pursuant to Good Utility Practice.

         (36)     "Release" means any release, spill, emission, leaking,
dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching
or migration into the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata) or within any building,
structure, facility or fixture.

         (37)     "Revenue Meters" means all MWh and MVArh meters, pulse
isolation relays, pulse conversion relays, transducers required by Pepco or the
PJM Interconnection or PJM System Operator for billing or other purposes, and
associated totalizing equipment, appurtenances and compensation required to
measure the transfer of energy across the Point of Interconnection.

         (38)     "Station" means the Potomac River Station as defined in the
Asset Sale Agreement.

         (39)     "Switching, Tagging, and Grounding Rules" means Pepco's
switching, tagging and grounding rules as amended, modified or replaced from
time to time. A copy of the existing Switching, Tagging and Grounding Rules is
attached hereto as Schedule D.

<PAGE>   231

         (40)     "Taxes" means all taxes, surtaxes, charges, fees, levies,
penalties or other assessments imposed by any United States federal, state,
local or foreign taxing authority, including income taxes, excise, property,
sales, transfer, franchise, special franchise, payroll, recording, withholding,
social security or other taxes, in each case including any interest, penalties
or additions attributable thereto.

         (41)     "Transmission System" means the facilities owned, controlled,
or operated by Pepco, for purposes of providing transmission service, including
services under the PJM Tariff, and Interconnection Service.

         (42)     "Transmission Operator" means the person, or persons
designated by Pepco to coordinate the day to day interconnection of the Station
with the Transmission System.

Part B.  The following terms have the meaning specified in the section of this
         Agreement set forth opposite to such term:

<TABLE>
<CAPTION>
      Term                          Agreement Reference

<S>                                 <C>
Agreement                           Preamble
Asset Sale Agreement                Preamble
Effective Date                      Section 2.1
Event of Default                    Section 8.1
Force Majeure                       Section 11.1
Initial Period                      Section 3.10
Operating Committee                 Section 3.20
Party or Parties                    Preamble
Term                                Article 2
</TABLE>

<PAGE>   232

                                                                    EXHIBIT E-2

                           INTERCONNECTION AGREEMENT
                                  (Morgantown)

                                 By and Between

                         POTOMAC ELECTRIC POWER COMPANY

                                      and

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

                           Dated             , 2000
                                 ------------
<PAGE>   233

                           INTERCONNECTION AGREEMENT

                               TABLE OF CONTENTS

<TABLE>
<S>     <C>                                                                     <C>
ARTICLE 1 - DEFINITIONS                                                          1
ARTICLE 2   TERM AND TERMINATION                                                 2
            2.1    Term                                                          2
            2.2    Change in Law                                                 2
            2.3    Effect after Termination                                      2
ARTICLE 3 - CONTINUING OBLIGATIONS AND RESPONSIBILITIES                          2
            3.1    Interconnection Service                                       2
            3.2    New Construction or Modifications                             3
                   3.2.1  Pepco Construction or Modifications                    3
                   3.2.2  Generator Construction or Modifications                4
                   3.2.3  Modifications Affecting the Transmission System
                          or the Station                                         5
            3.3    Access, Easements, Conveyances, Licenses,
                   and Restrictions                                              6
            3.4    Facility and Equipment Maintenance                            7
            3.5    Pepco Facilities and Generator Facilities                     7
            3.6    Equipment Testing Obligations                                 7
            3.7    Inspections                                                   8
            3.8    Information Reporting Obligations                             9
            3.9    Local Services                                               10
                   3.9.1  General                                               10
                   3.9.2  Temporary Suspension of Local Services                10
            3.10   Pepco Provided Services                                      11
            3.11   Generator Provided Services                                  11
            3.12   Optional Services                                            12
            3.13   Metering and Telemetering                                    12
            3.14   Emergency Procedure                                          12
            3.15   Interconnection Service Interruptions                        13
            3.16   Unit Status Notification                                     14
            3.17   Scheduled Maintenance Notification and Coordination          14
                   3.17.1  Local Routine Inspection and Maintenance             14
                   3.17.2  Transmission Sytem Maintenance                       15
            3.18   Safety                                                       15
                   3.18.1  General                                              15
                   3.18.2  Switching Tagging and Grounding                      15
            3.19   Environmental Compliance and Procedures                      15
            3.20   Operating Committee                                          16
ARTICLE 4 -  OPERATIONS                                                         16
            4.1    General                                                      16
            4.2    Generator's Operating Obligations                            17
                   4.2.1   General                                              17
                   4.2.2   Voltage or Reactive Control Requirements             18
</TABLE>

<PAGE>   234

<TABLE>
<S>         <C>                                                                 <C>
            4.3    Auditing of Accounts and Records                             19
ARTICLE 5 -- COST RESPONSIBILITIES AND BILLING PROCEDURES                       19
            5.1    Cost Responsibilities for Interconnection Service            19
            5.2    Cost Responsibilities for Local Services                     19
            5.3    Billing Procedures                                           19
            5.4    Billing Disputes                                             20
ARTICLE 6 - CONFIDENTIALITY                                                     20
            6.1    Confidentiality Obligations of Pepco                         20
            6.2    Confidentiality Obligations of Generator                     21
            6.3    Confidentiality of Audits                                    22
            6.4    Remedies                                                     22
ARTICLE 7 -  EVENTS OF DEFAULT                                                  22
            7.1    Events of Default                                            22
            7.2    Remedies                                                     23
ARTICLE 8 -  LIMITATION OF LIABILITY                                            24
            8.1    Limitation of Pepco's Liability                              24
            8.2    Limitation on Generator's Liability                          24
            8.3    Consequential Damages                                        24
ARTICLE 9 -  INDEMNIFICATION FOR THIRD PARTY CLAIMS                             25
            9.1    Generator's Indemnification                                  25
            9.2    Pepco's Indemnification                                      25
            9.3    Indemnification Procedures                                   25
            9.4    Survival                                                     26
ARTICLE 10 - INSURANCE                                                          26
            10.1   Insurance Coverage                                           26
            10.2   Certificates of Insurance                                    26
            10.3   Additional Insureds and Waiver                               26
ARTICLE 11 - FORCE MAJEURE                                                      27
            11.1   Effect of Force Majeure                                      27
            11.2   Force Majeure Defined                                        27
            11.3   Notification                                                 27
ARTICLE 12 -  DISPUTES                                                          27
            12.1   Disputes                                                     27
            12.2   Arbitration                                                  28
            12.3   FERC Dispute Resolution                                      29
ARTICLE 13 - REPRESENTATIONS                                                    29
            13.1   Representations of Pepco                                     29
            13.2   Representations of Generator                                 30
ARTICLE 14 - ASSIGNMENT/CHANGE IN CORPORATE IDENTITY                            31
            14.1   Assignment                                                   31
            14.2   Release of Rights and Obligations                            32
            14.3   Change in Corporate Identity                                 32
            14.4   Successors and Assigns                                       33
</TABLE>

<PAGE>   235

<TABLE>
<S>     <C>                                                                     <C>
ARTICLE 15 - SUBCONTRACTORS                                                     33
ARTICLE 16 - NOTICES                                                            33
            16.1   Emergency Notices                                            33
            16.2   Notices                                                      33
ARTICLE 17 - AMENDMENTS                                                         34
            17.1   Amendments                                                   34
            17.2   FERC Proceedings                                             34
ARTICLE 18 - MISCELLANEOUS PROVISIONS                                           35
            18.1   Waiver                                                       35
            18.2   Labor Relations                                              35
            18.3   No Third Party Beneficiaries                                 35
            18.4   Governing Law                                                35
            18.5   Counterparts                                                 35
            18.6   Interpretation                                               35
            18.7   Jurisdiction and Enforcement                                 36
            18.8   Entire Agreement                                             36
            18.9   Severability                                                 37
            18.10  Independent Contractor Status                                37
            18.11  Conflicts                                                    37
SCHEDULE A -  DEFINITIONS                                                        2
SCHEDULE B -  Pepco Facilities and Generator Facilities                          7
SCHEDULE C -  Points of Interconnection                                          9
SCHEDULE D -  Switching, Tagging and Grounding Rules                            10
SCHEDULE E -  Pepco's Interconnection Standards                                 14
SCHEDULE F -  Local Services                                                    15
SCHEDULE G -  Pepco Current Projects                                            17
SCHEDULE H -  Real Time Telemetry List                                          18
</TABLE>

<PAGE>   236

                     INTERCONNECTION AGREEMENT (Morgantown)

         This Interconnection Agreement ("Agreement") dated as of _________,
2000 by and between Potomac Electric Power Company ("Pepco") a District of
Columbia and Virginia corporation, and _____________ ("Generator") a
___________ [corporation]. Pepco and Generator are each referred to herein as a
"Party," and collectively referred to herein as the "Parties."

                                  WITNESSETH:

         WHEREAS, Pepco, and Generator have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets ("Asset Sale Agreement") dated
June 7, 2000, for the sale by Pepco to Generator of certain assets comprising
the Morgantown electric generation station;

         WHEREAS, Pepco intends to continue to operate its transmission and
distribution businesses from their present locations;

         WHEREAS, Generator needs Interconnection Service from Pepco for the
Morgantown electric generating station;

         WHEREAS, Pepco needs access to parts of the Generator's assets, and
Generator needs access to parts of the Pepco's assets; and

         WHEREAS, the Parties have agreed in the Asset Sale Agreement to
execute this Agreement in order to provide Interconnection Service to Generator
and to define continuing responsibilities and obligations of the Parties with
respect to the use of the other Party's property, assets and facilities as set
forth herein.

         NOW THEREFORE, in consideration of the mutual representations,
covenants and agreements hereinafter set forth, and intending to be legally
bound hereby, the Parties hereto agree as follows:

                                   ARTICLE 1
                                  DEFINITIONS

         Capitalized terms used in this Agreement shall have the meanings
specified or referred to in Schedule A.

<PAGE>   237

                                   ARTICLE 2
                              TERM AND TERMINATION

         2.1      Term. This Agreement shall become effective upon consummation
of the Closing ("Effective Date"), and unless terminated sooner in accordance
with the terms of this Agreement, shall continue in full force and effect until
the earlier to occur of (i) the permanent cessation by the Generator of the
power generation functions of the Station or (ii) the permanent cessation of
the interconnection functions of the Transmission System.

         2.2      Change in Law. If (a) the FERC, any state or state regulatory
commission or the PJM Interconnection LLC implements a change in any law,
regulation, rule or practice, or (b) Pepco's compliance with a change in any
law or regulation, which compliance, in either case, affects, or may reasonably
be expected to affect, Pepco's performance under this Agreement, the Parties
shall negotiate in good faith any amendments to this Agreement that are
necessary to adapt the terms of this Agreement to such change, and Pepco shall
file such amendments with the FERC. If the Parties are unable to reach
agreement on such amendments, either Party shall have the right to make a
unilateral filing with the FERC to modify this Agreement pursuant to Sections
205 or 206 or any other applicable provision of the Federal Power Act and the
FERC rules and regulations thereunder; provided that the other Party shall have
the right to oppose such filing and to participate fully in any proceeding
established by the FERC to address such amendments.

         2.3      Effect after Termination. The applicable provisions of this
Agreement shall continue in effect after cancellation or termination hereof to
the extent necessary to provide for final billings, billing adjustments and
payments pertaining to liability and indemnification obligations arising from
acts or events that occurred while this Agreement was in effect.

                                   ARTICLE 3
                  CONTINUING OBLIGATIONS AND RESPONSIBILITIES

         3.1      Interconnection Service

                  3.1.1    Subject to the terms and conditions of the
Agreement, Pepco shall (a) permit the Station to continue to be interconnected
to the Transmission System at the Point of Interconnection, and (b) provide
Interconnection Service at the Point of Interconnection. Pepco agrees to permit
Generator to interconnect

<PAGE>   238

Station as long as Generator continues to operate such facilities pursuant to
PJM Requirements and Good Utility Practice.

                  3.1.2    Interconnection Service shall not include, and Pepco
shall not be responsible under this Agreement for (a) transmission service,
losses or ancillary services associated with the use of the Transmission System
for the delivery of capacity, energy and/or ancillary services produced by the
Generating Facilities, or (b) providing or procuring capacity, energy and/or
ancillary services to the Generator or the Generating Facilities.

                  3.1.3    The Generator's interconnection to the Transmission
System of any new or expanded generating capacity of the Station shall (a) be
subject to PJM Requirements and/or FERC requirements governing interconnections
and (b) require a separate interconnection agreement mutually agreed to by the
Parties in writing.

                  3.1.4    Notwithstanding anything to the contrary in this
Agreement, Pepco's performance of its obligations under this Agreement shall be
subject to Generator entering into, and complying with, any PJM Generator
Connection Agreement which may be required pursuant to PJM Requirements with
respect to Interconnection Service or the Station.

         3.2      New Construction or Modifications

                  3.2.1    Pepco Construction or Modifications

                           (a)      Pepco shall make such additions,
modifications, replacements and improvements to the Interconnection Facilities
as are required by PJM Requirements or Good Utility Practice to enable Pepco to
provide Interconnection Service in compliance with this Agreement. Generator
shall pay all reasonable Costs incurred by Pepco for such additions,
modifications, replacements or improvements.

                           (b)      Except with respect to operation and
maintenance or ordinary maintenance done in the ordinary course of business or
to respond to abnormal or emergency conditions, if any additions,
modifications, replacements or improvements to the Interconnection Facilities
undertaken by Pepco might reasonably be expected to affect Generator's
operation of the Station, Pepco shall provide one hundred twenty (120) days
written notice to Generator prior to undertaking such additions, modifications,
replacements or improvements. Any such additions, modifications, replacements
or improvements shall comply with PJM Requirements and Good Utility Practice.
The Parties shall mutually agree to the

<PAGE>   239

scheduling of such addition, modification, replacement or improvement to
minimize any adverse impact on the Station. Generator shall be deemed to have
accepted Pepco's proposed additions, modifications, replacements or
improvements unless Generator gives Pepco written notice of its objections
within thirty (30) days after receipt of Pepco's notice. Generator's acceptance
or deemed acceptance of Pepco's proposed additions, modifications, replacements
or improvements shall not be construed, with respect thereto, as: (i)
confirmation or endorsement of the design; (ii) a warranty of safety,
durability or reliability; or (iii) responsibility for strength, details of
design, adequacy or capability.

                  3.2.2    Generator Construction or Modifications

                           (a)      In the event Generator plans to increase
the capacity of the Generating Facilities, Generator shall submit to Pepco any
and all plans and specifications that Pepco may reasonably request related to
such increase. Such specifications and plans shall be submitted by Generator to
Pepco at the time that Generator submits its plans under the PJM Tariff related
to such expansion but no later than one hundred twenty (120) days prior to
commencing such proposed increase. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice and
shall be subject to Section 3.1.3 of this Agreement.

                           (b)      If Generator plans any additions,
modifications, or replacements to the Station that will not increase its
capacity, but could reasonably be expected to affect the Transmission System or
the Interconnection Facilities, Generator shall give Pepco reasonable notice,
but not less than one hundred twenty (120) days prior written notice and
Generator shall comply with all applicable PJM Requirements with respect to
such proposed additions, modifications, or replacements. All such additions,
modifications, or replacements shall (i) comply with PJM Requirements and Good
Utility Practice, (ii) be accompanied by appropriate information and operating
instructions, and (iii) be subject to the review and acceptance of Pepco, which
review shall be based on PJM Requirements and Good Utility Practice and which
acceptance shall not unreasonably be withheld or delayed. Pepco shall be deemed
to have accepted Generator's proposed additions, modifications or replacements
unless Pepco gives Generator written notice of its objections within thirty
(30) days after receipt of the Generator's notice.

                           (c)      Pepco's acceptance of Generator's plans and
specifications for any proposed additions, modifications, or replacements to
the Generating Facilities and Pepco's participation in any interconnected
operations with Generator are not and shall not be construed as: (i)
confirmation or endorsement of the design of the Generating Facilities; (ii) a
warranty of safety, durability or reliability of the

<PAGE>   240

Generating Facilities; or (iii) responsibility for strength, details of design,
adequacy, or capability of the Generating Facilities.

                           (d)      Pepco, pursuant to PJM Requirements, shall
inform Generator of any additions, modifications, or replacements to the
Transmission System or Interconnection Facilities, that will be necessary as a
result of the addition, modification, or replacement to Station made pursuant
to Section 3.2.2. Generator shall compensate Pepco for all reasonable Costs it
incurs associated with any modifications, additions, or replacements made to
the Interconnection Facilities or Transmission System related to any additions,
modifications, or replacements to the Generating Facilities. Pepco shall
provide an estimate as early as practicable, but in any event not less than
sixty (60) days prior to the initiation of such addition, modification or
replacement.

                           (e)      Generator shall modify, at its sole cost
and expense, the Generating Facilities as may be reasonably required to conform
with PJM Requirements and Good Utility Practice or to conform with additions,
modifications, or replacements of the Transmission System or the
Interconnection Facilities, required by PJM Requirements and Good Utility
Practice or implemented in accordance with this Agreement, (including, without
limitation, changes to the voltages at which the Transmission System is
operated) provided, however, that Generator shall not be obligated under this
Agreement to modernize, expand or upgrade the Generating Facilities unless the
failure to modernize, expand or upgrade is reasonably likely to have a material
adverse effect on the operation of Pepco's Facilities.

                           (f)      Upon completion of any addition,
modification, or replacement to the Generating Facilities that may reasonably
be expected to affect the Transmission System or the Interconnection
Facilities, but no later than ninety (90) days thereafter, Generator shall
issue "as built" drawings to Pepco. Upon completion of any addition,
modification, or replacement to the Interconnection Facilities, that may
reasonably be expected to affect the operation of the Station, but no later
than ninety (90) days thereafter, Pepco shall issue "as built" drawings to the
Generator.

                  3.2.3    Modifications Affecting the Transmission System or
the Station

                           (a)      Notwithstanding anything herein to the
contrary, except with respect to the projects or construction set forth in
Schedule G, no modifications to or new construction of facilities, or access
thereto, including but not limited to rights of way, fences, gates, shall be
made by either Party which might reasonably be expected to adversely affect the
other Party with respect to such Party's obligations

<PAGE>   241

and responsibilities under this Agreement, without prior written notification
as set forth in Section 3.2.3(b) below, and without providing the other Party
with sufficient information regarding the work prior to commencement to enable
such Party to evaluate the impact of the proposed work on its operations. For
all modifications reasonably expected to adversely affect the operations of the
other Party's facilities, the Party shall provide at least one hundred twenty
(120) days written notice to the other Party prior to undertaking such
additions, modifications or replacements. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice.

                           (b)      The Parties shall mutually agree to the
scheduling of such addition, modification, replacement or improvement proposed
pursuant to Section 3.2.3(a) to minimize any adverse impact on the Station or
the Transmission System. For all construction work, major modifications, or
circuit changes involving new or existing facilities, equipment, systems or
circuits that could reasonably be expected to affect the operation of either
Party, the Party desiring to perform said work shall provide the other Party
with drawings, plans, specifications, and other necessary documentation for
review at least sixty (60) days prior to the beginning of construction provided
that for routine telecommunication work, the Party doing the work shall only be
required to provide 48 hours prior notice. The Party shall be deemed to have
accepted the proposed additions, modifications, replacements or improvements
unless the Party gives written notice of their objections within sixty (60)
days after receipt of such notice. The Party's acceptance or deemed acceptance
of the proposed additions, modifications, replacements or improvements shall
not be construed, with respect thereto, as: (i) confirmation or endorsement of
the design; (ii) a warranty of safety, durability or reliability; or (iii)
responsibility for strength, details of design, adequacy or capability.

         3.3      Access, Easements, Conveyances, Licenses, and Restrictions

                  3.3.1    The Parties hereby grant to each other such
licenses, access and other rights to the Station and the Interconnection
Facilities as may be necessary for either Party's performance of their
respective obligations under this Agreement. Such access shall be provided in a
manner so as not to unreasonably interfere with the ongoing business
operations, rights, and obligations of the other Party and shall be subject to
the safety and security practices of the Party granting such access. Access
shall only be granted to Qualified Personnel.

                  3.3.2    A Party shall not restrict a Party's rights
hereunder to access the other Party's property, facilities, or equipment
without prior written notification except in an Emergency, in which case the
restricted access shall last no longer than three (3) days, unless an alternate
means of access is provided.

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                  3.3.3    The Parties' rights with respect to access to their
respective facilities properties shall also be governed by the Easement.

         3.4      Facility and Equipment Maintenance

                  3.4.1    Pepco shall provide Interconnection Service at the
Point of Interconnection in a safe and efficient manner and pursuant to PJM
Requirements and Good Utility Practice. Generator shall be responsible for all
reasonable Costs incurred by Pepco to provide Interconnection Service and to
Maintain the Interconnection Facilities pursuant to the Agreement.

                  3.4.2    Generator shall Maintain the Generating Facilities
(including coordination of its relay protection equipment) in a safe and
efficient manner and as required by and in accordance with PJM Requirements and
Good Utility Practice, provided, however, that Generator shall not be obligated
to modernize, expand or upgrade the Generating Facilities unless the failure to
modernize, expand or upgrade is reasonably likely to have a material adverse
affect on the operation of the Interconnection Facilities or the Transmission
System.

                  3.4.3    Unless otherwise specified herein, or unless the
Parties mutually agree to a different arrangement, neither Party shall be
responsible for the maintenance of the other Party's equipment or property
regardless of its location.

                  3.4.4    In addition to the requirements set forth elsewhere
in this Agreement, each Party shall Maintain its equipment and facilities and
perform its maintenance obligations that could reasonably be expected to affect
the operations of the other Party in a safe and efficient manner and pursuant
to PJM Requirements and Good Utility Practice.

         3.5      Pepco Facilities and Generator Facilities Unless otherwise
agreed to by the Parties, the Party owning Pepco Facilities or Generator
Facilities shall Maintain those facilities and shall do so pursuant to PJM
Requirements and Good Utility Practice and shall make such additions,
modifications, replacements and improvements as are required by PJM
requirements and Good Utility Practice or which are necessary to maintain
Interconnection Service, provided, however, that the Generator shall not be
obligated under this Agreement to modernize, expand or upgrade the Generator
Facilities unless the failure to modernize, expand or upgrade is reasonably
likely to have a material adverse effect on the operation of the Transmission
System or Interconnection Facilities.

         3.6      Equipment Testing Obligations

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                  3.6.1    For reliability purposes with respect to the
Interconnection Facilities and the Transmission System, Pepco may reasonably
request, pursuant to PJM Requirements, or Good Utility Practice, that Generator
test, calibrate, verify, or validate the Generating Facilities or its
equipment, and Generator shall promptly comply with such a request. Generator
shall be responsible for all costs of testing, calibrating, verifying or
validating its facilities.

                  3.6.2    At Pepco's request, Generator shall supply to Pepco
at no cost, copies of inspection reports, installation and maintenance
documents, test and calibration records, verifications, and validations
pursuant to the foregoing Section 3.6.1. Pepco shall supply to Generator, at
Generator's request and at no cost to Generator, copies of inspection reports,
installation and maintenance documents, test and calibration records,
verifications, and validations that Pepco has which are related to the
Interconnection Facilities.

         3.7      Inspections

                  3.7.1    Pepco shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work to the Generating Facilities.
Such access by Pepco shall be exercised in a manner which does not unreasonably
interfere with Generator's ongoing business operations, rights and obligations
and shall be subject to Generator's safety and security practices. If Pepco
observes any deficiencies or defects with respect thereto that might reasonably
be expected to adversely affect the Transmission System or the Interconnection
Facilities, Pepco shall notify the Generator, and Generator shall immediately
make any corrections necessitated by PJM Requirements and Good Utility
Practice. Notwithstanding the foregoing in this Section 3.7.1, Pepco shall have
no liability whatsoever for any failure to fully or adequately observe any
deficiency, it being agreed that Generator shall be fully responsible and
liable for all such deficiencies, activities, equipment tests, installation,
construction or modification.

                  3.7.2    Generator shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work conducted by Pepco to the
Interconnection Facilities. Such access by Generator shall be exercised in a
manner which does not unreasonably interfere with Pepco's ongoing business
operations, rights and obligations and shall be subject to Pepco's safety and
security practices. If Generator observes any deficiencies or defects with
respect thereto that might reasonably be expected to adversely affect the
Station, Generator shall notify Pepco, and Pepco shall immediately make any
corrections necessitated by applicable PJM Requirements and Good Utility
Practice. Notwithstanding the foregoing in this

<PAGE>   244

Section 3.7.2, Generator shall have no liability whatsoever for any failure to
fully or adequately observe any deficiency, it being agreed that Pepco shall be
fully responsible and liable for all such deficiencies, activities, equipment
tests, installation, construction or modification.

         3.8      Information Reporting Obligations

                  3.8.1    In order to provide Interconnection Service
hereunder, Pepco may request, and Generator shall promptly provide, all
relevant information, documents, or data regarding the Generating Facilities
that would be expected to materially affect the Transmission System, and which
is reasonably requested by NERC, MAAC, the PJM Interconnection LLC, the MDPSC,
the District of Columbia Public Service Commission and any other state or
District of Columbia agency having jurisdiction over Pepco or Generator, the
PJM System Operator, or the Transmission Operator, which disclosure shall be
subject to Article 6 of this Agreement regarding the disclosure of commercially
sensitive information.

                  3.8.2    Generator shall promptly supply accurate, complete,
and reliable information in response to reasonable information requests for
real time data and other data from Pepco necessary for operations, maintenance,
compliance with PJM Requirements or regulatory requirements, or analysis of the
Interconnection Facilities or the Transmission System. Such information may
include metered values for MW and MVAR, voltage, current, automatic voltage
regulator status, automatic frequency control, dispatch, frequency, breaker
status indication, or any other information reasonably required for reliable
operation of the Transmission System pursuant to PJM Requirements and Good
Utility Practice. At minimum, Generator shall satisfy the telemetry
requirements set forth in Schedule H.

                  3.8.3    Information pertaining to generation operating
parameters shall be gathered and electronically transmitted directly to Pepco's
energy management system using a mutually acceptable communications protocol.

                  3.8.4    Generator shall be responsible for the maintenance,
and any required replacements or upgrades of the field devices and equipment
used to gather information regarding generation operating parameters.

                  3.8.5    Generator shall Maintain, at its expense, operating
telephone links to the PJM Interconnection LLC, PJM System Operator, Pepco and
the Transmission Operator, to provide information deemed necessary by them, or
as reasonably deemed necessary by Pepco in accordance with PJM Requirements or
Good Utility Practice to integrate operation of the Station with the
Transmission

<PAGE>   245

System, provided, however, that Generator shall not be obligated under this
Agreement to modernize, expand or upgrade the Generator's facilities unless the
failure to modernize, expand or upgrade is reasonably likely to have a material
adverse effect on the operation of the Transmission System. Generator shall use
communication links at the Station consisting of the mobile radio low band C
frequency and "all call" and "red phone" systems currently located at the
Station (or successor systems as may reasonably be required by Pepco) and shall
maintain the availability of such systems to operate during abnormal conditions
including blackouts.

         3.9      Local Services

                  3.9.1    General

                           (a)      The Parties agree that, due to the
integration of certain control schemes of the Station and the Transmission
System, it is cost effective to provide each other with the services set forth
in Sections 3.10 and 3.11 in accordance with the terms and conditions set forth
therein.

                           (b)      The Parties shall ensure, in accordance
with Good Utility Practice, that services provided by one Party to the other
Party pursuant to Sections 3.10 and 3.11 shall be available at all times and in
the manner and at the prices specified herein. Notwithstanding the foregoing,
either Party may change the services, provided that (1) there is no cost to the
receiving Party as a result of such change, (2) the quality, reliability and
integrity of the replacement services is equivalent to the existing service,
and (3) there is otherwise no materially adverse effect on the receiving Party.

                           (c)      Neither Party shall terminate any services
set forth in Sections 3.10 and 3.11 below that it agrees to provide to the
other Party, without the other Party's prior written consent, which consent
shall not be unreasonably withheld or delayed, provided, however, if a Party
receiving a service under Sections 3.10 or 3.11 no longer needs or desires a
particular service, said Party shall notify the other Party and the providing
Party shall terminate said services as soon thereafter as practicable.

                  3.9.2    Temporary Suspension of Local Services

                           (a)      The Party providing a service set forth in
Sections 3.10 or 3.11 below shall notify and obtain approval, which approval
shall not be unreasonably withheld or delayed, from the receiving Party of any
scheduled temporary

<PAGE>   246

suspension of services at least five (5) business days in advance of such
suspension. Such notification shall include an estimated time duration for
return to normal conditions.

                           (b)      In the event of any unplanned or forced
suspension of the services set forth in Sections 3.10 or 3.11, below, the
providing Party shall immediately notify the other Party first verbally and
then in writing. The providing Party shall use all reasonable efforts to
minimize the duration of said suspension.

                           (c)      The Parties agree to complete any repairs,
modifications or corrections, in accordance with Good Utility Practice, that
are necessary to restore to the other Party as soon as reasonably practicable
any services set forth in Sections 3.10 or 3.11 below that have been suspended.

                  3.10     Pepco Provided Services: Schedule F sets forth the
local services Pepco shall provide to the Generator pursuant to the terms of
this Agreement. Unless otherwise specified in Schedule F, for a period of three
(3) years after the Effective Date (the "Initial Period") and subject to
Section 3.9 above, Pepco shall provide Generator with the local services set
forth in Schedule F at no cost and in consideration of the local services
Generator shall provide Pepco in accordance with Section 3.11 below. If
Generator desires the continuation of any of the services set forth in Schedule
F which are subject to the Initial Period to continue after the Initial Period,
upon Generator's written request to Pepco made at least 60 days prior to the
expiration of the Initial Period, the Parties shall engage in good faith
negotiations to reach mutually agreeable terms and conditions upon which such
services will continue, provided, however, that if such agreement is not
reached prior to the expiration of the Initial Period, Pepco shall cease to
provide services under Section 3.10 at the end of the Initial Period.

                  3.11     Generator Provided Services. Schedule F sets forth
the local services Generator shall provide to Pepco pursuant to the terms of
this Agreement. Unless otherwise specified in Schedule F, for the Initial
Period and subject to Section 3.9 above, Generator shall provide Pepco with the
local services set forth in Schedule F at no cost and in consideration of the
local services Pepco shall provide Generator in accordance with Section 3.10
above. If Pepco desires the continuation of any of the services set forth in
Schedule F which are subject to the Initial Period to continue after the
Initial Period, upon Pepco's written request to Generator made at least 60 days
prior to the expiration of the Initial Period, the Parties shall engage in good
faith negotiations to reach mutually agreeable terms and conditions upon which
such services will continue, provided, however, that if such agreement is not
reached prior to the expiration of the Initial Period, Generator shall cease to
provide services under Section 3.11 at the end of the Initial Period.

<PAGE>   247

                  3.12     Optional Services: Generator may request that Pepco
provide the following services to the Generator, provided, however, that Pepco
shall not have any obligation to provide such services unless the Parties have
mutually agreed in writing to the price and other terms and conditions of such
service:

                           (a)      PJM interface and dispatch services through
the Pepco control center;

                           (b)      use of Pepco's communication services;

                           (c)      maintenance of certain auxiliary and
communications equipment at the Station;

                           (d)      maintenance of high-voltage and
medium-voltage equipment such as power transformers and power circuit breakers;

                           (e)      maintenance of protective relaying, certain
control equipment, such as AGC and MSVC, plant batteries and revenue meters
owned by Generator.

         3.13     Metering and Telemetering

                  3.13.1   Generator shall, at Generator's expense: (a) own,
Maintain and repair, all Revenue Meters, instrument transformers and
appurtenances associated with Revenue Meters, and real time telemetry, (b)
conduct meter accuracy and tolerance tests, and (c) prepare all calibration
reports required for equipment that measures energy transfers at the Point of
Interconnection. All meter accuracy and tolerance testing hereunder shall be in
accordance with PJM Requirements and Good Utility Practice and shall be
conducted, at Pepco's request, in the presence of Pepco's representative.

                  3.13.2   Generator shall own and Maintain, at the Generator's
expense, equipment for redundant real-time communications and transmission of
telemetry, hourly MWh information, and such other information as required by
the PJM System Operator or Transmission Operator, or as reasonably required by
Pepco in accordance with PJM Requirements and Good Utility Practice.

         3.14     Emergency Procedure

                  3.14.1   Pepco, through the Transmission Operator, shall
provide Generator with prompt verbal notification of Emergencies with regard to
the Transmission System which may reasonably be expected to affect Generator's

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immediate operation of the Station or Generator Facilities, and Generator shall
provide Pepco with prompt verbal notification of Emergencies with regard to the
Station which may reasonably be expected to affect Interconnection Service or
the Transmission System. Such notification shall describe the Emergency, the
extent of damage or deficiency, the anticipated length of an outage and the
corrective action taken and/or to be taken. Said verbal notification shall be
followed as soon as practicable (but no later than 24 hours after the verbal
notification) with written notification.

                  3.14.2   If an Emergency in the good faith judgment of a
Party endangers or could endanger life or property, the Party recognizing the
problem shall take such action as may be reasonable and necessary to prevent,
avoid, or mitigate injury, danger, or loss. If however the Emergency involves
transmission or electrical equipment, Generator shall notify the Transmission
Operator, and obtain the consent of such personnel, prior to performing any
switching operations.

                  3.14.3   Pepco may, consistent with PJM Requirements and Good
Utility Practice, have the Transmission System Operator take whatever actions
(including tripping Generator's synchronizing breakers) or inactions it deems
necessary during an Emergency to: (a) preserve public safety; (b) preserve the
integrity of the Transmission System, (c) limit or prevent damage; or (d)
expedite restoration of service. If any action or inaction by Pepco or the
Transmission Operator under this Section 3.14 results in the discontinuation,
curtailment, interruption or reduction of Interconnection Service, Pepco shall
use reasonable efforts consistent with PJM Requirements and Good Utility
Practice to restore Interconnection Service as promptly as practicable and to
minimize the effect of such restoration of service on the Station.

         3.15     Interconnection Service Interruptions

                  3.15.1   If at any time, in the reasonable exercise of the
PJM System Operator's judgment, or the Transmission Operator's judgment
exercised in accordance with PJM Requirements or Good Utility Practice and on a
non-discriminatory basis, a condition exists, including the operation of
Generator's equipment, which might reasonably be expected to have a materially
adverse affect on the quality of service rendered by Pepco (including services
rendered to transmission or distribution customers) or interferes with the safe
and reliable operation of the Transmission System, Pepco may discontinue,
curtail, reduce and/or interrupt Interconnection Service until the condition
has been corrected.

                  3.15.2   Unless the PJM System Operator, the Transmission
Operator or Pepco perceives that an Emergency exists or the risk of one is
imminent, Pepco

<PAGE>   249

shall give Generator reasonable notice of its intention to discontinue,
curtail, interrupt or reduce Interconnection Service in response to the
interfering condition and, where practical, allow suitable time for Generator
to remove the interfering condition if it is the result of Generator's
operations, before the discontinuation, curtailment, interruption or reduction
commences. Pepco's judgment with regard to the interruption of service under
this paragraph shall be made pursuant to PJM Requirements and Good Utility
Practice. In the case of such interruption, Pepco shall immediately confer with
Generator regarding the conditions causing such interruption and its
recommendation concerning timely correction thereof. In the event
Interconnection Service is interrupted under this section due to Generator's
failure to operate and Maintain the Generating Facilities pursuant to PJM
Requirements or Good Utility Practice, Generator shall compensate Pepco for all
costs reasonably incurred by Pepco attributable to the interruption and
restoration of Interconnection Service. Pepco shall use reasonable efforts
consistent with PJM Requirements and Good Utility Practice to restore
Interconnection Service interrupted, curtailed or reduced pursuant to this
Section 3.15 as promptly as practicable and to minimize the effect of such
restoration of service on the Station.

         3.16     Unit Status Notification

                  3.16.1   Generator acknowledges that Pepco requires
information regarding the status of the Station for Transmission System
reliability purposes. Accordingly, by 10:00 a.m. of each day, the Generator
shall provide Pepco the following information regarding the status of the
Station for the following day: Station availability to provide energy and
capacity, the Station's scheduled on and off times, Station synchronization,
planned outages or deratings, and generation restrictions and limitations.
Generator shall immediately notify Pepco of any changes to the information
provided pursuant to the foregoing sentence.

                  3.16.2   In circumstances, such as forced outages, Generator
shall notify Pepco of its generating unit's temporary interruption of
generation as soon as practicable; and it shall provide Pepco, as soon as
practicable, with a schedule of when generation will be resumed.

         3.17     Scheduled Maintenance Notification and Coordination

                  3.17.1   Local Routine Inspection and Maintenance. The
Parties agree that, due to the integration of certain control and protective
relaying schemes between the Station and the Interconnection Facilities, it
will be necessary for them to cooperate in the inspection, maintenance and
testing of these areas of integration. Each Party will provide advance notice
to the other Party before undertaking any work in these areas, especially in
electrical circuits involving circuit breaker trip and

<PAGE>   250

close contacts, current transformers or potential transformers and such work
will be performed in accordance with PJM Requirements and Good Utility
Practice.

                  3.17.2   Transmission System Maintenance. Pepco shall consult
with Generator regarding timing of scheduled maintenance of the Interconnection
Facilities or the transmission facilities of the Transmission System which
Pepco or the Transmission Operator performs and which might reasonably be
expected to affect the Station. Pepco shall, to the extent practicable,
schedule any testing, shutdown, or withdrawal of said facilities to coincide
with Generator's scheduled outages for the Station. To facilitate such
consultation and to the extent the information is not available from the PJM
System Operator in a timely manner, in June of each year, or on another date
mutually acceptable to the Parties, Generator shall furnish Pepco with
non-binding preliminary generator maintenance schedules covering the upcoming
two years and any material changes thereto. In the event Pepco is unable to
schedule the outage of its facilities to coincide with Generator's schedule,
Pepco shall notify Generator as soon as practicable of the reasons for the
facilities' outage, of the time scheduled for the outage to take place, and of
its expected duration.

         3.18     Safety

                  3.18.1   General. Pepco agrees with respect to the
Interconnection Facilities and the Transmission System, and Generator agrees
with respect to the Station, that all work performed by either Party on such
facilities which could reasonably be expected to affect the operations of the
other Party shall be performed in accordance with all applicable PJM
Requirements and Good Utility Practice.

                  3.18.2   Switching Tagging and Grounding . Each Party shall
comply with the Switching, Tagging and Grounding Rules. Pepco will notify
Generator of any changes in its Switching, Tagging and Grounding Rules.
Generator shall be responsible for all switching, tagging and grounding on
Generator's side of the Point of Interconnection and, except for Generator
Facilities, Pepco shall be responsible for all switching, tagging and grounding
on its side of the Point of Interconnection.

         3.19     Environmental Compliance and Procedures

                  3.19.1   Each Party shall be responsible for complying with
all Environmental Laws applicable to it with respect to its facilities or
property.

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                  3.19.2   A Party shall notify the other Party first verbally
and then in writing, of any Releases of a Hazardous Substance or any type of
remediation activities related thereto as soon as possible but no later than
twenty-four (24) hours after the occurrence if within the reasonable judgment
of the Party said activities could reasonably be expected to have a material
adverse effect upon the operations of the other Party and shall promptly
furnish to the other Party copies of any reports filed with any governmental
agencies covering such events. This Section 3.19.2 does not effect any
allocation of liability with respect to the Station pursuant to the Asset Sale
Agreement.

                  3.19.3   Neither Party shall knowingly take any actions which
might reasonably be expected to have a material adverse environmental impact
upon the operations of the other Party without prior written notification and
agreement between then Parties.

         3.20     Operating Committee. The Parties shall establish an operating
committee consisting of one representative for each Party ("Operating
Committee"). The Operating Committee shall act only by unanimous agreement or
consent. The Parties shall designate their respective representatives to the
Operating Committee, plus an alternate by written notice. Each Party's
representative on the Operating Committee is authorized to act on behalf of
such Party with respect to any matter arising under this Agreement which is to
be decided by the Operating Committee, however, the Operating Committee shall
not have any authority to modify or otherwise alter the rights and obligations
of the Parties hereunder. The Operating Committee shall develop and implement
suitable policies and procedures with which to coordinate the interaction of
the Parties with respect to the performance of their duties and obligations
under this Agreement.

                                   ARTICLE 4
                                   OPERATIONS

         4.1      General

                  4.1.1    The Parties agree to operate their respective
equipment that could reasonably be expected to have a material effect on the
operations of the other Party in a safe and efficient manner and in accordance
with PJM Requirements and Good Utility Practice, and otherwise in accordance
with the terms of this Agreement.

                  4.1.2    Generator shall comply with the requests, orders,
and directives of Pepco with respect to Interconnection Service to the extent
such requests, orders

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or directives are (a) issued pursuant to PJM Requirements or Good Utility
Practice, (b) not discriminatory; and (c) otherwise in accordance with this
Agreement or applicable tariffs.

                  4.1.3    In the event Generator believes that a request,
order, or directive of Pepco exceeds the limitations in this Section 4.1.2, it
shall nevertheless comply with the request, order, or directive pending
resolution of the dispute under Article 12. The Parties agree to cooperate in
good faith to expedite the resolution of any disputes arising under this
Section 4.1.

         4.2      Generator's Operating Obligations

                  4.2.1    General. Generator shall request permission from the
Transmission Operator, the PJM System Operator or the PJM Interconnection LLC,
as applicable, prior to opening and/or closing circuit breakers in accordance
with applicable switching and operations procedures and Good Utility Practice.

                           (a)      Generator shall carry out all switching
orders from the Transmission Operator, the PJM System Operator, or the PJM
Interconnection LLC, in a timely manner and in accordance with PJM Requirements
and Good Utility Practice.

                           (b)      Generator shall (i) comply with Pepco's
system restoration plan and black start criteria applicable to the Station as
configured as of the Effective Date or (ii) if the Station's configuration is
modified, provide alternative service restoration and black start capability in
accordance with PJM Requirements. Generator shall ensure that operating
personnel at the Station are trained to implement such system restoration or
black start plans. The Generator shall test the Station's black-start
combustion-turbines annually to confirm that the black-start
combustion-turbines will start without an external power supply. The Generator
shall test the Station's steam turbine-generators and those combustion-turbine
generators that would be required to be black-started in accordance with
Pepco's Emergency Conditions and System Restoration Manual, as revised from
time to time, and plant restoration procedures, at least once every three
years. Testing shall confirm the ability of a generating unit or Station to go
from a shut down condition to an operating condition and start delivering power
without assistance from the Transmission System. These testing requirements
shall remain in place until PJM promulgates specific rules governing
black-start testing.

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                           (c)      The electricity supplied by Generator to
the Point of Interconnection shall be in the form of three-phase 60 Hertz
alternating current at the nominal system voltage.

                           (d)      Generator's equipment shall conform with
Good Utility Practice for harmonic distortion and voltage fluctuation.

                  4.2.2    Voltage or Reactive Control Requirements. Unless
otherwise agreed to by the Parties or authorized or directed by the PJM
Interconnection LLC, Generator shall operate the Station with automatic voltage
regulators in service at all times. The voltage regulators will control voltage
at the Points of Interconnection consistent with the range of voltage
prescribed by Pepco or the Transmission System Operator in accordance with PJM
Requirements and Good Utility Practice.

                           (a)      Generator will operate the Station in
accordance with prescribed voltage schedules pursuant to Section 4.2.2 to the
extent the Station is operating within its reactive generating capability and
not violating any electrical constraints. Should Generator fail to comply with
such voltage schedules, Pepco or the Transmission Operator, as applicable,
shall provide written notice to the Generator of its intent to remedy that
failure. If Generator does not promptly commence appropriate action after
receiving such notice, Pepco or the Transmission Operator may then take any
necessary action at Generator's expense to remedy such failure, including the
installation of capacitor banks or other reactive compensation equipment
necessary to ensure the proper voltage or reactive supply at the Station
including, at a minimum, by installing such equipment outside any building
housing the Generation Facilities. Pepco shall make, to the extent feasible,
reasonable efforts to minimize the impact of such action on the operation of
the Station.

                           (b)      Generator shall notify the Transmission
Operator if (a) any or all generating units at the Station reaches a VAR limit,
(b) there is any deviation from the voltage schedules prescribed pursuant to
Section 4.2.2 which is outside the limits permitted by PJM Requirements or Good
Utility Practice, or (c) any automatic voltage regulator is removed from or
restored to service.

                           (c)      The Transmission Operator may from time to
time, pursuant to PJM Requirements or Good Utility Practice, request or direct
Generator to adjust generator controls that impact the Transmission System,
such as excitation, droop, and automatic generation control settings and
Generator shall comply with such request or directions.

<PAGE>   254

                           (d)      Generator acknowledges that the
Transmission Operator may have the right, to the extent authorized or directed
by the PJM Interconnection LLC, to require reduced or increased generation of
the Station in accordance with PJM Requirements, or in accordance with
applicable rules of the Transmission Operator.

         4.3      Auditing of Accounts and Records. The Parties shall have the
right, during normal business hours, to audit each other's accounts and records
pertaining to transactions under this Agreement, upon twenty (20) days prior
written notice, at the offices where such accounts and records are maintained,
provided, however, that the audit shall be limited to those portions of the
accounts and records that are related to services provided to the other Party
under this Agreement. Any such audit of a Party's accounts and records will be
at the expense of the auditing Party, shall not be made more frequently than
once in any twelve (12) month period, and no such audit may be made with
respect to accounts and records relating to periods more than twenty-four (24)
months prior to the date of the audit notice. The Party being audited will be
entitled to review the audit report and any supporting materials. The Party
conducting the audit shall maintain the confidentiality of all information
obtained during the audit in compliance with Article 6 of this Agreement. To
the extent that audited information includes confidential information, the
auditing Party shall designate an independent auditor at its expense to perform
such audit.

                                   ARTICLE 5
                  COST RESPONSIBILITIES AND BILLING PROCEDURES

         5.1      Cost Responsibilities for Interconnection Service. Except as
otherwise expressly stated herein, Generator shall not be responsible for any
costs arising from Pepco's provision of Interconnection Service or local
services to Generator, except for those costs specified in Sections 3.2.1,
3.2.2, 3.4.1, and 3.15 or arising from the liability or indemnification
provisions of this Agreement.

         5.2      Cost Responsibilities for Local Services. Except as otherwise
expressly provided herein or agreed to by the Parties, each Party shall be
responsible for the costs for local services provided to the other Party in
Sections 3.10 and 3.11 as set forth in said sections.

         5.3      Billing Procedures

<PAGE>   255

                           (a)      Within ten (10) days after the first day of
each calendar month, each Party shall provide the other Party with a written
invoice for any payments due from the other Party for services provided in the
previous month.

                           (b)      Each invoice shall (i) delineate the month
in which the services were provided, (ii) fully describe the services rendered,
(iii) be itemized to reflect the services performed or provided, and (iv)
provide reasonable detail as to the calculation of the amount involved.

                           (c)      All invoices shall be paid within fifteen
(15) days after receipt, but not earlier than the 25th day of the month in
which the invoice is rendered. All payments shall be made in immediately
available funds payable to the other Party, or by wire transfer to a bank
designated in writing by such Party. Payment of invoices shall not relieve the
paying Party from any responsibilities or obligations it has under this
Agreement, nor shall such payment constitute a waiver of any claims arising
hereunder.

                  5.3.2    To the extent that, for any billing period,
Generator is obligated to pay to Pepco amounts due and calculated pursuant to
Section 5.3, Pepco may use such amounts as a set-off against any amounts owed
by Pepco to Generator under this Section 5.3.

                  5.3.3    Interest on any unpaid amounts shall be calculated
in accordance with the methodology specified for interest on refunds in FERC
regulations at 18 C.F.R. Section 35.19a(a)(2)(iii). Interest on delinquent
amounts shall be calculated from the due date of the bill to the date of
payment. When payments are made by mail, bills shall be considered as having
been paid on the date of receipt by the other Party.

         5.4      Billing Disputes. In the event of a billing dispute between
the Parties, each Party shall continue to provide services as long as the other
Party continues to make all payments not in dispute. Payment of invoices by
either Party shall not relieve the paying Party from any responsibilities or
obligations it has under this Agreement; nor shall it constitute a waiver of
any claims arising hereunder.

                                   ARTICLE 6
                                CONFIDENTIALITY

         6.1      Confidentiality Obligations of Pepco. Pepco shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or other provisions of law, all documents and information furnished by
Generator in

<PAGE>   256

connection with this Agreement marked "Confidential" or "Proprietary." Except
to the extent that such information or documents are (i) generally available to
the public other than as a result of a disclosure by Pepco in breach of this
Agreement, (ii) available to Pepco on a non-confidential basis prior to
disclosure to Pepco by Generator, or (iii) available to Pepco on a
non-confidential basis from a source other than Generator, provided that such
source is not known, and by reasonable effort could not be known, by Pepco to
be bound by a confidentiality agreement with Generator or otherwise prohibited
from transmitting the information to Pepco by a contractual, legal or fiduciary
obligation, Pepco shall not release or disclose such information to any other
person, except to its employees, representatives or agents on a need-to-know
basis, in connection with this Agreement who has not first been advised of the
confidentiality provisions of this Section 6.1 and has agreed in writing to
comply with such provisions. In no event shall such information be disclosed in
violation of the requirements of FERC Orders 889 and 889-A, and any successor
thereto. Pepco shall promptly notify Generator if it receives notice or
otherwise concludes that the production of any information subject to this
Section 6.1 is being sought under any provision of law and Pepco shall use
reasonable efforts in cooperation with Generator to seek confidential treatment
for such confidential information provided thereto.

         6.2      Confidentiality Obligations of Generator. Generator shall
hold in confidence, unless compelled to disclose by judicial or administrative
process or other provisions of law, all documents and information furnished by
Pepco in connection with this Agreement marked "Confidential" or "Proprietary."
Except to the extent that such information or documents are (i) generally
available to the public other than as a result of a disclosure by Generator in
breach of this Agreement, (ii) available to Generator on a non-confidential
basis prior to disclosure to Generator by Pepco, or (iii) available to
Generator on a non-confidential basis from a source other than Pepco, provided
that such source is not known, and by reasonable effort could not be known, by
Generator to be bound by a confidentiality agreement with Pepco or otherwise
prohibited from transmitting the information to Generator by a contractual,
legal or fiduciary obligation, Generator shall not release or disclose such
information to any other person, except to its employees, representatives or
agents on a need-to-know basis, in connection with this Agreement who has not
first been advised of the confidentiality provisions of this Section 6.2 and
has agreed in writing to comply with such provisions. In no event shall such
information be disclosed in violation of the requirements of FERC Orders 889
and 889-A, and any successor thereto. Generator shall promptly notify Pepco if
it receives notice or otherwise concludes that the production of any
information subject to this Section 6.2 is being sought under any provision of
law and Generator shall use reasonable efforts in cooperation with Pepco to
seek confidential treatment for such confidential information provided thereto.

<PAGE>   257

         6.3      Confidentiality of Audits. The independent auditor performing
any audit, as referred to in Section 4.3, shall be subject to a confidentiality
agreement between the auditor and the Party being audited. Such audit
information shall be treated as confidential except to the extent that its
disclosure is required by regulatory or judicial order, for reliability
purposes pursuant to PJM Requirements or Good Utility Practice, and pursuant to
the FERC's rules and regulations. Except as provided herein, neither Party will
disclose the audit information to any third party, without the other Party's
prior written consent. Audit information in the hands of the Party not being
audited shall be subject to all provisions of Section 6.1 or 6.2, above, as
applicable.

         6.4      Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its
obligations under Section 6.1 or 6.2, above, as applicable. Each Party
accordingly agrees, subject to Article 8, that the other Party shall be
entitled to equitable relief, by way of injunction or otherwise, if the first
Party breaches or threatens to breach its obligations under Section 6.1 or 6.2
of this Agreement, as applicable, which equitable relief shall be granted
without bond or proof of damages, and the receiving Party shall not plead in
defense that there would be an adequate remedy at law.

                                   ARTICLE 7
                               EVENTS OF DEFAULT

         7.1      Events of Default. Each of the following shall constitute an
Event of Default by the a defaulting Party under this Agreement:

                           (a)      The failure by a Party to pay any amount
due within twenty (20) calendar days after receipt of written notice of
nonpayment by the other Party, unless the payment of such amount is disputed in
good faith, in which event Section 5.5 shall apply;

                           (b)      A Party's breach of any material term or
condition of this Agreement, including but not limited to any material breach
of a representation, warranty or covenant made in this Agreement which, after
receiving written notice of the breach from the non-breaching Party (such
notice to set forth in reasonable detail the nature of the default and, where
known and if applicable, the steps necessary to cure such default), (i) the
breaching Party fails to cure, if curable, within thirty (30) days following
receipt of the notice or (ii) if such default is of such a nature that it
cannot be cured within thirty (30) days following receipt of such notice, the
breaching Party fails within such thirty (30) days to commence the necessary
cure and fails at any time thereafter diligently and continuously to

<PAGE>   258

prosecute such cure to completion provided that the cure is completed no later
than 180 days after the receipt of the default notice;

                           (c)      The appointment of a receiver, liquidator
or trustee for either Party, and such receiver, liquidator or trustee is not
discharged within sixty (60) days;

                           (d)      The entry of a decree or decrees
adjudicating a Party as bankrupt or insolvent, and such decree or decrees are
not stayed or discharged within sixty (60) days; or

                           (e)      The filing of voluntary petitions for
bankruptcy under any federal or state bankruptcy law by a Party.

         7.2      Remedies

                  7.2.1    If the breaching Party disputes that an Event of
Default under Section 7.1.(b) has occurred, the breaching Party shall
nonetheless comply with this Section 7.2 pending the resolution of the dispute.
If it is determined that no breach or Event of Default under Section 7.1(b)
existed, the Party alleging the default shall pay and reimburse the other Party
for all reasonable costs and expenses incurred by it to cure the alleged
default.

                  7.2.2    Upon the occurrence of an Event of Default, the
non-defaulting Party may (i) exercise all such rights and remedies as may be
available to it at law or equity including seeking to recover damages caused by
such Event of Default, subject to Article 8 of this Agreement; and/or (ii)
terminate this Agreement. The Parties shall not discontinue the performance of
any one or more of their obligations hereunder due to the occurrence of an
Event of Default during the pendency of any dispute regarding such Event of
Default and until such dispute is finally resolved except that Pepco may
suspend or interrupt service if necessary for the safe and reliable operation
of the Interconnection Facilities or the Transmission System.

                  7.2.3    Notwithstanding the foregoing, upon the occurrence
of any Event of Default, the non-defaulting Party shall be entitled to commence
an action to require the defaulting Party to remedy such default by
specifically performance of its duties and obligations hereunder in accordance
with the terms and conditions hereof.

<PAGE>   259

                  7.2.4    Notwithstanding anything in this Agreement to the
contrary, in the event the Generator's failure to comply with the provisions of
Sections 4.1 and 4.2 of this Agreement is reasonably likely to have an
immediate and material adverse impact on Pepco or the Transmission System,
Pepco shall have the right to take immediately reasonable steps and/or to
exercise immediately all remedies available under this Agreement, or at law or
equity, including the right, after providing as much notice as is practicable
under the circumstances and complying with the applicable FERC notice
requirements regarding termination of service, to disconnect the Station from
the Transmission System.

                                   ARTICLE 8
                            LIMITATION OF LIABILITY

         8.1      Limitation of Pepco's Liability. Pepco does not guarantee the
non-occurrence of, or warrant against, and will have no liability hereunder
for, and the Generator will release Pepco from all claims or damages associated
with, any interruption in the availability of the Interconnection Facilities,
Interconnection Service or local services pursuant to Section 3.10 or damages
to the Generator's facilities, except to the extent such interruption or damage
is caused by Pepco's gross negligence or willful misconduct in the performance
of its obligations under this Agreement.

         8.2      Limitation on Generator's Liability. Generator does not
guarantee the non-occurrence of, or warrant against, and will have no liability
under this Agreement for, and Pepco will release Generator from all claims or
damages arising under this Agreement which are associated with any interruption
in the availability of the Station or local services pursuant to Section 3.11,
any reduction, curtailment, interruption or reduction of energy from the
Station, or damage to Pepco's facilities, except to the extent such
interruption or damage is caused by Generator's gross negligence or willful
misconduct in the performance of its obligations under the Agreement.

         8.3      Consequential Damages. Except for indemnity obligations set
forth in Article 9, neither Party, nor their respective officers, directors,
agents, employees, Affiliates, or successors or assigns of any of them, shall
be liable to the other Party or its Affiliates, officers, directors, agents,
employees, successors or assigns for claims, suits, actions or causes of action
for incidental, punitive, special, indirect, multiple or consequential damages
(including, without limitation, replacement power costs, lost revenues, claims
of customers, attorneys' fees and litigation costs) connected with, or
resulting from, performance or non-performance of this Agreement, or any
actions undertaken in connection with or related to this Agreement, including,
without limitation, any such damages which are based upon causes of action for

<PAGE>   260

breach of contract, tort (including negligence and misrepresentation), breach
of warranty or strict liability. The provisions of this Section 8.3 shall apply
regardless of fault and shall survive termination, cancellation, suspension,
completion, or expiration of this Agreement.

                                   ARTICLE 9
                     INDEMNIFICATION FOR THIRD PARTY CLAIMS

         9.1      Generator's Indemnification. Generator shall indemnify, hold
harmless, and defend Pepco and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between Pepco and a third party or Generator) for
damage to property of unaffiliated third parties, injury to or death of any
person, including Pepco's employees or any third parties, to the extent caused,
by the negligence or willful misconduct of Generator's and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Generator's performance or breach of this Agreement,
or the exercise by Generator of its rights hereunder. In furtherance of the
foregoing indemnification and not by way of limitation thereof, Generator
hereby waives any defense it might otherwise have under applicable workers'
compensation laws.

         9.2      Pepco's Indemnification. Pepco shall indemnify, hold
harmless, and defend Generator and its Affiliates, as the case may be, and
their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between the Generator and a third party
or Pepco) for damage to property of unaffiliated third parties, injury to or
death of any person, including Generator's employees or any third parties, to
the extent caused by the negligence or willful misconduct of Pepco and/or its
officers, directors, employees, agents, contractors, subcontractors or invitees
arising out of or connected with Pepco's performance or breach of this
Agreement, or the exercise by Pepco of its rights hereunder. In furtherance of
the foregoing indemnification and not by way of limitation thereof, Pepco
hereby waives any defense it might otherwise have under applicable workers'
compensation laws.

         9.3      Indemnification Procedures. If either Party intends to seek
indemnification under this Article 9 from the other Party, the Party seeking
indemnification shall give the other Party notice of such claim within ninety
(90)

<PAGE>   261

days of the later of the commencement of, or the Party's actual knowledge of,
such claim or action. Such notice shall describe the claim in reasonable
detail, and shall indicate the amount (estimated if necessary) of the claim
that has been, or may be sustained by, said Party. To the extent that the other
Party will have been actually and materially prejudiced as a result of the
failure to provide such notice, such notice will be a condition precedent to
any liability of the other Party under the provisions for indemnification
contained in this Agreement. Neither Party may settle or compromise any claim
without the prior consent of the other Party; provided, however, said consent
shall not be unreasonably withheld or delayed.

         9.4      Survival. The indemnification obligations of each Party under
this Article 9 shall continue in full force and effect regardless of whether
this Agreement has either expired or been terminated or canceled.

                                   ARTICLE 10
                                   INSURANCE

         10.1     Insurance Coverage. The Parties shall maintain at their own
cost and expense, fire, liability, worker's compensation, and other forms of
insurance relating to their respective property and facilities subject to this
Agreement in the manner, and amounts, and for the durations as is customary in
the electric utility industry.

         10.2     Certificates of Insurance. The Parties agree to furnish each
other with certificates of insurance evidencing the insurance Coverage obtained
in accordance with this Article 10, and the Parties agree to notify and send
copies to the other of any policies maintained hereunder upon written request
by a Party. Each Party must notify the other Party within ten (10) business
days of receiving notice of cancellation, change, amendment or renewal of any
insurance policy required pursuant to Section 10.1 above.

         10.3     Additional Insureds and Waiver. Each Party and its affiliates
shall be named as additional insureds on the general liability insurance
policies obtained in accordance with Section 10.1, above, as regards liability
under this Agreement; and each Party shall waive its rights of recovery against
the other for any loss or damage covered by such policy.

<PAGE>   262

                                   ARTICLE 11
                                 FORCE MAJEURE

         11.1     Effect of Force Majeure. Notwithstanding anything in this
Agreement to the contrary, Generator and Pepco shall not be liable in damages
or otherwise or responsible to the other for its failure to carry out any of
its obligations under this Agreement (except for the obligation to pay sums of
money due and owing hereunder) to the extent that they are unable to so perform
or are prevented from performing by an event of Force Majeure and has complied
with Section 11.3.

         11.2     Force Majeure Defined. Force Majeure means those causes
beyond the reasonable control of the Party affected, which by the exercise of
reasonable diligence, including Good Utility Practice, that Party is unable to
prevent, avoid, mitigate, or overcome, including the following: any act of God,
labor disturbance (including a strike), act of the public enemy, war,
insurrection, riot, fire, storm or flood, explosion, breakage or accident to
machinery or equipment, electric system disturbance), order, regulation or
restriction imposed by governmental, military or lawfully established civilian
authorities, or any other cause of a similar nature beyond a Party's reasonable
control.

         11.3     Notification. A Party shall not be entitled to rely on the
occurrence of an event of Force Majeure as a basis for being excused from
performance of its obligations under this Agreement, unless the Party relying
on the event or condition shall: (a) provide prompt written notice of such
Force Majeure event to the other Party, including an estimation of its expected
duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts in accordance with Good Utility
Practice to continue to perform its obligations under this Agreement; (c)
expeditiously take action to correct or cure the event or condition excusing
performance; (d) exercise all reasonable efforts to mitigate or limit damages
to the other Party; and (e) provide prompt notice to the other Party of the
cessation of the event or condition giving rise to its excuse from performance.
Subject to this Section 11.3, any obligation under this Agreement shall be
suspended only to the extent caused by such Force Majeure and only during the
continuance of any inability of performance caused by such Force Majeure but
for no longer period.

                              ARTICLE 12
                               DISPUTES

         12.1     Disputes

<PAGE>   263

                  12.1.1   A Party with a claim or dispute under this Agreement
shall submit to the Operating Committee a notification of such claim or dispute
within sixty (60) days after the circumstances that gave rise to the claim or
the question or issue in dispute. The notification shall be in writing and
shall include a concise statement of the claim or the issue or question in
dispute, a statement of the relevant facts and documentation to support the
claim. In the event the Operating Committee is unable, in good faith, to
resolve their disagreement in a manner satisfactory to both Parties within
thirty (30) days after receipt by the Operating Committee of a notification
specifying the claim, issue or question in dispute, the Parties shall refer the
dispute to their respective senior management. If, after using their good faith
best efforts to resolve the dispute, senior management cannot resolve the
dispute within thirty (30) days, the Parties shall utilize the arbitration
procedures set forth below in Section 12.2 to resolve a dispute, provided that
nothing herein or therein shall prohibit either Party from at any time
requesting from a court of competent jurisdiction a temporary restraining
order, preliminary injunction, or other similar form of equitable relief to
enforce performance of the provisions of this Agreement.

         12.2     Arbitration.

                           (a)      Unless the Parties other wise mutually
agree in writing to another form of dispute resolution such as dispute
resolution under the PJM Agreement or the MAAC agreement, any arbitration
initiated under this Agreement shall be conducted before a single neutral
arbitrator appointed by the Parties within thirty (30) days of receipt by
respondent of the demand for arbitration. If the Parties are unable to agree on
an arbitrator, such arbitration shall be appointed by the American Arbitration
Association. Unless the Parties agree otherwise, the arbitrator shall be an
attorney or retired judge with at least fifteen (15) years of experience, and
shall not have any current or past substantial business or financial
relationships with any Party to the arbitration. If possible, the arbitrator
shall have experience in the electric utility industry. Unless otherwise
agreed, the arbitration shall be conducted in accordance with the American
Arbitration Association's Commercial Arbitration Rules, then in effect. Any
arbitration proceedings, decision or award rendered hereunder and the validity,
effect and interpretation of this arbitration agreement shall be governed by
the Federal Arbitration Act of the United States, 9 U.S.C. Section 1 et seq.
The location of any arbitration hereunder shall be in the District of Columbia.

                           (b)      The arbitration shall, if possible, be
concluded not later than six (6) months after the date that it is initiated.
The arbitrator shall be authorized only to interpret and apply the provisions
of this Agreement or any related agreements entered into under this Agreement
and shall have no power to modify

<PAGE>   264

or change any of the above in any manner. The arbitrator shall have no
authority to award punitive or multiple damages or any damages inconsistent
with this Agreement. The arbitrator shall, within thirty (30) days of the
conclusion of the hearing, unless such time is extended by agreement of the
Parties, notify the Parties in writing of his or her decision, stating his or
her reasons for such decision and separately listing his or her findings of
fact and conclusions of law. The decision of the arbitrator rendered in such a
proceeding shall be final and binding on the Parties. Judgment on the award may
be entered upon it in any court having jurisdiction.

         12.3     FERC Dispute Resolution. Nothing in this Agreement shall
preclude, or be construed to preclude, any Party from filing a petition or
complaint with FERC with respect to any arbitrable claim over which FERC has
jurisdiction. In such case, the other Party may request FERC to reject or to
waive jurisdiction. If FERC rejects or waives jurisdiction with respect to all
or a portion of the claim, the portion of the claim not so accepted by FERC
shall be resolved through arbitration, as provided in this Agreement. To the
extent that FERC asserts or accepts jurisdiction over the claim, the decision,
finding of fact or order of FERC shall be final and binding, subject to
judicial review under the Federal Power Act, and any arbitration proceedings
that may have commenced with respect to the claim prior to the assertion or
acceptance of jurisdiction by FERC shall be terminated.

                                   ARTICLE 13
                                REPRESENTATIONS

         13.1     Representations of Pepco. Pepco hereby represents and
warrants to Generator as follows:

                           (a)      Incorporation. Pepco is a corporation duly
organized, validly existing and in good standing under the laws of the District
of Columbia and the Commonwealth of Virginia, and has all requisite corporate
power and authority to own, lease and operate its material assets and
properties and to carry on its business as now being conducted.

                           (b)      Authority. Pepco has all necessary
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery by
Pepco of this Agreement and the consummation by Pepco of the transactions
contemplated hereunder have been duly and validly authorized by the Board of
Directors of Pepco or by a committee thereof to whom such authority has been
delegated and no other corporate proceedings on the part of Pepco are necessary
to authorize this Agreement or the transactions contemplated hereby. This
Agreement has been duly and validly

<PAGE>   265

executed and delivered by Pepco and, assuming that this Agreement constitutes a
valid and binding agreement of Generator, constitutes a valid and binding
agreement of Pepco, enforceable by Pepco in accordance with its terms.

                           (c)      Consents and Approvals; No Violation.

                           (i)      Neither the execution and delivery of this
Agreement by Pepco nor performance by Pepco of its obligations hereunder will
(A) conflict with or result in any breach of any provision of the Certificate
of Incorporation or By-laws of Pepco, (B) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Pepco or any of its
subsidiaries is a party or by which any of their respective assets may be bound
or (C) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Pepco, or any of its assets, except in the case of clauses (B)
and (C) for such failures to obtain a necessary consent, defaults and
violations which would not, individually or in the aggregate, have a material
adverse effect on the ability of Pepco to discharge its obligations under this
Agreement (a "Pepco Material Adverse Effect").

                           (ii)     No declaration, filing or registration
with, or notice to, or authorization, consent or approval of any governmental
authority is necessary for performance by Pepco of its obligations hereunder,
other than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made would not, individually or
in the aggregate, have a Pepco Material Adverse Effect.

         13.2     Representations of Generator. Generator hereby represents and
warrants to Pepco as follows:

                           (a)      Incorporation. Generator is a [corporation]
duly [incorporated], validly existing and in good standing under the laws of
the State of __________, and has all requisite [corporate] power and authority
to own, lease and operate its material assets and properties and to carry on
its business as now being conducted.

                           (b)      Authority. Generator has all necessary
[corporate] power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery by
the Generator of this Agreement and the consummation by Generator of the
transactions contemplated hereby have been duly and validly authorized the
[Board of Directors] of Generator

<PAGE>   266

or by a committee thereof to whom such authority has been delegated and no
other [corporate] proceedings on the part of Generator are necessary to
authorize this Agreement or the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Generator and,
assuming that this Agreement constitutes a valid and binding agreement of
Pepco, constitutes a valid and binding agreement of Generator, enforceable
against Generator in accordance with its terms.

                           (c)      Consents and Approvals.

                           (i)      Neither the execution and delivery of this
Agreement by Generator nor performance by Generator of its obligations
hereunder will (A) conflict with or result in any breach of any provision of
the [Certificate of Incorporation or By-laws] of Generator, (B) result in a
default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement, lease or other instrument or
obligation to which Generator or any of its subsidiaries is a party or by which
any of their respective assets may be bound or (C) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Generator, or any
of its assets, except in the case of clauses (B) and (C) for such failures to
obtain a necessary consent, defaults and violations which would not,
individually or in the aggregate, have a material adverse effect on the ability
of Generator to discharge its obligations under this Agreement (a "Generator
Material Adverse Effect").

                           (ii)     No declaration, filing or registration
with, or notice to, or authorization, consent or approval of any Governmental
Authority is necessary for performance by Generator of its obligations
hereunder, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not obtained or made would not,
individually or in the aggregate, have a Generator Material Adverse Effect.

                                   ARTICLE 14
                    ASSIGNMENT/CHANGE IN CORPORATE IDENTITY

                  14.1     Assignment.

                           (a)      Except as set forth in this Article 14,
neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned by either Party hereto, without the prior written
consent of the other Party, which consent shall not be unreasonably withheld or
delayed.

<PAGE>   267

                           (b)      Subject to Section 14.2, upon ten (10) days
prior written notice to Generator, Pepco may assign this Agreement, and Pepco's
rights, interests and obligations hereunder, to (i) an Affiliate of Pepco that
owns all or part of Pepco's Transmission System or (ii) an independent system
operator or independent transmission company whose control over all or part of
Pepco's Transmission System has been approved by the FERC.

                           (c)      Subject to Section 14.2, Generator may (a)
assign any of its rights and obligations hereunder to an Affiliate to the
extent necessary for the Generator to qualify as an exempt wholesale generator
under Section 32 of the Public Utility Holding Company Act of 1935, as amended,
and (b) assign, transfer, pledge or otherwise dispose of its rights and
interests hereunder to a trustee, lending institution, or other Person for the
purposes of financing or refinancing the Station, including upon or pursuant to
the exercise of remedies under such financing or refinancing, or by way of
assignments, transfers, conveyances of dispositions in lieu thereof; provided,
however, that no such assignment shall relieve or in any way discharge
Generator from the performance of its duties and obligations under this
Agreement. Pepco agrees to execute and deliver, at Generator's expense, such
documents as may be reasonably necessary to accomplish any such assignment,
transfer, conveyance, pledge or disposition of rights hereunder for purposes of
the financing or refinancing of the Facility, so long as Pepco's rights under
this Agreement are not thereby altered, amended, diminished or otherwise
impaired.

                           (d)      Subject to Section 14.2, either Party may
assign this Agreement to a successor to all or substantially all of the assets
of such Party by way of merger, consolidation, sale or otherwise, provided such
successor assumes in writing and becomes liable for all of such Party's duties
and obligations hereunder.

                  14.2     Release of Rights and Obligations. No assignment,
transfer, conveyance, pledge or disposition of rights, interests, duties or
obligations under this Agreement by a Party shall relieve that Party from
liability and financial responsibility for the performance thereof after any
such transfer, assignment, conveyance, pledge or disposition unless and until
(i) the transferee or assignee shall agree in writing to assume the obligations
and duties of that Party under this Agreement and to impose such obligations on
subsequent permitted transferees and assignees and (ii) the non-assigning Party
has consented in writing to such assumption and to a release of the assigning
Party from such liability, such consent not to be unreasonably withheld or
delayed.

                  14.3     Change in Corporate Identity. If Generator
terminates its existence as a [corporate] entity by merger, acquisition, sale,
consolidation or otherwise, or if all or substantially all of Generator's
assets are transferred to another person or

<PAGE>   268

business entity without complying with this Article 14, Pepco shall have the
right, enforceable in a court of competent jurisdiction, to enjoin Generator's
successor from using the Station in any manner that does not comply with the
requirements of this Agreement or that impedes Pepco's ability to carry on its
ongoing business operations.

                  14.4     Successors and Assigns. This Agreement and all of
the provisions hereof are binding upon, and inure to the benefit of, the
Parties and their respective successors and permitted assigns.

                                   ARTICLE 15
                                 SUBCONTRACTORS

                  Nothing in this Agreement shall prevent the Parties from
utilizing the services of subcontractors as they deem appropriate, provided,
however, the Parties agree that, where applicable, all said subcontractors
shall comply with the terms and conditions of this Agreement. The creation of
any subcontract relationship shall not relieve the hiring Party of any of its
obligations under this Agreement. Each Party shall be fully responsible to the
other Party for the acts and/or omission of any subcontractor it hires as if no
subcontract had been made. Any obligation imposed by this Agreement upon the
Parties, where applicable, shall be equally binding upon and shall be construed
as having application to any subcontractor. The Parties shall each be liable
for, indemnify, and hold harmless the other Party, their Affiliates and their
officers, directors, employees, agents, servants, and assigns from and against
any and all claims, demands, or actions, from the other Party's subcontractors;
and shall pay all costs, expenses and legal fees associated therewith and all
judgments, decrees and awards rendered therein. No subcontractor is intended to
be or shall be deemed a third-party beneficiary of this Agreement.

                                   ARTICLE 16
                                    NOTICES

                  16.1     Emergency Notices. At or prior to the Effective
Date, each Party shall indicate to the other Party, by notice, the appropriate
person during each eight-hour work shift to contact in the event of an
emergency, a scheduled or forced interruption or reduction in services. The
notice last received by a Party shall be effective until modified in writing by
the other Party.

                  16.2     Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given (as of the time of
delivery or, in the case of a telecopied communication, of confirmation) if
delivered personally, telecopied (which is confirmed) or sent by overnight
courier (providing proof of delivery) to

<PAGE>   269

the Parties at the following addresses (or at such other address for a Party as
shall be specified by like notice):

            if to Pepco, to:

                  Potomac Electric Power Company
                  1900 Pennsylvania Avenue, N.W.
                  Washington, D.C.  20068
                  Telecopier:  (202) ________________
                  Attention:  ___________________

            if to Generator, to:

                  c/o Southern Energy, Inc.
                  900 Ashwood Parkway
                  Suite 500
                  Atlanta, Georgia  30338-4780
                  Telecopier:  (770)  821-6575
                  Attention:

                                   ARTICLE 17
                                   AMENDMENTS

                  17.1     Amendments. Except as set forth in Sections 2.2 and
17.2 of this Agreement, this Agreement may be amended, modified, or
supplemented only by written agreement of both Pepco and Generator.

                  17.2     FERC Proceedings

                           (a)      Pepco may unilaterally make application to
FERC under Section 205 of the Federal Power Act and pursuant to the FERC's
rules and regulations promulgated thereunder for, or exercise any rights it may
have under Section 206 of the Federal Power Act and the regulations thereunder
with respect to, a change in any rates, terms and conditions, charges,
classification of service, rule or regulation for any services Pepco provides
under this Agreement over which FERC has jurisdiction.

                           (b)      Generator may exercise its rights under
Section 205 or 206 of the Federal Power Act and pursuant to FERC's rules and
regulations promulgated thereunder with respect to any rate, term, condition,
charge, classification of service, rule or regulation for any services provided
under this Agreement over which FERC has jurisdiction.

<PAGE>   270

                                   ARTICLE 18
                            MISCELLANEOUS PROVISIONS

                  18.1     Waiver. Except as otherwise provided in this
Agreement, any failure of a Party to comply with any obligation, covenant,
agreement, or condition herein may be waived by the Party entitled to the
benefits thereof only by a written instrument signed by the Party granting such
waiver, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement, or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.

                  18.2     Labor Relations. The Parties agree to immediately
notify the other Party, verbally and then in writing, of any labor dispute or
anticipated labor dispute which may reasonably be expected to affect the
operations of the other Party.

                  18.3     No Third Party Beneficiaries. Nothing in this
Agreement is intended to confer upon any other person except the Parties any
rights or remedies hereunder or shall create any third party beneficiary rights
in any person. No provision of this Agreement shall create any rights in any
such persons in respect of any benefits that may be provided, directly or
indirectly, under any employee benefit plan or arrangement except as expressly
provided for thereunder.

                  18.4     Governing Law

This Agreement shall be governed by and construed in accordance with the laws
of the State of Maryland (regardless of the laws that might otherwise govern
under applicable principles of conflicts of law).

                  18.5     Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

                  18.6     Interpretation. When a reference is made in this
Agreement to an Article, Section, Schedule or exhibit, such reference shall be
to an Article or Section of, or Schedule or exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation" or equivalent words. The words
"hereof", "herein" and "hereunder" and words of similar import when used in
this Agreement shall refer to this

<PAGE>   271

Agreement as a whole and not to any particular provision of this Agreement. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Unless otherwise expressly stated
otherwise herein, the word "day" shall mean any calendar day including weekends
and holidays. Any agreement, instrument, statute, regulation, rule or order
defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument, statute, regulation, rule
or order as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes, regulations, rules or orders) by succession of comparable successor
statutes, regulations, rules or orders and references to all attachments
thereto and instruments incorporated therein. References to a person are also
to its permitted successors and assigns. Each Party acknowledges that it has
been represented by counsel in connection with the review and execution of this
Agreement, and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

                  18.7     Jurisdiction and Enforcement. Each of the Parties
irrevocably submits to the exclusive jurisdiction of the federal and state
courts of the State of Maryland for the purposes of any suit, action or other
proceeding arising out of this Agreement or any transaction contemplated
hereby. Each of the Parties agrees to commence any action, suit or proceeding
relating hereto either in the federal courts of the State of Maryland or, if
such suit, action or proceeding may not be brought in such court for
jurisdictional reasons, in the state courts of the State of Maryland. Each of
the Parties further agrees that service of process, summons, notice or document
by hand delivery or U.S. registered mail at the address specified for such
Party in Section 16.2 (or such other address specified by such Party from time
to time pursuant to Section 16.2) shall be effective service of process for any
action, suit or proceeding brought against such Party in any such court. Each
of the Parties irrevocably and unconditionally waives any objection to the
laying of venue of any action, suit or proceeding arising out of this Agreement
or the transactions contemplated hereby in the federal and state courts of the
State of Maryland and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.

                  18.8     Entire Agreement. This Agreement, Asset Sale
Agreement, the Confidentiality Agreement and the Ancillary Agreements including
the Exhibits, Schedules, documents, certificates and instruments referred to
herein or therein and other contracts, agreements and instruments contemplated
hereby or thereby, embody the entire agreement and understanding of the Parties
in respect of the

<PAGE>   272

transactions contemplated by this Agreement. There are no restrictions,
promises, representations, warranties, covenants or undertakings other than
those expressly set forth or referred to herein or therein. This Agreement, the
Asset Sale Agreement and the Ancillary Agreements supersede all prior
agreements and understandings between the Parties with respect to the
transactions contemplated by this Agreement other than the Confidentiality
Agreement.

                  18.9     Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the Parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.

                  18.10    Independent Contractor Status. Nothing in this
Agreement shall be construed as creating any relationship between Pepco and
Generator other than that of independent contractors.

                  18.11    Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

<PAGE>   273

                  IN WITNESS WHEREOF, Pepco and Generator have caused this
Interconnection Agreement (Morgantown) to be signed by their respective duly
authorized officers as of the date first above written.

                                 POTOMAC ELECTRIC POWER COMPANY

                                 By:
                                      --------------------------------
                                      Name:
                                      Title:

                                 [GENERATOR]

                                 By:
                                      --------------------------------
                                      Name:
                                      Title:

<PAGE>   274

                                  SCHEDULE A
                                  DEFINITIONS

Part A.  Capitalized terms not defined in the body of the Agreement shall have
         the meaning set forth in Part A of this Schedule A. (Part B of this
         Schedule A sets forth capitalized terms defined within the Agreement.)

                  (1)      "Affiliate" has the meaning set forth in Rule 12b-2
of the General Rules and Regulations under the Securities Exchange Act of 1934.

                  (2)      "Ancillary Agreements" has the meaning set forth in
the Asset Sale Agreement.

                  (3)      "Closing" has the meaning set forth in the Asset
Sale Agreement.

                  (4)      "Confidentiality Agreement" has the meaning set
forth in the Asset Sale Agreement.

                  (5)      "Costs" means all costs, including without
limitation, any Taxes, costs of acquiring real property, costs and fees for
permits, franchises, licenses and regulatory approvals except to the extent
that such costs are allocated to a party or parties other than the Generator by
the PJM Interconnection LLC or otherwise under the PJM Tariff or PJM Agreement.

                  (6)      "Easement" means the Easement Agreement dated
__________, 2000, between the Parties with respect to the Station.

                  (7)      "Environmental Laws" means all former, current and
future federal, state, local and foreign laws (including common law), treaties,
regulations, rules, ordinances, codes, decrees, judgments, directives or orders
(including consent orders) and environmental permits, in each case, relating to
pollution or protection of the environment or natural resources, including laws
relating to Releases or threatened Releases, or otherwise relating to the
generation, manufacture, processing, distribution, use, treatment, storage,
arrangement for disposal, transport, recycling or handling, of Hazardous
Substances.

                  (8)      "Emergency" means (a) with respect to Pepco, a
condition or situation which Pepco, the PJM Interconnection LLC, the PJM System
Operator or the Transmission Operator deem imminently likely to (i) endanger
life or property, or (ii) adversely affect or impair the Transmission System,
Pepco's electrical system or the electrical or transmission systems of others
to which the Transmission System or Pepco's electrical system are directly or
indirectly connected and (b) with respect to the Generator, a condition or
situation which the Generator deems imminently likely to (i) endanger life or
property, or (ii) adversely affect or impair the Station.

                  (9)      "FERC" means the Federal Energy Regulatory
Commission or its successors.

<PAGE>   275

                  (10)     "Generating Facilities" means the Station and any
additional generating plants, turbines or other generating facilities
constructed by Generator after the Effective Date at the site of the Station.

                  (11)     "Generator" has the meaning set forth in the
introductory paragraph of this Agreement and shall include its permitted
successors and assigns.

                  (12)     "Generator Facilities" mean the equipment and
facilities owned by the Generator but located on Pepco's property which are
identified in Schedule B of this Agreement.

                  (13)     "Good Utility Practice" means any of the applicable
practices, methods and acts.

                           (a)      required by FERC, NERC, MAAC, the PJM
Interconnection LLC, the PJM System Operator, or the successor of any of them,
whether or not the Party whose conduct is at issue is a member thereof,

                           (b)      required by applicable law or regulations,

                           (c)      required by the Pepco Interconnection
Standards or the policies and standards of Pepco relating to emergency
operations;

                           (d)      otherwise engaged in or approved by a
significant portion of the electric utility industry during the relevant time
period;

which, in the exercise of reasonable judgment in light of the facts known at
the time the decision was made, could have been expected to accomplish the
desired result at a reasonable cost consistent with law, regulation, good
business practices, reliability, safety, and expedition. Good Utility Practice
is not intended to be limited to the optimum practice, method, or act to the
exclusion of all others, but rather to be acceptable practices, methods, or
acts generally accepted in the region.

                  (14)     "Hazardous Substances" means (i) any petrochemical
or petroleum products, crude oil or any fraction thereof, ash, radioactive
materials, radon gas, asbestos in any form, urea formaldehyde foam insulation
or polychlorinated biphenyls, (ii) any chemicals, materials, substances or
wastes defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "restricted hazardous materials,"
"extremely hazardous substances," "toxic substances," "contaminants" or
"pollutants" or words of similar meaning and regulatory effect contained in any
Environmental Law or (iii) any other chemical, material, substance or waste
which is prohibited, limited or regulated by any Environmental Law.

                  (15)     "Interconnection Facilities" means those facilities
or portions of facilities owned or operated by Pepco to provide Interconnection
Service which shall include, but not be limited to (1) facilities the cost of
which is reasonably allocated to the Interconnection Service provided to the
Station, or (2) Attachment Facilities or Local Upgrade Facilities, as defined
in the PJM Tariff, which are associated with the Interconnection Service and
operated and maintained by Pepco.

<PAGE>   276

                  (16)     "Interconnection Service" means the services
provided by Pepco which are necessary to connect the Station to the
Transmission System for parallel operation of the Station and to enable
Generator to transmit the energy and ancillary services produced by the Station
to the Transmission System and receive Station energy service and ancillary
services, including blackstart power, from the Generator's supplier.

                  (17)     "MAAC" means the Mid-Atlantic Area Council, a
reliability council under Section 202 of the Federal Power Act established
pursuant to the MAAC Agreement dated August 1, 1994, or any successor thereto.

                  (18)     "Maintain" means construct, reconstruct, install,
inspect, repair, replace, operate, patrol, maintain, use, modernize, expand,
upgrade, or other similar activities.

                  (19)     "MDPSC" means the Maryland Public Service Commission
or any successor agency thereto.

                  (20)     "NERC" means North American Electric Reliability
Council or any successor thereto.

                  (21)     "Pepco" has the meaning set forth in the
introductory paragraph of this Agreement and shall include its permitted
successors or assigns.

                  (22)     "Pepco Facilities" means the equipment and
facilities owned by Pepco but located on Generator's property which are
identified in Schedule B of this Agreement.

                  (23)     "Pepco Interconnection Standards" means Pepco's
Interconnection and Parallel Operating Guidelines as amended, modified or
replaced from time to time. A copy of the existing Pepco Interconnection
Standards is attached hereto as Schedule E.

                  (24)     "Point of Interconnection" means each ownership
point of demarcation set forth in Schedule C where capacity, energy and
ancillary services are transferred between the Station and the Transmission
System.

                  (25)     "Pepco Transmission Facilities" means those
transmission, substation, and communication facilities and related equipment,
including the Interconnection Facilities, and any additions, modifications or
replacements thereto, that are utilized to provide Interconnection Service to
the Station.

                  (26)     "PJM" means the Pennsylvania New Jersey-Maryland
interconnected power pool operated under the PJM Agreement and any successor
thereto including any regional transmission operator, independent system
operator, transco, or any other independent system administrator that possesses
operational or planning control over the Transmission System.

                  (27)     "PJM Agreement" means the Amended and Restated
Operating Agreement of the PJM Interconnection LLC dated as of June 2, 1997.

<PAGE>   277

                  (28)     "PJM Control Area" shall mean the control area
recognized by NERC as the PJM Control Area.

                  (29)     "PJM Interconnection LLC" means the independent
system operator of the PJM Control Area pursuant to the PJM Operating Agreement
and the PJM Tariff.

                  (30)     "PJM Generator Connection Agreement" means the
interconnection agreement entered into between the Generator and the PJM
Interconnection LLC pursuant to the PJM Tariff with respect to the
interconnection of the Station and the Transmission System.

                  (31)     "PJM Reliability Agreement" means the Reliability
Assurance Agreement dated June 2, 1997 among the load serving entities of PJM.

                  (32)     "PJM Requirements" means the rules, regulations or
other requirements of PJM or MAAC contained in or adopted pursuant to the PJM
Agreement, the PJM Tariff or the PJM Reliability Agreement which are applicable
to Pepco, with respect to the Transmission System or the Interconnection
Service, and the Generator with respect to the Generating Facilities.

                  (33)     "PJM System Operator" shall mean the PJM
Interconnection LLC, energy control center staff responsible for central
dispatch as provided in the PJM Agreement.

                  (34)     "PJM Tariff" means the PJM Open Access Transmission
Tariff providing transmission service within the PJM Control Area.

                  (35)     "Qualified Personnel" means individuals who possess
any required licenses and are trained for their positions and duties by
Generator and/or Pepco pursuant to Good Utility Practice.

                  (36)     "Release" means any release, spill, emission,
leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal,
leaching or migration into the environment (including ambient air, surface
water, groundwater, land surface or subsurface strata) or within any building,
structure, facility or fixture.

                  (37)     "Revenue Meters" means all MWh and MVArh meters,
pulse isolation relays, pulse conversion relays, transducers required by Pepco
or the PJM Interconnection or PJM System Operator for billing or other
purposes, and associated totalizing equipment and appurtenances and
compensation required to measure the transfer of energy across the Point of
Interconnection.

                  (38)     "Station" means the Morgantown Station as defined in
the Asset Sale Agreement.

                  (39)     "Switching, Tagging, and Grounding Rules" means
Pepco's switching, tagging and grounding rules as amended, modified or replace
from time to time. A copy of the existing Switching, Tagging and Grounding
Rules is attached hereto as Schedule D.

<PAGE>   278

                  (40)     "Taxes" means all taxes, surtaxes, charges, fees,
levies, penalties or other assessments imposed by any United States federal,
state, local or foreign taxing authority, including income taxes, excise,
property, sales, transfer, franchise, special franchise, payroll, recording,
withholding, social security or other taxes, in each case including any
interest, penalties or additions attributable thereto.

                  (41)     "Transmission System" means the facilities owned,
controlled, or operated by Pepco, for purposes of providing transmission
service, including services under the PJM Tariff, and Interconnection Service.

                  (42)     "Transmission Operator" means the person, or persons
designated by Pepco to coordinate the day to day interconnection of the Station
with the Transmission System.

Part B.  The following terms have the meaning specified in the section of this
         Agreement set forth opposite to such term:

<TABLE>
<CAPTION>
Term                                Agreement Reference

<S>                                 <C>
Agreement                           Preamble
Asset Sale Agreement                Preamble
Effective Date                      Section 2.1
Event of Default                    Section 8.1
Force Majeure                       Section 11.1
Initial Period                      Section 3.10
Operating Committee                 Section 3.20
Party or Parties                    Preamble
Term                                Article 2
</TABLE>
<PAGE>   279
                                                                    EXHIBIT E-3

                           INTERCONNECTION AGREEMENT
                                  (Dickerson)

                                 By and Between

                         POTOMAC ELECTRIC POWER COMPANY

                                      and

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

                            Dated ____________, 2000

<PAGE>   280

                           INTERCONNECTION AGREEMENT

                               TABLE OF CONTENTS

<TABLE>
<S>                                                             <C>
ARTICLE 1 -  DEFINITIONS                                         1
ARTICLE 2 -  TERM AND TERMINATION                                2
  2.1    Term                                                    2
  2.2    Change in Law                                           2
  2.3    Effect after Termination                                2
ARTICLE 3 - CONTINUING OBLIGATIONS AND RESPONSIBILITIES          2
  3.1    Interconnection Service                                 2
  3.2    New Construction or Modifications                       3
    3.2.1   Pepco Construction or Modifications                  3
    3.2.2   Generator Construction or Modifications              4
    3.2.3   Modifications Affecting the Transmission System
            or the Station                                       6
  3.3    Access, Easements, Conveyances, Licenses,
         and Restrictions                                        6
  3.4    Facility and Equipment Maintenance                      7
  3.5    Pepco Facilities and Generator Facilities               8
  3.6    Equipment Testing Obligations                           8
  3.7    Inspections                                             8
  3.8    Information Reporting Obligations                       9
  3.9    Local Services                                         10
    3.9.1   General                                             10
    3.9.2   Temporary Suspension of Local Services              11
  3.10   Pepco Provided Services                                11
  3.11   Generator Provided Services                            12
  3.12   Optional Services                                      12
  3.13   Metering and Telemetering                              13
  3.14   Emergency Procedure                                    13
  3.15   Interconnection Service Interruptions                  14
  3.16   Unit Status Notification                               15
  3.17   Scheduled Maintenance Notification and Coordination    15
    3.17.1   Local Routine Inspection and Maintenance           15
    3.17.2   Transmission Sytem Maintenance                     15
  3.18   Safety                                                 16
    3.18.1   General                                            16
    3.18.2   Switching Tagging and Grounding                    16
  3.19   Environmental Compliance and Procedures                16
  3.20   Operating Committee                                    17
ARTICLE 4 -  OPERATIONS                                         17
  4.1    General                                                17
  4.2    Generator's Operating Obligations                      18
    4.2.1   General                                             18
    4.2.2   Voltage or Reactive Control Requirements            18
</TABLE>

<PAGE>   281

<TABLE>
<S>                                                             <C>
  4.3    Auditing of Accounts and Records                       19
ARTICLE 5 - COST RESPONSIBILITIES AND BILLING PROCEDURES        20
  5.1    Cost Responsibilities for Interconnection Service      20
  5.2    Cost Responsibilities for Local Services               20
  5.3    Billing Procedures                                     20
  5.4    Billing Disputes                                       21
ARTICLE 6 - CONFIDENTIALITY                                     21
  6.1    Confidentiality Obligations of Pepco                   21
  6.2    Confidentiality Obligations of Generator               22
  6.3    Confidentiality of Audits                              22
  6.4    Remedies                                               23
ARTICLE 7 -  EVENTS OF DEFAULT                                  23
  7.1    Events of Default                                      23
  7.2    Remedies                                               24
ARTICLE 8 -  LIMITATION OF LIABILITY                            25
  8.1    Limitation of Pepco's Liability                        25
  8.2    Limitation on Generator's Liability                    25
  8.3    Consequential Damages                                  25
ARTICLE 9 -  INDEMNIFICATION FOR THIRD PARTY CLAIMS             26
  9.1    Generator's Indemnification                            26
  9.2    Pepco's Indemnification                                26
  9.3    Indemnification Procedures                             26
  9.4    Survival                                               27
ARTICLE 10 -  INSURANCE                                         27
  10.1   Insurance Coverage                                     27
  10.2   Certificates of Insurance                              27
  10.3   Additional Insureds and Waiver                         27
ARTICLE 11 -  FORCE MAJEURE                                     28
  11.1   Effect of Force Majeure                                28
  11.2   Force Majeure Defined                                  28
  11.3   Notification                                           28
ARTICLE 12 -  DISPUTES                                          29
  12.1   Disputes                                               29
  12.2   Arbitration                                            29
  12.3   FERC Dispute Resolution                                30
ARTICLE 13 -  REPRESENTATIONS                                   30
  13.1   Representations of Pepco                               30
  13.2   Representations of Generator                           31
ARTICLE 14 -  ASSIGNMENT/CHANGE IN CORPORATE IDENTITY           33
  14.1   Assignment                                             33
  14.2   Release of Rights and Obligations                      33
  14.3   Change in Corporate Identity                           34
  14.4   Successors and Assigns                                 34
</TABLE>

<PAGE>   282

<TABLE>
<S>                                                             <C>
ARTICLE 15 -  SUBCONTRACTORS                                    34
ARTICLE 16 - NOTICES                                            35
  16.1   Emergency Notices                                      35
  16.2   Notices                                                35
ARTICLE 17 -  AMENDMENTS                                        35
  17.1   Amendments                                             35
  17.2   FERC Proceedings                                       36
ARTICLE 18 -  MISCELLANEOUS PROVISIONS                          36
  18.1   Waiver                                                 36
  18.2   Labor Relations                                        36
  18.3   No Third Party Beneficiaries                           36
  18.4   Governing Law                                          37
  18.5   Counterparts                                           37
  18.6   Interpretation                                         37
  18.7   Jurisdiction and Enforcement                           37
  18.8   Entire Agreement                                       38
  18.9   Severability                                           38
  18.10  Independent Contractor Status                          38
  18.11  Conflicts                                              39
SCHEDULE A  DEFINITIONS                                          2
SCHEDULE B   Pepco Facilities and Generator Facilities           7
SCHEDULE C - Points of Interconnection                           9
SCHEDULE D -  Switching, Tagging and Grounding Rules            11
SCHEDULE E -  Pepco's Interconnection Standards                 14
SCHEDULE F -  Local Services                                    15
SCHEDULE G -  Pepco Current Projects                            17
SCHEDULE H -  Real Time Telemetry List                          18
</TABLE>

<PAGE>   283

                     INTERCONNECTION AGREEMENT (Dickerson)

         This Interconnection Agreement ("Agreement") dated as of _________,
2000 by and between Potomac Electric Power Company ("Pepco") a District of
Columbia and Virginia corporation, and _____________ ("Generator") a
___________ [corporation]. Pepco and Generator are each referred to herein as a
"Party," and collectively referred to herein as the "Parties."

                                  WITNESSETH:

         WHEREAS, Pepco, and Generator have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets ("Asset Sale Agreement") dated
June 7, 2000, for the sale by Pepco to Generator of certain assets comprising
the Dickerson electric generation station;

         WHEREAS, Pepco intends to continue to operate its transmission and
distribution businesses from their present locations;

         WHEREAS, Generator needs Interconnection Service from Pepco for the
Dickerson electric generating station;

         WHEREAS, Pepco needs access to parts of the Generator's assets, and
Generator needs access to parts of the Pepco's assets; and

         WHEREAS, the Parties have agreed in the Asset Sale Agreement to
execute this Agreement in order to provide Interconnection Service to Generator
and to define continuing responsibilities and obligations of the Parties with
respect to the use of the other Party's property, assets and facilities as set
forth herein.

         NOW THEREFORE, in consideration of the mutual representations,
covenants and agreements hereinafter set forth, and intending to be legally
bound hereby, the Parties hereto agree as follows:

                                   ARTICLE 1
                                  DEFINITIONS

         Capitalized terms used in this Agreement shall have the meanings
specified or referred to in Schedule A.

<PAGE>   284

                                   ARTICLE 2
                              TERM AND TERMINATION

         2.1      Term. This Agreement shall become effective upon consummation
of the Closing ("Effective Date"), and unless terminated sooner in accordance
with the terms of this Agreement, shall continue in full force and effect until
the earlier to occur of (i) the permanent cessation by the Generator of the
power generation functions of the Station or (ii) the permanent cessation of
the interconnection functions of the Transmission System.

         2.2      Change in Law. If (a) the FERC, any state or state regulatory
commission or the PJM Interconnection LLC implements a change in any law,
regulation, rule or practice, or (b) Pepco's compliance with a change in any
law or regulation, which compliance, in either case, affects, or may reasonably
be expected to affect, Pepco's performance under this Agreement, the Parties
shall negotiate in good faith any amendments to this Agreement that are
necessary to adapt the terms of this Agreement to such change, and Pepco shall
file such amendments with the FERC. If the Parties are unable to reach
agreement on such amendments, either Party shall have the right to make a
unilateral filing with the FERC to modify this Agreement pursuant to Sections
205 or 206 or any other applicable provision of the Federal Power Act and the
FERC rules and regulations thereunder; provided that the other Party shall have
the right to oppose such filing and to participate fully in any proceeding
established by the FERC to address such amendments.

         2.3      Effect after Termination. The applicable provisions of this
Agreement shall continue in effect after cancellation or termination hereof to
the extent necessary to provide for final billings, billing adjustments and
payments pertaining to liability and indemnification obligations arising from
acts or events that occurred while this Agreement was in effect.

                                   ARTICLE 3
                  CONTINUING OBLIGATIONS AND RESPONSIBILITIES

         3.1      Interconnection Service

                  3.1.1    Subject to the terms and conditions of the
Agreement, Pepco shall (a) permit the Station to continue to be interconnected
to the Transmission System at the Point of Interconnection, and (b) provide
Interconnection Service at the Point of Interconnection. Pepco agrees to permit
Generator to interconnect

<PAGE>   285

Station as long as Generator continues to operate such facilities pursuant to
PJM Requirements and Good Utility Practice.

                  3.1.2    Interconnection Service shall not include, and Pepco
shall not be responsible under this Agreement for (a) transmission service,
losses or ancillary services associated with the use of the Transmission System
for the delivery of capacity, energy and/or ancillary services produced by the
Generating Facilities, or (b) providing or procuring capacity, energy and/or
ancillary services to the Generator or the Generating Facilities.

                  3.1.3    The Generator's interconnection to the Transmission
System of any new or expanded generating capacity of the Station shall (a) be
subject to PJM Requirements and/or FERC requirements governing interconnections
and (b) require a separate interconnection agreement mutually agreed to by the
Parties in writing.

                  3.1.4    Notwithstanding anything to the contrary in this
Agreement, Pepco's performance of its obligations under this Agreement shall be
subject to Generator entering into, and complying with, any PJM Generator
Connection Agreement which may be required pursuant to PJM Requirements with
respect to Interconnection Service or the Station.

         3.2      New Construction or Modifications

                  3.2.1    Pepco Construction or Modifications

                           (a)      Pepco shall make such additions,
modifications, replacements and improvements to the Interconnection Facilities
as are required by PJM Requirements or Good Utility Practice to enable Pepco to
provide Interconnection Service in compliance with this Agreement. Generator
shall pay all reasonable Costs incurred by Pepco for such additions,
modifications, replacements or improvements.

                           (b)      Except with respect to operation and
maintenance or ordinary maintenance done in the ordinary course of business or
to respond to abnormal or emergency conditions, if any additions,
modifications, replacements or improvements to the Interconnection Facilities
undertaken by Pepco might reasonably be expected to affect Generator's
operation of the Station, Pepco shall provide one hundred twenty (120) days
written notice to Generator prior to undertaking such additions, modifications,
replacements or improvements. Any such additions, modifications, replacements
or improvements shall comply with PJM Requirements and Good Utility Practice.
The Parties shall mutually agree to the

<PAGE>   286

scheduling of such addition, modification, replacement or improvement to
minimize any adverse impact on the Station. Generator shall be deemed to have
accepted Pepco's proposed additions, modifications, replacements or
improvements unless Generator gives Pepco written notice of its objections
within thirty (30) days after receipt of Pepco's notice. Generator's acceptance
or deemed acceptance of Pepco's proposed additions, modifications, replacements
or improvements shall not be construed, with respect thereto, as: (i)
confirmation or endorsement of the design; (ii) a warranty of safety,
durability or reliability; or (iii) responsibility for strength, details of
design, adequacy or capability.

                  3.2.2    Generator Construction or Modifications

                           (a)      In the event Generator plans to increase
the capacity of the Generating Facilities, Generator shall submit to Pepco any
and all plans and specifications that Pepco may reasonably request related to
such increase. Such specifications and plans shall be submitted by Generator to
Pepco at the time that Generator submits its plans under the PJM Tariff related
to such expansion but no later than one hundred twenty (120) days prior to
commencing such proposed increase. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice and
shall be subject to Section 3.1.3 of this Agreement.

                           (b)      If Generator plans any additions,
modifications, or replacements to the Station that will not increase its
capacity, but could reasonably be expected to affect the Transmission System or
the Interconnection Facilities, Generator shall give Pepco reasonable notice,
but not less than one hundred twenty (120) days prior written notice and
Generator shall comply with all applicable PJM Requirements with respect to
such proposed additions, modifications, or replacements. All such additions,
modifications, or replacements shall (i) comply with PJM Requirements and Good
Utility Practice, (ii) be accompanied by appropriate information and operating
instructions, and (iii) be subject to the review and acceptance of Pepco, which
review shall be based on PJM Requirements and Good Utility Practice and which
acceptance shall not unreasonably be withheld or delayed. Pepco shall be deemed
to have accepted Generator's proposed additions, modifications or replacements
unless Pepco gives Generator written notice of its objections within thirty
(30) days after receipt of the Generator's notice.

                           (c)      Pepco's acceptance of Generator's plans and
specifications for any proposed additions, modifications, or replacements to
the Generating Facilities and Pepco's participation in any interconnected
operations with Generator are not and shall not be construed as: (i)
confirmation or endorsement of the design of the Generating Facilities; (ii) a
warranty of safety, durability or reliability of the

<PAGE>   287

Generating Facilities; or (iii) responsibility for strength, details of design,
adequacy, or capability of the Generating Facilities.

                           (d)      Pepco, pursuant to PJM Requirements, shall
inform Generator of any additions, modifications, or replacements to the
Transmission System or Interconnection Facilities, that will be necessary as a
result of the addition, modification, or replacement to Station made pursuant
to Section 3.2.2. Generator shall compensate Pepco for all reasonable Costs it
incurs associated with any modifications, additions, or replacements made to
the Interconnection Facilities or Transmission System related to any additions,
modifications, or replacements to the Generating Facilities. Pepco shall
provide an estimate as early as practicable, but in any event not less than
sixty (60) days prior to the initiation of such addition, modification or
replacement.

                           (e)      Generator shall modify, at its sole cost
and expense, the Generating Facilities as may be reasonably required to conform
with PJM Requirements and Good Utility Practice or to conform with additions,
modifications, or replacements of the Transmission System or the
Interconnection Facilities, required by PJM Requirements and Good Utility
Practice or implemented in accordance with this Agreement, (including, without
limitation, changes to the voltages at which the Transmission System is
operated) provided, however, that Generator shall not be obligated under this
Agreement to modernize, expand or upgrade the Generating Facilities unless the
failure to modernize, expand or upgrade is reasonably likely to have a material
adverse effect on the operation of Pepco's Facilities.

                           (f)      Upon completion of any addition,
modification, or replacement to the Generating Facilities that may reasonably
be expected to affect the Transmission System or the Interconnection
Facilities, but no later than ninety (90) days thereafter, Generator shall
issue "as built" drawings to Pepco. Upon completion of any addition,
modification, or replacement to the Interconnection Facilities, that may
reasonably be expected to affect the operation of the Station, but no later
than ninety (90) days thereafter, Pepco shall issue "as built" drawings to the
Generator.

                  3.2.3    Modifications Affecting the Transmission System or
                           the Station

                           (a)      Notwithstanding anything herein to the
contrary, except with respect to the projects or construction set forth in
Schedule G, no modifications to or new construction of facilities, or access
thereto, including but not limited to rights of way, fences, gates, shall be
made by either Party which might reasonably be expected to adversely affect the
other Party with respect to such Party's obligations

<PAGE>   288

and responsibilities under this Agreement, without prior written notification
as set forth in Section 3.2.3(b) below, and without providing the other Party
with sufficient information regarding the work prior to commencement to enable
such Party to evaluate the impact of the proposed work on its operations. For
all modifications reasonably expected to adversely affect the operations of the
other Party's facilities, the Party shall provide at least one hundred twenty
(120) days written notice to the other Party prior to undertaking such
additions, modifications or replacements. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice.

                           (b)      The Parties shall mutually agree to the
scheduling of such addition, modification, replacement or improvement proposed
pursuant to Section 3.2.3(a) to minimize any adverse impact on the Station or
the Transmission System. For all construction work, major modifications, or
circuit changes involving new or existing facilities, equipment, systems or
circuits that could reasonably be expected to affect the operation of either
Party, the Party desiring to perform said work shall provide the other Party
with drawings, plans, specifications, and other necessary documentation for
review at least sixty (60) days prior to the beginning of construction provided
that for routine telecommunication work, the Party doing the work shall only be
required to provide 48 hours prior notice. The Party shall be deemed to have
accepted the proposed additions, modifications, replacements or improvements
unless the Party gives written notice of their objections within sixty (60)
days after receipt of such notice. The Party's acceptance or deemed acceptance
of the proposed additions, modifications, replacements or improvements shall
not be construed, with respect thereto, as: (i) confirmation or endorsement of
the design; (ii) a warranty of safety, durability or reliability; or (iii)
responsibility for strength, details of design, adequacy or capability.

         3.3      Access, Easements, Conveyances, Licenses, and Restrictions

                  3.3.1    The Parties hereby grant to each other such
licenses, access and other rights to the Station and the Interconnection
Facilities as may be necessary for either Party's performance of their
respective obligations under this Agreement. Such access shall be provided in a
manner so as not to unreasonably interfere with the ongoing business
operations, rights, and obligations of the other Party and shall be subject to
the safety and security practices of the Party granting such access. Access
shall only be granted to Qualified Personnel.

                  3.3.2    A Party shall not restrict a Party's rights
hereunder to access the other Party's property, facilities, or equipment
without prior written notification except in an Emergency, in which case the
restricted access shall last no longer than three (3) days, unless an alternate
means of access is provided.

<PAGE>   289

                  3.3.3    The Parties' rights with respect to access to their
respective facilities properties shall also be governed by the Easement.

         3.4      Facility and Equipment Maintenance

                  3.4.1    Pepco shall provide Interconnection Service at the
Point of Interconnection in a safe and efficient manner and pursuant to PJM
Requirements and Good Utility Practice. Generator shall be responsible for all
reasonable Costs incurred by Pepco to provide Interconnection Service and to
Maintain the Interconnection Facilities pursuant to the Agreement.

                  3.4.2    Generator shall Maintain the Generating Facilities
(including coordination of its relay protection equipment) in a safe and
efficient manner and as required by and in accordance with PJM Requirements and
Good Utility Practice, provided, however, that Generator shall not be obligated
to modernize, expand or upgrade the Generating Facilities unless the failure to
modernize, expand or upgrade is reasonably likely to have a material adverse
affect on the operation of the Interconnection Facilities or the Transmission
System.

                  3.4.3    Unless otherwise specified herein, or unless the
Parties mutually agree to a different arrangement, neither Party shall be
responsible for the maintenance of the other Party's equipment or property
regardless of its location.

                  3.4.4    In addition to the requirements set forth elsewhere
in this Agreement, each Party shall Maintain its equipment and facilities and
perform its maintenance obligations that could reasonably be expected to affect
the operations of the other Party in a safe and efficient manner and pursuant
to PJM Requirements and Good Utility Practice.

         3.5      Pepco Facilities and Generator Facilities Unless otherwise
agreed to by the Parties, the Party owning Pepco Facilities or Generator
Facilities shall Maintain those facilities and shall do so pursuant to PJM
Requirements and Good Utility Practice and shall make such additions,
modifications, replacements and improvements as are required by PJM
requirements and Good Utility Practice or which are necessary to maintain
Interconnection Service, provided, however, that the Generator shall not be
obligated under this Agreement to modernize, expand or upgrade the Generator
Facilities unless the failure to modernize, expand or upgrade is reasonably
likely to have a material adverse effect on the operation of the Transmission
System or Interconnection Facilities.

         3.6      Equipment Testing Obligations

<PAGE>   290

                  3.6.1    For reliability purposes with respect to the
Interconnection Facilities and the Transmission System, Pepco may reasonably
request, pursuant to PJM Requirements, or Good Utility Practice, that Generator
test, calibrate, verify, or validate the Generating Facilities or its
equipment, and Generator shall promptly comply with such a request. Generator
shall be responsible for all costs of testing, calibrating, verifying or
validating its facilities.

                  3.6.2    At Pepco's request, Generator shall supply to Pepco
at no cost, copies of inspection reports, installation and maintenance
documents, test and calibration records, verifications, and validations
pursuant to the foregoing Section 3.6.1. Pepco shall supply to Generator, at
Generator's request and at no cost to Generator, copies of inspection reports,
installation and maintenance documents, test and calibration records,
verifications, and validations that Pepco has which are related to the
Interconnection Facilities.

         3.7      Inspections

                  3.7.1    Pepco shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work to the Generating Facilities.
Such access by Pepco shall be exercised in a manner which does not unreasonably
interfere with Generator's ongoing business operations, rights and obligations
and shall be subject to Generator's safety and security practices. If Pepco
observes any deficiencies or defects with respect thereto that might reasonably
be expected to adversely affect the Transmission System or the Interconnection
Facilities, Pepco shall notify the Generator, and Generator shall immediately
make any corrections necessitated by PJM Requirements and Good Utility
Practice. Notwithstanding the foregoing in this Section 3.7.1, Pepco shall have
no liability whatsoever for any failure to fully or adequately observe any
deficiency, it being agreed that Generator shall be fully responsible and
liable for all such deficiencies, activities, equipment tests, installation,
construction or modification.

                  3.7.2    Generator shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work conducted by Pepco to the
Interconnection Facilities. Such access by Generator shall be exercised in a
manner which does not unreasonably interfere with Pepco's ongoing business
operations, rights and obligations and shall be subject to Pepco's safety and
security practices. If Generator observes any deficiencies or defects with
respect thereto that might reasonably be expected to adversely affect the
Station, Generator shall notify Pepco, and Pepco shall immediately make any
corrections necessitated by applicable PJM Requirements and Good Utility
Practice. Notwithstanding the foregoing in this

<PAGE>   291

Section 3.7.2, Generator shall have no liability whatsoever for any failure to
fully or adequately observe any deficiency, it being agreed that Pepco shall be
fully responsible and liable for all such deficiencies, activities, equipment
tests, installation, construction or modification.

         3.8      Information Reporting Obligations

                  3.8.1    In order to provide Interconnection Service
hereunder, Pepco may request, and Generator shall promptly provide, all
relevant information, documents, or data regarding the Generating Facilities
that would be expected to materially affect the Transmission System, and which
is reasonably requested by NERC, MAAC, the PJM Interconnection LLC, the MDPSC,
the District of Columbia Public Service Commission and any other state or
District of Columbia agency having jurisdiction over Pepco or Generator, the
PJM System Operator, or the Transmission Operator, which disclosure shall be
subject to Article 6 of this Agreement regarding the disclosure of commercially
sensitive information.

                  3.8.2    Generator shall promptly supply accurate, complete,
and reliable information in response to reasonable information requests for
real time data and other data from Pepco necessary for operations, maintenance,
compliance with PJM Requirements or regulatory requirements, or analysis of the
Interconnection Facilities or the Transmission System. Such information may
include metered values for MW and MVAR, voltage, current, automatic voltage
regulator status, automatic frequency control, dispatch, frequency, breaker
status indication, or any other information reasonably required for reliable
operation of the Transmission System pursuant to PJM Requirements and Good
Utility Practice. At minimum, Generator shall satisfy the telemetry
requirements set forth in Schedule H.

                  3.8.3    Information pertaining to generation operating
parameters shall be gathered and electronically transmitted directly to Pepco's
energy management system using a mutually acceptable communications protocol.

                  3.8.4    Generator shall be responsible for the maintenance,
and any required replacements or upgrades of the field devices and equipment
used to gather information regarding generation operating parameters.

                  3.8.5    Generator shall Maintain, at its expense, operating
telephone links to the PJM Interconnection LLC, PJM System Operator, Pepco and
the Transmission Operator, to provide information deemed necessary by them, or
as reasonably deemed necessary by Pepco in accordance with PJM Requirements or
Good Utility Practice to integrate operation of the Station with the
Transmission

<PAGE>   292

System, provided, however, that Generator shall not be obligated under this
Agreement to modernize, expand or upgrade the Generator's facilities unless the
failure to modernize, expand or upgrade is reasonably likely to have a material
adverse effect on the operation of the Transmission System. Generator shall use
communication links at the Station consisting of the mobile radio low band C
frequency and "all call" and "red phone" systems currently located at the
Station (or successor systems as may reasonably be required by Pepco) and shall
maintain the availability of such systems to operate during abnormal conditions
including blackouts.

         3.9      Local Services

                  3.9.1    General

                           (a)      The Parties agree that, due to the
integration of certain control schemes of the Station and the Transmission
System, it is cost effective to provide each other with the services set forth
in Sections 3.10 and 3.11 in accordance with the terms and conditions set forth
therein.

                           (b)      The Parties shall ensure, in accordance
with Good Utility Practice, that services provided by one Party to the other
Party pursuant to Sections 3.10 and 3.11 shall be available at all times and in
the manner and at the prices specified herein. Notwithstanding the foregoing,
either Party may change the services, provided that (1) there is no cost to the
receiving Party as a result of such change, (2) the quality, reliability and
integrity of the replacement services is equivalent to the existing service,
and (3) there is otherwise no materially adverse effect on the receiving Party.

                           (c)      Neither Party shall terminate any services
set forth in Sections 3.10 and 3.11 below that it agrees to provide to the
other Party, without the other Party's prior written consent, which consent
shall not be unreasonably withheld or delayed, provided, however, if a Party
receiving a service under Sections 3.10 or 3.11 no longer needs or desires a
particular service, said Party shall notify the other Party and the providing
Party shall terminate said services as soon thereafter as practicable.

                  3.9.2    Temporary Suspension of Local Services

                           (a)      The Party providing a service set forth in
Sections 3.10 or 3.11 below shall notify and obtain approval, which approval
shall not be unreasonably withheld or delayed, from the receiving Party of any
scheduled temporary

<PAGE>   293

suspension of services at least five (5) business days in advance of such
suspension. Such notification shall include an estimated time duration for a
return to normal conditions.

                           (b)      In the event of any unplanned or forced
suspension of the services set forth in Sections 3.10 or 3.11, below, the
providing Party shall immediately notify the other Party first verbally and
then in writing. The providing Party shall use all reasonable efforts to
minimize the duration of said suspension.

                           (c)      The Parties agree to complete any repairs,
modifications or corrections, in accordance with Good Utility Practice, that
are necessary to restore to the other Party as soon as reasonably practicable
any services set forth in Sections 3.10 or 3.11 below that have been suspended.

         3.10     Pepco Provided Services: Schedule F sets forth the local
services Pepco shall provide to the Generator pursuant to the terms of this
Agreement. Unless otherwise specified in Schedule F, for a period of three (3)
years after the Effective Date (the "Initial Period") and subject to Section
3.9 above, Pepco shall provide Generator with the local services set forth in
Schedule F at no cost and in consideration of the local services Generator
shall provide Pepco in accordance with Section 3.11 below. If Generator desires
the continuation of any of the services set forth in Schedule F which are
subject to the Initial Period to continue after the Initial Period, upon
Generator's written request to Pepco made at least 60 days prior to the
expiration of the Initial Period, the Parties shall engage in good faith
negotiations to reach mutually agreeable terms and conditions upon which such
services will continue, provided, however, that if such agreement is not
reached prior to the expiration of the Initial Period, Pepco shall cease to
provide services under Section 3.10 at the end of the Initial Period.

         3.11     Generator Provided Services. Schedule F sets forth the local
services Generator shall provide to Pepco pursuant to the terms of this
Agreement. Unless otherwise specified in Schedule F, for the Initial Period and
subject to Section 3.9 above, Generator shall provide Pepco with the local
services set forth in Schedule F at no cost and in consideration of the local
services Pepco shall provide Generator in accordance with Section 3.10 above.
If Pepco desires the continuation of any of the services set forth in Schedule
F which are subject to the Initial Period to continue after the Initial Period,
upon Pepco's written request to Generator made at least 60 days prior to the
expiration of the Initial Period, the Parties shall engage in good faith
negotiations to reach mutually agreeable terms and conditions upon which such
services will continue, provided, however, that if such agreement is not
reached prior to the expiration of the Initial Period, Generator shall cease to
provide services under Section 3.11 at the end of the Initial Period.

<PAGE>   294

         3.12     Optional Services: Generator may request that Pepco provide
the following services to the Generator, provided, however, that Pepco shall
not have any obligation to provide such services unless the Parties have
mutually agreed in writing to the price and other terms and conditions of such
service:

                  (a)      PJM interface and dispatch services through the
Pepco control center;

                  (b)      use of Pepco's communication services;

                  (c)      maintenance of certain auxiliary and communications
equipment at the Station;

                  (d)      maintenance of high-voltage and medium-voltage
equipment such as power transformers and power circuit breakers;

                  (e)      maintenance of protective relaying, certain control
equipment, such as AGC and MSVC, plant batteries and revenue meters owned by
Generator.

         3.13     Metering and Telemetering

                  3.13.1   Generator shall, at Generator's expense: (a) own,
Maintain and repair, all Revenue Meters, instrument transformers and
appurtenances associated with Revenue Meters, and real time telemetry, (b)
conduct meter accuracy and tolerance tests, and (c) prepare all calibration
reports required for equipment that measures energy transfers at the Point of
Interconnection. All meter accuracy and tolerance testing hereunder shall be in
accordance with PJM Requirements and Good Utility Practice and shall be
conducted, at Pepco's request, in the presence of Pepco's representative.

                  3.13.2   Generator shall own and Maintain, at the Generator's
expense, equipment for redundant real-time communications and transmission of
telemetry, hourly MWh information, and such other information as required by
the PJM System Operator or Transmission Operator, or as reasonably required by
Pepco in accordance with PJM Requirements and Good Utility Practice.

         3.14     Emergency Procedure

                  3.14.1   Pepco, through the Transmission Operator, shall
provide Generator with prompt verbal notification of Emergencies with regard to
the Transmission System which may reasonably be expected to affect Generator's

<PAGE>   295

immediate operation of the Station or Generator Facilities, and Generator shall
provide Pepco with prompt verbal notification of Emergencies with regard to the
Station which may reasonably be expected to affect Interconnection Service or
the Transmission System. Such notification shall describe the Emergency, the
extent of damage or deficiency, the anticipated length of an outage and the
corrective action taken and/or to be taken. Said verbal notification shall be
followed as soon as practicable (but no later than 24 hours after the verbal
notification) with written notification.

                  3.14.2   If an Emergency in the good faith judgment of a
Party endangers or could endanger life or property, the Party recognizing the
problem shall take such action as may be reasonable and necessary to prevent,
avoid, or mitigate injury, danger, or loss. If however the Emergency involves
transmission or electrical equipment, Generator shall notify the Transmission
Operator, and obtain the consent of such personnel, prior to performing any
switching operations.

                  3.14.3   Pepco may, consistent with PJM Requirements and Good
Utility Practice, have the Transmission System Operator take whatever actions
(including tripping Generator's synchronizing breakers) or inactions it deems
necessary during an Emergency to: (a) preserve public safety; (b) preserve the
integrity of the Transmission System, (c) limit or prevent damage; or (d)
expedite restoration of service. If any action or inaction by Pepco or the
Transmission Operator under this Section 3.14 results in the discontinuation,
curtailment, interruption or reduction of Interconnection Service, Pepco shall
use reasonable efforts consistent with PJM Requirements and Good Utility
Practice to restore Interconnection Service as promptly as practicable and to
minimize the effect of such restoration of service on the Station.

         3.15     Interconnection Service Interruptions

                  3.15.1   If at any time, in the reasonable exercise of the
PJM System Operator's judgment, or the Transmission Operator's judgment
exercised in accordance with PJM Requirements or Good Utility Practice and on a
non-discriminatory basis, a condition exists, including the operation of
Generator's equipment, which might reasonably be expected to have a materially
adverse affect on the quality of service rendered by Pepco (including services
rendered to transmission or distribution customers) or interferes with the safe
and reliable operation of the Transmission System, Pepco may discontinue,
curtail, reduce and/or interrupt Interconnection Service until the condition
has been corrected.

                  3.15.2   Unless the PJM System Operator, the Transmission
Operator or Pepco perceives that an Emergency exists or the risk of one is
imminent, Pepco

<PAGE>   296

shall give Generator reasonable notice of its intention to discontinue,
curtail, interrupt or reduce Interconnection Service in response to the
interfering condition and, where practical, allow suitable time for Generator
to remove the interfering condition if it is the result of Generator's
operations, before the discontinuation, curtailment, interruption or reduction
commences. Pepco's judgment with regard to the interruption of service under
this paragraph shall be made pursuant to PJM Requirements and Good Utility
Practice. In the case of such interruption, Pepco shall immediately confer with
Generator regarding the conditions causing such interruption and its
recommendation concerning timely correction thereof. In the event
Interconnection Service is interrupted under this section due to Generator's
failure to operate and Maintain the Generating Facilities pursuant to PJM
Requirements or Good Utility Practice, Generator shall compensate Pepco for all
costs reasonably incurred by Pepco attributable to the interruption and
restoration of Interconnection Service. Pepco shall use reasonable efforts
consistent with PJM Requirements and Good Utility Practice to restore
Interconnection Service interrupted, curtailed or reduced pursuant to this
Section 3.15 as promptly as practicable and to minimize the effect of such
restoration of service on the Station.

         3.16     Unit Status Notification

                  3.16.1   Generator acknowledges that Pepco requires
information regarding the status of the Station for Transmission System
reliability purposes. Accordingly, by 10:00 a.m. of each day, the Generator
shall provide Pepco the following information regarding the status of the
Station for the following day: Station availability to provide energy and
capacity, the Station's scheduled on and off times, Station synchronization,
planned outages or deratings, and generation restrictions and limitations.
Generator shall immediately notify Pepco of any changes to the information
provided pursuant to the foregoing sentence.

                  3.16.2   In circumstances, such as forced outages, Generator
shall notify Pepco of its generating unit's temporary interruption of
generation as soon as practicable; and it shall provide Pepco, as soon as
practicable, with a schedule of when generation will be resumed.

         3.17     Scheduled Maintenance Notification and Coordination

                  3.17.1   Local Routine Inspection and Maintenance. The
Parties agree that, due to the integration of certain control and protective
relaying schemes between the Station and the Interconnection Facilities, it
will be necessary for them to cooperate in the inspection, maintenance and
testing of these areas of integration. Each Party will provide advance notice
to the other Party before undertaking any work in these areas, especially in
electrical circuits involving circuit breaker trip and

<PAGE>   297

close contacts, current transformers or potential transformers and such work
will be performed in accordance with PJM Requirements and Good Utility
Practice.

                  3.17.2   Transmission System Maintenance. Pepco shall consult
with Generator regarding timing of scheduled maintenance of the Interconnection
Facilities or the transmission facilities of the Transmission System which
Pepco or the Transmission Operator performs and which might reasonably be
expected to affect the Station. Pepco shall, to the extent practicable,
schedule any testing, shutdown, or withdrawal of said facilities to coincide
with Generator's scheduled outages for the Station. To facilitate such
consultation and to the extent the information is not available from the PJM
System Operator in a timely manner, in June of each year, or on another date
mutually acceptable to the Parties, Generator shall furnish Pepco with
non-binding preliminary generator maintenance schedules covering the upcoming
two years and any material changes thereto. In the event Pepco is unable to
schedule the outage of its facilities to coincide with Generator's schedule,
Pepco shall notify Generator as soon as practicable of the reasons for the
facilities' outage, of the time scheduled for the outage to take place, and of
its expected duration.

         3.18     Safety

                  3.18.1   General. Pepco agrees with respect to the
Interconnection Facilities and the Transmission System, and Generator agrees
with respect to the Station, that all work performed by either Party on such
facilities which could reasonably be expected to affect the operations of the
other Party shall be performed in accordance with all applicable PJM
Requirements and Good Utility Practice.

                  3.18.2   Switching Tagging and Grounding . Each Party shall
comply with the Switching, Tagging and Grounding Rules. Pepco will notify
Generator of any changes in its Switching, Tagging and Grounding Rules.
Generator shall be responsible for all switching, tagging and grounding on
Generator's side of the Point of Interconnection and, except for Generator
Facilities, Pepco shall be responsible for all switching, tagging and grounding
on its side of the Point of Interconnection.

         3.19     Environmental Compliance and Procedures

                  3.19.1   Each Party shall be responsible for complying with
all Environmental Laws applicable to it with respect to its facilities or
property.

<PAGE>   298

                  3.19.2   A Party shall notify the other Party first verbally
and then in writing, of any Releases of a Hazardous Substance or any type of
remediation activities related thereto as soon as possible but no later than
twenty-four (24) hours after the occurrence if within the reasonable judgment
of the Party said activities could reasonably be expected to have a material
adverse effect upon the operations of the other Party and shall promptly
furnish to the other Party copies of any reports filed with any governmental
agencies covering such events. This Section 3.19.2 does not effect any
allocation of liability with respect to the Station pursuant to the Asset Sale
Agreement.

                  3.19.3   Neither Party shall knowingly take any actions which
might reasonably be expected to have a material adverse environmental impact
upon the operations of the other Party without prior written notification and
agreement between then Parties.

         3.20     Operating Committee. The Parties shall establish an operating
committee consisting of one representative for each Party ("Operating
Committee"). The Operating Committee shall act only by unanimous agreement or
consent. The Parties shall designate their respective representatives to the
Operating Committee, plus an alternate by written notice. Each Party's
representative on the Operating Committee is authorized to act on behalf of
such Party with respect to any matter arising under this Agreement which is to
be decided by the Operating Committee, however, the Operating Committee shall
not have any authority to modify or otherwise alter the rights and obligations
of the Parties hereunder. The Operating Committee shall develop and implement
suitable policies and procedures with which to coordinate the interaction of
the Parties with respect to the performance of their duties and obligations
under this Agreement.

                                   ARTICLE 4
                                   OPERATIONS

         4.1      General

                  4.1.1    The Parties agree to operate their respective
equipment that could reasonably be expected to have a material effect on the
operations of the other Party in a safe and efficient manner and in accordance
with PJM Requirements and Good Utility Practice, and otherwise in accordance
with the terms of this Agreement.

                  4.1.2    Generator shall comply with the requests, orders,
and directives of Pepco with respect to Interconnection Service to the extent
such requests, orders

<PAGE>   299

or directives are (a) issued pursuant to PJM Requirements or Good Utility
Practice, (b) not discriminatory; and (c) otherwise in accordance with this
Agreement or applicable tariffs.

                  4.1.3    In the event Generator believes that a request,
order, or directive of Pepco exceeds the limitations in this Section 4.1.2, it
shall nevertheless comply with the request, order, or directive pending
resolution of the dispute under Article 12. The Parties agree to cooperate in
good faith to expedite the resolution of any disputes arising under this
Section 4.1.

         4.2      Generator's Operating Obligations

                  4.2.1    General. Generator shall request permission from the
Transmission Operator, the PJM System Operator or the PJM Interconnection LLC,
as applicable, prior to opening and/or closing circuit breakers in accordance
with applicable switching and operations procedures and Good Utility Practice.

                           (a)      Generator shall carry out all switching
orders from the Transmission Operator, the PJM System Operator, or the PJM
Interconnection LLC, in a timely manner and in accordance with PJM Requirements
and Good Utility Practice.

                           (b)      Generator shall (i) comply with Pepco's
system restoration plan and black start criteria applicable to the Station as
configured as of the Effective Date or (ii) if the Station's configuration is
modified, provide alternative service restoration and black start capability in
accordance with PJM Requirements. Generator shall ensure that operating
personnel at the Station are trained to implement such system restoration or
black start plans. The Generator shall test the Station's black-start
combustion-turbines annually to confirm that the black-start
combustion-turbines will start without an external power supply. The Generator
shall test the Station's steam turbine-generators and those combustion-turbine
generators that would be required to be black-started in accordance with
Pepco's Emergency Conditions and System Restoration Manual, as revised from
time to time, and plant restoration procedures, at least once every three
years. Testing shall confirm the ability of a generating unit or Station to go
from a shut down condition to an operating condition and start delivering power
without assistance from the Transmission System. These testing requirements
shall remain in place until PJM promulgates specific rules governing
black-start testing.

<PAGE>   300

                           (c)      The electricity supplied by Generator to
the Point of Interconnection shall be in the form of three-phase 60 Hertz
alternating current at the nominal system voltage.

                           (d)      Generator's equipment shall conform with
Good Utility Practice for harmonic distortion and voltage fluctuation.

                  4.2.2    Voltage or Reactive Control Requirements. Unless
otherwise agreed to by the Parties or authorized or directed by the PJM
Interconnection LLC, Generator shall operate the Station with automatic voltage
regulators in service at all times. The voltage regulators will control voltage
at the Points of Interconnection consistent with the range of voltage
prescribed by Pepco or the Transmission System Operator in accordance with PJM
Requirements and Good Utility Practice.

                           (a)      Generator will operate the Station in
accordance with prescribed voltage schedules pursuant to Section 4.2.2 to the
extent the Station is operating within its reactive generating capability and
not violating any electrical constraints. Should Generator fail to comply with
such voltage schedules, Pepco or the Transmission Operator, as applicable,
shall provide written notice to the Generator of its intent to remedy that
failure. If Generator does not promptly commence appropriate action after
receiving such notice, Pepco or the Transmission Operator may then take any
necessary action at Generator's expense to remedy such failure, including the
installation of capacitor banks or other reactive compensation equipment
necessary to ensure the proper voltage or reactive supply at the Station
including, at a minimum, by installing such equipment outside any building
housing the Generation Facilities. Pepco shall make, to the extent feasible,
reasonable efforts to minimize the impact of such action on the operation of
the Station.

                           (b)      Generator shall notify the Transmission
Operator if (a) any or all generating units at the Station reaches a VAR limit,
(b) there is any deviation from the voltage schedules prescribed pursuant to
Section 4.2.2 which is outside the limits permitted by PJM Requirements or Good
Utility Practice, or (c) any automatic voltage regulator is removed from or
restored to service.

                           (c)      The Transmission Operator may from time to
time, pursuant to PJM Requirements or Good Utility Practice, request or direct
Generator to adjust generator controls that impact the Transmission System,
such as excitation, droop, and automatic generation control settings and
Generator shall comply with such request or directions.

<PAGE>   301

                           (d)      Generator acknowledges that the
Transmission Operator may have the right, to the extent authorized or directed
by the PJM Interconnection LLC, to require reduced or increased generation of
the Station in accordance with PJM Requirements, or in accordance with
applicable rules of the Transmission Operator.

         4.3      Auditing of Accounts and Records. The Parties shall have the
right, during normal business hours, to audit each other's accounts and records
pertaining to transactions under this Agreement, upon twenty (20) days prior
written notice, at the offices where such accounts and records are maintained,
provided, however, that the audit shall be limited to those portions of the
accounts and records that are related to services provided to the other Party
under this Agreement. Any such audit of a Party's accounts and records will be
at the expense of the auditing Party, shall not be made more frequently than
once in any twelve (12) month period, and no such audit may be made with
respect to accounts and records relating to periods more than twenty-four (24)
months prior to the date of the audit notice. The Party being audited will be
entitled to review the audit report and any supporting materials. The Party
conducting the audit shall maintain the confidentiality of all information
obtained during the audit in compliance with Article 6 of this Agreement. To
the extent that audited information includes confidential information, the
auditing Party shall designate an independent auditor at its expense to perform
such audit.

                                   ARTICLE 5
                  COST RESPONSIBILITIES AND BILLING PROCEDURES

         5.1      Cost Responsibilities for Interconnection Service. Except as
otherwise expressly stated herein, Generator shall not be responsible for any
costs arising from Pepco's provision of Interconnection Service or local
services to Generator, except for those costs specified in Sections 3.2.1,
3.2.2, 3.4.1, and 3.15 or arising from the liability or indemnification
provisions of this Agreement.

         5.2      Cost Responsibilities for Local Services. Except as otherwise
expressly provided herein or agreed to by the Parties, each Party shall be
responsible for the costs for local services provided to the other Party in
Sections 3.10 and 3.11 as set forth in said sections.

         5.3      Billing Procedures

<PAGE>   302

                  (a)      Within ten (10) days after the first day of each
calendar month, each Party shall provide the other Party with a written invoice
for any payments due from the other Party for services provided in the previous
month.

                  (b)      Each invoice shall (i) delineate the month in which
the services were provided, (ii) fully describe the services rendered, (iii) be
itemized to reflect the services performed or provided, and (iv) provide
reasonable detail as to the calculation of the amount involved.

                  (c)      All invoices shall be paid within fifteen (15) days
after receipt, but not earlier than the 25th day of the month in which the
invoice is rendered. All payments shall be made in immediately available funds
payable to the other Party, or by wire transfer to a bank designated in writing
by such Party. Payment of invoices shall not relieve the paying Party from any
responsibilities or obligations it has under this Agreement, nor shall such
payment constitute a waiver of any claims arising hereunder.

                  5.3.2    To the extent that, for any billing period,
Generator is obligated to pay to Pepco amounts due and calculated pursuant to
Section 5.3, Pepco may use such amounts as a set-off against any amounts owed
by Pepco to Generator under this Section 5.3.

                  5.3.3    Interest on any unpaid amounts shall be calculated
in accordance with the methodology specified for interest on refunds in FERC
regulations at 18 C.F.R. Section 35.19a(a)(2)(iii). Interest on delinquent
amounts shall be calculated from the due date of the bill to the date of
payment. When payments are made by mail, bills shall be considered as having
been paid on the date of receipt by the other Party.

         5.4      Billing Disputes. In the event of a billing dispute between
the Parties, each Party shall continue to provide services as long as the other
Party continues to make all payments not in dispute. Payment of invoices by
either Party shall not relieve the paying Party from any responsibilities or
obligations it has under this Agreement; nor shall it constitute a waiver of
any claims arising hereunder.

                                   ARTICLE 6
                                CONFIDENTIALITY

         6.1      Confidentiality Obligations of Pepco. Pepco shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or other provisions of law, all documents and information furnished by
Generator in

<PAGE>   303

connection with this Agreement marked "Confidential" or "Proprietary." Except
to the extent that such information or documents are (i) generally available to
the public other than as a result of a disclosure by Pepco in breach of this
Agreement, (ii) available to Pepco on a non-confidential basis prior to
disclosure to Pepco by Generator, or (iii) available to Pepco on a
non-confidential basis from a source other than Generator, provided that such
source is not known, and by reasonable effort could not be known, by Pepco to
be bound by a confidentiality agreement with Generator or otherwise prohibited
from transmitting the information to Pepco by a contractual, legal or fiduciary
obligation, Pepco shall not release or disclose such information to any other
person, except to its employees, representatives or agents on a need-to-know
basis, in connection with this Agreement who has not first been advised of the
confidentiality provisions of this Section 6.1 and has agreed in writing to
comply with such provisions. In no event shall such information be disclosed in
violation of the requirements of FERC Orders 889 and 889-A, and any successor
thereto. Pepco shall promptly notify Generator if it receives notice or
otherwise concludes that the production of any information subject to this
Section 6.1 is being sought under any provision of law and Pepco shall use
reasonable efforts in cooperation with Generator to seek confidential treatment
for such confidential information provided thereto.

         6.2      Confidentiality Obligations of Generator. Generator shall
hold in confidence, unless compelled to disclose by judicial or administrative
process or other provisions of law, all documents and information furnished by
Pepco in connection with this Agreement marked "Confidential" or "Proprietary."
Except to the extent that such information or documents are (i) generally
available to the public other than as a result of a disclosure by Generator in
breach of this Agreement, (ii) available to Generator on a non-confidential
basis prior to disclosure to Generator by Pepco, or (iii) available to
Generator on a non-confidential basis from a source other than Pepco, provided
that such source is not known, and by reasonable effort could not be known, by
Generator to be bound by a confidentiality agreement with Pepco or otherwise
prohibited from transmitting the information to Generator by a contractual,
legal or fiduciary obligation, Generator shall not release or disclose such
information to any other person, except to its employees, representatives or
agents on a need-to-know basis, in connection with this Agreement who has not
first been advised of the confidentiality provisions of this Section 6.2 and
has agreed in writing to comply with such provisions. In no event shall such
information be disclosed in violation of the requirements of FERC Orders 889
and 889-A, and any successor thereto. Generator shall promptly notify Pepco if
it receives notice or otherwise concludes that the production of any
information subject to this Section 6.2 is being sought under any provision of
law and Generator shall use reasonable efforts in cooperation with Pepco to
seek confidential treatment for such confidential information provided thereto.

<PAGE>   304

         6.3      Confidentiality of Audits. The independent auditor performing
any audit, as referred to in Section 4.3, shall be subject to a confidentiality
agreement between the auditor and the Party being audited. Such audit
information shall be treated as confidential except to the extent that its
disclosure is required by regulatory or judicial order, for reliability
purposes pursuant to PJM Requirements or Good Utility Practice, and pursuant to
the FERC's rules and regulations. Except as provided herein, neither Party will
disclose the audit information to any third party, without the other Party's
prior written consent. Audit information in the hands of the Party not being
audited shall be subject to all provisions of Section 6.1 or 6.2, above, as
applicable.

         6.4      Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its
obligations under Section 6.1 or 6.2, above, as applicable. Each Party
accordingly agrees, subject to Article 8, that the other Party shall be
entitled to equitable relief, by way of injunction or otherwise, if the first
Party breaches or threatens to breach its obligations under Section 6.1 or 6.2
of this Agreement, as applicable, which equitable relief shall be granted
without bond or proof of damages, and the receiving Party shall not plead in
defense that there would be an adequate remedy at law.

                                   ARTICLE 7
                               EVENTS OF DEFAULT

         7.1      Events of Default. Each of the following shall constitute an
Event of Default by the a defaulting Party under this Agreement:

                  (a)      The failure by a Party to pay any amount due within
twenty (20) calendar days after receipt of written notice of nonpayment by the
other Party, unless the payment of such amount is disputed in good faith, in
which event Section 5.5 shall apply;

                  (b)      A Party's breach of any material term or condition
of this Agreement, including but not limited to any material breach of a
representation, warranty or covenant made in this Agreement which, after
receiving written notice of the breach from the non-breaching Party (such
notice to set forth in reasonable detail the nature of the default and, where
known and if applicable, the steps necessary to cure such default), (i) the
breaching Party fails to cure, if curable, within thirty (30) days following
receipt of the notice or (ii) if such default is of such a nature that it
cannot be cured within thirty (30) days following receipt of such notice, the
breaching Party fails within such thirty (30) days to commence the necessary
cure and fails at any time thereafter diligently and continuously to

<PAGE>   305

prosecute such cure to completion provided that the cure is completed no later
than 180 days after the receipt of the default notice;

                  (c)      The appointment of a receiver, liquidator or trustee
for either Party, and such receiver, liquidator or trustee is not discharged
within sixty (60) days;

                  (d)      The entry of a decree or decrees adjudicating a
Party as bankrupt or insolvent, and such decree or decrees are not stayed or
discharged within sixty (60) days; or

                  (e)      The filing of voluntary petitions for bankruptcy
under any federal or state bankruptcy law by a Party.

            7.2   Remedies

                  7.2.1    If the breaching Party disputes that an Event of
Default under Section 7.1.(b) has occurred, the breaching Party shall
nonetheless comply with this Section 7.2 pending the resolution of the dispute.
If it is determined that no breach or Event of Default under Section 7.1(b)
existed, the Party alleging the default shall pay and reimburse the other Party
for all reasonable costs and expenses incurred by it to cure the alleged
default.

                  7.2.2    Upon the occurrence of an Event of Default, the
non-defaulting Party may (i) exercise all such rights and remedies as may be
available to it at law or equity including seeking to recover damages caused by
such Event of Default, subject to Article 8 of this Agreement; and/or (ii)
terminate this Agreement. The Parties shall not discontinue the performance of
any one or more of their obligations hereunder due to the occurrence of an
Event of Default during the pendency of any dispute regarding such Event of
Default and until such dispute is finally resolved except that Pepco may
suspend or interrupt service if necessary for the safe and reliable operation
of the Interconnection Facilities or the Transmission System.

                  7.2.3    Notwithstanding the foregoing, upon the occurrence
of any Event of Default, the non-defaulting Party shall be entitled to commence
an action to require the defaulting Party to remedy such default by
specifically performance of its duties and obligations hereunder in accordance
with the terms and conditions hereof.

<PAGE>   306

                  7.2.4    Notwithstanding anything in this Agreement to the
contrary, in the event the Generator's failure to comply with the provisions of
Sections 4.1 and 4.2 of this Agreement is reasonably likely to have an
immediate and material adverse impact on Pepco or the Transmission System,
Pepco shall have the right to take immediately reasonable steps and/or to
exercise immediately all remedies available under this Agreement, or at law or
equity, including the right, after providing as much notice as is practicable
under the circumstances and complying with the applicable FERC notice
requirements regarding termination of service, to disconnect the Station from
the Transmission System.

                                   ARTICLE 8
                            LIMITATION OF LIABILITY

         8.1      Limitation of Pepco's Liability. Pepco does not guarantee the
non-occurrence of, or warrant against, and will have no liability hereunder
for, and the Generator will release Pepco from all claims or damages associated
with, any interruption in the availability of the Interconnection Facilities,
Interconnection Service or local services pursuant to Section 3.10 or damages
to the Generator's facilities, except to the extent such interruption or damage
is caused by Pepco's gross negligence or willful misconduct in the performance
of its obligations under this Agreement.

         8.2      Limitation on Generator's Liability. Generator does not
guarantee the non-occurrence of, or warrant against, and will have no liability
under this Agreement for, and Pepco will release Generator from all claims or
damages arising under this Agreement which are associated with any interruption
in the availability of the Station or local services pursuant to Section 3.11,
any reduction, curtailment, interruption or reduction of energy from the
Station, or damage to Pepco's facilities, except to the extent such
interruption or damage is caused by Generator's gross negligence or willful
misconduct in the performance of its obligations under the Agreement.

         8.3      Consequential Damages. Except for indemnity obligations set
forth in Article 9, neither Party, nor their respective officers, directors,
agents, employees, Affiliates, or successors or assigns of any of them, shall
be liable to the other Party or its Affiliates, officers, directors, agents,
employees, successors or assigns for claims, suits, actions or causes of action
for incidental, punitive, special, indirect, multiple or consequential damages
(including, without limitation, replacement power costs, lost revenues, claims
of customers, attorneys' fees and litigation costs) connected with, or
resulting from, performance or non-performance of this Agreement, or any
actions undertaken in connection with or related to this Agreement, including,
without limitation, any such damages which are based upon causes of action for

<PAGE>   307

breach of contract, tort (including negligence and misrepresentation), breach
of warranty or strict liability. The provisions of this Section 8.3 shall apply
regardless of fault and shall survive termination, cancellation, suspension,
completion, or expiration of this Agreement.

                                   ARTICLE 9
                     INDEMNIFICATION FOR THIRD PARTY CLAIMS

         9.1      Generator's Indemnification. Generator shall indemnify, hold
harmless, and defend Pepco and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between Pepco and a third party or Generator) for
damage to property of unaffiliated third parties, injury to or death of any
person, including Pepco's employees or any third parties, to the extent caused,
by the negligence or willful misconduct of Generator's and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Generator's performance or breach of this Agreement,
or the exercise by Generator of its rights hereunder. In furtherance of the
foregoing indemnification and not by way of limitation thereof, Generator
hereby waives any defense it might otherwise have under applicable workers'
compensation laws.

         9.2      Pepco's Indemnification. Pepco shall indemnify, hold
harmless, and defend Generator and its Affiliates, as the case may be, and
their respective officers, directors, employees, agents, contractors,
subcontractors, invitees, successors and permitted assigns from and against any
and all claims, liabilities, costs, damages, and expenses (including, without
limitation, reasonable attorney and expert fees, and disbursements incurred by
any of them in any action or proceeding between the Generator and a third party
or Pepco) for damage to property of unaffiliated third parties, injury to or
death of any person, including Generator's employees or any third parties, to
the extent caused by the negligence or willful misconduct of Pepco and/or its
officers, directors, employees, agents, contractors, subcontractors or invitees
arising out of or connected with Pepco's performance or breach of this
Agreement, or the exercise by Pepco of its rights hereunder. In furtherance of
the foregoing indemnification and not by way of limitation thereof, Pepco
hereby waives any defense it might otherwise have under applicable workers'
compensation laws.

         9.3      Indemnification Procedures. If either Party intends to seek
indemnification under this Article 9 from the other Party, the Party seeking
indemnification shall give the other Party notice of such claim within ninety
(90)

<PAGE>   308

days of the later of the commencement of, or the Party's actual knowledge of,
such claim or action. Such notice shall describe the claim in reasonable
detail, and shall indicate the amount (estimated if necessary) of the claim
that has been, or may be sustained by, said Party. To the extent that the other
Party will have been actually and materially prejudiced as a result of the
failure to provide such notice, such notice will be a condition precedent to
any liability of the other Party under the provisions for indemnification
contained in this Agreement. Neither Party may settle or compromise any claim
without the prior consent of the other Party; provided, however, said consent
shall not be unreasonably withheld or delayed.

         9.4      Survival. The indemnification obligations of each Party under
this Article 9 shall continue in full force and effect regardless of whether
this Agreement has either expired or been terminated or canceled.

                                   ARTICLE 10
                                   INSURANCE

         10.1     Insurance Coverage. The Parties shall maintain at their own
cost and expense, fire, liability, worker's compensation, and other forms of
insurance relating to their respective property and facilities subject to this
Agreement in the manner, and amounts, and for the durations as is customary in
the electric utility industry.

         10.2     Certificates of Insurance. The Parties agree to furnish each
other with certificates of insurance evidencing the insurance coverage obtained
in accordance with this Article 10, and the Parties agree to notify and send
copies to the other of any policies maintained hereunder upon written request
by a Party. Each Party must notify the other Party within ten (10) business
days of receiving notice of cancellation, change, amendment or renewal of any
insurance policy required pursuant to Section 10.1 above.

         10.3     Additional Insureds and Waiver. Each Party and its affiliates
shall be named as additional insureds on the general liability insurance
policies obtained in accordance with Section 10.1, above, as regards liability
under this Agreement; and each Party shall waive its rights of recovery against
the other for any loss or damage covered by such policy.

<PAGE>   309
                                   ARTICLE 11
                                 FORCE MAJEURE

         11.1     Effect of Force Majeure. Notwithstanding anything in this
Agreement to the contrary, Generator and Pepco shall not be liable in damages
or otherwise or responsible to the other for its failure to carry out any of
its obligations under this Agreement (except for the obligation to pay sums of
money due and owing hereunder) to the extent that they are unable to so perform
or are prevented from performing by an event of Force Majeure and has complied
with Section 11.3.

         11.2     Force Majeure Defined. Force Majeure means those causes
beyond the reasonable control of the Party affected, which by the exercise of
reasonable diligence, including Good Utility Practice, that Party is unable to
prevent, avoid, mitigate, or overcome, including the following: any act of God,
labor disturbance (including a strike), act of the public enemy, war,
insurrection, riot, fire, storm or flood, explosion, breakage or accident to
machinery or equipment, electric system disturbance), order, regulation or
restriction imposed by governmental, military or lawfully established civilian
authorities, or any other cause of a similar nature beyond a Party's reasonable
control.

         11.3     Notification. A Party shall not be entitled to rely on the
occurrence of an event of Force Majeure as a basis for being excused from
performance of its obligations under this Agreement, unless the Party relying
on the event or condition shall: (a) provide prompt written notice of such
Force Majeure event to the other Party, including an estimation of its expected
duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts in accordance with Good Utility
Practice to continue to perform its obligations under this Agreement; (c)
expeditiously take action to correct or cure the event or condition excusing
performance; (d) exercise all reasonable efforts to mitigate or limit damages
to the other Party; and (e) provide prompt notice to the other Party of the
cessation of the event or condition giving rise to its excuse from performance.
Subject to this Section 11.3, any obligation under this Agreement shall be
suspended only to the extent caused by such Force Majeure and only during the
continuance of any inability of performance caused by such Force Majeure but
for no longer period.

                                   ARTICLE 12
                                    DISPUTES

         12.1     Disputes

<PAGE>   310

                  12.1.1   A Party with a claim or dispute under this Agreement
shall submit to the Operating Committee a notification of such claim or dispute
within sixty (60) days after the circumstances that gave rise to the claim or
the question or issue in dispute. The notification shall be in writing and
shall include a concise statement of the claim or the issue or question in
dispute, a statement of the relevant facts and documentation to support the
claim. In the event the Operating Committee is unable, in good faith, to
resolve their disagreement in a manner satisfactory to both Parties within
thirty (30) days after receipt by the Operating Committee of a notification
specifying the claim, issue or question in dispute, the Parties shall refer the
dispute to their respective senior management. If, after using their good faith
best efforts to resolve the dispute, senior management cannot resolve the
dispute within thirty (30) days, the Parties shall utilize the arbitration
procedures set forth below in Section 12.2 to resolve a dispute, provided that
nothing herein or therein shall prohibit either Party from at any time
requesting from a court of competent jurisdiction a temporary restraining
order, preliminary injunction, or other similar form of equitable relief to
enforce performance of the provisions of this Agreement.

         12.2     Arbitration.

                  (a)      Unless the Parties other wise mutually agree in
writing to another form of dispute resolution such as dispute resolution under
the PJM Agreement or the MAAC agreement, any arbitration initiated under this
Agreement shall be conducted before a single neutral arbitrator appointed by
the Parties within thirty (30) days of receipt by respondent of the demand for
arbitration. If the Parties are unable to agree on an arbitrator, such
arbitration shall be appointed by the American Arbitration Association. Unless
the Parties agree otherwise, the arbitrator shall be an attorney or retired
judge with at least fifteen (15) years of experience, and shall not have any
current or past substantial business or financial relationships with any Party
to the arbitration. If possible, the arbitrator shall have experience in the
electric utility industry. Unless otherwise agreed, the arbitration shall be
conducted in accordance with the American Arbitration Association's Commercial
Arbitration Rules, then in effect. Any arbitration proceedings, decision or
award rendered hereunder and the validity, effect and interpretation of this
arbitration agreement shall be governed by the Federal Arbitration Act of the
United States, 9 U.S.C. Section 1 et seq. The location of any arbitration
hereunder shall be in the District of Columbia.

                  (b)      The arbitration shall, if possible, be concluded not
later than six (6) months after the date that it is initiated. The arbitrator
shall be authorized only to interpret and apply the provisions of this
Agreement or any related agreements entered into under this Agreement and shall
have no power to modify

<PAGE>   311

or change any of the above in any manner. The arbitrator shall have no
authority to award punitive or multiple damages or any damages inconsistent
with this Agreement. The arbitrator shall, within thirty (30) days of the
conclusion of the hearing, unless such time is extended by agreement of the
Parties, notify the Parties in writing of his or her decision, stating his or
her reasons for such decision and separately listing his or her findings of
fact and conclusions of law. The decision of the arbitrator rendered in such a
proceeding shall be final and binding on the Parties. Judgment on the award may
be entered upon it in any court having jurisdiction.

         12.3     FERC Dispute Resolution. Nothing in this Agreement shall
preclude, or be construed to preclude, any Party from filing a petition or
complaint with FERC with respect to any arbitrable claim over which FERC has
jurisdiction. In such case, the other Party may request FERC to reject or to
waive jurisdiction. If FERC rejects or waives jurisdiction with respect to all
or a portion of the claim, the portion of the claim not so accepted by FERC
shall be resolved through arbitration, as provided in this Agreement. To the
extent that FERC asserts or accepts jurisdiction over the claim, the decision,
finding of fact or order of FERC shall be final and binding, subject to
judicial review under the Federal Power Act, and any arbitration proceedings
that may have commenced with respect to the claim prior to the assertion or
acceptance of jurisdiction by FERC shall be terminated.

                                   ARTICLE 13
                                REPRESENTATIONS

         13.1     Representations of Pepco. Pepco hereby represents and
warrants to Generator as follows:

                  (a)      Incorporation. Pepco is a corporation duly
organized, validly existing and in good standing under the laws of the District
of Columbia and the Commonwealth of Virginia, and has all requisite corporate
power and authority to own, lease and operate its material assets and
properties and to carry on its business as now being conducted.

                  (b)      Authority. Pepco has all necessary corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Pepco of this
Agreement and the consummation by Pepco of the transactions contemplated
hereunder have been duly and validly authorized by the Board of Directors of
Pepco or by a committee thereof to whom such authority has been delegated and
no other corporate proceedings on the part of Pepco are necessary to authorize
this Agreement or the transactions contemplated hereby. This Agreement has been
duly and validly

<PAGE>   312

executed and delivered by Pepco and, assuming that this Agreement constitutes a
valid and binding agreement of Generator, constitutes a valid and binding
agreement of Pepco, enforceable by Pepco in accordance with its terms.

                  (c)      Consents and Approvals; No Violation.

                           (i)      Neither the execution and delivery of this
Agreement by Pepco nor performance by Pepco of its obligations hereunder will
(A) conflict with or result in any breach of any provision of the Certificate
of Incorporation or By-laws of Pepco, (B) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Pepco or any of its
subsidiaries is a party or by which any of their respective assets may be bound
or (C) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Pepco, or any of its assets, except in the case of clauses (B)
and (C) for such failures to obtain a necessary consent, defaults and
violations which would not, individually or in the aggregate, have a material
adverse effect on the ability of Pepco to discharge its obligations under this
Agreement (a "Pepco Material Adverse Effect").

                           (ii)     No declaration, filing or registration
with, or notice to, or authorization, consent or approval of any governmental
authority is necessary for performance by Pepco of its obligations hereunder,
other than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made would not, individually or
in the aggregate, have a Pepco Material Adverse Effect.

         13.2     Representations of Generator. Generator hereby represents and
warrants to Pepco as follows:

                  (a)      Incorporation. Generator is a [corporation] duly
[incorporated], validly existing and in good standing under the laws of the
State of __________, and has all requisite [corporate] power and authority to
own, lease and operate its material assets and properties and to carry on its
business as now being conducted.

                  (b)      Authority. Generator has all necessary [corporate]
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by the Generator
of this Agreement and the consummation by Generator of the transactions
contemplated hereby have been duly and validly authorized the [Board of
Directors] of Generator

<PAGE>   313

or by a committee thereof to whom such authority has been delegated and no
other [corporate] proceedings on the part of Generator are necessary to
authorize this Agreement or the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Generator and,
assuming that this Agreement constitutes a valid and binding agreement of
Pepco, constitutes a valid and binding agreement of Generator, enforceable
against Generator in accordance with its terms.

                  (c)      Consents and Approvals.

                           (i)      Neither the execution and delivery of this
Agreement by Generator nor performance by Generator of its obligations
hereunder will (A) conflict with or result in any breach of any provision of
the [Certificate of Incorporation or By-laws] of Generator, (B) result in a
default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement, lease or other instrument or
obligation to which Generator or any of its subsidiaries is a party or by which
any of their respective assets may be bound or (C) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Generator, or any
of its assets, except in the case of clauses (B) and (C) for such failures to
obtain a necessary consent, defaults and violations which would not,
individually or in the aggregate, have a material adverse effect on the ability
of Generator to discharge its obligations under this Agreement (a "Generator
Material Adverse Effect").

                           (ii)     No declaration, filing or registration
with, or notice to, or authorization, consent or approval of any Governmental
Authority is necessary for performance by Generator of its obligations
hereunder, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not obtained or made would not,
individually or in the aggregate, have a Generator Material Adverse Effect.

                                   ARTICLE 14
                    ASSIGNMENT/CHANGE IN CORPORATE IDENTITY

         14.1     Assignment.

                  (a)      Except as set forth in this Article 14, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by either Party hereto, without the prior written consent of the other
Party, which consent shall not be unreasonably withheld or delayed.

<PAGE>   314

                  (b)      Subject to Section 14.2, upon ten (10) days prior
written notice to Generator, Pepco may assign this Agreement, and Pepco's
rights, interests and obligations hereunder, to (i) an Affiliate of Pepco that
owns all or part of Pepco's Transmission System or (ii) an independent system
operator or independent transmission company whose control over all or part of
Pepco's Transmission System has been approved by the FERC.

                  (c)      Subject to Section 14.2, Generator may (a) assign
any of its rights and obligations hereunder to an Affiliate to the extent
necessary for the Generator to qualify as an exempt wholesale generator under
Section 32 of the Public Utility Holding Company Act of 1935, as amended, and
(b) assign, transfer, pledge or otherwise dispose of its rights and interests
hereunder to a trustee, lending institution, or other Person for the purposes
of financing or refinancing the Station, including upon or pursuant to the
exercise of remedies under such financing or refinancing, or by way of
assignments, transfers, conveyances of dispositions in lieu thereof; provided,
however, that no such assignment shall relieve or in any way discharge
Generator from the performance of its duties and obligations under this
Agreement. Pepco agrees to execute and deliver, at Generator's expense, such
documents as may be reasonably necessary to accomplish any such assignment,
transfer, conveyance, pledge or disposition of rights hereunder for purposes of
the financing or refinancing of the Facility, so long as Pepco's rights under
this Agreement are not thereby altered, amended, diminished or otherwise
impaired.

                  (d)      Subject to Section 14.2, either Party may assign
this Agreement to a successor to all or substantially all of the assets of such
Party by way of merger, consolidation, sale or otherwise, provided such
successor assumes in writing and becomes liable for all of such Party's duties
and obligations hereunder.

         14.2     Release of Rights and Obligations. No assignment, transfer,
conveyance, pledge or disposition of rights, interests, duties or obligations
under this Agreement by a Party shall relieve that Party from liability and
financial responsibility for the performance thereof after any such transfer,
assignment, conveyance, pledge or disposition unless and until (i) the
transferee or assignee shall agree in writing to assume the obligations and
duties of that Party under this Agreement and to impose such obligations on
subsequent permitted transferees and assignees and (ii) the non-assigning Party
has consented in writing to such assumption and to a release of the assigning
Party from such liability, such consent not to be unreasonably withheld or
delayed.

         14.3     Change in Corporate Identity. If Generator terminates its
existence as a [corporate] entity by merger, acquisition, sale, consolidation
or otherwise, or if all or substantially all of Generator's assets are
transferred to another person or

<PAGE>   315

business entity without complying with this Article 14, Pepco shall have the
right, enforceable in a court of competent jurisdiction, to enjoin Generator's
successor from using the Station in any manner that does not comply with the
requirements of this Agreement or that impedes Pepco's ability to carry on its
ongoing business operations.

         14.4     Successors and Assigns. This Agreement and all of the
provisions hereof are binding upon, and inure to the benefit of, the Parties
and their respective successors and permitted assigns.

                                   ARTICLE 15
                                 SUBCONTRACTORS

         Nothing in this Agreement shall prevent the Parties from utilizing the
services of subcontractors as they deem appropriate, provided, however, the
Parties agree that, where applicable, all said subcontractors shall comply with
the terms and conditions of this Agreement. The creation of any subcontract
relationship shall not relieve the hiring Party of any of its obligations under
this Agreement. Each Party shall be fully responsible to the other Party for
the acts and/or omission of any subcontractor it hires as if no subcontract had
been made. Any obligation imposed by this Agreement upon the Parties, where
applicable, shall be equally binding upon and shall be construed as having
application to any subcontractor. The Parties shall each be liable for,
indemnify, and hold harmless the other Party, their Affiliates and their
officers, directors, employees, agents, servants, and assigns from and against
any and all claims, demands, or actions, from the other Party's subcontractors;
and shall pay all costs, expenses and legal fees associated therewith and all
judgments, decrees and awards rendered therein. No subcontractor is intended to
be or shall be deemed a third-party beneficiary of this Agreement.

                                   ARTICLE 16
                                    NOTICES

         16.1     Emergency Notices. At or prior to the Effective Date, each
Party shall indicate to the other Party, by notice, the appropriate person
during each eight-hour work shift to contact in the event of an emergency, a
scheduled or forced interruption or reduction in services. The notice last
received by a Party shall be effective until modified in writing by the other
Party.

         16.2     Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (as of the time of delivery or, in the
case of a telecopied communication, of confirmation) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier (providing proof
of delivery) to

<PAGE>   316

the Parties at the following addresses (or at such other address for a Party as
shall be specified by like notice):

            if to Pepco, to:

                  Potomac Electric Power Company
                  1900 Pennsylvania Avenue, N.W.
                  Washington, D.C.  20068
                  Telecopier:  (202) ________________
                  Attention: ________________________

            if to Generator, to:

                  c/o Southern Energy, Inc.
                  900 Ashwood Parkway
                  Suite 500
                  Atlanta, Georgia 30338-4780
                  Telecopier: (770) 821-6575
                  Attention:

                                   ARTICLE 17
                                   AMENDMENTS

         17.1     Amendments. Except as set forth in Sections 2.2 and 17.2 of
this Agreement, this Agreement may be amended, modified, or supplemented only
by written agreement of both Pepco and Generator.

         17.2     FERC Proceedings

                  (a)      Pepco may unilaterally make application to FERC
under Section 205 of the Federal Power Act and pursuant to the FERC's rules and
regulations promulgated thereunder for, or exercise any rights it may have
under Section 206 of the Federal Power Act and the regulations thereunder with
respect to, a change in any rates, terms and conditions, charges,
classification of service, rule or regulation for any services Pepco provides
under this Agreement over which FERC has jurisdiction.

                  (b)      Generator may exercise its rights under Section 205
or 206 of the Federal Power Act and pursuant to FERC's rules and regulations
promulgated thereunder with respect to any rate, term, condition, charge,
classification of service, rule or regulation for any services provided under
this Agreement over which FERC has jurisdiction.

<PAGE>   317

                                   ARTICLE 18
                            MISCELLANEOUS PROVISIONS

         18.1     Waiver. Except as otherwise provided in this Agreement, any
failure of a Party to comply with any obligation, covenant, agreement, or
condition herein may be waived by the Party entitled to the benefits thereof
only by a written instrument signed by the Party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement, or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.

         18.2     Labor Relations. The Parties agree to immediately notify the
other Party, verbally and then in writing, of any labor dispute or anticipated
labor dispute which may reasonably be expected to affect the operations of the
other Party.

         18.3     No Third Party Beneficiaries. Nothing in this Agreement is
intended to confer upon any other person except the Parties any rights or
remedies hereunder or shall create any third party beneficiary rights in any
person. No provision of this Agreement shall create any rights in any such
persons in respect of any benefits that may be provided, directly or
indirectly, under any employee benefit plan or arrangement except as expressly
provided for thereunder.

         18.4     Governing Law

This Agreement shall be governed by and construed in accordance with the laws
of the State of Maryland (regardless of the laws that might otherwise govern
under applicable principles of conflicts of law).

         18.5     Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         18.6     Interpretation. When a reference is made in this Agreement to
an Article, Section, Schedule or exhibit, such reference shall be to an Article
or Section of, or Schedule or exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation" or equivalent words. The words "hereof",
"herein" and "hereunder" and words of similar import when used in this
Agreement shall refer to this

<PAGE>   318

Agreement as a whole and not to any particular provision of this Agreement. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Unless otherwise expressly stated
otherwise herein, the word "day" shall mean any calendar day including weekends
and holidays. Any agreement, instrument, statute, regulation, rule or order
defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument, statute, regulation, rule
or order as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes, regulations, rules or orders) by succession of comparable successor
statutes, regulations, rules or orders and references to all attachments
thereto and instruments incorporated therein. References to a person are also
to its permitted successors and assigns. Each Party acknowledges that it has
been represented by counsel in connection with the review and execution of this
Agreement, and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

         18.7     Jurisdiction and Enforcement. Each of the Parties irrevocably
submits to the exclusive jurisdiction of the federal and state courts of the
State of Maryland for the purposes of any suit, action or other proceeding
arising out of this Agreement or any transaction contemplated hereby. Each of
the Parties agrees to commence any action, suit or proceeding relating hereto
either in the federal courts of the State of Maryland or, if such suit, action
or proceeding may not be brought in such court for jurisdictional reasons, in
the state courts of the State of Maryland. Each of the Parties further agrees
that service of process, summons, notice or document by hand delivery or U.S.
registered mail at the address specified for such Party in Section 16.2 (or
such other address specified by such Party from time to time pursuant to
Section 16.2) shall be effective service of process for any action, suit or
proceeding brought against such Party in any such court. Each of the Parties
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in the federal and state courts of the State
of Maryland and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.

         18.8     Entire Agreement. This Agreement, Asset Sale Agreement, the
Confidentiality Agreement and the Ancillary Agreements including the Exhibits,
Schedules, documents, certificates and instruments referred to herein or
therein and other contracts, agreements and instruments contemplated hereby or
thereby, embody the entire agreement and understanding of the Parties in
respect of the

<PAGE>   319

transactions contemplated by this Agreement. There are no restrictions,
promises, representations, warranties, covenants or undertakings other than
those expressly set forth or referred to herein or therein. This Agreement, the
Asset Sale Agreement and the Ancillary Agreements supersede all prior
agreements and understandings between the Parties with respect to the
transactions contemplated by this Agreement other than the Confidentiality
Agreement.

         18.9     Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
Parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the Parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.

         18.10    Independent Contractor Status. Nothing in this Agreement
shall be construed as creating any relationship between Pepco and Generator
other than that of independent contractors.

         18.11    Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

<PAGE>   320

         IN WITNESS WHEREOF, Pepco and Generator have caused this
Interconnection Agreement (Dickerson) to be signed by their respective duly
authorized officers as of the date first above written.

                           POTOMAC ELECTRIC POWER COMPANY

                           By:
                              -------------------------------------------------
                              Name:
                              Title:

                           [GENERATOR]

                           By:
                              -------------------------------------------------
                              Name:
                              Title:

<PAGE>   321

                                   SCHEDULE A
                                  DEFINITIONS

Part A.  Capitalized terms not defined in the body of the Agreement shall
         have the meaning set forth in Part A of this Schedule A. (Part B of
         this Schedule A sets forth capitalized terms defined within the
         Agreement.)

         (1)      "Affiliate" has the meaning set forth in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934.

         (2)      "Ancillary Agreements" has the meaning set forth in the Asset
Sale Agreement.

         (3)      "Closing" has the meaning set forth in the Asset Sale
Agreement.

         (4)      "Confidentiality Agreement" has the meaning set forth in the
Asset Sale Agreement.

         (5)      "Costs" means all costs, including without limitation, any
Taxes, costs of acquiring real property, costs and fees for permits,
franchises, licenses and regulatory approvals except to the extent that such
costs are allocated to a party or parties other than the Generator by the PJM
Interconnection LLC or otherwise under the PJM Tariff or PJM Agreement.

         (6)      "Easement" means the Easement Agreement dated __________,
2000, between the Parties with respect to the Station.

         (7)      "Environmental Laws" means all former, current and future
federal, state, local and foreign laws (including common law), treaties,
regulations, rules, ordinances, codes, decrees, judgments, directives or orders
(including consent orders) and environmental permits, in each case, relating to
pollution or protection of the environment or natural resources, including laws
relating to Releases or threatened Releases, or otherwise relating to the
generation, manufacture, processing, distribution, use, treatment, storage,
arrangement for disposal, transport, recycling or handling, of Hazardous
Substances.

         (8)      "Emergency" means (a) with respect to Pepco, a condition or
situation which Pepco, the PJM Interconnection LLC, the PJM System Operator or
the Transmission Operator deem imminently likely to (i) endanger life or
property, or (ii) adversely affect or impair the Transmission System, Pepco's
electrical system or the electrical or transmission systems of others to which
the Transmission System or Pepco's electrical system are directly or indirectly
connected and (b) with respect to the Generator, a condition or situation which
the Generator deems imminently likely to (i) endanger life or property, or (ii)
adversely affect or impair the Station.

         (9)      "FERC" means the Federal Energy Regulatory Commission or its
successors.

<PAGE>   322

         (10)     "Generating Facilities" means the Station and any additional
generating plants, turbines or other generating facilities constructed by
Generator after the Effective Date at the site of the Station.

         (11)     "Generator" has the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors and
assigns.

         (12)     "Generator Facilities" mean the equipment and facilities
owned by the Generator but located on Pepco's property which are identified in
Schedule B of this Agreement.

         (13)     "Good Utility Practice" means any of the applicable
practices, methods and acts

                  (a)      required by FERC, NERC, MAAC, the PJM
Interconnection LLC, the PJM System Operator, or the successor of any of them,
whether or not the Party whose conduct is at issue is a member thereof,

                  (b)      required by applicable law or regulations,

                  (c)      required by the Pepco Interconnection Standards or
the policies and standards of Pepco relating to emergency operations;

                  (d)      otherwise engaged in or approved by a significant
portion of the electric utility industry during the relevant time period;
which, in the exercise of reasonable judgment in light of the facts known at
the time the decision was made, could have been expected to accomplish the
desired result at a reasonable cost consistent with law, regulation, good
business practices, reliability, safety, and expedition. Good Utility Practice
is not intended to be limited to the optimum practice, method, or act to the
exclusion of all others, but rather to be acceptable practices, methods, or
acts generally accepted in the region.

         (14)     "Hazardous Substances" means (i) any petrochemical or
petroleum products, crude oil or any fraction thereof, ash, radioactive
materials, radon gas, asbestos in any form, urea formaldehyde foam insulation
or polychlorinated biphenyls, (ii) any chemicals, materials, substances or
wastes defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "restricted hazardous materials,"
"extremely hazardous substances," "toxic substances," "contaminants" or
"pollutants" or words of similar meaning and regulatory effect contained in any
Environmental Law or (iii) any other chemical, material, substance or waste
which is prohibited, limited or regulated by any Environmental Law.

         (15)     "Interconnection Facilities" means those facilities or
portions of facilities owned or operated by Pepco to provide Interconnection
Service which shall include, but not be limited to (1) facilities the cost of
which is reasonably allocated to the Interconnection Service provided to the
Station, or (2) Attachment Facilities or Local Upgrade Facilities, as defined
in the PJM Tariff, which are associated with the Interconnection Service and
operated and maintained by Pepco.

<PAGE>   323

         (16)     "Interconnection Service" means the services provided by
Pepco which are necessary to connect the Station to the Transmission System for
parallel operation of the Station and to enable Generator to transmit the
energy and ancillary services produced by the Station to the Transmission
System and receive Station energy service and ancillary services, including
blackstart power, from the Generator's supplier.

         (17)     "MAAC" means the Mid-Atlantic Area Council, a reliability
council under Section 202 of the Federal Power Act established pursuant to the
MAAC Agreement dated August 1, 1994, or any successor thereto.

         (18)     "Maintain" means construct, reconstruct, install, inspect,
repair, replace, operate, patrol, maintain, use, modernize, expand, upgrade, or
other similar activities.

         (19)     "MDPSC" means the Maryland Public Service Commission or any
successor agency thereto.

         (20)     "NERC" means North American Electric Reliability Council or
any successor thereto.

         (21)     "Pepco" has the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors or
assigns.

         (22)     "Pepco Facilities" means the equipment and facilities owned
by Pepco but located on Generator's property which are identified in Schedule B
of this Agreement.

         (23)     "Pepco Interconnection Standards" means Pepco's
Interconnection and Parallel Operating Guidelines as amended, modified or
replaced from time to time. A copy of the existing Pepco Interconnection
Standards is attached hereto as Schedule E.

         (24)     "Point of Interconnection" means each ownership point of
demarcation set forth in Schedule C where capacity, energy and ancillary
services are transferred between the Station and the Transmission System.

         (25)     "Pepco Transmission Facilities" means those transmission,
substation, and communication facilities and related equipment, including the
Interconnection Facilities, and any additions, modifications or replacements
thereto, that are utilized to provide Interconnection Service to the Station.

         (26)     "PJM" means the Pennsylvania New Jersey-Maryland
interconnected power pool operated under the PJM Agreement and any successor
thereto including any regional transmission operator, independent system
operator, transco, or any other independent system administrator that possesses
operational or planning control over the Transmission System.

         (27)     "PJM Agreement" means the Amended and Restated Operating
Agreement of the PJM Interconnection LLC dated as of June 2, 1997.

<PAGE>   324

         (28)     "PJM Control Area" shall mean the control area recognized by
NERC as the PJM Control Area.

         (29)     "PJM Interconnection LLC" means the independent system
operator of the PJM Control Area pursuant to the PJM Operating Agreement and
the PJM Tariff.

         (30)     "PJM Generator Connection Agreement" means the
interconnection agreement entered into between the Generator and the PJM
Interconnection LLC pursuant to the PJM Tariff with respect to the
interconnection of the Station and the Transmission System.

         (31)     "PJM Reliability Agreement" means the Reliability Assurance
Agreement dated June 2, 1997 among the load serving entities of PJM.

         (32)     "PJM Requirements" means the rules, regulations or other
requirements of PJM or MAAC contained in or adopted pursuant to the PJM
Agreement, the PJM Tariff or the PJM Reliability Agreement which are applicable
to Pepco, with respect to the Transmission System or the Interconnection
Service, and the Generator with respect to the Generating Facilities.

         (33)     "PJM System Operator" shall mean the PJM Interconnection LLC,
energy control center staff responsible for central dispatch as provided in the
PJM Agreement.

         (34)     "PJM Tariff" means the PJM Open Access Transmission Tariff
providing transmission service within the PJM Control Area.

         (35)     "Qualified Personnel" means individuals who possess any
required licenses and are trained for their positions and duties by Generator
and/or Pepco pursuant to Good Utility Practice.

         (36)     "Release" means any release, spill, emission, leaking,
dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching
or migration into the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata) or within any building,
structure, facility or fixture.

         (37)     "Revenue Meters" means all MWh and MVArh meters, pulse
isolation relays, pulse conversion relays, transducers required by Pepco or the
PJM Interconnection or PJM System Operator for billing or other purposes, and
associated totalizing equipment and appurtenances and compensation required to
measure the transfer of energy across the Point of Interconnection.

         (38)     "Station" means the Dickerson Station as defined in the Asset
Sale Agreement.

         (39)     "Switching, Tagging, and Grounding Rules" means Pepco's
switching, tagging and grounding rules as amended, modified or replaced from
time to time. A copy of the existing Switching, Tagging and Grounding Rules is
attached hereto as Schedule D.

<PAGE>   325

         (40)     "Taxes" means all taxes, surtaxes, charges, fees, levies,
penalties or other assessments imposed by any United States federal, state,
local or foreign taxing authority, including income taxes, excise, property,
sales, transfer, franchise, special franchise, payroll, recording, withholding,
social security or other taxes, in each case including any interest, penalties
or additions attributable thereto.

         (41)     "Transmission System" means the facilities owned, controlled,
or operated by Pepco, for purposes of providing transmission service, including
services under the PJM Tariff, and Interconnection Service.

         (42)     "Transmission Operator" means the person, or persons
designated by Pepco to coordinate the day to day interconnection of the Station
with the Transmission System.

Part B.  The following terms have the meaning specified in the section of
         this Agreement set forth opposite to such term:

<TABLE>
<CAPTION>
      Term                          Agreement Reference

<S>                                 <C>
Agreement                           Preamble
Asset Sale Agreement                Preamble
Effective Date                      Section 2.1
Event of Default                    Section 8.1
Force Majeure                       Section 11.1
Initial Period                      Section 3.10
Operating Committee                 Section 3.20
Party or Parties                    Preamble
Term                                Article 2
</TABLE>
<PAGE>   326

                                                                     EXHIBIT E-4

                            INTERCONNECTION AGREEMENT
                                  (Chalk Point)

                                 By and Between

                         POTOMAC ELECTRIC POWER COMPANY

                                       and

                       ___________________________________

                            Dated ____________, 2000

<PAGE>   327

                            INTERCONNECTION AGREEMENT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                              <C>
ARTICLE 1 - DEFINITIONS                                          1
ARTICLE 2   TERM AND TERMINATION                                 2
  2.1    Term                                                    2
  2.2    Change in Law                                           2
  2.3    Effect after Termination                                2
ARTICLE 3 - CONTINUING OBLIGATIONS AND RESPONSIBILITIES          2
  3.1    Interconnection Service                                 2
  3.2    New Construction or Modifications                       3
    3.2.1   Pepco Construction or Modifications                  3
    3.2.2   Generator Construction or Modifications              4
    3.2.3   Modifications Affecting the Transmission System
            or the Station                                       5
  3.3    Access, Easements, Conveyances, Licenses,
         and Restrictions                                        6
  3.4    Facility and Equipment Maintenance                      7
  3.5    Pepco Facilities and Generator Facilities               7
  3.6    Equipment Testing Obligations                           8
  3.7    Inspections                                             8
  3.8    Information Reporting Obligations                       9
  3.9    Local Services                                         10
    3.9.1   General                                             10
    3.9.2   Temporary Suspension of Local Services              11
  3.10   Pepco Provided Services                                11
  3.11   Generator Provided Services                            11
  3.12   Optional Services                                      12
  3.13   Metering and Telemetering                              12
  3.14   Emergency Procedure                                    13
  3.15   Interconnection Service Interruptions                  14
    3.21.2  SMECO CT Metering and Telemetering                  14
  3.16   Unit Status Notification                               14
  3.17   Scheduled Maintenance Notification and Coordination    15
    3.17.1  Local Routine Inspection and Maintenance            15
    3.17.2  Transmission Sytem Maintenance                      15
  3.18   Safety                                                 15
    3.18.1  General                                             15
    3.18.2  Switching Tagging and Grounding                     16
  3.19   Environmental Compliance and Procedures                16
  3.20   Operating Committee                                    16
  3.21   SMECO CT                                               17
    3.21.1  Information Reporting Obligations                   17
    3.21.2  SMECO CT Metering and Telemetering                  17
    3.21.2  SMECO CT Unit Status Notification                   18
</TABLE>

<PAGE>   328

<TABLE>
<S>                                                             <C>
    3.21.4  SMECO CT Operations                                 18
ARTICLE 4 - OPERATIONS                                          20
  4.1    General                                                20
  4.2    Generator's Operating Obligations                      20
    4.2.1   General                                             20
    4.2.2   Voltage or Reactive Control Requirements            21
  4.3    Auditing of Accounts and Records                       22
ARTICLE 5 - COST RESPONSIBILITIES AND BILLING PROCEDURES        23
  5.1    Cost Responsibilities for Interconnection Service      23
  5.2    Cost Responsibilities for Local Services               23
  5.3    Billing Procedures                                     23
  5.4    Billing Disputes                                       24
ARTICLE 6 - CONFIDENTIALITY                                     24
  6.1    Confidentiality Obligations of Pepco                   24
  6.2    Confidentiality Obligations of Generator               24
  6.3    Confidentiality of Audits                              25
  6.4    Remedies                                               25
ARTICLE 7 - EVENTS OF DEFAULT                                   26
  7.1    Events of Default                                      26
  7.2    Remedies                                               26
ARTICLE 8 - LIMITATION OF LIABILITY                             27
  8.1    Limitation of Pepco's Liability                        27
  8.2    Limitation on Generator's Liability                    28
  8.3    Consequential Damages                                  28
ARTICLE 9 - INDEMNIFICATION FOR THIRD PARTY CLAIMS              28
  9.1    Generator's Indemnification                            28
  9.2    Pepco's Indemnification                                29
  9.3    Indemnification Procedures                             29
  9.4    Survival                                               29
ARTICLE 10 - INSURANCE                                          30
  10.1   Insurance Coverage                                     30
  10.2   Certificates of Insurance                              30
  10.3   Additional Insureds and Waiver                         30
ARTICLE 11 - FORCE MAJEURE                                      30
  11.1   Effect of Force Majeure                                30
  11.2   Force Majeure Defined                                  30
  11.3   Notification                                           31
ARTICLE 12 - DISPUTES                                           31
  12.1   Disputes                                               31
  12.2   Arbitration                                            32
  12.3   FERC Dispute Resolution                                32
ARTICLE 13 - REPRESENTATIONS                                    33
  13.1   Representations of Pepco                               33
  13.2   Representations of Generator                           34
</TABLE>

<PAGE>   329

<TABLE>
<S>                                                             <C>
ARTICLE 14 - ASSIGNMENT/CHANGE IN CORPORATE IDENTITY            35
  14.1   Assignment                                             35
  14.2   Release of Rights and Obligations                      36
  14.3   Change in Corporate Identity                           36
  14.4   Successors and Assigns                                 36
ARTICLE 15 - SUBCONTRACTORS                                     36
ARTICLE 16 - NOTICES                                            37
  16.1   Emergency Notices                                      37
  16.2   Notices                                                37
ARTICLE 17 - AMENDMENTS                                         38
  17.1   Amendments                                             38
  17.2   FERC Proceedings                                       38
ARTICLE 18 - MISCELLANEOUS PROVISIONS                           38
  18.1   Waiver                                                 38
  18.2   Labor Relations                                        39
  18.3   No Third Party Beneficiaries                           39
  18.4   Governing Law                                          39
  18.5   Counterparts                                           39
  18.6   Interpretation                                         39
  18.7   Jurisdiction and Enforcement                           40
  18.8   Entire Agreement                                       40
  18.9   Severability                                           41
  18.10  Independent Contractor Status                          41
  18.11  Conflicts                                              41
SCHEDULE A  DEFINITIONS                                          2
SCHEDULE B  Pepco Facilities and Generator Facilities            7
SCHEDULE C  Points of Interconnection                            9
SCHEDULE D  Switching, Tagging and Grounding Rules              11
SCHEDULE E  Pepco's Interconnection Standards                   14
SCHEDULE F  Local Services                                      15
SCHEDULE G  Pepco Current Projects                              17
SCHEDULE H  Real Time Telemetry List for the Station            18
SCHEDULE I  Real Time Telemetry List for the SMECO CT           20
</TABLE>

<PAGE>   330

                     INTERCONNECTION AGREEMENT (Chalk Point)

         This Interconnection Agreement ("Agreement") dated as of _________,
2000 by and between Potomac Electric Power Company ("Pepco") a District of
Columbia and Virginia corporation, and _____________ ("Generator") a ___________
[corporation]. Pepco and Generator are each referred to herein as a "Party," and
collectively referred to herein as the "Parties."

                                   WITNESSETH:

         WHEREAS, Pepco, and Generator have entered into an Asset Purchase and
Sale Agreement for Generating and Related Assets ("Asset Sale Agreement") dated
June 7, 2000, for the sale by Pepco to Generator of certain assets comprising
the Chalk Point electric generation station;

         WHEREAS, Pepco intends to continue to operate its transmission and
distribution businesses from their present locations;

         WHEREAS, Generator needs Interconnection Service from Pepco for the
Chalk Point electric generating station;

         WHEREAS, Pepco needs access to parts of the Generator's assets, and
Generator needs access to parts of the Pepco's assets; and

         WHEREAS, the Parties have agreed in the Asset Sale Agreement to execute
this Agreement in order to provide Interconnection Service to Generator and to
define continuing responsibilities and obligations of the Parties with respect
to the use of the other Party's property, assets and facilities as set forth
herein.

         NOW THEREFORE, in consideration of the mutual representations,
covenants and agreements hereinafter set forth, and intending to be legally
bound hereby, the Parties hereto agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

         Capitalized terms used in this Agreement shall have the meanings
specified or referred to in Schedule A.

<PAGE>   331

                                    ARTICLE 2
                              TERM AND TERMINATION

         2.1      Term. This Agreement shall become effective upon consummation
of the Closing ("Effective Date"), and unless terminated sooner in accordance
with the terms of this Agreement, shall continue in full force and effect until
the earlier to occur of (i) the permanent cessation by the Generator of the
power generation functions of the Station or (ii) the permanent cessation of the
interconnection functions of the Transmission System.

         2.2      Change in Law. If (a) the FERC, any state or state regulatory
commission or the PJM Interconnection LLC implements a change in any law,
regulation, rule or practice, or (b) Pepco's compliance with a change in any law
or regulation, which compliance, in either case, affects, or may reasonably be
expected to affect, Pepco's performance under this Agreement, the Parties shall
negotiate in good faith any amendments to this Agreement that are necessary to
adapt the terms of this Agreement to such change, and Pepco shall file such
amendments with the FERC. If the Parties are unable to reach agreement on such
amendments, either Party shall have the right to make a unilateral filing with
the FERC to modify this Agreement pursuant to Sections 205 or 206 or any other
applicable provision of the Federal Power Act and the FERC rules and regulations
thereunder; provided that the other Party shall have the right to oppose such
filing and to participate fully in any proceeding established by the FERC to
address such amendments.

         2.3      Effect after Termination. The applicable provisions of this
Agreement shall continue in effect after cancellation or termination hereof to
the extent necessary to provide for final billings, billing adjustments and
payments pertaining to liability and indemnification obligations arising from
acts or events that occurred while this Agreement was in effect.

                                    ARTICLE 3
                   CONTINUING OBLIGATIONS AND RESPONSIBILITIES

         3.1      Interconnection Service

                  3.1.1    Subject to the terms and conditions of the Agreement,
Pepco shall (a) permit the Station to continue to be interconnected to the
Transmission System at the Point of Interconnection, and (b) provide
Interconnection Service at the Point of Interconnection. Pepco agrees to permit
Generator to interconnect Station as long as Generator continues to operate such
facilities pursuant to PJM Requirements and Good Utility Practice.

<PAGE>   332

                  3.1.2    Interconnection Service shall not include, and Pepco
shall not be responsible under this Agreement for (a) transmission service,
losses or ancillary services associated with the use of the Transmission System
for the delivery of capacity, energy and/or ancillary services produced by the
Generating Facilities, or (b) providing or procuring capacity, energy and/or
ancillary services to the Generator or the Generating Facilities.

                  3.1.3    The Generator's interconnection to the
Transmission System of any new or expanded generating capacity of
the Station shall (a) be subject to PJM Requirements and/or FERC
requirements governing interconnections and (b) require a separate
interconnection agreement mutually agreed to by the Parties in
writing.

                  3.1.4    Notwithstanding anything to the contrary in this
Agreement, Pepco's performance of its obligations under this Agreement shall be
subject to Generator entering into, and complying with, any PJM Generator
Connection Agreement which may be required pursuant to PJM Requirements with
respect to Interconnection Service or the Station.

         3.2      New Construction or Modifications

                  3.2.1    Pepco Construction or Modifications

                      (a)      Pepco shall make such additions, modifications,
replacements and improvements to the Interconnection Facilities
as are required by PJM Requirements or Good Utility Practice to enable Pepco to
provide Interconnection Service in compliance with this Agreement. Generator
shall pay all reasonable Costs incurred by Pepco for such additions,
modifications, replacements or improvements.

                      (b)      Except with respect to operation and maintenance
or ordinary maintenance done in the ordinary course of business or to respond to
abnormal or emergency conditions, if any additions, modifications, replacements
or improvements to the Interconnection Facilities undertaken by Pepco might
reasonably be expected to affect Generator's operation of the Station, Pepco
shall provide one hundred twenty (120) days written notice to Generator prior to
undertaking such additions, modifications, replacements or improvements. Any
such additions, modifications, replacements or improvements shall comply with
PJM Requirements and Good Utility Practice. The Parties shall mutually agree to
the scheduling of such addition, modification, replacement or improvement to
minimize any adverse impact on the Station. Generator shall be deemed to have
accepted Pepco's proposed additions, modifications, replacements or improvements
unless Generator gives Pepco written notice of its objections within thirty (30)
days after

<PAGE>   333

receipt of Pepco's notice. Generator's acceptance or deemed acceptance of
Pepco's proposed additions, modifications, replacements or improvements shall
not be construed, with respect thereto, as: (i) confirmation or endorsement of
the design; (ii) a warranty of safety, durability or reliability; or (iii)
responsibility for strength, details of design, adequacy or capability.

                  3.2.2    Generator Construction or Modifications

                           (a)      In the event Generator plans to increase the
capacity of the Generating Facilities, Generator shall submit to Pepco any and
all plans and specifications that Pepco may reasonably request related to such
increase. Such specifications and plans shall be submitted by Generator to Pepco
at the time that Generator submits its plans under the PJM Tariff related to
such expansion but no later than one hundred twenty (120) days prior to
commencing such proposed increase. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice and
shall be subject to Section 3.1.3 of this Agreement.

                           (b)      If Generator plans any additions,
modifications, or replacements to the Station that will not increase its
capacity, but could reasonably be expected to affect the Transmission System or
the Interconnection Facilities, Generator shall give Pepco reasonable notice,
but not less than one hundred twenty (120) days prior written notice and
Generator shall comply with all applicable PJM Requirements with respect to such
proposed additions, modifications, or replacements. All such additions,
modifications, or replacements shall (i) comply with PJM Requirements and Good
Utility Practice, (ii) be accompanied by appropriate information and operating
instructions, and (iii) be subject to the review and acceptance of Pepco, which
review shall be based on PJM Requirements and Good Utility Practice and which
acceptance shall not unreasonably be withheld or delayed. Pepco shall be deemed
to have accepted Generator's proposed additions, modifications or replacements
unless Pepco gives Generator written notice of its objections within thirty (30)
days after receipt of the Generator's notice.

                           (c)      Pepco's acceptance of Generator's plans and
specifications for any proposed additions, modifications, or replacements to the
Generating Facilities and Pepco's participation in any interconnected operations
with Generator are not and shall not be construed as: (i) confirmation or
endorsement of the design of the Generating Facilities; (ii) a warranty of
safety, durability or reliability of the Generating Facilities; or (iii)
responsibility for strength, details of design, adequacy, or capability of the
Generating Facilities.

                           (d)      Pepco, pursuant to PJM Requirements, shall
inform Generator of any additions, modifications, or replacements to the
Transmission System or

<PAGE>   334

Interconnection Facilities, that will be necessary as a result of the addition,
modification, or replacement to Station made pursuant to Section 3.2.2.
Generator shall compensate Pepco for all reasonable Costs it incurs associated
with any modifications, additions, or replacements made to the Interconnection
Facilities or Transmission System related to any additions, modifications, or
replacements to the Generating Facilities. Pepco shall provide an estimate as
early as practicable, but in any event not less than sixty (60) days prior to
the initiation of such addition, modification or replacement.

                           (e)      Generator shall modify, at its sole cost and
expense, the Generating Facilities as may be reasonably required to conform with
PJM Requirements and Good Utility Practice or to conform with additions,
modifications, or replacements of the Transmission System or the Interconnection
Facilities, required by PJM Requirements and Good Utility Practice or
implemented in accordance with this Agreement, (including, without limitation,
changes to the voltages at which the Transmission System is operated) provided,
however, that Generator shall not be obligated under this Agreement to
modernize, expand or upgrade the Generating Facilities unless the failure to
modernize, expand or upgrade is reasonably likely to have a material adverse
effect on the operation of Pepco's Facilities.

                           (f)      Upon completion of any addition,
modification, or replacement to the Generating Facilities that may reasonably be
expected to affect the Transmission System or the Interconnection Facilities,
but no later than ninety (90) days thereafter, Generator shall issue "as built"
drawings to Pepco. Upon completion of any addition, modification, or replacement
to the Interconnection Facilities, that may reasonably be expected to affect the
operation of the Station, but no later than ninety (90) days thereafter, Pepco
shall issue "as built" drawings to the Generator.

                  3.2.3    Modifications Affecting the Transmission System or
                           the Station

                           (a)      Notwithstanding anything herein to the
contrary, except with respect to the projects or construction set forth in
Schedule G, no modifications to or new construction of facilities, or access
thereto, including but not limited to rights of way, fences, gates, shall be
made by either Party which might reasonably be expected to adversely affect the
other Party with respect to such Party's obligations and responsibilities under
this Agreement, without prior written notification as set forth in Section
3.2.3(b) below, and without providing the other Party with sufficient
information regarding the work prior to commencement to enable such Party to
evaluate the impact of the proposed work on its operations. For all
modifications reasonably expected to adversely affect the operations of the
other Party's facilities, the Party shall provide at least one hundred twenty
(120) days

<PAGE>   335

written notice to the other Party prior to undertaking such additions,
modifications or replacements. Any such additions, modifications, or
replacements shall comply with PJM Requirements and Good Utility Practice.

                           (b)      The Parties shall mutually agree to the
scheduling of such addition, modification, replacement or improvement proposed
pursuant to Section 3.2.3(a) to minimize any adverse impact on the Station or
the Transmission System. For all construction work, major modifications, or
circuit changes involving new or existing facilities, equipment, systems or
circuits that could reasonably be expected to affect the operation of either
Party, the Party desiring to perform said work shall provide the other Party
with drawings, plans, specifications, and other necessary documentation for
review at least sixty (60) days prior to the beginning of construction provided
that for routine telecommunications work, the Party doing the work shall only be
required to provide 48 hours prior notice. The Party shall be deemed to have
accepted the proposed additions, modifications, replacements or improvements
unless the Party gives written notice of their objections within sixty (60) days
after receipt of such notice. The Party's acceptance or deemed acceptance of the
proposed additions, modifications, replacements or improvements shall not be
construed, with respect thereto, as: (i) confirmation or endorsement of the
design; (ii) a warranty of safety, durability or reliability; or (iii)
responsibility for strength, details of design, adequacy or capability.

         3.3      Access, Easements, Conveyances, Licenses, and Restrictions

                  3.3.1    The Parties hereby grant to each other such licenses,
access and other rights to the Station and the Interconnection Facilities as may
be necessary for either Party's performance of their respective obligations
under this Agreement. Such access shall be provided in a manner so as not to
unreasonably interfere with the ongoing business operations, rights, and
obligations of the other Party and shall be subject to the safety and security
practices of the Party granting such access. Access shall only be granted to
Qualified Personnel.

                  3.3.2    A Party shall not restrict a Party's rights hereunder
to access the other Party's property, facilities, or equipment without prior
written notification except in an Emergency, in which case the restricted access
shall last no longer than three (3) days, unless an alternate means of access is
provided.

                  3.3.3    The Parties' rights with respect to access to their
respective facilities properties shall also be governed by the Easement.

         3.4      Facility and Equipment Maintenance

<PAGE>   336

                  3.4.1    Pepco shall provide Interconnection Service at the
Point of Interconnection in a safe and efficient manner and pursuant to PJM
Requirements and Good Utility Practice. Generator shall be responsible for all
reasonable Costs incurred by Pepco to provide Interconnection Service and to
Maintain the Interconnection Facilities pursuant to the Agreement.

                  3.4.2    Generator shall Maintain the Generating Facilities
(including coordination of its relay protection equipment) in a safe and
efficient manner and as required by and in accordance with PJM Requirements and
Good Utility Practice, provided, however, that Generator shall not be obligated
to modernize, expand or upgrade the Generating Facilities unless the failure to
modernize, expand or upgrade is reasonably likely to have a material adverse
affect on the operation of the Interconnection Facilities or the Transmission
System.

                  3.4.3    Unless otherwise specified herein, or unless the
Parties mutually agree to a different arrangement, neither Party shall be
responsible for the maintenance of the other Party's equipment or property
regardless of its location.

                  3.4.4    In addition to the requirements set forth elsewhere
in this Agreement, each Party shall Maintain its equipment and facilities and
perform its maintenance obligations that could reasonably be expected to affect
the operations of the other Party in a safe and efficient manner and pursuant to
PJM Requirements and Good Utility Practice.

                  3.5      Pepco Facilities and Generator Facilities Unless
otherwise agreed to by the Parties, the Party owning Pepco Facilities or
Generator Facilities shall Maintain those facilities and shall do so pursuant to
PJM Requirements and Good Utility Practice and shall make such additions,
modifications, replacements and improvements as are required by PJM requirements
and Good Utility Practice or which are necessary to maintain Interconnection
Service, provided, however, that the Generator shall not be obligated under this
Agreement to modernize, expand or upgrade the Generator Facilities unless the
failure to modernize, expand or upgrade is reasonably likely to have a material
adverse effect on the operation of the Transmission System or Interconnection
Facilities.

         3.6      Equipment Testing Obligations

                  3.6.1    For reliability purposes with respect to the
Interconnection Facilities and the Transmission System, Pepco may reasonably
request, pursuant to PJM Requirements, or Good Utility Practice, that Generator
test, calibrate, verify, or validate the Generating Facilities or its equipment,
and Generator shall promptly

<PAGE>   337

comply with such a request. Generator shall be responsible for all costs of
testing, calibrating, verifying or validating its facilities.

                  3.6.2    At Pepco's request, Generator shall supply to Pepco
at no cost, copies of inspection reports, installation and maintenance
documents, test and calibration records, verifications, and validations pursuant
to the foregoing Section 3.6.1. Pepco shall supply to Generator, at Generator's
request and at no cost to Generator, copies of inspection reports, installation
and maintenance documents, test and calibration records, verifications, and
validations that Pepco has which are related to the Interconnection Facilities.

         3.7      Inspections

                  3.7.1    Pepco shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work to the Generating Facilities.
Such access by Pepco shall be exercised in a manner which does not unreasonably
interfere with Generator's ongoing business operations, rights and obligations
and shall be subject to Generator's safety and security practices. If Pepco
observes any deficiencies or defects with respect thereto that might reasonably
be expected to adversely affect the Transmission System or the Interconnection
Facilities, Pepco shall notify the Generator, and Generator shall immediately
make any corrections necessitated by PJM Requirements and Good Utility Practice.
Notwithstanding the foregoing in this Section 3.7.1, Pepco shall have no
liability whatsoever for any failure to fully or adequately observe any
deficiency, it being agreed that Generator shall be fully responsible and liable
for all such deficiencies, activities, equipment tests, installation,
construction or modification.

                  3.7.2    Generator shall, at its expense, have the right to
inspect or observe all maintenance activities, equipment tests, installation
work, construction work, and modification work conducted by Pepco to the
Interconnection Facilities. Such access by Generator shall be exercised in a
manner which does not unreasonably interfere with Pepco's ongoing business
operations, rights and obligations and shall be subject to Pepco's safety and
security practices. If Generator observes any deficiencies or defects with
respect thereto that might reasonably be expected to adversely affect the
Station, Generator shall notify Pepco, and Pepco shall immediately make any
corrections necessitated by applicable PJM Requirements and Good Utility
Practice. Notwithstanding the foregoing in this Section 3.7.2, Generator shall
have no liability whatsoever for any failure to fully or adequately observe any
deficiency, it being agreed that Pepco shall be fully responsible and liable for
all such deficiencies, activities, equipment tests, installation, construction
or modification.

<PAGE>   338

         3.8      Information Reporting Obligations

                  3.8.1    In order to provide Interconnection Service
hereunder, Pepco may request, and Generator shall promptly provide, all relevant
information, documents, or data regarding the Generating Facilities that would
be expected to materially affect the Transmission System, and which is
reasonably requested by NERC, MAAC, the PJM Interconnection LLC, the MDPSC, the
District of Columbia Public Service Commission and any other state or District
of Columbia agency having jurisdiction over Pepco or Generator, the PJM System
Operator, or the Transmission Operator, which disclosure shall be subject to
Article 6 of this Agreement regarding the disclosure of commercially sensitive
information.

                  3.8.2    Generator shall promptly supply accurate, complete,
and reliable information in response to reasonable information requests for real
time data and other data from Pepco necessary for operations, maintenance,
compliance with PJM Requirements or regulatory requirements, or analysis of the
Interconnection Facilities or the Transmission System. Such information may
include metered values for MW and MVAR, voltage, current, automatic voltage
regulator status, automatic frequency control, dispatch, frequency, breaker
status indication, or any other information reasonably required for reliable
operation of the Transmission System pursuant to PJM Requirements and Good
Utility Practice. At minimum, Generator shall satisfy the telemetry requirements
set forth in Schedule H.

                  3.8.3    Information pertaining to generation operating
parameters shall be gathered and electronically transmitted directly to Pepco's
energy management system using a mutually acceptable communications protocol.

                  3.8.4    Generator shall be responsible for the maintenance,
and any required replacements or upgrades of the field devices and equipment
used to gather information regarding generation operating parameters.

                  3.8.5    Generator shall Maintain, at its expense, operating
telephone links to the PJM Interconnection LLC, PJM System Operator, Pepco and
the Transmission Operator, to provide information deemed necessary by them, or
as reasonably deemed necessary by Pepco in accordance with PJM Requirements or
Good Utility Practice to integrate operation of the Station with the
Transmission System, provided, however, that Generator shall not be obligated
under this Agreement to modernize, expand or upgrade the Generator's facilities
unless the failure to modernize, expand or upgrade is reasonably likely to have
a material adverse effect on the operation of the Transmission System. Generator
shall use communication links at the Station consisting of the mobile radio low
band C frequency and "all call" and "red phone" systems currently located at the
Station (or successor systems as may reasonably be required by Pepco) and shall
maintain the

<PAGE>   339

availability of such systems to operate during abnormal conditions including
blackouts.

         3.9      Local Services

                  3.9.1    General

                           (a)      The Parties agree that, due to the
integration of certain control schemes of the Station and the Transmission
System, it is cost effective to provide each other with the services set forth
in Sections 3.10 and 3.11 in accordance with the terms and conditions set forth
therein.

                           (b)      The Parties shall ensure, in accordance with
Good Utility Practice, that services provided by one Party to the other Party
pursuant to Sections 3.10 and 3.11 shall be available at all times and in the
manner and at the prices specified herein. Notwithstanding the foregoing, either
Party may change the services, provided that (1) there is no cost to the
receiving Party as a result of such change, (2) the quality, reliability and
integrity of the replacement services is equivalent to the existing service, and
(3) there is otherwise no materially adverse effect on the receiving Party.

                           (c)      Neither Party shall terminate any services
set forth in Sections 3.10 and 3.11 below that it agrees to provide to the other
Party, without the other Party's prior written consent, which consent shall not
be unreasonably withheld or delayed, provided, however, if a Party receiving a
service under Sections 3.10 or 3.11 no longer needs or desires a particular
service, said Party shall notify the other Party and the providing Party shall
terminate said services as soon thereafter as practicable.

                  3.9.2    Temporary Suspension of Local Services

                           (a)      The Party providing a service set forth in
Sections 3.10 or 3.11 below shall notify and obtain approval, which approval
shall not be unreasonably withheld or delayed, from the receiving Party of any
scheduled temporary suspension of services at least five (5) business days in
advance of such suspension. Such notification shall include an estimated time
duration for a return to normal conditions.

                           (b)      In the event of any unplanned or forced
suspension of the services set forth in Sections 3.10 or 3.11, below, the
providing Party shall immediately notify the other Party first verbally and then
in writing. The providing Party shall use all reasonable efforts to minimize the
duration of said suspension.

<PAGE>   340

                           (c)      The Parties agree to complete any repairs,
modifications or corrections, in accordance with Good Utility Practice, that are
necessary to restore to the other Party as soon as reasonably practicable any
services set forth in Sections 3.10 or 3.11 below that have been suspended.

         3.10     Pepco Provided Services: Schedule F sets forth the local
services Pepco shall provide to the Generator pursuant to the terms of this
Agreement. Unless otherwise specified in Schedule F, for a period of three (3)
years after the Effective Date (the "Initial Period") and subject to Section 3.9
above, Pepco shall provide Generator with the local services set forth in
Schedule F at no cost and in consideration of the local services Generator shall
provide Pepco in accordance with Section 3.11 below. If Generator desires the
continuation of any of the services set forth in Schedule F which are subject to
the Initial Period to continue after the Initial Period, upon Generator's
written request to Pepco made at least 60 days prior to the expiration of the
Initial Period, the Parties shall engage in good faith negotiations to reach
mutually agreeable terms and conditions upon which such services will continue,
provided, however, that if such agreement is not reached prior to the expiration
of the Initial Period, Pepco shall cease to provide services under Section 3.10
at the end of the Initial Period.

         3.11     Generator Provided Services. Schedule F sets forth the local
services Generator shall provide to Pepco pursuant to the terms of this
Agreement. Unless otherwise specified in Schedule F, for the Initial Period and
subject to Section 3.9 above, Generator shall provide Pepco with the local
services set forth in Schedule F at no cost and in consideration of the local
services Pepco shall provide Generator in accordance with Section 3.10 above. If
Pepco desires the continuation of any of the services set forth in Schedule F
which are subject to the Initial Period to continue after the Initial Period,
upon Pepco's written request to Generator made at least 60 days prior to the
expiration of the Initial Period, the Parties shall engage in good faith
negotiations to reach mutually agreeable terms and conditions upon which such
services will continue, provided, however, that if such agreement is not reached
prior to the expiration of the Initial Period, Generator shall cease to provide
services under Section 3.11 at the end of the Initial Period.

         3.12     Optional Services: Generator may request that Pepco provide
the following services to the Generator, provided, however, that Pepco shall not
have any obligation to provide such services unless the Parties have mutually
agreed in writing to the price and other terms and conditions of such service:

                           (a)      PJM interface and dispatch services through
the Pepco control center;

                           (b)      use of Pepco's communication services;

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                           (c)      maintenance of certain auxiliary and
communications equipment at the Station;

                           (d)      maintenance of high-voltage and
medium-voltage equipment such as power transformers and power circuit breakers;

                           (e)      maintenance of protective relaying, certain
control equipment, such as AGC and MSVC, plant batteries and revenue meters
owned by Generator.

         3.13     Metering and Telemetering

                  3.13.1   Generator shall, at Generator's expense: (a) own,
Maintain and repair, all Revenue Meters, instrument transformers and
appurtenances associated with Revenue Meters, and real time telemetry, (b)
conduct meter accuracy and tolerance tests, and (c) prepare all calibration
reports required for equipment that measures energy transfers at the Point of
Interconnection. All meter accuracy and tolerance testing hereunder shall be in
accordance with PJM Requirements and Good Utility Practice and shall be
conducted, at Pepco's request, in the presence of Pepco's representative.

                  3.13.2   Generator shall own and Maintain, at the Generator's
expense, equipment for redundant real-time communications and transmission of
telemetry, hourly MWh information, and such other information as required by the
PJM System Operator or Transmission Operator, or as reasonably required by Pepco
in accordance with PJM Requirements and Good Utility Practice.

                  3.14     Emergency Procedure

                           3.14.1   Pepco, through the Transmission Operator,
shall provide Generator with prompt verbal notification of Emergencies with
regard to the Transmission System which may reasonably be expected to affect
Generator's immediate operation of the Station or Generator Facilities, and
Generator shall provide Pepco with prompt verbal notification of Emergencies
with regard to the Station which may reasonably be expected to affect
Interconnection Service or the Transmission System. Such notification shall
describe the Emergency, the extent of damage or deficiency, the anticipated
length of an outage and the corrective action taken and/or to be taken. Said
verbal notification shall be followed as soon as practicable (but no later than
24 hours after the verbal notification) with written notification.

                           3.14.2   If an Emergency in the good faith judgment
of a Party endangers or could endanger life or property, the Party recognizing
the problem

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shall take such action as may be reasonable and necessary to prevent, avoid, or
mitigate injury, danger, or loss. If however the Emergency involves transmission
or electrical equipment, Generator shall notify the Transmission Operator, and
obtain the consent of such personnel, prior to performing any switching
operations.

                  3.14.3   Pepco may, consistent with PJM Requirements and Good
Utility Practice, have the Transmission System Operator take whatever actions
(including tripping Generator's synchronizing breakers) or inactions it deems
necessary during an Emergency to: (a) preserve public safety; (b) preserve the
integrity of the Transmission System, (c) limit or prevent damage; or (d)
expedite restoration of service. If any action or inaction by Pepco or the
Transmission Operator under this Section 3.14 results in the discontinuation,
curtailment, interruption or reduction of Interconnection Service, Pepco shall
use reasonable efforts consistent with PJM Requirements and Good Utility
Practice to restore Interconnection Service as promptly as practicable and to
minimize the effect of such restoration of service on the Station.

         3.15     Interconnection Service Interruptions

                  3.15.1   If at any time, in the reasonable exercise of the PJM
System Operator's judgment, or the Transmission Operator's judgment exercised in
accordance with PJM Requirements or Good Utility Practice and on a
non-discriminatory basis, a condition exists, including the operation of
Generator's equipment, which might reasonably be expected to have a materially
adverse affect on the quality of service rendered by Pepco (including services
rendered to transmission or distribution customers) or interferes with the safe
and reliable operation of the Transmission System, Pepco may discontinue,
curtail, reduce and/or interrupt Interconnection Service until the condition has
been corrected.

                  3.15.2   Unless the PJM System Operator, the Transmission
Operator or Pepco perceives that an Emergency exists or the risk of one is
imminent, Pepco shall give Generator reasonable notice of its intention to
discontinue, curtail, interrupt or reduce Interconnection Service in response to
the interfering condition and, where practical, allow suitable time for
Generator to remove the interfering condition if it is the result of Generator's
operations, before the discontinuation, curtailment, interruption or reduction
commences. Pepco's judgment with regard to the interruption of service under
this paragraph shall be made pursuant to PJM Requirements and Good Utility
Practice. In the case of such interruption, Pepco shall immediately confer with
Generator regarding the conditions causing such interruption and its
recommendation concerning timely correction thereof. In the event
Interconnection Service is interrupted under this section due to Generator's
failure to operate and Maintain the Generating Facilities pursuant to PJM
Requirements or Good Utility Practice, Generator shall compensate Pepco for all

<PAGE>   343

costs reasonably incurred by Pepco attributable to the interruption and
restoration of Interconnection Service. Pepco shall use reasonable efforts
consistent with PJM Requirements and Good Utility Practice to restore
Interconnection Service interrupted, curtailed or reduced pursuant to this
Section 3.15 as promptly as practicable and to minimize the effect of such
restoration of service on the Station.

         3.16     SMECO CT Metering and Telemetering

                  3.16.1   Generator acknowledges that Pepco requires
information regarding the status of the Station for Transmission System
reliability purposes. Accordingly, by 10:00 a.m. of each day, the Generator
shall provide Pepco the following information regarding the status of the
Station for the following day: Station availability to provide energy and
capacity, the Station's scheduled on and off times, Station synchronization,
planned outages or deratings, and generation restrictions and limitations.
Generator shall immediately notify Pepco of any changes to the information
provided pursuant to the foregoing sentence.

                  3.16.2   In circumstances, such as forced outages, Generator
shall notify Pepco of its generating unit's temporary interruption of generation
as soon as practicable; and it shall provide Pepco, as soon as practicable, with
a schedule of when generation will be resumed.

         3.17     Scheduled Maintenance Notification and Coordination

                  3.17.1   Local Routine Inspection and Maintenance. The Parties
agree that, due to the integration of certain control and protective relaying
schemes between the Station and the Interconnection Facilities, it will be
necessary for them to cooperate in the inspection, maintenance and testing of
these areas of integration. Each Party will provide advance notice to the other
Party before undertaking any work in these areas, especially in electrical
circuits involving circuit breaker trip and close contacts, current transformers
or potential transformers and such work will be performed in accordance with PJM
Requirements and Good Utility Practice.

                  3.17.2   Transmission System Maintenance. Pepco shall consult
with Generator regarding timing of scheduled maintenance of the Interconnection
Facilities or the transmission facilities of the Transmission System which Pepco
or the Transmission Operator performs and which might reasonably be expected to
affect the Station. Pepco shall, to the extent practicable, schedule any
testing, shutdown, or withdrawal of said facilities to coincide with Generator's
scheduled outages for the Station. To facilitate such consultation and to the
extent the information is not available from the PJM System Operator in a timely
manner, in June of each year, or on another date mutually acceptable to the
Parties, Generator

<PAGE>   344

shall furnish Pepco with non-binding preliminary generator maintenance schedules
covering the upcoming two years and any material changes thereto. In the event
Pepco is unable to schedule the outage of its facilities to coincide with
Generator's schedule, Pepco shall notify Generator as soon as practicable of the
reasons for the facilities' outage, of the time scheduled for the outage to take
place, and of its expected duration.

         3.18     Safety

                  3.18.1   General. Pepco agrees with respect to the
Interconnection Facilities and the Transmission System, and Generator agrees
with respect to the Station, that all work performed by either Party on such
facilities which could reasonably be expected to affect the operations of the
other Party shall be performed in accordance with all applicable PJM
Requirements and Good Utility Practice.

                  3.18.2   Switching Tagging and Grounding . Each Party shall
comply with the Switching, Tagging and Grounding Rules. Pepco will notify
Generator of any changes in its Switching, Tagging and Grounding Rules.
Generator shall be responsible for all switching, tagging and grounding on
Generator's side of the Point of Interconnection and, except for Generator
Facilities, Pepco shall be responsible for all switching, tagging and grounding
on its side of the Point of Interconnection.

         3.19     Environmental Compliance and Procedures

                  3.19.1   Each Party shall be responsible for complying with
all Environmental Laws applicable to it with respect to its facilities or
property.

                  3.19.2   A Party shall notify the other Party first verbally
and then in writing, of any Releases of a Hazardous Substance or any type of
remediation activities related thereto as soon as possible but no later than
twenty-four (24) hours after the occurrence if within the reasonable judgment of
the Party said activities could reasonably be expected to have a material
adverse effect upon the operations of the other Party and shall promptly furnish
to the other Party copies of any reports filed with any governmental agencies
covering such events. This Section 3.19.2 does not effect any allocation of
liability with respect to the Station pursuant to the Asset Sale Agreement.

                  3.19.3   Neither Party shall knowingly take any actions which
might reasonably be expected to have a material adverse environmental impact
upon the operations of the other Party without prior written notification and
agreement between then Parties.

<PAGE>   345

         3.20     Operating Committee. The Parties shall establish an operating
committee consisting of one representative for each Party ("Operating
Committee"). The Operating Committee shall act only by unanimous agreement or
consent. The Parties shall designate their respective representatives to the
Operating Committee, plus an alternate by written notice. Each Party's
representative on the Operating Committee is authorized to act on behalf of such
Party with respect to any matter arising under this Agreement which is to be
decided by the Operating Committee, however, the Operating Committee shall not
have any authority to modify or otherwise alter the rights and obligations of
the Parties hereunder. The Operating Committee shall develop and implement
suitable policies and procedures with which to coordinate the interaction of the
Parties with respect to the performance of their duties and obligations under
this Agreement.

         3.21     SMECO CT To the extent that Generator owns, operates and/or
controls the SMECO CT, Generator shall be subject to the provisions set forth in
this Section 3.21.

                  3.21.1   Information Reporting Obligations

                           (a)      For Transmission System reliability
purposes, Pepco may request, and Generator shall promptly provide, all relevant
information, documents, or data regarding the SMECO CT that would be expected to
materially affect the Transmission System, and which is reasonably requested by
NERC, MAAC, the PJM Interconnection LLC, the MDPSC, any other state or District
of Columbia agency having jurisdiction over Pepco or Generator, the PJM System
Operator, or the Transmission Operator, which disclosure shall be subject to
Article 6 of this Agreement regarding the disclosure of commercially sensitive
information.

                           (b)      Generator shall promptly supply accurate,
complete, and reliable information in response to reasonable information
requests for real time data and other data from Pepco necessary for operations,
maintenance, compliance with PJM Requirements or regulatory requirements, or
analysis of the Transmission System. Such information may include metered values
for MW and MVAR, voltage, current, automatic voltage regulator status, automatic
frequency control, dispatch, frequency, breaker status indication, or any other
information reasonably required for reliable operation of the Transmission
System pursuant to PJM Requirements and Good Utility Practice. At minimum,
Generator shall satisfy the telemetry requirements set forth in Schedule I for
the SMECO CT.

                           (c)      Generator shall comply with Sections 3.8.3,
3.8.4 and 3.8.5 with respect to the SMECO CT.

<PAGE>   346

                  3.21.2   SMECO CT Metering and Telemetering

                           (a)      With respect to the SMECO CT, Generator
shall, at Generator's expense: (a) own, Maintain and repair, all meters,
instrument transformers and appurtenances associated with meters, and real time
telemetry, (b) conduct meter accuracy and tolerance tests, and (c) prepare all
calibration reports required for equipment that measures energy transfers at the
interconnection points with Pepco's or any other parties' facilities. All meter
accuracy and tolerance testing hereunder shall be in accordance with PJM
Requirements and Good Utility Practice and shall be conducted, at Pepco's
request, in the presence of Pepco's representative.

                           (b)      With respect to the SMECO CT, Generator
shall own and Maintain, at the Generator's expense, equipment for redundant
real-time communications and transmission of telemetry, hourly MWh information,
and such other information as required by the PJM System Operator or
Transmission Operator, or as reasonably required by Pepco in accordance with PJM
Requirements and Good Utility Practice.

                  3.21.3   SMECO CT Unit Status Notification Generator shall
provide the information described in Article 16 with respect to the status of
the SMECO CT at the times set forth in Article 16.

                  3.21.4   SMECO Operations

                           (a)      Generator agrees that to the extent the
SMECO CT could reasonably be expected to have a material effect on the
operations of Pepco, it shall operate the SMECO CT in a safe and efficient
manner and in accordance with PJM Requirements and Good Utility Practice, and
otherwise in accordance with the terms of this Agreement.

                           (b)      Generator shall comply with the requests,
orders, and directives of Pepco with respect to the SMECO CT to the extent such
requests, orders or directives are (a) issued pursuant to PJM Requirements or
Good Utility Practice, (b) not discriminatory; and (c) otherwise in accordance
with this Agreement or applicable tariffs. In the event Generator believes that
a request, order, or directive of Pepco exceeds the limitations in this Section
3.21.4(b), it shall nevertheless comply with the request, order, or directive
pending resolution of the dispute under Article 12. The Parties agree to
cooperate in good faith to expedite the resolution of any disputes arising under
this Section 3.21.4(b).

<PAGE>   347

                           (c)      Generator shall (i) comply with Pepco's
system restoration plan and black start criteria applicable to the SMECO CT as
configured as of the Effective Date or (ii) if the SMECO CT's configuration is
modified, provide alternative service restoration and black start capability in
accordance with PJM Requirements. Generator shall ensure that operating
personnel at the SMECO CT are trained to implement such system restoration or
black start plans. The Generator shall test the SMECO CT's black-start
combustion-turbines annually to confirm that the black-start combustion-turbines
will start without an external power supply. To the extent that the SMECO CT
would be required to be black-started in accordance with Pepco's Emergency
Conditions and System Restoration Manual, as revised from time to time, and
plant restoration procedures, Generator shall test the SMECO CT at least once
every three years. Testing shall confirm the ability of the SMECO CT to go from
a shut down condition to an operating condition and start delivering power
without assistance from the Transmission System or SMECO's system. These testing
requirements shall remain in place until PJM promulgates specific rules
governing black-start testing.

                           (d)      Unless otherwise agreed to by the Parties or
authorized or directed by the PJM Interconnection LLC, Generator shall operate
the SMECO CT with automatic voltage regulators in service at all times. The
voltage regulators will control voltage consistent with the range of voltage
prescribed by Pepco or the Transmission System Operator in accordance with PJM
Requirements and Good Utility Practice.

                                    (i)      Generator will operate the SMECO CT
in accordance with prescribed voltage schedules pursuant to Section 3.21.4(d) to
the extent the SMECO CT is operating within its reactive generating capability
and not violating any electrical constraints. Should Generator fail to comply
with such voltage schedules, Pepco or the Transmission Operator, as applicable,
shall provide written notice to the Generator of its intent to remedy that
failure. If Generator does not promptly commence appropriate action after
receiving such notice, Pepco or the Transmission Operator may then take any
necessary action at Generator's expense to remedy such failure, including the
installation of capacitor banks or other reactive compensation equipment
necessary to ensure the proper voltage or reactive supply at the Station
including, at a minimum, by installing such equipment outside any building
housing the SMECO CT. Pepco shall make, to the extent feasible, reasonable
efforts to minimize the impact of such action on the operation of the SMECO CT.

                                    (ii)     Generator shall notify the
Transmission Operator if (a) any or all generating units at the SMECO CT reaches
a VAR limit, (b) there is any deviation from the voltage schedules prescribed
pursuant to Section 3.21.4(d) which is outside the limits permitted by PJM
Requirements or Good Utility

<PAGE>   348

Practice, or (c) any automatic voltage regulator is removed from or restored to
service.

                                    (iii)    The Transmission Operator may from
time to time, pursuant to PJM Requirements or Good Utility Practice, request or
direct Generator to adjust generator controls that impact the Transmission
System, such as excitation, droop, and automatic generation control settings and
Generator shall comply with such request or directions.

                                    (iv)     Generator acknowledges that the
Transmission Operator may have the right, to the extent authorized or directed
by the PJM Interconnection LLC, to require reduced or increased generation of
the SMECO CT in accordance with PJM Requirements, or in accordance with
applicable rules of the Transmission Operator.

                                    ARTICLE 4
                                   OPERATIONS

         4.1      General

                  4.1.1    The Parties agree to operate their respective
equipment that could reasonably be expected to have a material effect on the
operations of the other Party in a safe and efficient manner and in accordance
with PJM Requirements and Good Utility Practice, and otherwise in accordance
with the terms of this Agreement.

                  4.1.2    Generator shall comply with the requests, orders, and
directives of Pepco with respect to Interconnection Service to the extent such
requests, orders or directives are (a) issued pursuant to PJM Requirements or
Good Utility Practice, (b) not discriminatory; and (c) otherwise in accordance
with this Agreement or applicable tariffs.

                  4.1.3    In the event Generator believes that a request,
order, or directive of Pepco exceeds the limitations in this Section 4.1.2, it
shall nevertheless comply with the request, order, or directive pending
resolution of the dispute under Article 12. The Parties agree to cooperate in
good faith to expedite the resolution of any disputes arising under this Section
4.1.

         4.2      Generator's Operating Obligations

                  4.2.1    General. Generator shall request permission from the
Transmission Operator, the PJM System Operator or the PJM Interconnection

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LLC, as applicable, prior to opening and/or closing circuit breakers in
accordance with applicable switching and operations procedures and Good Utility
Practice.

                           (a)      Generator shall carry out all switching
orders from the Transmission Operator, the PJM System Operator, or the PJM
Interconnection LLC, in a timely manner and in accordance with PJM Requirements
and Good Utility Practice.

                           (b)      Generator shall (i) comply with Pepco's
system restoration plan and black start criteria applicable to the Station as
configured as of the Effective Date or (ii) if the Station's configuration is
modified, provide alternative service restoration and black start capability in
accordance with PJM Requirements. Generator shall ensure that operating
personnel at the Station are trained to implement such system restoration or
black start plans. The Generator shall test the Station's black-start
combustion-turbines annually to confirm that the black-start combustion-turbines
will start without an external power supply. The Generator shall test the
Station's steam turbine-generators and those combustion-turbine generators that
would be required to be black-started in accordance with Pepco's Emergency
Conditions and System Restoration Manual, as revised from time to time, and
plant restoration procedures, at least once every three years. Testing shall
confirm the ability of a generating unit or Station to go from a shut down
condition to an operating condition and start delivering power without
assistance from the Transmission System. These testing requirements shall remain
in place until PJM promulgates specific rules governing black-start testing.

                           (c)      The electricity supplied by Generator to the
Point of Interconnection shall be in the form of three-phase 60 Hertz
alternating current at the nominal system voltage.

                           (d)      Generator's equipment shall conform with
Good Utility Practice for harmonic distortion and voltage
fluctuation.

                  4.2.2    Voltage or Reactive Control Requirements. Unless
otherwise agreed to by the Parties or authorized or directed by the PJM
Interconnection LLC, Generator shall operate the Station with automatic voltage
regulators in service at all times. The voltage regulators will control voltage
at the Points of Interconnection consistent with the range of voltage prescribed
by Pepco or the Transmission System Operator in accordance with PJM Requirements
and Good Utility Practice.

                           (a)      Generator will operate the Station in
accordance with prescribed voltage schedules pursuant to Section 4.2.2 to the
extent the Station is operating within its reactive generating capability and
not violating any electrical

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constraints. Should Generator fail to comply with such voltage schedules, Pepco
or the Transmission Operator, as applicable, shall provide written notice to the
Generator of its intent to remedy that failure. If Generator does not promptly
commence appropriate action after receiving such notice, Pepco or the
Transmission Operator may then take any necessary action at Generator's expense
to remedy such failure, including the installation of capacitor banks or other
reactive compensation equipment necessary to ensure the proper voltage or
reactive supply at the Station including, at a minimum, by installing such
equipment outside any building housing the Generation Facilities. Pepco shall
make, to the extent feasible, reasonable efforts to minimize the impact of such
action on the operation of the Station.

                           (b)      Generator shall notify the Transmission
Operator if (a) any or all generating units at the Station reaches a VAR limit,
(b) there is any deviation from the voltage schedules prescribed pursuant to
Section 4.2.2 which is outside the limits permitted by PJM Requirements or Good
Utility Practice, or (c) any automatic voltage regulator is removed from or
restored to service.

                           (c)      The Transmission Operator may from time to
time, pursuant to PJM Requirements or Good Utility Practice, request or direct
Generator to adjust generator controls that impact the Transmission System, such
as excitation, droop, and automatic generation control settings and Generator
shall comply with such request or directions.

                           (d)      Generator acknowledges that the Transmission
Operator may have the right, to the extent authorized or directed by the PJM
Interconnection LLC, to require reduced or increased generation of the Station
in accordance with PJM Requirements, or in accordance with applicable rules of
the Transmission Operator.

         4.3      Auditing of Accounts and Records. The Parties shall have the
right, during normal business hours, to audit each other's accounts and records
pertaining to transactions under this Agreement, upon twenty (20) days prior
written notice, at the offices where such accounts and records are maintained,
provided, however, that the audit shall be limited to those portions of the
accounts and records that are related to services provided to the other Party
under this Agreement. Any such audit of a Party's accounts and records will be
at the expense of the auditing Party, shall not be made more frequently than
once in any twelve (12) month period, and no such audit may be made with respect
to accounts and records relating to periods more than twenty-four (24) months
prior to the date of the audit notice. The Party being audited will be entitled
to review the audit report and any supporting materials. The Party conducting
the audit shall maintain the confidentiality of all information obtained during
the audit in compliance with Article 6 of this Agreement. To the extent that
audited information includes confidential

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information, the auditing Party shall designate an independent auditor at its
expense to perform such audit.

                                    ARTICLE 5
                  COST RESPONSIBILITIES AND BILLING PROCEDURES

         5.1      Cost Responsibilities for Interconnection Service. Except as
otherwise expressly stated herein, Generator shall not be responsible for any
costs arising from Pepco's provision of Interconnection Service or local
services to Generator, except for those costs specified in Sections 3.2.1,
3.2.2, 3.4.1, and 3.15 or arising from the liability or indemnification
provisions of this Agreement.

         5.2      Cost Responsibilities for Local Services. Except as otherwise
expressly provided herein or agreed to by the Parties, each Party shall be
responsible for the costs for local services provided to the other Party in
Sections 3.10 and 3.11 as set forth in said sections.

         5.3      Billing Procedures

                  (a)      Within ten (10) days after the first day of each
calendar month, each Party shall provide the other Party with a written invoice
for any payments due from the other Party for services provided in the previous
month.

                  (b)      Each invoice shall (i) delineate the month in which
the services were provided, (ii) fully describe the services rendered, (iii) be
itemized to reflect the services performed or provided, and (iv) provide
reasonable detail as to the calculation of the amount involved.

                  (c)      All invoices shall be paid within fifteen (15) days
after receipt, but not earlier than the 25th day of the month in which the
invoice is rendered. All payments shall be made in immediately available funds
payable to the other Party, or by wire transfer to a bank designated in writing
by such Party. Payment of invoices shall not relieve the paying Party from any
responsibilities or obligations it has under this Agreement, nor shall such
payment constitute a waiver of any claims arising hereunder.

                  5.3.2    To the extent that, for any billing period, Generator
is obligated to pay to Pepco amounts due and calculated pursuant to Section 5.3,
Pepco may use such amounts as a set-off against any amounts owed by Pepco to
Generator under this Section 5.3.

<PAGE>   352

                  5.3.3    Interest on any unpaid amounts shall be calculated in
accordance with the methodology specified for interest on refunds in FERC
regulations at 18 C.F.R. Section 35.19a(a)(2)(iii). Interest on delinquent
amounts shall be calculated from the due date of the bill to the date of
payment. When payments are made by mail, bills shall be considered as having
been paid on the date of receipt by the other Party.

         5.4      Billing Disputes. In the event of a billing dispute between
the Parties, each Party shall continue to provide services as long as the other
Party continues to make all payments not in dispute. Payment of invoices by
either Party shall not relieve the paying Party from any responsibilities or
obligations it has under this Agreement; nor shall it constitute a waiver of any
claims arising hereunder.

                                    ARTICLE 6
                                 CONFIDENTIALITY

         6.1      Confidentiality Obligations of Pepco. Pepco shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or other provisions of law, all documents and information furnished by Generator
in connection with this Agreement marked "Confidential" or "Proprietary." Except
to the extent that such information or documents are (i) generally available to
the public other than as a result of a disclosure by Pepco in breach of this
Agreement, (ii) available to Pepco on a non-confidential basis prior to
disclosure to Pepco by Generator, or (iii) available to Pepco on a
non-confidential basis from a source other than Generator, provided that such
source is not known, and by reasonable effort could not be known, by Pepco to be
bound by a confidentiality agreement with Generator or otherwise prohibited from
transmitting the information to Pepco by a contractual, legal or fiduciary
obligation, Pepco shall not release or disclose such information to any other
person, except to its employees, representatives or agents on a need-to-know
basis, in connection with this Agreement who has not first been advised of the
confidentiality provisions of this Section 6.1 and has agreed in writing to
comply with such provisions. In no event shall such information be disclosed in
violation of the requirements of FERC Orders 889 and 889-A, and any successor
thereto. Pepco shall promptly notify Generator if it receives notice or
otherwise concludes that the production of any information subject to this
Section 6.1 is being sought under any provision of law and Pepco shall use
reasonable efforts in cooperation with Generator to seek confidential treatment
for such confidential information provided thereto.

         6.2      Confidentiality Obligations of Generator. Generator shall hold
in confidence, unless compelled to disclose by judicial or administrative
process or other provisions of law, all documents and information furnished by
Pepco in connection with this Agreement marked "Confidential" or "Proprietary."
Except to

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the extent that such information or documents are (i) generally available to the
public other than as a result of a disclosure by Generator in breach of this
Agreement, (ii) available to Generator on a non-confidential basis prior to
disclosure to Generator by Pepco, or (iii) available to Generator on a
non-confidential basis from a source other than Pepco, provided that such source
is not known, and by reasonable effort could not be known, by Generator to be
bound by a confidentiality agreement with Pepco or otherwise prohibited from
transmitting the information to Generator by a contractual, legal or fiduciary
obligation, Generator shall not release or disclose such information to any
other person, except to its employees, representatives or agents on a
need-to-know basis, in connection with this Agreement who has not first been
advised of the confidentiality provisions of this Section 6.2 and has agreed in
writing to comply with such provisions. In no event shall such information be
disclosed in violation of the requirements of FERC Orders 889 and 889-A, and any
successor thereto. Generator shall promptly notify Pepco if it receives notice
or otherwise concludes that the production of any information subject to this
Section 6.2 is being sought under any provision of law and Generator shall use
reasonable efforts in cooperation with Pepco to seek confidential treatment for
such confidential information provided thereto.

         6.3      Confidentiality of Audits. The independent auditor performing
any audit, as referred to in Section 4.3, shall be subject to a confidentiality
agreement between the auditor and the Party being audited. Such audit
information shall be treated as confidential except to the extent that its
disclosure is required by regulatory or judicial order, for reliability purposes
pursuant to PJM Requirements or Good Utility Practice, and pursuant to the
FERC's rules and regulations. Except as provided herein, neither Party will
disclose the audit information to any third party, without the other Party's
prior written consent. Audit information in the hands of the Party not being
audited shall be subject to all provisions of Section 6.1 or 6.2, above, as
applicable.

         6.4      Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its obligations
under Section 6.1 or 6.2, above, as applicable. Each Party accordingly agrees,
subject to Article 8, that the other Party shall be entitled to equitable
relief, by way of injunction or otherwise, if the first Party breaches or
threatens to breach its obligations under Section 6.1 or 6.2 of this Agreement,
as applicable, which equitable relief shall be granted without bond or proof of
damages, and the receiving Party shall not plead in defense that there would be
an adequate remedy at law.

<PAGE>   354

                                   ARTICLE 7
                               EVENTS OF DEFAULT

         7.1      Events of Default. Each of the following shall constitute an
Event of Default by the a defaulting Party under this Agreement:

                  (a)      The failure by a Party to pay any amount due within
twenty (20) calendar days after receipt of written notice of nonpayment by the
other Party, unless the payment of such amount is disputed in good faith, in
which event Section 5.5 shall apply;

                  (b)      A Party's breach of any material term or condition of
this Agreement, including but not limited to any material breach of a
representation, warranty or covenant made in this Agreement which, after
receiving written notice of the breach from the non-breaching Party (such notice
to set forth in reasonable detail the nature of the default and, where known and
if applicable, the steps necessary to cure such default), (i) the breaching
Party fails to cure, if curable, within thirty (30) days following receipt of
the notice or (ii) if such default is of such a nature that it cannot be cured
within thirty (30) days following receipt of such notice, the breaching Party
fails within such thirty (30) days to commence the necessary cure and fails at
any time thereafter diligently and continuously to prosecute such cure to
completion provided that the cure is completed no later than 180 days after the
receipt of the default notice;

                  (c)      The appointment of a receiver, liquidator or trustee
for either Party, and such receiver, liquidator or trustee is not discharged
within sixty (60) days;

                  (d)      The entry of a decree or decrees adjudicating a Party
as bankrupt or insolvent, and such decree or decrees are not stayed or
discharged within sixty (60) days; or

                  (e)      The filing of voluntary petitions for bankruptcy
under any federal or state bankruptcy law by a Party.

         7.2      Remedies

                  7.2.1    If the breaching Party disputes that an Event of
Default under Section 7.1.(b) has occurred, the breaching Party shall
nonetheless comply with this Section 7.2 pending the resolution of the dispute.
If it is determined that no breach or Event of Default under Section 7.1(b)
existed, the Party alleging the default shall

<PAGE>   355

pay and reimburse the other Party for all reasonable costs and expenses incurred
by it to cure the alleged default.

                  7.2.2    Upon the occurrence of an Event of Default, the
non-defaulting Party may (i) exercise all such rights and remedies as may be
available to it at law or equity including seeking to recover damages caused by
such Event of Default, subject to Article 8 of this Agreement; and/or (ii)
terminate this Agreement. The Parties shall not discontinue the performance of
any one or more of their obligations hereunder due to the occurrence of an Event
of Default during the pendency of any dispute regarding such Event of Default
and until such dispute is finally resolved except that Pepco may suspend or
interrupt service if necessary for the safe and reliable operation of the
Interconnection Facilities or the Transmission System.

                  7.2.3    Notwithstanding the foregoing, upon the occurrence of
any Event of Default, the non-defaulting Party shall be entitled to commence an
action to require the defaulting Party to remedy such default by specifically
performance of its duties and obligations hereunder in accordance with the terms
and conditions hereof.

                  7.2.4    Notwithstanding anything in this Agreement to the
contrary, in the event the Generator's failure to comply with the provisions of
Sections 4.1 and 4.2 of this Agreement is reasonably likely to have an immediate
and material adverse impact on Pepco or the Transmission System, Pepco shall
have the right to take immediately reasonable steps and/or to exercise
immediately all remedies available under this Agreement, or at law or equity,
including the right, after providing as much notice as is practicable under the
circumstances and complying with the applicable FERC notice requirements
regarding termination of service, to disconnect the Station from the
Transmission System.

                                    ARTICLE 8
                             LIMITATION OF LIABILITY

         8.1      Limitation of Pepco's Liability. Pepco does not guarantee the
non-occurrence of, or warrant against, and will have no liability hereunder for,
and the Generator will release Pepco from all claims or damages associated with,
any interruption in the availability of the Interconnection Facilities,
Interconnection Service or local services pursuant to Section 3.10 or damages to
the Generator's facilities, except to the extent such interruption or damage is
caused by Pepco's gross negligence or willful misconduct in the performance of
its obligations under this Agreement.

<PAGE>   356

         8.2      Limitation on Generator's Liability. Generator does not
guarantee the non-occurrence of, or warrant against, and will have no liability
under this Agreement for, and Pepco will release Generator from all claims or
damages arising under this Agreement which are associated with any interruption
in the availability of the Station or local services pursuant to Section 3.11,
any reduction, curtailment, interruption or reduction of energy from the
Station, or damage to Pepco's facilities, except to the extent such interruption
or damage is caused by Generator's gross negligence or willful misconduct in the
performance of its obligations under the Agreement.

         8.3      Consequential Damages. Except for indemnity obligations set
forth in Article 9, neither Party, nor their respective officers, directors,
agents, employees, Affiliates, or successors or assigns of any of them, shall be
liable to the other Party or its Affiliates, officers, directors, agents,
employees, successors or assigns for claims, suits, actions or causes of action
for incidental, punitive, special, indirect, multiple or consequential damages
(including, without limitation, replacement power costs, lost revenues, claims
of customers, attorneys' fees and litigation costs) connected with, or resulting
from, performance or non-performance of this Agreement, or any actions
undertaken in connection with or related to this Agreement, including, without
limitation, any such damages which are based upon causes of action for breach of
contract, tort (including negligence and misrepresentation), breach of warranty
or strict liability. The provisions of this Section 8.3 shall apply regardless
of fault and shall survive termination, cancellation, suspension, completion, or
expiration of this Agreement.

                                    ARTICLE 9
                     INDEMNIFICATION FOR THIRD PARTY CLAIMS

         9.1      Generator's Indemnification. Generator shall indemnify, hold
harmless, and defend Pepco and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between Pepco and a third party or Generator) for
damage to property of unaffiliated third parties, injury to or death of any
person, including Pepco's employees or any third parties, to the extent caused,
by the negligence or willful misconduct of Generator's and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Generator's performance or breach of this Agreement, or
the exercise by Generator of its rights hereunder. In furtherance of the
foregoing indemnification and not by way of limitation thereof, Generator hereby
waives any defense it might otherwise have under applicable workers'
compensation laws.

<PAGE>   357

         9.2      Pepco's Indemnification. Pepco shall indemnify, hold harmless,
and defend Generator and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between the Generator and a third party or Pepco)
for damage to property of unaffiliated third parties, injury to or death of any
person, including Generator's employees or any third parties, to the extent
caused by the negligence or willful misconduct of Pepco and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Pepco's performance or breach of this Agreement, or the
exercise by Pepco of its rights hereunder. In furtherance of the foregoing
indemnification and not by way of limitation thereof, Pepco hereby waives any
defense it might otherwise have under applicable workers' compensation laws.

         9.3      Indemnification Procedures. If either Party intends to seek
indemnification under this Article 9 from the other Party, the Party seeking
indemnification shall give the other Party notice of such claim within ninety
(90) days of the later of the commencement of, or the Party's actual knowledge
of, such claim or action. Such notice shall describe the claim in reasonable
detail, and shall indicate the amount (estimated if necessary) of the claim that
has been, or may be sustained by, said Party. To the extent that the other Party
will have been actually and materially prejudiced as a result of the failure to
provide such notice, such notice will be a condition precedent to any liability
of the other Party under the provisions for indemnification contained in this
Agreement. Neither Party may settle or compromise any claim without the prior
consent of the other Party; provided, however, said consent shall not be
unreasonably withheld or delayed.

         9.4      Survival. The indemnification obligations of each Party under
this Article 9 shall continue in full force and effect regardless of whether
this Agreement has either expired or been terminated or canceled.

                                   ARTICLE 10
                                    INSURANCE

         10.1     Insurance Coverage. The Parties shall maintain at their own
cost and expense, fire, liability, worker's compensation, and other forms of
insurance relating to their respective property and facilities subject to this
Agreement in the manner, and amounts, and for the durations as is customary in
the electric utility industry.

<PAGE>   358

         10.2     Certificates of Insurance. The Parties agree to furnish each
other with certificates of insurance evidencing the insurance coverage obtained
in accordance with this Article 10, and the Parties agree to notify and send
copies to the other of any policies maintained hereunder upon written request by
a Party. Each Party must notify the other Party within ten (10) business days of
receiving notice of cancellation, change, amendment or renewal of any insurance
policy required pursuant to Section 10.1 above.

         10.3     Additional Insureds and Waiver. Each Party and its affiliates
shall be named as additional insureds on the general liability insurance
policies obtained in accordance with Section 10.1, above, as regards liability
under this Agreement; and each Party shall waive its rights of recovery against
the other for any loss or damage covered by such policy.

                                   ARTICLE 11
                                  FORCE MAJEURE

         11.1     Effect of Force Majeure. Notwithstanding anything in this
Agreement to the contrary, Generator and Pepco shall not be liable in damages or
otherwise or responsible to the other for its failure to carry out any of its
obligations under this Agreement (except for the obligation to pay sums of money
due and owing hereunder) to the extent that they are unable to so perform or are
prevented from performing by an event of Force Majeure and has complied with
Section 11.3.

         11.2     Force Majeure Defined. Force Majeure means those causes beyond
the reasonable control of the Party affected, which by the exercise of
reasonable diligence, including Good Utility Practice, that Party is unable to
prevent, avoid, mitigate, or overcome, including the following: any act of God,
labor disturbance (including a strike), act of the public enemy, war,
insurrection, riot, fire, storm or flood, explosion, breakage or accident to
machinery or equipment, electric system disturbance), order, regulation or
restriction imposed by governmental, military or lawfully established civilian
authorities, or any other cause of a similar nature beyond a Party's reasonable
control.

         11.3     Notification. A Party shall not be entitled to rely on the
occurrence of an event of Force Majeure as a basis for being excused from
performance of its obligations under this Agreement, unless the Party relying on
the event or condition shall: (a) provide prompt written notice of such Force
Majeure event to the other Party, including an estimation of its expected
duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts in accordance with Good Utility
Practice to continue to perform its obligations under this Agreement; (c)
expeditiously take action to correct or cure the event or condition excusing
performance; (d) exercise all reasonable efforts to mitigate or

<PAGE>   359

limit damages to the other Party; and (e) provide prompt notice to the other
Party of the cessation of the event or condition giving rise to its excuse from
performance. Subject to this Section 11.3, any obligation under this Agreement
shall be suspended only to the extent caused by such Force Majeure and only
during the continuance of any inability of performance caused by such Force
Majeure but for no longer period.

                                   ARTICLE 12
                                    DISPUTES

         12.1     Disputes

                  12.1.1   A Party with a claim or dispute under this Agreement
shall submit to the Operating Committee a notification of such claim or dispute
within sixty (60) days after the circumstances that gave rise to the claim or
the question or issue in dispute. The notification shall be in writing and shall
include a concise statement of the claim or the issue or question in dispute, a
statement of the relevant facts and documentation to support the claim. In the
event the Operating Committee is unable, in good faith, to resolve their
disagreement in a manner satisfactory to both Parties within thirty (30) days
after receipt by the Operating Committee of a notification specifying the claim,
issue or question in dispute, the Parties shall refer the dispute to their
respective senior management. If, after using their good faith best efforts to
resolve the dispute, senior management cannot resolve the dispute within thirty
(30) days, the Parties shall utilize the arbitration procedures set forth below
in Section 12.2 to resolve a dispute, provided that nothing herein or therein
shall prohibit either Party from at any time requesting from a court of
competent jurisdiction a temporary restraining order, preliminary injunction, or
other similar form of equitable relief to enforce performance of the provisions
of this Agreement.

         12.2     Arbitration.

                  (a)      Unless the Parties other wise mutually agree in
writing to another form of dispute resolution such as dispute resolution under
the PJM Agreement or the MAAC agreement, any arbitration initiated under this
Agreement shall be conducted before a single neutral arbitrator appointed by the
Parties within thirty (30) days of receipt by respondent of the demand for
arbitration. If the Parties are unable to agree on an arbitrator, such
arbitration shall be appointed by the American Arbitration Association. Unless
the Parties agree otherwise, the arbitrator shall be an attorney or retired
judge with at least fifteen (15) years of experience, and shall not have any
current or past substantial business or financial relationships with any Party
to the arbitration. If possible, the arbitrator shall

<PAGE>   360

have experience in the electric utility industry. Unless otherwise agreed, the
arbitration shall be conducted in accordance with the American Arbitration
Association's Commercial Arbitration Rules, then in effect. Any arbitration
proceedings, decision or award rendered hereunder and the validity, effect and
interpretation of this arbitration agreement shall be governed by the Federal
Arbitration Act of the United States, 9 U.S.C. Section 1 et seq. The location of
any arbitration hereunder shall be in the District of Columbia.

                  (b)      The arbitration shall, if possible, be concluded not
later than six (6) months after the date that it is initiated. The arbitrator
shall be authorized only to interpret and apply the provisions of this Agreement
or any related agreements entered into under this Agreement and shall have no
power to modify or change any of the above in any manner. The arbitrator shall
have no authority to award punitive or multiple damages or any damages
inconsistent with this Agreement. The arbitrator shall, within thirty (30) days
of the conclusion of the hearing, unless such time is extended by agreement of
the Parties, notify the Parties in writing of his or her decision, stating his
or her reasons for such decision and separately listing his or her findings of
fact and conclusions of law. The decision of the arbitrator rendered in such a
proceeding shall be final and binding on the Parties. Judgment on the award may
be entered upon it in any court having jurisdiction.

         12.3     FERC Dispute Resolution. Nothing in this Agreement shall
preclude, or be construed to preclude, any Party from filing a petition or
complaint with FERC with respect to any arbitrable claim over which FERC has
jurisdiction. In such case, the other Party may request FERC to reject or to
waive jurisdiction. If FERC rejects or waives jurisdiction with respect to all
or a portion of the claim, the portion of the claim not so accepted by FERC
shall be resolved through arbitration, as provided in this Agreement. To the
extent that FERC asserts or accepts jurisdiction over the claim, the decision,
finding of fact or order of FERC shall be final and binding, subject to judicial
review under the Federal Power Act, and any arbitration proceedings that may
have commenced with respect to the claim prior to the assertion or acceptance of
jurisdiction by FERC shall be terminated.

                                   ARTICLE 13
                                 REPRESENTATIONS

         13.1     Representations of Pepco. Pepco hereby represents and warrants
to Generator as follows:

                  (a)      Incorporation. Pepco is a corporation duly organized,
validly existing and in good standing under the laws of the District of Columbia
and the Commonwealth of Virginia, and has all requisite corporate power and
authority to

<PAGE>   361

own, lease and operate its material assets and properties and to carry on its
business as now being conducted.

                  (b)      Authority. Pepco has all necessary corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Pepco of this
Agreement and the consummation by Pepco of the transactions contemplated
hereunder have been duly and validly authorized by the Board of Directors of
Pepco or by a committee thereof to whom such authority has been delegated and no
other corporate proceedings on the part of Pepco are necessary to authorize this
Agreement or the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Pepco and, assuming that this Agreement
constitutes a valid and binding agreement of Generator, constitutes a valid and
binding agreement of Pepco, enforceable by Pepco in accordance with its terms.

                  (c)      Consents and Approvals; No Violation.

                  (i)      Neither the execution and delivery of this Agreement
by Pepco nor performance by Pepco of its obligations hereunder will (A) conflict
with or result in any breach of any provision of the Certificate of
Incorporation or By-laws of Pepco, (B) result in a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Pepco or any of its
subsidiaries is a party or by which any of their respective assets may be bound
or (C) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Pepco, or any of its assets, except in the case of clauses (B) and
(C) for such failures to obtain a necessary consent, defaults and violations
which would not, individually or in the aggregate, have a material adverse
effect on the ability of Pepco to discharge its obligations under this Agreement
(a "Pepco Material Adverse Effect").

                  (ii)     No declaration, filing or registration with, or
notice to, or authorization, consent or approval of any governmental authority
is necessary for performance by Pepco of its obligations hereunder, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not obtained or made would not, individually or in the
aggregate, have a Pepco Material Adverse Effect.

         13.2     Representations of Generator. Generator hereby represents and
warrants to Pepco as follows:

<PAGE>   362

                  (a)      Incorporation. Generator is a [corporation] duly
[incorporated], validly existing and in good standing under the laws of the
State of __________, and has all requisite [corporate] power and authority to
own, lease and operate its material assets and properties and to carry on its
business as now being conducted.

                  (b)      Authority. Generator has all necessary [corporate]
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by the Generator of
this Agreement and the consummation by Generator of the transactions
contemplated hereby have been duly and validly authorized the [Board of
Directors] of Generator or by a committee thereof to whom such authority has
been delegated and no other [corporate] proceedings on the part of Generator are
necessary to authorize this Agreement or the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Generator
and, assuming that this Agreement constitutes a valid and binding agreement of
Pepco, constitutes a valid and binding agreement of Generator, enforceable
against Generator in accordance with its terms.

                  (c)      Consents and Approvals.

                  (i)      Neither the execution and delivery of this Agreement
by Generator nor performance by Generator of its obligations hereunder will (A)
conflict with or result in any breach of any provision of the [Certificate of
Incorporation or By-laws] of Generator, (B) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Generator or any of
its subsidiaries is a party or by which any of their respective assets may be
bound or (C) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Generator, or any of its assets, except in the case of
clauses (B) and (C) for such failures to obtain a necessary consent, defaults
and violations which would not, individually or in the aggregate, have a
material adverse effect on the ability of Generator to discharge its obligations
under this Agreement (a "Generator Material Adverse Effect").

                  (ii)     No declaration, filing or registration with, or
notice to, or authorization, consent or approval of any Governmental Authority
is necessary for performance by Generator of its obligations hereunder, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made would not, individually or
in the aggregate, have a Generator Material Adverse Effect.

                                   ARTICLE 14
                     ASSIGNMENT/CHANGE IN CORPORATE IDENTITY

         14.1     Assignment.

                  (a)      Except as set forth in this Article 14, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by either Party hereto, without the prior written consent of the other
Party, which consent shall not be unreasonably withheld or delayed.

                  (b)      Subject to Section 14.2, upon ten (10) days prior
written notice to Generator, Pepco may assign this Agreement, and Pepco's
rights, interests and obligations hereunder, to (i) an Affiliate of Pepco that
owns all or part of Pepco's Transmission System or (ii) an independent system
operator or independent transmission company whose control over all or part of
Pepco's Transmission System has been approved by the FERC.

                  (c)      Subject to Section 14.2, Generator may (a) assign any
of its rights and obligations hereunder to an Affiliate to the extent necessary
for the Generator to qualify as an exempt wholesale generator under Section 32
of the Public Utility Holding Company Act of 1935, as amended, and (b) assign,
transfer, pledge or otherwise dispose of its rights and interests hereunder to a
trustee, lending institution, or other Person for the purposes of financing or
refinancing the Station, including upon or pursuant to the exercise of remedies
under such financing or refinancing, or by way of assignments, transfers,
conveyances of dispositions in lieu thereof; provided, however, that no such
assignment shall relieve or in any way discharge Generator from the performance
of its duties and obligations under this Agreement. Pepco agrees to execute and
deliver, at Generator's expense, such documents as may be reasonably necessary
to accomplish any such assignment, transfer, conveyance, pledge or disposition
of rights hereunder for purposes of the financing or refinancing of the
Facility, so long as Pepco's rights under this Agreement are not thereby
altered, amended, diminished or otherwise impaired.

                  (d)      Subject to Section 14.2, either Party may assign this
Agreement to a successor to all or substantially all of the assets of such Party
by way of merger, consolidation, sale or otherwise, provided such successor
assumes in writing and becomes liable for all of such Party's duties and
obligations hereunder.

         14.2     Release of Rights and Obligations. No assignment, transfer,
conveyance, pledge or disposition of rights, interests, duties or obligations
under this Agreement by a Party shall relieve that Party from liability and
financial responsibility for the performance thereof after any such transfer,
assignment,

<PAGE>   363

conveyance, pledge or disposition unless and until (i) the transferee or
assignee shall agree in writing to assume the obligations and duties of that
Party under this Agreement and to impose such obligations on subsequent
permitted transferees and assignees and (ii) the non-assigning Party has
consented in writing to such assumption and to a release of the assigning Party
from such liability, such consent not to be unreasonably withheld or delayed.

         14.3     Change in Corporate Identity. If Generator terminates its
existence as a [corporate] entity by merger, acquisition, sale, consolidation or
otherwise, or if all or substantially all of Generator's assets are transferred
to another person or business entity without complying with this Article 14,
Pepco shall have the right, enforceable in a court of competent jurisdiction, to
enjoin Generator's successor from using the Station in any manner that does not
comply with the requirements of this Agreement or that impedes Pepco's ability
to carry on its ongoing business operations.

         14.4     Successors and Assigns. This Agreement and all of the
provisions hereof are binding upon, and inure to the benefit of, the Parties
and their respective successors and permitted assigns.

                                   ARTICLE 15
                                 SUBCONTRACTORS

         Nothing in this Agreement shall prevent the Parties from utilizing the
services of subcontractors as they deem appropriate, provided, however, the
Parties agree that, where applicable, all said subcontractors shall comply with
the terms and conditions of this Agreement. The creation of any subcontract
relationship shall not relieve the hiring Party of any of its obligations under
this Agreement. Each Party shall be fully responsible to the other Party for the
acts and/or omission of any subcontractor it hires as if no subcontract had been
made. Any obligation imposed by this Agreement upon the Parties, where
applicable, shall be equally binding upon and shall be construed as having
application to any subcontractor. The Parties shall each be liable for,
indemnify, and hold harmless the other Party, their Affiliates and their
officers, directors, employees, agents, servants, and assigns from and against
any and all claims, demands, or actions, from the other Party's subcontractors;
and shall pay all costs, expenses and legal fees associated therewith and all
judgments, decrees and awards rendered therein. No subcontractor is intended to
be or shall be deemed a third-party beneficiary of this Agreement.

                                   ARTICLE 16
                                     NOTICES

         16.1     Emergency Notices. At or prior to the Effective Date, each
Party shall indicate to the other Party, by notice, the appropriate person
during each

<PAGE>   364

eight-hour work shift to contact in the event of an emergency, a scheduled or
forced interruption or reduction in services. The notice last received by a
Party shall be effective until modified in writing by the other Party.

         16.2     Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (as of the time of delivery or, in the
case of a telecopied communication, of confirmation) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier (providing proof of
delivery) to the Parties at the following addresses (or at such other address
for a Party as shall be specified by like notice):

         if to Pepco , to:

                  Potomac Electric Power Company
                  1900 Pennsylvania Avenue, N.W.
                  Washington, D.C.  20068
                  Telecopier:  (202) ________________
                  Attention:  ___________________

         if to Generator, to:

                  c/o Southern Energy, Inc.
                  900 Ashwood Parkway
                  Suite 500
                  Atlanta, Georgia  30338-4780
                  Telecopier:  (770)  821-6575
                  Attention:

                                   ARTICLE 17
                                   AMENDMENTS

         17.1     Amendments. Except as set forth in Sections 2.2 and 17.2 of
this Agreement, this Agreement may be amended, modified, or supplemented only by
written agreement of both Pepco and Generator.

         17.2     FERC Proceedings

                  (a)      Pepco may unilaterally make application to FERC under
Section 205 of the Federal Power Act and pursuant to the FERC's rules and
regulations promulgated thereunder for, or exercise any rights it may have under
Section 206 of the Federal Power Act and the regulations thereunder with respect
to, a change in any rates, terms and conditions, charges, classification of
service, rule or regulation for any services Pepco provides under this Agreement
over which FERC has jurisdiction.

<PAGE>   365

                  (b)      Generator may exercise its rights under Section 205
or 206 of the Federal Power Act and pursuant to FERC's rules and regulations
promulgated thereunder with respect to any rate, term, condition, charge,
classification of service, rule or regulation for any services provided under
this Agreement over which FERC has jurisdiction.

                                   ARTICLE 18
                            MISCELLANEOUS PROVISIONS

         18.1     Waiver. Except as otherwise provided in this Agreement, any
failure of a Party to comply with any obligation, covenant, agreement, or
condition herein may be waived by the Party entitled to the benefits thereof
only by a written instrument signed by the Party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement, or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.

         18.2     Labor Relations. The Parties agree to immediately notify the
other Party, verbally and then in writing, of any labor dispute or anticipated
labor dispute which may reasonably be expected to affect the operations of the
other Party.

         18.3     No Third Party Beneficiaries. Nothing in this Agreement is
intended to confer upon any other person except the Parties any rights or
remedies hereunder or shall create any third party beneficiary rights in any
person. No provision of this Agreement shall create any rights in any such
persons in respect of any benefits that may be provided, directly or indirectly,
under any employee benefit plan or arrangement except as expressly provided for
thereunder.

         18.4     Governing Law

This Agreement shall be governed by and construed in accordance with the laws of
the State of Maryland (regardless of the laws that might otherwise govern under
applicable principles of conflicts of law).

         18.5     Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         18.6     Interpretation. When a reference is made in this Agreement to
an Article, Section, Schedule or exhibit, such reference shall be to an Article
or Section of, or Schedule or exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference

<PAGE>   366

purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation" or equivalent words. The words "hereof", "herein" and "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. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Unless otherwise expressly stated
otherwise herein, the word "day" shall mean any calendar day including weekends
and holidays. Any agreement, instrument, statute, regulation, rule or order
defined or referred to herein or in any agreement or instrument that is referred
to herein means such agreement, instrument, statute, regulation, rule or order
as from time to time amended, modified or supplemented, including (in the case
of agreements or instruments) by waiver or consent and (in the case of statutes,
regulations, rules or orders) by succession of comparable successor statutes,
regulations, rules or orders and references to all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns. Each Party acknowledges that it has been
represented by counsel in connection with the review and execution of this
Agreement, and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

         18.7     Jurisdiction and Enforcement. Each of the Parties irrevocably
submits to the exclusive jurisdiction of the federal and state courts of the
State of Maryland for the purposes of any suit, action or other proceeding
arising out of this Agreement or any transaction contemplated hereby. Each of
the Parties agrees to commence any action, suit or proceeding relating hereto
either in the federal courts of the State of Maryland or, if such suit, action
or proceeding may not be brought in such court for jurisdictional reasons, in
the state courts of the State of Maryland. Each of the Parties further agrees
that service of process, summons, notice or document by hand delivery or U.S.
registered mail at the address specified for such Party in Section 16.2 (or such
other address specified by such Party from time to time pursuant to Section
16.2) shall be effective service of process for any action, suit or proceeding
brought against such Party in any such court. Each of the Parties irrevocably
and unconditionally waives any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in the federal and state courts of the State of Maryland and
hereby further irrevocably and unconditionally waives and agrees not to plead or
claim in any such court that any such action, suit or proceeding brought in any
such court has been brought in an inconvenient forum.

<PAGE>   367

         18.8     Entire Agreement. This Agreement, Asset Sale Agreement, the
Confidentiality Agreement and the Ancillary Agreements including the Exhibits,
Schedules, documents, certificates and instruments referred to herein or therein
and other contracts, agreements and instruments contemplated hereby or thereby,
embody the entire agreement and understanding of the Parties in respect of the
transactions contemplated by this Agreement. There are no restrictions,
promises, representations, warranties, covenants or undertakings other than
those expressly set forth or referred to herein or therein. This Agreement, the
Asset Sale Agreement and the Ancillary Agreements supersede all prior agreements
and understandings between the Parties with respect to the transactions
contemplated by this Agreement other than the Confidentiality Agreement.

         18.9     Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the Parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the Parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.

         18.10    Independent Contractor Status. Nothing in this Agreement shall
be construed as creating any relationship between Pepco and Generator other than
that of independent contractors.

         18.11    Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

<PAGE>   368

         IN WITNESS WHEREOF, Pepco and Generator have caused this
Interconnection Agreement (Chalk Point) to be signed by their respective duly
authorized officers as of the date first above written.

                                   POTOMAC ELECTRIC POWER COMPANY

                                   By:
                                       ----------------------------
                                       Name:
                                       Title:

                                   [GENERATOR]

                                   By:
                                       ----------------------------
                                       Name:
                                       Title:

<PAGE>   369

                                   SCHEDULE A
                                   DEFINITIONS

Part A. Capitalized terms not defined in the body of the Agreement shall
        have the meaning set forth in Part A of this Schedule A. (Part B of
        this Schedule A sets forth capitalized terms defined within the
        Agreement.)

         (1)      "Affiliate" has the meaning set forth in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934.

         (2)      "Ancillary Agreements" has the meaning set forth in the Asset
Sale Agreement.

         (3)      "Closing" has the meaning set forth in the Asset Sale
Agreement.

         (4)      "Confidentiality Agreement" has the meaning set forth in the
Asset Sale Agreement.

         (5)      "Costs" means all costs, including without limitation, any
Taxes, costs of acquiring real property, costs and fees for permits, franchises,
licenses and regulatory approvals except to the extent that such costs are
allocated to a party or parties other than the Generator by the PJM
Interconnection LLC or otherwise under the PJM Tariff or PJM Agreement.

         (6)      "Easement" means the Easement Agreement dated __________,
2000, between the Parties with respect to the Station.

         (7)      "Environmental Laws" means all former, current and future
federal, state, local and foreign laws (including common law), treaties,
regulations, rules, ordinances, codes, decrees, judgments, directives or orders
(including consent orders) and environmental permits, in each case, relating to
pollution or protection of the environment or natural resources, including laws
relating to Releases or threatened Releases, or otherwise relating to the
generation, manufacture, processing, distribution, use, treatment, storage,
arrangement for disposal, transport, recycling or handling, of Hazardous
Substances.

         (8)      "Emergency" means (a) with respect to Pepco, a condition or
situation which Pepco, the PJM Interconnection LLC, the PJM System Operator or
the Transmission Operator deem imminently likely to (i) endanger life or
property, or (ii) adversely affect or impair the Transmission System, Pepco's
electrical system or the electrical or transmission systems of others to which
the Transmission System or Pepco's electrical system are directly or indirectly
connected and (b) with respect to the Generator, a condition or situation which
the Generator deems imminently likely to (i) endanger life or property, or (ii)
adversely affect or impair the Station.

         (9)      "FERC" means the Federal Energy Regulatory Commission or its
successors.

<PAGE>   370

         (10)     "Generating Facilities" means the Station and any additional
generating plants, turbines or other generating facilities constructed by
Generator after the Effective Date at the site of the Station.

         (11)     "Generator" has the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors and
assigns.

         (12)     "Generator Facilities" mean the equipment and facilities owned
by the Generator but located on Pepco's property which are identified in
Schedule B of this Agreement.

         (13)     "Good Utility Practice" means any of the applicable practices,
methods and acts.

                  (a)      required by FERC, NERC, MAAC, the PJM Interconnection
LLC, the PJM System Operator, or the successor of any of them, whether or not
the Party whose conduct is at issue is a member thereof,

                  (b)   required by applicable law or regulations,

                  (c)      required by the Pepco Interconnection Standards or
the policies and standards of Pepco relating to emergency operations;

                  (d)      otherwise engaged in or approved by a significant
portion of the electric utility industry during the relevant time period;

which, in the exercise of reasonable judgment in light of the facts known at the
time the decision was made, could have been expected to accomplish the desired
result at a reasonable cost consistent with law, regulation, good business
practices, reliability, safety, and expedition.  Good Utility Practice is not
intended to be limited to the optimum practice, method, or act to the exclusion
of all others, but rather to be acceptable practices, methods, or acts generally
accepted in the region.

         (14)     "Hazardous Substances" means (i) any petrochemical or
petroleum products, crude oil or any fraction thereof, ash, radioactive
materials, radon gas, asbestos in any form, urea formaldehyde foam insulation or
polychlorinated biphenyls, (ii) any chemicals, materials, substances or wastes
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "restricted hazardous materials," "extremely
hazardous substances," "toxic substances," "contaminants" or "pollutants" or
words of similar meaning and regulatory effect contained in any Environmental
Law or (iii) any other chemical, material, substance or waste which is
prohibited, limited or regulated by any Environmental Law.

         (15)     "Interconnection Facilities" means those facilities or
portions of facilities owned or operated by Pepco to provide Interconnection
Service which shall include, but not be limited to (1) facilities the cost of
which is reasonably allocated to the Interconnection Service provided to the
Station, or (2) Attachment Facilities or Local Upgrade Facilities, as defined in
the PJM Tariff, which are associated with the Interconnection Service and
operated and maintained by Pepco.

<PAGE>   371

         (16)     "Interconnection Service" means the services provided by Pepco
which are necessary to connect the Station to the Transmission System for
parallel operation of the Station and to enable Generator to transmit the energy
and ancillary services produced by the Station to the Transmission System and
receive Station energy service and ancillary services, including blackstart
power, from the Generator's supplier.

         (17)     "MAAC" means the Mid-Atlantic Area Council, a reliability
council under Section 202 of the Federal Power Act established pursuant to the
MAAC Agreement dated August 1, 1994, or any successor thereto.

         (18)     "Maintain" means construct, reconstruct, install, inspect,
repair, replace, operate, patrol, maintain, use, modernize, expand, upgrade, or
other similar activities.

         (19)     "MDPSC" means the Maryland Public Service Commission or any
successor agency thereto.

         (20)     "NERC" means North American Electric Reliability Council or
any successor thereto.

         (21)     "Pepco" has the meaning set forth in the introductory
paragraph of this Agreement and shall include its permitted successors or
assigns.

         (22)     "Pepco Facilities" means the equipment and facilities owned by
Pepco but located on Generator's property which are identified in Schedule B of
this Agreement.

         (23)     "Pepco Interconnection Standards" means Pepco's
Interconnection and Parallel Operating Guidelines as amended, modified or
replaced from time to time. A copy of the existing Pepco Interconnection
Standards is attached hereto as Schedule E.

         (24)     "Point of Interconnection" means each ownership point of
demarcation set forth in Schedule C where capacity, energy and ancillary
services are transferred between the Station and the Transmission System.

         (25)     "Pepco Transmission Facilities" means those transmission,
substation, and communication facilities and related equipment, including the
Interconnection Facilities, and any additions, modifications or replacements
thereto, that are utilized to provide Interconnection Service to the Station.

         (26)     "PJM" means the Pennsylvania New Jersey-Maryland
interconnected power pool operated under the PJM Agreement and any successor
thereto including any regional transmission operator, independent system
operator, transco, or any other independent system administrator that possesses
operational or planning control over the Transmission System.

         (27)     "PJM Agreement" means the Amended and Restated Operating
Agreement of the PJM Interconnection LLC dated as of June 2, 1997.

<PAGE>   372

         (28)     "PJM Control Area" shall mean the control area recognized by
NERC as the PJM Control Area.

         (29)     "PJM Interconnection LLC" means the independent system
operator of the PJM Control Area pursuant to the PJM Operating Agreement and the
PJM Tariff.

         (30)     "PJM Generator Connection Agreement" means the interconnection
agreement entered into between the Generator and the PJM Interconnection LLC
pursuant to the PJM Tariff with respect to the interconnection of the Station
and the Transmission System.

         (31)     "PJM Reliability Agreement" means the Reliability Assurance
Agreement dated June 2, 1997 among the load serving entities of PJM.

         (32)     "PJM Requirements" means the rules, regulations or other
requirements of PJM or MAAC contained in or adopted pursuant to the PJM
Agreement, the PJM Tariff or the PJM Reliability Agreement which are applicable
to Pepco, with respect to the Transmission System or the Interconnection
Service, and the Generator with respect to the Generating Facilities.

         (33)     "PJM System Operator" shall mean the PJM Interconnection LLC,
energy control center staff responsible for central dispatch as provided in the
PJM Agreement.

         (34)     "PJM Tariff" means the PJM Open Access Transmission Tariff
providing transmission service within the PJM Control Area.

         (35)     "Qualified Personnel" means individuals who possess any
required licenses and are trained for their positions and duties by Generator
and/or Pepco pursuant to Good Utility Practice.

         (36)     "Release" means any release, spill, emission, leaking,
dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching
or migration into the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata) or within any building,
structure, facility or fixture.

         (37)     "Revenue Meters" means all MWh and MVArh meters, pulse
isolation relays, pulse conversion relays, transducers required by Pepco or the
PJM Interconnection or PJM System Operator for billing or other purposes, and
associated totalizing equipment and appurtenances and compensation required to
measure the transfer of energy across the Point of Interconnection.

         (38)     "SMECO CT" means the approximately 84 MW generating facility
and related assets owned by the Southern Maryland Electric Cooperative, or its
successors or assigns, which is located at or near the site of the Station.

         (39)     "Station" means the Chalk Point Station as defined in the
Asset Sale Agreement (excluding the SMECO CT).

<PAGE>   373

         (40)     "Switching, Tagging, and Grounding Rules" means Pepco's
switching, tagging and grounding rules as amended, modified or replace from time
to time. A copy of the existing Switching Tagging and Grounding Rules is
attached hereto as Schedule D.

         (41)     "Taxes" means all taxes, surtaxes, charges, fees, levies,
penalties or other assessments imposed by any United States federal, state,
local or foreign taxing authority, including income taxes, excise, property,
sales, transfer, franchise, special franchise, payroll, recording, withholding,
social security or other taxes, in each case including any interest, penalties
or additions attributable thereto.

         (42)     "Transmission System" means the facilities owned, controlled,
or operated by Pepco, for purposes of providing transmission service, including
services under the PJM Tariff, and Interconnection Service.

         (43)     "Transmission Operator" means the person, or persons
designated by Pepco to coordinate the day to day interconnection of the Station
with the Transmission System.

Part B. The following terms have the meaning specified in the section of this
        Agreement set forth opposite to such term:

<TABLE>
<CAPTION>
     Term                           Agreement Reference

<S>                                 <C>
Agreement                           Preamble
Asset Sale Agreement                Preamble
Effective Date                      Section 2.1
Event of Default                    Section 8.1
Force Majeure                       Section 11.1
Initial Period                      Section 3.10
Operating Committee                 Section 3.20
Party or Parties                    Preamble
Term                                Article 2
</TABLE>

<PAGE>   374
                                   EXHIBIT F

                          LOCAL AREA SUPPORT AGREEMENT

                                 BY AND BETWEEN

                         POTOMAC ELECTRIC POWER COMPANY

                                       and

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

                            Dated               , 2000
                                  --------------

<PAGE>   375

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                               Page

<S>                                                            <C>
ARTICLE I - DEFINITIONS                                          1
ARTICLE II - TERM; TERMINATION                                   1
  2.1 - Term                                                     1
  2.2 - Termination                                              1
  2.3 - Continuation                                             2
ARTICLE III - OPERATING REQUIREMENTS                             2
  3.1 - PJM; MAAC                                                2
  3.2 - Obligations of Generator                                 2
  3.3 - Violations                                               4
  3.4 - Billing Procedures                                       4
ARTICLE IV - RETIREMENT OR REMOVAL FROM SERVICE OF
           THE FACILITY                                          5
  4.1 - Conditions Precedent to Retirement or Removal            5
  4.2 - Notice Requirement                                       5
  4.3 - PJM Studies                                              6
  4.4 - Termination Fee                                          6
ARTICLE V - REPRESENTATIONS OF THE PARTIES                       7
  5.1 - Representations of Pepco                                 7
  5.2 - Representations of Generator                             8
ARTICLE VI - DEFAULT                                             9
  6.1 - Event of Default                                         9
  6.2 - Remedies                                                 9
  6.3 - Additional Remedies                                     10
  6.4 - Reimbursement for Replacement Costs                     10
  6.5 - Limitation of Liability                                 10
ARTICLE VII - ASSIGNMENT                                        11
  7.1 - Assignment                                              11
  7.2 - Release of Rights and Obligations                       11
  7.3 - Transfer of Facility                                    11
  7.4 - Change in Corporate Identity                            12
  7.5 - Successors and Assigns                                  12
ARTICLE VIII - FORCE MAJEURE                                    12
  8.1 - Force Majeure                                           12
  8.2 - Definition of Force Majeure                             12
  8.3 - Force Majeure Procedures                                12
ARTICLE IX - INDEMNIFICATION                                    13
  9.1 - Generator's Indemnification                             13
  9.2 - Pepco's Indemnification                                 13
  9.3 - Indemnification Procedures                              13
  9.4 - Survival                                                13
ARTICLE X - CONFIDENTIALITY                                     14
  10.1 - Confidentiality Obligations of Pepco                   14
</TABLE>

<PAGE>   376

<TABLE>
<S>                                                             <C>
  10.2 - Confidentiality Obligations of Generator               14
  10.3 - Remedies                                               15
ARTICLE XI - DISPUTE RESOLUTION                                 15
  11.1 - Disputes                                               15
  11.2 - Arbitration                                            15
  11.3 - FERC Jurisdiction                                      16
ARTICLE XII - MISCELLANEOUS                                     16
  12.1 - Amendment and Modification; Extension; Waiver          16
  12.2 - Notices                                                16
  12.3 - No Third Party Beneficiaries                           17
  12.4 - Independent Contractors                                17
  12.5 - Governing Law                                          18
  12.6 - Jurisdiction and Enforcement                           18
  12.7 - Counterparts                                           18
  12.8 - Interpretation                                         18
  12.9 - Entire Agreement                                       19
  12.10 - Severability                                          19
  12.11 - Conflicts                                             19
  12.12 - Further Assurances                                    19
</TABLE>

<PAGE>   377

                          LOCAL AREA SUPPORT AGREEMENT

         THIS LOCAL AREA SUPPORT AGREEMENT (as amended from time to time, this
"Agreement") is made and entered into as of ___________, 2000 by and between
Potomac Electric Power Company, a District of Columbia and Virginia corporation
("Pepco"), and ______________________ ("Generator"), a __________ [corporation].
Pepco and Generator are referred to individually as a "Party" and collectively
as the "Parties."

                                   WITNESSETH:

         WHEREAS, Pepco and Generator have entered into an Asset Purchase and
Sale Agreement, dated June 7, 2000 (as amended from time to time, the "Asset
Sale Agreement"), for the sale by Pepco to Generator of the Facility (as defined
herein);

         WHEREAS, Pepco requires local generation support from the Facility in
order to maintain reliability of electric service in the local area of the
Facility, including the reliable transmission and delivery of Energy (as defined
herein) to loads connected radially to the Facility switchyard; and

         WHEREAS, the provisions of this Agreement are essential to maintaining
the reliability of electric service in the local area of the Facility.

         NOW THEREFORE, in consideration of the mutual covenants,
representations, warranties, and agreements contained herein, and intending to
be legally bound hereby, the Parties hereto agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

         Capitalized terms used in this Agreement shall have the respective
meanings set forth in Appendix A hereto.

                                   ARTICLE II

                                TERM; TERMINATION

         2.1      Term. This Agreement shall become effective upon consummation
of the Closing (the "Effective Date"). The Agreement shall continue in full
force and effect for a term of twenty (20) years (the "Term") unless terminated
earlier in accordance with Section 2.2.

         2.2      Termination. Subject to any required regulatory approval, this
Agreement may be terminated prior to the end of the Term: (a) by either Party
pursuant to Section 6.2; or

<PAGE>   378

(b) upon written notice by Pepco that Substitute Resources satisfactory to PJM
and Pepco have become operational.

         2.3      Continuation. The applicable provisions of this Agreement
shall continue in effect after cancellation, termination or expiration hereof to
the extent necessary to provide for final billings, billing adjustments and
payments pertaining to liability and indemnification obligations arising from
acts or events that occurred while this Agreement was in effect.

                                   ARTICLE III

                             OPERATING REQUIREMENTS

         3.1      PJM; MAAC.

                  (a)      From and after the Effective Date and for so long as
PJM Interconnection LLC is the control area operator for the System, Generator
shall maintain membership in good standing in PJM and MAAC and shall execute,
deliver and perform all agreements required by PJM and MAAC, including the PJM
Agreement and the MAAC Agreement.

                  (b)      If PJM Interconnection LLC ceases to be the control
area operator for the System, then Generator shall be obligated to enter into
comparable operating arrangements with any succeeding control area operator for
the System, or with Pepco, to achieve the same local area reliability goals,
subject to equivalent terms, set forth in this Agreement.

         3.2      Obligations of Generator. Provided the Facility's switchyard
remains in the PJM Control Area, Generator shall operate and maintain the
Facility in the following manner:

                  (a)      Operation and Compensation.

                           (i)      Generator shall make the Facility Available
and shall follow the generation unit commitment procedures and dispatch orders
(including requests for Ancillary Services) of PJM Interconnection LLC and, in
order to maintain local area reliability as provided in Section 3.2(a)(iii)
below, of Pepco. Generator shall make the Facility Available and shall follow
such generation unit commitments and dispatch orders (including requests for
Ancillary Services) even if operation of the Facility is not required for energy
sales scheduled by Generator.

                           (ii)     When PJM Interconnection LLC orders a change
in operation of the Facility for any reason, including local area reliability,
PJM compensation rules will apply. Pepco will have no obligation under this
Agreement to compensate Generator for such operation.

                           (iii)    Pepco may order operation and dispatch level
of the Facility for local area reliability in accordance with Pepco Transmission
Procedures No. 28 and No. 29 at any time when PJM Interconnection LLC has not
ordered such operation. When Pepco

<PAGE>   379

orders operation of the Facility for local area reliability in accordance with
Pepco Transmission Procedures No. 28 and No. 29 at a time when PJM
Interconnection LLC has not ordered such operation, Generator shall schedule the
appropriate operation of the Facility in accordance with PJM procedures. Pepco
shall pay Generator the excess, if any, of (A) the compensation Generator would
have received if PJM Interconnection LLC had ordered such operation for local
area reliability minus (B) the compensation actually received by Generator from
PJM Interconnection LLC for such operation.

                           (iv)     Generator shall not retire or indefinitely
remove from service the Facility or any of its Units except as permitted
pursuant to Article IV. Until the retirement or indefinite removal from service
of the Facility or any of its Units in accordance with Article IV, Generator
shall (A) maintain the capacity of each Unit in accordance with Good Utility
Practice and (B) shall otherwise operate and maintain the Facility, or cause the
Facility to be operated and maintained, in accordance with Good Utility
Practice.

                           (v)      Notwithstanding any provision of this
Section 3.2(a) to the contrary, in the event Abnormal Conditions exist for any
period of twenty-one (21) consecutive days, then during the period commencing on
the twenty-first (21st) day of such Abnormal Conditions and ending with the
termination of such Abnormal Conditions, Generator must use best efforts to
comply with Pepco Transmission Procedure No. 28 pursuant to Sections 3.2(a)(i)
and 3.2(a)(iii).

                  (b)      Maintenance. Generator shall abide by PJM rules and
cooperate with PJM Interconnection LLC and Pepco in scheduling maintenance of
the Facility and each Unit and any other equipment outages affecting the
operation of the Facility or any Unit.

                  (c)      Notification of Pepco.

                           (i)      Generator shall promptly notify Pepco of any
condition, incident or occurrence that will, or is reasonably likely to, cause
Generator to fail to provide Energy or Ancillary Services during such periods
and in such amounts as required by Section 3.2(a), along with the anticipated
duration of the condition, incident or occurrence. Such notice shall not excuse
performance by Generator of any of its obligation hereunder nor shall it deprive
Pepco of any of its remedies under this Agreement.

                           (ii)     Generator shall, unless specifically waived
by Pepco in writing, (A) promptly provide Pepco copies of any written
correspondence, notices and agreements and arrangements between Generator and
PJM Interconnection LLC and/or MAAC and (B) permit Pepco to attend any meetings
or discussions between Generator and PJM Interconnection LLC and/or MAAC, in
each case to the extent any such correspondence, notices, agreements,
arrangements, meetings or discussions concern any operation, outage or shutdown
of the Facility or any Unit that has or is reasonably expected to have an impact
on Pepco's local area reliability.

<PAGE>   380

         3.3      Violations.

                  (a)      Normal Condition Violation. If Pepco Sheds Load as a
result of a Normal Condition Violation, Generator shall pay to Pepco an amount
equal to one million dollars ($1,000,000) for each such violation.

                  (b)      Abnormal Condition Violation.

                           (i)      If Generator commits an Abnormal Condition
Violation, Generator shall pay to Pepco an amount equal to one thousand dollars
per megawatt hour ($1,000/MWh) for the difference (whether positive or negative)
in any hour during such Abnormal Condition Violation between the Target Output
and the Actual Output.

                           (ii)     In addition to any amount payable by
Generator pursuant to Section 3.3(b)(i), if Generator has supplied Excess Output
during an Abnormal Condition Violation, then Generator shall pay to Pepco an
amount equal to all revenues derived by Generator from supplying such Excess
Output.

                           (iii)    Notwithstanding any provision of this
Section 3.3(b) to the contrary, in the event Abnormal Conditions exist for any
period of twenty-one (21) consecutive days, then Generator shall not be required
to pay Pepco the amounts otherwise due under Section 3.3(b)(i) or 3.3(b)(ii) for
the period commencing on the twenty-first (21st) day of such Abnormal Conditions
and ending with the termination of such Abnormal Conditions.

                  (c)      All amounts payable under this Section 3.3 shall be
paid in accordance with the billing procedures set forth in Section 3.4.

                  (d)      The Parties agree that the foregoing payment
provisions are an integral part of this Agreement and forms a portion of the
consideration for executing the Asset Sale Agreement; that the amounts set forth
in this Section 3.3 represent a reasonable estimate of the damages incurred by
Pepco for a Normal Condition Violation and an Abnormal Condition Violation; that
the payment by Generator of such amounts is an appropriate remedy; and that such
payments constitute liquidated damages and not a forfeiture or penalty.
Generator irrevocably and unconditionally waives any claim that these payments
are or may be unenforceable as to Generator.

         3.4      Billing Procedures.

                  (a)      Within ten (10) calendar days after the first day of
each month immediately following the month in which one or more Transaction Days
have occurred, Generator shall provide to Pepco a written invoice for any
payments due to Generator from Pepco pursuant to Section 3.2(a)(iii). Pepco
shall submit invoices to Generator whenever necessary under this Agreement.

                  (b)      Each invoice shall (i) delineate the month in which
the Services were provided, (ii) fully describe the Services rendered, (iii) be
itemized to reflect the Services

<PAGE>   381

performed or provided, and (iv) provide reasonable detail as to the calculation
of the amount involved.

                  (c)      All invoices shall be paid within fifteen (15)
calendar days of receipt, but not earlier than the 25th day of the month in
which the invoice is rendered. All payments shall be made in immediately
available funds payable to the other Party, by wire transfer to a bank account
designated in writing by such Party. Payment of invoices shall not relieve the
paying Party from any responsibilities or obligations it has under this
Agreement, nor shall such payment constitute a waiver of any claims arising
hereunder.

                  (d)      To the extent that, for any billing period, Generator
is obligated to pay to Pepco amounts due and calculated pursuant to Section 3.3,
Pepco may use such amounts as a set-off against any amounts owed by Pepco to
Generator under Section 3.2(a)(iii). If such amounts due and calculated pursuant
to Section 3.3 exceed the amounts due to Generator under Section 3.2(a)(iii) for
any billing period, Pepco shall submit an invoice to Generator and Generator
shall pay such invoice within fifteen (15) calendar days of receipt.

                  (e)      In the event of a billing dispute hereunder, (i)
Generator shall continue to provide Services in accordance with the terms of
this Agreement and (ii) the Party required to make payments hereunder shall pay
to the other Party all invoiced amounts, net of any set-offs permitted under
Section 3.4(d), that are not in dispute.

                                   ARTICLE IV

               RETIREMENT OR REMOVAL FROM SERVICE OF THE FACILITY

         4.1      Conditions Precedent to Retirement or Removal. Prior to the
retirement or indefinite removal from service of the Facility or any of its
Units, Generator shall: (i) comply with all applicable MAAC requirements in
connection with such retirement or indefinite removal from service; (ii) if
applicable, enter into an agreement with PJM Interconnection LLC providing for
studies relating to the impact of the retirement or indefinite removal from
service on the Facility, as more particularly described in Section 4.3 below;
and (iii) either (A) pay any applicable termination fee, as more particularly
described in Section 4.4 below, or (B) provide (at Generator's expense)
substitute resources satisfactory to PJM and Pepco for the remaining term of the
Agreement to maintain the reliability of the Facility (the "Substitute
Resources").

         4.2      Notice Requirement. Generator shall not be permitted to shut
down the Facility or applicable Unit until the later of (x) the date specified
by Generator in a written notice to PJM Interconnection LLC and Pepco indicating
Generator's intent to shut down the Facility or Unit, such notice to be provided
at least five (5) years prior to the date of shutdown (the "Termination Notice")
and (y) the date on which PJM notifies Generator in writing that transmission
reinforcements or other appropriate measures necessitated by the shutdown are in
commercial operation. PJM Interconnection LLC may reduce or eliminate the five
(5) year notice requirement if PJM Interconnection LLC determines, following
consideration of Generator's commitment to provide Substitute Resources and
other applicable factors, that the reliability of the PJM Control Area no longer
requires

<PAGE>   382

such advance notice. In addition to PJM's determination, Generator must obtain
Pepco's consent to reduce or eliminate the advance notice requirement, such
consent not to be unreasonably withheld.

         4.3      PJM Studies. In the event Generator does not intend to provide
Substitute Resources, Generator shall enter into an agreement with PJM
Interconnection LLC to perform a system impact study and, if indicated by the
system impact study, a facilities study, of the proposed retirement or
indefinite removal from service of the Facility or applicable Unit in order to
determine the PJM transmission additions or upgrades required, if any, to
accommodate such retirement or indefinite removal from service. Alternatively,
if Generator does intend to provide Substitute Resources, Generator shall (i)
commission a study to evaluate the feasibility of the proposed Substitute
Resources and (ii) at the request of PJM Interconnection LLC, enter into an
agreement with PJM Interconnection LLC to perform any system impact and
facilities studies required by PJM Interconnection LLC. Generator shall pay all
costs and deposits required in connection with the performance of any such
studies consistent with Part IV of the PJM Tariff.

         4.4      Termination Fee. Based on the results of the studies required
by PJM Interconnection LLC, PJM Interconnection LLC may determine that certain
transmission system additions or upgrades are necessary to accommodate the
retirement or indefinite removal from service of the Facility or applicable
Unit. As a termination fee (the "Termination Fee"), Generator shall contribute
to the transmission owner(s) constructing the additions or upgrades (through PJM
or directly), an amount equal to that portion of the installed cost of such
additions or upgrades calculated as follows:

                  (i)      if the Termination Notice specifies a retirement or
indefinite removal from service date which is prior to the sixth anniversary of
the Closing Date, the portion shall be 100%;

                  (ii)     if the specified retirement or indefinite removal
from service date is on or after the sixth anniversary but prior to the seventh
anniversary of the Closing Date, the portion shall be 80%;

                  (iii)    if the specified retirement or indefinite removal
from service date is on or after the seventh anniversary but prior to the eighth
anniversary of the Closing Date, the portion shall be 60%;

                  (iv)     if the specified retirement or indefinite removal
from service date is on or after the eighth anniversary but prior to the ninth
anniversary of the Closing Date, the portion shall be 40%;

                  (v)      if the specified retirement or indefinite removal
from service date is on or after the ninth anniversary but prior to the tenth
anniversary of the Closing Date, the portion shall be 20%; and

                  (vi)     if the specified retirement or indefinite removal
from service date is on or after the tenth anniversary of the Closing Date,
Generator shall have no obligation under

<PAGE>   383

this Agreement to reimburse PJM Interconnection LLC for the cost of the
additions and upgrades found necessary by PJM Interconnection LLC.

                                    ARTICLE V

                         REPRESENTATIONS OF THE PARTIES

         5.1      Representations of Pepco. Pepco hereby represents and warrants
to Generator as follows:

                  (a)      Incorporation. Pepco is a corporation duly
incorporated, validly existing and in good standing under the laws of the
District of Columbia and Commonwealth of Virginia, and has all requisite
corporate power and authority to own, lease and operate its material assets and
properties and to carry on its business as now being conducted.

                  (b)      Authority. Pepco has all necessary corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Pepco of this
Agreement and the consummation by Pepco of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of Pepco or by a
committee thereof to whom such authority has been delegated and no other
corporate proceedings on the part of Pepco are necessary to authorize this
Agreement or the transactions contemplated hereby. The Agreement has been duly
and validly executed and delivered by Pepco and, assuming that this Agreement
constitutes a valid and binding agreement of Generator, constitutes a valid and
binding agreement of Pepco, enforceable against Pepco in accordance with its
terms.

                  (c)      Consents and Approvals; No Violation.

                           (i)      Neither the execution and delivery of this
Agreement by Pepco nor performance by Pepco of its obligations hereunder will
(i) conflict with or result in any breach of any provision of the Certificate of
Incorporation or By-laws of Pepco, (ii) result in a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Pepco or any of its
subsidiaries is a party or by which any of their respective assets may be bound
or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Pepco, or any of its assets, except in the case of
clauses (ii) and (iii) for such failures to obtain a necessary consent, defaults
and violations which would not, individually or in the aggregate, have a
material adverse effect on the ability of Pepco to discharge its obligations
under this Agreement (a "Pepco Material Adverse Effect").

                           (ii)     No declaration, filing or registration with,
or notice to, or authorization, consent or approval of any Governmental
Authority is necessary for performance by Pepco of its obligations hereunder,
other than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made would not, individually or
in the aggregate, have a Pepco Material Adverse Effect.

<PAGE>   384

         5.2      Representations of Generator. Generator represents and
warrants to Pepco as follows:

                  (a)      Incorporation. Generator is a [corporation] duly
[incorporated], validly existing and in good standing under the laws of the
State of ______________ and has all requisite [corporate] power and authority to
own, lease and operate its material assets and properties, including the
Facility, and to carry on its business as now being conducted.

                  (b)      Authority. Generator has all necessary [corporate]
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Generator of
this Agreement and the consummation by Generator of the transactions
contemplated hereby have been duly and validly authorized by the [Board of
Directors] of Generator or by a committee thereof to whom such authority has
been delegated and no other [corporate] proceedings on the part of Generator are
necessary to authorize this Agreement or the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Generator
and, assuming that this Agreement constitutes a valid and binding agreement of
Pepco, constitutes a valid and binding agreement of Generator, enforceable
against Generator in accordance with its terms.

                  (c)      Consents and Approvals; No Violation.

                           (i)      Neither the execution and delivery of this
Agreement by Generator nor performance by Generator of its obligations hereunder
will (i) conflict with or result in any breach of any provision of the
[Certificate of Incorporation or By-laws] of Generator, (ii) result in a default
(or give rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement, lease or other instrument or obligation to which
Generator or any of its subsidiaries is a party or by which any of their
respective assets may be bound or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Generator, or any of its
assets, except in the case of clauses (ii) and (iii) for such failures to obtain
a necessary consent, defaults and violations which would not, individually or in
the aggregate, have a material adverse effect on the ability of Generator to
discharge its obligations under this Agreement (a "Generator Material Adverse
Effect").

                           (ii)     No declaration, filing or registration with,
or notice to, or authorization, consent or approval of any Governmental
Authority is necessary for performance by Generator of its obligations
hereunder, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not obtained or made would not,
individually or in the aggregate, have a Generator Material Adverse Effect.

<PAGE>   385

                                   ARTICLE VI

                                     DEFAULT

         6.1      Event of Default. Unless excused by Force Majeure, each of the
following events shall constitute an event of default (an "Event of Default")
under this Agreement:

                  (a)      The failure by a Party to pay any amount due
hereunder within thirty (30) days after receipt of written notice of nonpayment
by the other Party, unless the payment of such amount is disputed in good faith,
in which event Section 3.4(e) and Article XI shall apply;

                  (b)      A Party's breach of any material term or condition of
this Agreement, including but not limited to any material breach of a
representation, warranty or covenant made in this Agreement which, after
receiving written notice of the breach from the non-breaching Party (such notice
to set forth in reasonable detail the nature of the default and, where known and
if applicable, the steps necessary to cure such default), (i) the breaching
Party fails to cure the default, if curable, within thirty (30) days following
receipt of the notice or (ii) if such default is of such a nature that it cannot
be cured within thirty (30) days following receipt of such notice, the breaching
Party fails within such thirty (30) days to commence the necessary cure and
fails at any time thereafter diligently and continuously to prosecute such cure
to completion, provided that the cure is completed no later than one hundred
eighty (180) days after receipt of the default notice; provided, that no notice
or cure period shall be applicable with respect to any breach by Generator of
Section 3.2(a)(v);

                  (c)      The appointment of a receiver or liquidator or
trustee for either Party, and such receiver, liquidator or trustee is not
discharged within sixty (60) days;

                  (d)      The entry of a decree adjudicating a Party as
bankrupt or insolvent, and such decree is continued undischarged and unstayed
for a period of sixty (60) days; or

                  (e)      The filing of a voluntary or involuntary petition in
bankruptcy under any provision of any federal or state bankruptcy law by a Party
or against it, and, with respect to an involuntary petition in bankruptcy, such
petition continues undischarged and unstayed for a period of sixty (60) days.

         6.2      Remedies. Upon the occurrence of an Event of Default, the
non-defaulting Party may (i) exercise all such rights and remedies as may be
available to it at law or equity including seeking to recover damages caused by
such Event of Default, subject to Section 6.5 of this Agreement, and/or (ii)
terminate this Agreement. The Parties shall not discontinue the performance of
any one or more of their obligations hereunder due to the occurrence of an Event
of Default during the pendency of any dispute regarding such Event of Default
and until such dispute is finally resolved.

<PAGE>   386

         6.3      Additional Remedies. Generator acknowledges and specifically
agrees that its obligations under this Agreement are essential to ensure the
reliability of the System; that breach of Generator's obligations may result in
irreparable harm and damage to Pepco which cannot adequately be compensated by a
monetary award; and that, as a consequence thereof, Pepco shall, in addition to
any other remedy to which Pepco may be entitled by reason of Generator's breach
of this Agreement, be entitled to seek and obtain temporary, preliminary and
permanent injunctive relief from any court or Governmental Authority of
competent jurisdiction restraining Generator from committing or continuing any
breach of this Agreement.

         6.4      Reimbursement for Replacement Costs. Upon an Event of Default,
Generator shall be liable to Pepco for all costs reasonably incurred by Pepco as
a direct result of Generator's failure to deliver Energy or Ancillary Services
pursuant to the terms of this Agreement. Such costs shall include all reasonable
costs associated with the procurement of replacement Energy, including Energy,
Ancillary Services, demand, capacity, or reservation charges, any transmission
costs associated with procuring such replacement Energy and any costs of
constructing the additions or upgrades necessary to provide the Energy to be
supplied by Generator hereunder. In addition to the amounts associated with the
purchase of replacement Energy, Generator shall be liable for reasonable
administrative and legal expenses incurred as a result of Generator's failure to
perform. The Parties expressly agree that such amounts do not constitute
liquidated damages and that the obligations of Generator under this Section 6.4
shall survive and continue in full force and effect regardless of whether this
Agreement expires or terminates or is canceled, surrendered or completed.

         6.5      Limitation of Liability. Except as provided in Sections 3.3,
4.4 and 6.4, neither Party nor their respective officers, directors, agents,
employees, parents, Affiliates, successors, assign, contractors or
subcontractors shall be liable to the other Party or its shareholders,
subsidiaries, Affiliates, officers, directors, agents, employees, successors,
assigns, contractors or subcontractors for any claims, demands or suits for
consequential, incidental, special, exemplary, punitive, indirect or multiple
damages connected with or resulting from any breach of this Agreement (other
than breach of Article IX), or any actions undertaken in connection with or
related hereto or thereto, including any such damages which are based upon
breach of contract, tort (including negligence and misrepresentation), breach of
warranty, strict liability, statute, operation of law or any other theory of
recovery. The foregoing shall not prevent any Party from recovering damages of
the foregoing nature in a claim for indemnification hereunder for such damages
asserted by a third party.

<PAGE>   387

                                   ARTICLE VII

                                   ASSIGNMENT

         7.1      Assignment.

                  (a)      Except as set forth in Sections 7.1(b), 7.1(c) and
7.1(d), neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned by either Party hereto, without the prior written
consent of the other Party, which consent shall not be unreasonably withheld or
delayed.

                  (b)      Upon ten (10) days prior written notice to Generator,
Pepco may assign this Agreement, and Pepco's rights, interests and obligations
hereunder, to (i) an Affiliate of Pepco that owns all or part of Pepco's
transmission system or (ii) an Independent System Operator or independent
transmission company whose control over all or part of Pepco's transmission
system has been approved by the FERC.

                  (c)      Generator may assign, transfer, pledge or otherwise
dispose of its rights and interests hereunder to a trustee, lending institution,
or other Person for the purposes of financing or refinancing the Facility,
including upon or pursuant to the exercise of remedies under such financing or
refinancing, or by way of assignments, transfers, conveyances of dispositions in
lieu thereof; provided, however, that no such assignment or disposition shall
relieve or in any way discharge Generator from the performance of its duties and
obligations under this Agreement.

Pepco agrees to execute and deliver, at Generator's expense, such documents as
may be reasonably necessary to accomplish any such assignment, transfer,
conveyance, pledge or disposition of rights hereunder for purposes of the
financing or refinancing of the Facility, so long as Pepco's rights under this
Agreement are not thereby altered, amended, diminished or otherwise impaired.

                  (d)      Either Party may assign this Agreement to a successor
to all or substantially all of the assets of such Party by way of merger,
consolidation, sale or otherwise, provided such successor assumes in writing and
becomes liable for all of such Party's duties and obligations hereunder.

         7.2      Release of Rights and Obligations. No assignment, transfer,
conveyance, pledge or disposition of rights, interests, duties or obligations
under this Agreement by a Party shall relieve that Party from liability and
financial responsibility for the performance thereof after any such transfer,
assignment, conveyance, pledge or disposition unless and until (i) the
transferee or assignee shall agree in writing to assume the obligations and
duties of that Party under this Agreement and to impose such obligations on
subsequent permitted transferees and assignees and (ii) the non-assigning Party
has consented in writing to such assumption and to a release of the assigning
Party from such liability, such consent not to be unreasonably withheld or
delayed.

         7.3      Transfer of Facility. Any direct or indirect assignment, sale,
conveyance, lease, or other transfer by Generator of the Facility, any Unit or
Generator's direct or indirect

<PAGE>   388

owner thereof, whether by operation of law or otherwise, shall be null and void
unless, with Pepco's prior written consent, which shall not be unreasonably
withheld or delayed, the transferee of the Facility or such Unit assumes in
writing all of Generator's right, title and interest in and to this Agreement,
and all of Generator's rights, interests, duties and obligations hereunder.

         7.4      Change in Corporate Identity. If Generator terminates its
existence as a corporate entity by merger, acquisition, sale, consolidation or
otherwise, or if all or substantially all of Generator's assets are transferred
to another person or business entity without complying with this Article VII,
Pepco shall have the right, enforceable in a court of competent jurisdiction, to
enjoin Generator's successor from using the Facility in any manner that does not
comply with the requirements of this Agreement or that impedes Pepco's ability
to carry on its ongoing business operations.

         7.5      Successors and Assigns. This Agreement and all of the
provisions hereof are binding upon, and inure to the benefit of, the Parties and
their respective successors and permitted assigns.

                                  ARTICLE VIII

                                  FORCE MAJEURE

         8.1      Force Majeure. Notwithstanding anything in this Agreement to
the contrary, the Parties shall be excused from performing their respective
obligations hereunder and shall not be liable in damages or otherwise to the
extent that a Party is unable to perform or is prevented from performing by an
event of Force Majeure and has complied with Section 8.3. The Parties recognize
and agree that an event of Force Majeure will not relieve any Party of its
obligation to make payments when due hereunder.

         8.2      Definition of Force Majeure. The term "Force Majeure" as used
herein means those causes beyond the reasonable control of the Party affected,
that, by the exercise of reasonable diligence, including Good Utility Practice,
such Party is unable to prevent, avoid, mitigate, or overcome, including the
following: any act of God, act of the public enemy, war, civil disturbance,
insurrection, riot, fire (unless resulting from the fault or negligence of the
Party asserting Force Majeure), storm or flood, lightning or explosion (unless
resulting from the fault or negligence of the Party asserting Force Majeure) or
any other cause of a similar nature beyond such Party's reasonable control.
Neither the cost to operate and maintain the Facility nor any mechanical or
electrical breakdown or failure of machinery or plant owned or operated by
Generator due to any reason other than an event which itself constitutes an
event of Force Majeure shall be deemed an event of Force Majeure.

         8.3      Force Majeure Procedures. A Party shall not be entitled to
rely on the occurrence of an event of Force Majeure as a basis for being excused
from performance of its obligations under this Agreement unless the Party
relying on the event or condition shall: (a) provide prompt written notice of
such Force Majeure event to the other Party, including an estimation of its
expected duration and the probable impact on the

<PAGE>   389

performance of its obligations hereunder; (b) exercise all reasonable efforts in
accordance with Good Utility Practice to continue to perform its obligations
under this Agreement; (c) expeditiously take action to correct or cure the event
or condition excusing performance; (d) exercise all reasonable efforts to
mitigate or limit damages to the other Party; and (e) provide prompt notice to
the other Party of the cessation of the event or condition giving rise to its
excuse from performance. Subject to this Section 8.3, any obligation under this
Agreement shall be suspended only to the extent caused by such Force Majeure and
only during the continuance of any inability of performance caused by such Force
Majeure but for no longer period.

                                   ARTICLE IX

                                 INDEMNIFICATION

         9.1      Generator's Indemnification. Generator shall indemnify, hold
harmless and defend Pepco, its Affiliates, and their respective officers,
directors, employees, agents, contractors, subcontractors, invitees and
successors, from and against any and all claims, demands, suits, obligations,
payments, liabilities, costs, losses, judgments, damages and expenses (including
the costs and expenses of any and all actions, suits, proceedings, assessments,
judgments, settlements, and compromises relating thereto, reasonable attorneys'
and expert fees and reasonable disbursements in connection therewith) for any
loss or liability arising out of or relating to Generator's breach of any
covenant, representation or warranty of Generator in this Agreement.

         9.2      Pepco's Indemnification. Pepco shall indemnify, hold harmless
and defend Generator, its Affiliates, and their respective officers, directors,
employees, agents, contractors, subcontractors, invitees and successors, from
and against any and all claims, demands, suits, obligations, payments,
liabilities, costs, losses, judgments, damages and expenses (including the costs
and expenses of any and all actions, suits, proceedings, assessments, judgments,
settlements, and compromises relating thereto reasonable attorneys' and expert
fees and reasonable disbursements in connection therewith) for any loss or
liability arising out of or relating to Pepco's breach of any covenant,
representation or warranty of Pepco in this Agreement.

         9.3      Indemnification Procedures. Any Party seeking indemnification
under this Agreement shall give the other Party notice of such claim within
ninety (90) days of the later of the commencement of, or the Party's actual
knowledge of, such claim or action. Such notice shall describe the claim in
reasonable detail, and shall indicate the amount (estimated if necessary) of the
claim that has been, or may be sustained by, said Party. The failure to provide
such notice shall not excuse any Party from its continuing obligations
hereunder; however, any claim shall be reduced by the damages resulting from
such Party's delay or failure to provide such notice. Neither Party may settle
or compromise any claim for which indemnification is sought under this Agreement
without the prior consent of the other Party; provided, however, said consent
shall not be unreasonably withheld or delayed.

         9.4      Survival. The indemnification obligations of each Party under
this Article IX for acts or occurrences that occur prior to expiration,
termination, or cancellation of this

<PAGE>   390

Agreement shall survive the Effective Date and continue in full force and effect
regardless of whether this Agreement expires or terminates, or is canceled,
surrendered or completed.

                                    ARTICLE X

                                 CONFIDENTIALITY

         10.1     Confidentiality Obligations of Pepco. Pepco shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or other provisions of law, all documents and information furnished by Generator
in connection with this Agreement marked "Confidential" or "Proprietary." Except
to the extent that such information or documents are (i) generally available to
the public other than as a result of a disclosure by Pepco in breach of this
Agreement, (ii) available to Pepco on a non-confidential basis prior to
disclosure to Pepco by Generator, or (iii) available to Pepco on a
non-confidential basis from a source other than Generator, provided that such
source is not known, and by reasonable effort could not be known, by Pepco to be
bound by a confidentiality agreement with Generator or otherwise prohibited from
transmitting the information to Pepco by a contractual, legal or fiduciary
obligation, Pepco shall not release or disclose such information to any other
person, except to its employees, representatives or agents on a need-to-know
basis, in connection with this Agreement who has not first been advised of the
confidentiality provisions of this Section 10.1 and has agreed in writing to
comply with such provisions. In no event shall such information be disclosed in
violation of the requirements of FERC Orders 889 and 889-A, and any successor
thereto. Pepco shall promptly notify Generator if it receives notice or
otherwise concludes that the production of any information subject to this
Section 10.1 is being sought under any provision of law and Pepco shall use
reasonable efforts in cooperation with Generator to seek confidential treatment
for such confidential information provided thereto.

         10.2     Confidentiality Obligations of Generator. Generator shall hold
in confidence, unless compelled to disclose by judicial or administrative
process or other provisions of law, all documents and information furnished by
Pepco in connection with this Agreement marked "Confidential" or "Proprietary."
Except to the extent that such information or documents are (i) generally
available to the public other than as a result of a disclosure by Generator in
breach of this Agreement, (ii) available to Generator on a non-confidential
basis prior to disclosure to Generator by Pepco, or (iii) available to Generator
on a non-confidential basis from a source other than Pepco, provided that such
source is not known, and by reasonable effort could not be known, by Generator
to be bound by a confidentiality agreement with Pepco or otherwise prohibited
from transmitting the information to Generator by a contractual, legal or
fiduciary obligation, Generator shall not release or disclose such information
to any other person, except to its employees, representatives or agents on a
need-to-know basis, in connection with this Agreement who has not first been
advised of the confidentiality provisions of this Section 10.2 and has agreed in
writing to comply with such provisions. In no event shall such information be
disclosed in violation of the requirements of FERC Orders 889 and 889-A, and any
successor thereto. Generator shall promptly notify Pepco if it receives notice
or otherwise concludes that the production of any information subject to this
Section 10.2 is being sought under any provision of law and Generator shall use
reasonable efforts in cooperation

<PAGE>   391

with Pepco to seek confidential treatment for such confidential information
provided thereto.

         10.3     Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its obligations
under Section 10.1 or 10.2, above, as applicable. Each Party accordingly agrees,
that the other Party shall be entitled to equitable relief, by way of injunction
or otherwise, if a Party breaches or threatens to breach its obligations under
Section 10.1 or 10.2 of this Agreement, as applicable, which equitable relief
shall be granted without bond or proof of damages, and the receiving Party shall
not plead in defense that there would be an adequate remedy at law.

                                   ARTICLE XI

                               DISPUTE RESOLUTION

         11.1     Disputes. A Party with a claim or dispute under this Agreement
shall submit to the other Party a notification of such claim or dispute within
sixty (60) days after the circumstances that gave rise to the claim or the
question or issue in dispute. The notification shall be in writing and shall
include a concise statement of the claim or the issue or question in dispute, a
statement of the relevant facts and documentation to support the claim. In the
event the Parties are unable, in good faith, to resolve their disagreement in a
manner satisfactory to both Parties within thirty (30) days after receipt by a
Party of a notification specifying the claim, issue or question in dispute, the
Parties shall refer the dispute to their respective senior management. If, after
using their good faith best efforts to resolve the dispute, senior management
cannot resolve the dispute within thirty (30) days, the Parties shall utilize
the arbitration procedures set forth below in Section 11.2 to resolve a dispute,
provided that nothing herein or therein shall prohibit Pepco or Generator from
at any time requesting from a court of competent jurisdiction a temporary
restraining order, preliminary injunction, or other similar form of equitable
relief to enforce performance of the provisions of this Agreement.

         11.2     Arbitration.

                  (a)      Unless the Parties otherwise mutually agree in
writing to another form of dispute resolution, such as dispute resolution under
the PJM Agreement or the MAAC Agreement, any arbitration initiated under this
Agreement shall be conducted before a single neutral arbitrator appointed by the
Parties within thirty (30) days of receipt by respondent of the demand for
arbitration. If the Parties are unable to agree on an arbitrator, such
arbitration shall be appointed by the American Arbitration Association. Unless
the Parties agree otherwise, the arbitrator shall be an attorney or retired
judge with at least fifteen (15) years of experience, and shall not have any
current or past substantial business or financial relationships with any Party
to the arbitration. If possible, the arbitrator shall have experience in the
electric utility industry. Unless otherwise agreed, the arbitration shall be
conducted in accordance with the American Arbitration Association's Commercial
Arbitration Rules, then in effect, in the District of Columbia. Any arbitration
proceedings, decision or award rendered hereunder and the validity, effect and

<PAGE>   392

interpretation of this arbitration agreement shall be governed by the Federal
Arbitration Act of the United States, 9 U.S.C. Section 1 et seq.

                  (b)      The arbitration shall, if possible, be concluded not
later than six (6) months after the date that it is initiated. The arbitrator
shall be authorized only to interpret and apply the provisions of this Agreement
or any related agreements entered into under this Agreement and shall have no
power to modify or change any of the above in any manner. The arbitrator shall
have no authority to award punitive or multiple damages or any damages
inconsistent with this Agreement. The arbitrator shall, within thirty (30) days
of the conclusion of the hearing, unless such time is extended by agreement of
the Parties, notify the Parties in writing of his or her decision, stating his
or her reasons for such decision and separately listing his or her findings of
fact and conclusions of law. The decision of the arbitrator rendered in such a
proceeding shall be final and binding on the Parties. Judgment on the award may
be entered upon it in any court having jurisdiction.

         11.3     FERC Jurisdiction. Nothing in this Agreement shall preclude,
or be construed to preclude, any Party from filing a petition or complaint with
FERC with respect to any arbitrable claim over which FERC has jurisdiction. In
such case, the other Party may request FERC to reject or to waive jurisdiction.
If FERC rejects or waives jurisdiction with respect to all or a portion of the
claim, the portion of the claim not so accepted by FERC shall be resolved
through arbitration, as provided in this Agreement. To the extent that FERC
asserts or accepts jurisdiction over the claim, the decision, finding of fact or
order of FERC shall be final and binding, subject to judicial review under the
Federal Power Act, and any arbitration proceedings that may have commenced with
respect to the claim prior to the assertion or acceptance of jurisdiction by
FERC shall be terminated.

                                   ARTICLE XII

                                  MISCELLANEOUS

         12.1     Amendment and Modification; Extension; Waiver. This Agreement
may be amended, modified or supplemented only by an instrument in writing signed
on behalf of each of the Parties. Either Party may (i) extend the time for the
performance of any of the obligations or other acts of the other Party, (ii)
waive any inaccuracies in the representations and warranties of the other Party
contained in this Agreement or (iii) waive compliance by the other Party with
any of the agreements or conditions contained in this Agreement. Any agreement
on the part of a Party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such Party. The
failure of a Party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such rights.

         12.2     Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (as of the time of delivery or, in the
case of a telecopied communication, of confirmation) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier (providing proof of
delivery) to the Parties at the following addresses (or at such other address
for a Party as shall be specified by like notice):

<PAGE>   393

          if to Pepco, to:

               Potomac Electric Power Company
               1900 Pennsylvania Avenue, N.W.
               Washington, D.C. 20068
               Telecopier: (202) 261-7889
               Attention: William T. Torgerson, General Counsel

          with a copy to:

               Dickstein Shapiro Morin & Oshinsky LLP
               2101 L Street, NW
               Washington, DC 20037
               Telecopier: (202) 887-0689
               Attention: Kenneth M. Simon, Esq.

          if to Generator, to:

               Southern Energy, Inc.
               900 Ashwood Parkway
               Suite 500
               Atlanta, Georgia 30338-4780
               Telecopier: (770) 821-6575
               Attention:

          with a copy to:

               Troutman Sanders LLP
               1300 I Street, NW
               Suite 300 East
               Washington, DC 20005
               Telecopier: (202) 274-2994
               Attention: Benjamin Israel, Esq.

         12.3     No Third Party Beneficiaries. Nothing in this Agreement,
express or implied, is intended to confer on any other person except the Parties
hereto any rights, interests, obligations or remedies hereunder.

         12.4     Independent Contractors. The Parties acknowledge and agree
that: (i) they are independent contractors, (ii) neither Party shall have any
right, power or authority to enter into any agreement or commitment, act on
behalf of, or otherwise bind the other

<PAGE>   394

Party in any way, and (iii) nothing contained in this Agreement shall create any
relationship between Pepco and Generator other than that of independent
contractors.

         12.5     Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the District of Columbia (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).

         12.6     Jurisdiction and Enforcement. Except as provided in Article
XI, each of the Parties irrevocably submits to the exclusive jurisdiction of (i)
the Superior Court of the District of Columbia and (ii) the United States
District Court for the District of Columbia, for the purposes of any suit,
action or other proceeding arising out of this Agreement or any transaction
contemplated hereby. Except as provided in Article XI, each of the Parties
agrees to commence any action, suit or proceeding relating hereto either in the
United States District Court for the District of Columbia or, if such suit,
action or proceeding may not be brought in such court for jurisdictional
reasons, in the Superior Court for the District of Columbia. Except as provided
in Article XI, each of the Parties further agrees that service of process,
summons, notice or document by hand delivery or U.S. registered mail at the
address specified for such Party in Section 12.2 (or such other address
specified by such Party from time to time pursuant to Section 12.2) shall be
effective service of process for any action, suit or proceeding brought against
such Party in any such court. Except as provided in Article XI, each of the
Parties irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the Superior Court of the District of
Columbia and (ii) the United States District Court for the District of Columbia,
and hereby further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.

         12.7     Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

         12.8     Interpretation. When a reference is made in this Agreement to
an Article or Section, such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation" or equivalent words. The
words "hereof", "herein" and "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. The definitions contained in this
Agreement are applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter genders of such
term. Any agreement, instrument, statute, regulation, rule or order defined or
referred to herein or in any agreement or instrument that is referred to herein
means such agreement, instrument, statute, regulation, rule or order as from
time to time amended, modified or supplemented, including (in the case of
agreements or instruments) by waiver or consent and (in the case of statutes,

<PAGE>   395

regulations, rules or orders) by succession of comparable successor statutes,
regulations, rules or orders and references to all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns. Each Party acknowledges that it has been
represented by counsel in connection with the review and execution of this
Agreement, and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

         12.9     Entire Agreement. This Agreement, including the documents,
certificates and instruments referred to herein and other contracts, agreements
and instruments contemplated hereby, embody the entire agreement and
understanding of the Parties in respect of the transactions contemplated by this
Agreement. There are no restrictions, promises, representations, warranties,
covenants or undertakings other than those expressly set forth or referred to
herein or therein. This Agreement supersedes all prior agreements and
understandings between the Parties with respect to the transactions contemplated
by this Agreement.

         12.10    Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the Parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the Parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.

         12.11    Conflicts. Except with respect to the indemnification,
liability, default and remedies provisions contained herein or as otherwise
expressly provided herein, in the event of any conflict or inconsistency between
the terms of this Agreement and the terms of the Asset Sale Agreement, the terms
of the Asset Sale Agreement shall prevail.

         12.12    Further Assurances. The Parties hereto agree to execute and
deliver promptly, at the expense of the Party requesting such action, any and
all other and further instruments, documents and information which may be
reasonably requested in order to effectuate the transactions contemplated
hereby. Each Party agrees to cooperate with, assist and accommodate all
reasonable requests made by the other Party in respect of any regulatory
approval necessary for, or any regulatory proceeding relating to, the execution,
delivery or performance of this Agreement. Each Party further agrees to comply
in all material respects with all Laws of Governmental Authorities relating to
this Agreement and the consummation of the transactions contemplated hereby.

               [THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>   396

         IN WITNESS WHEREOF, Pepco and Generator have caused this Local Area
Support Agreement to be signed by their respective duly authorized
representatives on the date first above written.

                                   POTOMAC ELECTRIC POWER
                                   COMPANY

                                   By:
                                       --------------------------------
                                        Name:
                                        Title:

                                   [GENERATOR]

                                   By:
                                       --------------------------------
                                        Name:
                                        Title:

<PAGE>   397

                                   APPENDIX A

         As used in this Agreement, the following terms have the meanings set
forth below:

         (a)      "Abnormal Conditions" means Abnormal Conditions as described
in Pepco Transmission Procedure No. 28.

         (b)      "Abnormal Condition Violation" means any failure by Generator
during Abnormal Conditions to comply during any hour with the operation and
dispatch orders specified by PJM Interconnection LLC or Pepco for that hour
pursuant to Section 3.2(a); provided, however, Generator shall not have
committed an Abnormal Condition Violation if the Actual Output is no more than
five megawatts (5 MW) greater than or five megawatts (5 MW) less than the Target
Output based on instantaneous meter readings.

         (c)      "Actual Output" means the actual output supplied in any hour
during Abnormal Conditions by Generator from the Facility pursuant to the
operation and dispatch orders of PJM Interconnection LLC or Pepco in accordance
with Section 3.2(a).

         (d)      "Affiliate" shall have the meaning set forth in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended.

         (e)      "Ancillary Services" means all services or requirements
necessary to support the transmission of capacity and Energy from resources to
loads while maintaining reliable operation of the System in accordance with Good
Utility Practice. Ancillary Services includes, but is not limited to,
scheduling, system control and dispatch, reactive supply and voltage control
from generation sources, regulation and frequency response, energy imbalance,
operating reserve, emergency energy, spinning reserve and supplemental reserve.

         (f)      "Available" means, in relation to the Facility, that the
Facility or any Unit thereof is capable, in real time, of producing Energy and
Ancillary Services which will be delivered into the System.

         (g)      "Closing" shall have the meaning set forth in the Asset Sale
Agreement.

         (h)      "Closing Date" means the date on which the Closing with
respect to the Facility actually occurs.

         (i)      "Effective Date" means the date upon which this Agreement
becomes effective as determined pursuant to Section 2.1.

         (j)      "Energy" means electrical energy.

         (k)      "Event of Default" has the meaning set forth in Section 6.1.

<PAGE>   398

         (l)      "Excess Output" means the amount, if any, by which the Actual
Output exceeds the Target Output based on instantaneous meter readings.

         (m)      "Facility" means the Potomac River Station electric generating
facility, which consists of Units 1, 2, 3, 4 and 5 and associated generating
facilities, located in Alexandria, Virginia.

         (n)      "FERC" means the Federal Energy Regulatory Commission or its
successor.

         (o)      "Force Majeure" has the meaning set forth in Section 8.2.

         (p)      "Generator Material Adverse Effect" has the meaning set forth
in Section 5.2.

         (q)      "Good Utility Practice" means any of the applicable practices,
methods and acts:

                  (i)      required by FERC, NERC, MAAC, PJM Interconnection
LLC, the PJM System Operator, or the successor of any of them, whether or not
the Party whose conduct is at issue is a member thereof;

                  (ii)     required by applicable Law;

                  (iii)    required by the Pepco Interconnection Standards or
the policies and standards of Pepco relating to emergency operations;

                  (iv)     otherwise engaged in or approved by a significant
portion of the electric utility industry during the relevant time period;

which, in the exercise of reasonable judgment in light of the facts known at the
time the decision was made, could have been expected to accomplish the desired
result at a reasonable cost consistent with applicable Law, good business
practices, reliability, safety, and expedition. Good Utility Practice is not
intended to be limited to the optimum practice, method, or act to the exclusion
of all others, but rather to be acceptable practices, methods, or acts generally
accepted in the region.

         (r)      "Governmental Authority" means any court, administrative or
regulatory agency or commission or other governmental entity or instrumentality,
domestic, foreign or supranational or any department thereof.

         (s)      "Independent System Operator" means an entity, other than
Pepco or any affiliate or associate company, including any regional transmission
operator, independent system operator, transco, or any other independent system
administrator, that possess operational or planning control over the System.

<PAGE>   399

         (t)      "Law" means any law, statute, treaty, code, rule, regulation,

or order judgement or determination of an arbitrator, court or other
Governmental Authority, or any franchise, license, lease, permit, certificate,
authorization, qualification, easement, right of way, right or approval binding
on a Party or any of its property.

         (u)      "MAAC" means the Mid-Atlantic Area Council, a reliability
council under Section 202 of the Federal Power Act established pursuant to the
MAAC Agreement, dated August 1, 1994 (the "MAAC Agreement"), and any successor
thereto.

         (v)      "NERC" means the North American Electric Reliability Council
and any successor entity thereto.

         (w)      "Normal Conditions" means Normal Conditions as described in
Pepco Transmission Procedure No. 28.

         (x)      "Normal Condition Violation" means any failure by Generator to
comply with Pepco Transmission Procedure No. 28 during Normal Conditions, any
failure to have at least one (1) Unit at full rated capacity during Normal
Conditions or both.

         (y)      "PJM" means the Pennsylvania New Jersey-Maryland
interconnected power pool operated under the PJM Agreement and any successor
thereto including any regional transmission operator, independent system
operator, transco, or any other independent system administrator that possesses
operational or planning control over the System.

         (z)      "PJM Agreement" means the Amended and Restated Operating
Agreement of the PJM Interconnection LLC, dated as of June 2, 1997.

         (aa)     "PJM Control Area" means the control area recognized by NERC
as the PJM Control Area.

         (bb)     "PJM Interconnection LLC" means the independent system
operator of the PJM Control Area pursuant to the PJM Agreement and the PJM
Tariff.

         (cc)     "PJM System Operator" means the PJM Interconnection LLC energy
control center staff responsible for central dispatch as provided in the PJM
Agreement.

         (dd)     "PJM Tariff" means the PJM Open Access Transmission Tariff
providing transmission service within the PJM Control Area.

         (ee)     "Pepco Interconnection Standards" means Pepco's
Interconnection and Parallel Operating Guidelines as amended from time to time.
A copy of the existing Pepco Interconnection Standards is attached hereto as
Exhibit A.

         (ff)     "Pepco Interconnection Procedure No. 28" means Pepco's
Transmission System Operations Procedure No. 28, and any modification or
successor procedure accepted by PJM. A copy of existing Pepco Transmission
Procedure No. 28 is attached.

<PAGE>   400

hereto as Exhibit B.  The Parties shall revise Exhibit B from time
to time to conform to any changes made to Pepco Transmission
Procedure No. 28.

         (gg)     "Pepco Transmission Procedure No. 29" means Pepco's
Transmission System Operations Procedure No. 29, and any modification or
successor procedure accepted by PJM. A copy of the existing Pepco Transmission
Procedure No. 29 is attached hereto as Exhibit C. The Parties shall revise
Exhibit C from time to time to conform to any changes made to Pepco Transmission
Procedure No. 29.

         (hh)     "Pepco Material Adverse Effect" has the meaning set forth in
Section 5.1.

         (ii)     "Person" means any individual, partnership, limited liability
company, joint venture, corporation, trust, unincorporated organization, or
governmental entity or any department or agency thereof.

         (jj)     "Services" means Generator's operation of the Facility or any
Unit thereof in accordance with Section 3.2(a).

         (kk)     "Shed Load" means the process of deliberately removing firm
load from the System, whether manually, automatically or through requiring
location-specific load reductions, in accordance with Good Utility Practice to
maintain the integrity of the System.

         (ll)     "Substitute Resources" has the meaning set forth in Section
4.1
         (mm)     "System" means Pepco's electric system in the electrical
vicinity of the Facility.

         (nn)     "Target Output" means the output required to be supplied in
any hour during Abnormal Conditions by Generator from the Facility pursuant to
 the operation and dispatch orders of PJM Interconnection LLC or Pepco in
accordance with Sections 3.2(a).

         (oo)     "Term" has the meaning set forth in Section 2.1.

         (pp)     "Termination Fee" has the meaning set forth in Sections 4.4.

         (qq)     "Termination Notice" has the meaning set forth in Section 4.2.

         (rr)     "Transaction Day" means any day during which the Facility is
required to, and in fact does, provide Services.

         (ss)     "Unit" or "Units" means one or more individual electricity
generating unit or units constituting a part of the Facility.

<PAGE>   401

                                    EXHIBIT G

                       OPERATION AND MAINTENANCE AGREEMENT

                                       FOR

                      BUZZARD POINT AND BENNING FACILITIES
                           LOCATED IN WASHINGTON, D.C.

                                 By and Between

                    POTOMAC ELECTRIC POWER COMPANY, As Owner

                                       And

                  ________________________________, As Operator

                           Dated as of _________, 2000

<PAGE>   402

                                    EXHIBIT G

                                TABLE OF CONTENTS

<TABLE>

<S>         <C>                                                   <C>
ARTICLE 1   DEFINITIONS                                            1
ARTICLE 2   SCOPE OF SERVICES                                      1
ARTICLE 3   PEPCO RESPONSIBILITIES                                 8
ARTICLE 4   BUDGET                                                 9
ARTICLE 5   OPERATOR'S FEE, INVOICING AND PAYMENTS                11
ARTICLE 6   FACILITIES CUSTODY                                    12
ARTICLE 7   TERM AND TERMINATION                                  14
ARTICLE 8   REPRESENTATIONS AND WARRANTIES OF PEPCO               16
ARTICLE 9   REPRESENTATIONS AND WARRANTIES OF OPERATOR            18
ARTICLE 10  COVENANTS OF THE PARTIES                              20
ARTICLE 11  EMPLOYEE MATTERS                                      21
ARTICLE 12  INDEMNIFICATION                                       21
ARTICLE 13  FORCE MAJEURE                                         23
ARTICLE 14  CONFIDENTIALITY                                       24
ARTICLE 15  DISPUTE RESOLUTION                                    25
ARTICLE 16  MISCELLANEOUS PROVISIONS                              26
</TABLE>

                        APPENDICES AND EXHIBITS
<TABLE>

<S>              <C>
Appendix A       Definitions
Exhibit I        Facility Sites
Exhibit II       Budget for First Contract Year
Exhibit III      Employee Matters
Exhibit IV       Pepco Interconnection Standards
</TABLE>

<PAGE>   403

                                    EXHIBIT G

                       OPERATION AND MAINTENANCE AGREEMENT

         THIS OPERATION AND MAINTENANCE AGREEMENT (including the Appendices,
Exhibits and Schedules hereto, this "Agreement"), dated as of ____________, 2000
(the "Effective Date"), by and between Potomac Electric Power Company, a
District of Columbia and Virginia corporation ("Pepco"), and ________________, a
_____________ ("Operator") (individually, a "Party"; collectively, the
"Parties").

         WHEREAS, Pepco is the owner of two electric generation facilities
located in Washington, DC, namely the Buzzard Point Generating Station and the
Benning Generation Station (collectively, the "Facilities");

         WHEREAS, Pepco is desirous of having Operator operate and maintain the
Facilities, and Operator is willing to operate and maintain the Facilities, upon
the terms and conditions hereinafter set forth.

         NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements hereinafter set forth, and intending
to be legally bound hereby, the Parties agree as follows:

                                    ARTICLE 1

                                   DEFINITIONS

         Capitalized terms used in this Agreement shall have the respective
meanings set forth in Appendix A hereto.

                                    ARTICLE 2

                                SCOPE OF SERVICES

         2.1      Applicable Principles.

         2.1.1    Operator shall operate and maintain the Facilities for the
Term of this Agreement. Operator shall perform all Services specified herein,
and all other Services that are reasonably necessary to support operation of the
Facilities, it being understood that a principal purpose of this Agreement is to
relieve Pepco of the necessity of engaging or supplying any labor, service or
material to support operation of the Facilities unless the labor, service or
material is specifically itemized in this Agreement as being furnished by Pepco
to Operator. Pepco shall retain responsibility for the disposition and sale of
the entire capacity and energy output of the Facilities.

<PAGE>   404

                                    EXHIBIT G

         2.1.2    Operator shall perform the Services in accordance with Good
Utility Practices and pursuant to all applicable PJM Requirements and dispatch
orders.

         2.2      Operator's Performance. Operator's responsibilities and
obligations to Pepco shall include the following, from and after the Turnover
Date until the Termination Date:

         2.2.1    Operate and maintain the Facilities.

         2.2.2    Respond to and operate the Facilities as directed by Pepco and
in a manner consistent with this Agreement.

         2.2.3    Be responsible for all costs and Taxes associated with
operating and maintaining the Facilities; with the exception of capital
expenditures to be funded by Pepco pursuant to Section 4.2 below and Income
Taxes and property taxes imposed on Pepco.

         2.2.4    Arrange for the procurement, delivery, storage and redelivery
of all material, equipment, chemicals and other consumables and supplies
associated with operating and maintaining the Facilities, including fuel, water,
sewer, electricity (except to the extent provided by Pepco pursuant to Section
3.1) and telecommunications service.

         2.2.5    Retain all operating and maintenance records (whether in
electronic form or otherwise) relating to the Facilities. Operator shall provide
to Pepco, upon reasonable request, copies of any records or other information in
Operator's possession relating to the Facilities and required by Pepco in order
to comply with Applicable Law.

         2.2.6    Implement and maintain a program of planned maintenance for
the Facilities.

         2.2.7    Develop, implement and enforce a preventative maintenance
program that will ensure that the Facilities (a) experience no more than a 20%
derating of either Facility (except for maintenance) so as to support
requirements for local area reliability by demonstration of generation during
the semi-annual PJM Net Capability Test, and (b) can meet the performance
requirements on the Termination Date (as provided in Section 6.2 below).

         2.2.8    Perform all routine maintenance.

         2.2.9    Coordinate arrangements with Pepco for maintenance outages,
planned and unplanned outages including outages requiring major capital expenses
by Pepco.

                                    EXHIBIT G

<PAGE>   405

         2.2.10   Maintain an effective work force at the Facilities, assuming
and discharging as appropriate any outstanding responsibilities of Pepco under
any collective bargaining agreements as set forth in Exhibit III.

         2.2.11   Conduct appropriate inspections and make the Facilities
available at reasonable times for inspections by Pepco and others designated by
Pepco.

         2.2.12   Develop, implement and enforce programs for safety, quality
assurance and quality control.

         2.2.13   Dispose of all discharge water and other waste, including
wastewater, spent chemicals, and Hazardous Substances, in compliance with all
applicable Environmental Laws. Costs incurred by Operator associated with such
substances existing at the Facility Sites prior to the Turnover Date shall be
reimbursed to Operator by Pepco.

         2.2.14   Immediately notify the Pepco representative of any
environmental violation, serious personal injury, equipment damage that would
not be encompassed within the scope of routine operations and maintenance,
citizen complaint, Governmental Authority complaint or inspection.

         2.2.15   Comply with reporting requirements of all applicable
Environmental Laws.

         2.2.16   Obtain, comply with and maintain in force all necessary
Operator Required Regulatory Approvals and any Permits and Environmental Permits
required for the performance of its duties hereunder other than Permits and
Environmental Permits to be procured by Pepco pursuant to Section 3.1.6.

        2.2.17 Maintain comprehensive records relating to Facilities performance
and submit reports (monthly during Peak Season, quarterly otherwise, and
additional reports as may be appropriate) to Pepco regarding performance (which
records shall be the property of Pepco and shall be delivered to Pepco on the
Termination Date).

         2.2.18   Pay (i) all fines, penalties or other levies imposed by any
Governmental Authority relating to the operation of the Facilities after the
Turnover Date, and (ii) all costs incurred in remedying the consequences of any
such failure to comply with Applicable Law after the Turnover Date, unless the
imposition related solely to the gross negligence or willful misconduct of
Pepco.

<PAGE>   406

                                    EXHIBIT G

         2.2.19   Cooperate with Pepco for purposes of maintaining good
relationships with Governmental Authorities and the general public (including
tours, community relations programs, etc.).

         2.2.20   Comply with requirements and cooperate in processes relating
to Budgeting (Article 4), Facilities Custody (Article 6), and other matters as
provided in this Agreement.

         2.2.21   Conduct training for and follow applicable system restoration
procedures in system emergencies and in all system restoration drills as
implemented by PJM and local Pepco control centers.

         2.2.22   Designate a duly authorized representative as a point of
contact for Pepco.

         2.2.23   Cooperate with Pepco to ensure the smooth transitions of
operational responsibility for the Facilities (i) from Pepco to Operator
effective the Turnover Date and (ii) from Operator to Pepco effective the
Termination Date.

         2.2.24   Cooperate generally with Pepco. Operator may, without the
consent of Pepco, enter into subcontracts for the performance of the obligations
set forth in this Section 2.2, provided however any subcontract or series of
subcontracts with any subcontractor of a value greater than five hundred
thousand dollars ($500,000) shall be subject to the prior written approval of
Pepco, not to be unreasonably withheld or delayed.

         2.3      Operator's Commitments Related to Facility Performance
Generally. Operator shall comply with the following performance commitments,
except with respect to, and while, a Facility is on an approved maintenance
outage or during, and to the extent of interference by, an event of Force
Majeure declared in accordance with Article 13:

         2.3.1    Maintain black start capability.

         2.3.2    Maintain response capability in accordance with the following
requirements:

         During a system emergency, Buzzard Point Station must be online within
two (2) hours notice, thirty (30) minutes during Peak Season.

<PAGE>   407

                                    EXHIBIT G

         For a local area emergency, Benning Station must be online within
twenty-four (24) hours notice, eighteen (18) hours during Peak Season.

         On a prescheduled basis, as determined by Pepco, the Facilities must be
online within seventy-two (72) hours notice, twenty-four (24) hours during Peak
Season.

         2.3.3    Follow the generation unit commitment procedures and dispatch
orders of PJM as remitted through Pepco or, to maintain local area reliability.

         2.3.4    Respond when PJM orders a change in operation of a Facility
for any reason, including local area reliability.

         2.3.5    Conduct training for and follow applicable system restoration
procedures in system emergencies and in all system restoration drills as
implemented by PJM and local Pepco control centers.

         2.3.6    Respond when Pepco orders operation of the Facility for local
area reliability at a time when PJM has not ordered such operation.

         2.3.7    Assure that the Units experience no more than a twenty percent
(20%) derating at either Facility (except for maintenance).

         2.4      Operator's Commitments Related to Facility Performance Damages
and Bonuses.

         2.4.1    EFORD. Operator shall satisfy the EFORD Standard during each
Contract Year. In the event of a failure to satisfy the EFORD Standard during
any Contract Year, Operator shall pay to Pepco as liquidated damages and not as
a penalty an amount determined pursuant to the following formula:

                  (a)      EFORD Liquidated Damages = [EFORD for the Contract
Year] minus [EFORD Standard] multiplied by [$200,000 per point at Benning,
$80,000 per point at Buzzard].

                  (b)      In the event Facilities performance exceeds the EFORD
Standard during any Contract Year, Pepco shall pay to Operator as a performance
bonus an amount determined pursuant to the following formula (provided such
amount is greater than zero):

         EFORD Performance Bonus = [EFORD Standard] minus [EFORD for the
Contract Year] multiplied by [$100,000 per point at Benning, $40,000 per point
at Buzzard].

<PAGE>   408
                                    EXHIBIT G

         2.4.2    Net Revenues Bonus. Operator shall exercise reasonable
commercial efforts to support maximization of net revenues earned from
Facilities operations. Operator shall be eligible for a Net Revenues Bonus
determined as follows:

         Net Revenues Bonus= (.05) x [(M1xLMP1) + (M2-M1)xLMP2) (M2xQe)]

         Where

         M1 = quantity of energy scheduled by PJM for each hour for the Unit for
the first settlement for that day during the 16-hour peak period.

         M2 = quantity of energy delivered real time for each hour during the
16-hour peak period.

         LMP1 = the first settlement hourly integrated Pepco zone LMP for each
hour.

         LMP2 = the real time hourly integrated Pepco zone LMP for each hour.

         Qe = the fuel cost of the Unit as specified in Section 4.1.2 hereof.

         2.4.3    Limitation. Operator's obligation for Liquidated Damages
hereunder shall not exceed one million dollars ($1,000,000) per Contract Year.
In the event the calculation of Operator's Net Revenues Bonus pursuant to
section 2.4.2 is negative, Operator shall not be obligated to make payment
thereof to Pepco provided, however, the amount of any EFORD Performance Bonus
may be offset to the extent of any negative Net Revenue balance as determined
above.

         2.5      Insurance.

         2.5.1    Operator shall procure and maintain in force from the Turnover
Date through the Termination Date the following insurance coverages.

                  (a)      Workers Compensation with statutory limits and in
compliance with District of Columbia law.

                  (b)      Employer's Liability with minimum limits of one
million dollars ($1,000,000).

                  (c)      General Liability with minimum limits of one million
dollars ($1,000,000) per occurrence, including broad form endorsement,
products/completed operations, contractual liability and personal injury
coverage. Pepco shall be named an additional insured on Operator's policy.
Fellow employee and explosion, collapse and underground exclusions shall be
deleted, if they exist.

<PAGE>   409

                                    EXHIBIT G

                  (d)      Automobile Liability with minimum limits of one
million dollars ($1,000,000) combined single limit, including coverage for
owned, non-owned and hired vehicles. All coverages required by the District of
Columbia shall be provided.

                  (e)      Umbrella Coverage with respect to the coverages in
subparts (b), (c) and (d) above, in the amount of five million dollars
($5,000,000).

         All coverages provided shall be primary without right of contribution
from any insurance that Pepco may have in force from time to time. Any insurance
maintained by Pepco shall be in excess of Operator's insurance and will not pay
on any claim until Operator's insurance is exhausted. If Operator chooses to
maintain any deductibles or retention with respect to any required coverages,
Operator shall pay all costs that would have been paid by insurance until the
deductible or retention is satisfied. Any deductibles or retentions shall be
disclosed to Pepco, which will retain the right to disapprove such deductibles
or retentions. All insurers proposed to be used by Operator shall be either
rated [A] or better or first approved by Pepco.

                  (f)      Environmental Coverages Contractors/Operators
Pollution Legal Liability with at least minimum limits as follows:

                  fifty million dollars ($50,000,000) per occurrence/ one
                  hundred million dollars $100,000,000) in the annual aggregate

and will cover pollution losses arising out of Operator's operations and
completed operations, associated with work performed under this Agreement.

         Minimum Scope of Coverage for Pollution Legal Liability: For losses
covered by pollution conditions that arise from Operator activities during the
Term, the policy shall include the following coverage arising from pollution
from covered operations:

                  bodily injury, sickness, disease, mental anguish or shock
sustained by any person, including death;

                  property damage including physical injury to or destruction of
tangible property including the resulting loss of use thereof, the loss of use
of tangible property and natural resource damage liability that has not been
physically injured or destroyed;

<PAGE>   410

                                    EXHIBIT G

                  clean-up costs including investigation, testing,
detoxification, neutralization, for release on and off the insured property; and

                  defense  including costs, charges and expenses incurred in the
investigation, adjustment or defense of claims for such compensation damages.

If the above insurance policy is on a "claims made" basis, it shall be
maintained for a period of not less than two (2) years with the retroactive date
to be held constant with the Turnover Date.

         2.5.2    Prior to the Turnover Date, Operator shall provide a
certificate and a broker's opinion letter indicating compliance with the above
requirements to:

         Manager, Corporate Insurance & Risk Management Department
         Potomac Electric Power Company
         1900 Pennsylvania Avenue, NW
         Washington, DC 20068

                                    ARTICLE 3

                             PEPCO RESPONSIBILITIES

         3.1      Pepco's Duties Generally. Pepco shall be responsible, at its
own expense, for providing information, materials and other items described in
this Article 3. All such items shall be made available at such times and in such
manner as may be reasonably required for the orderly performance of those
Services provided hereunder by Operator. Pepco's responsibilities and
obligations to Operator shall include the following:

         3.1.1    Market and arrange for the sale or other disposition of, and
any necessary transmission service for, the entire capacity and energy output of
the Facilities as Pepco may determine from time to time in its discretion.

         3.1.2    Provide access to the Facilities and the Facility Sites.

         3.1.3    Provide access to property adjacent to the Facilities under
the control of Pepco, as necessary for the performance of the Services.

         3.1.4    Allow Operator to operate and maintain the Facilities.

         3.1.5    Schedule the operation of the Units in accordance with Good
Utility Practices, equipment warranties, the operating procedures for the
Facilities, and otherwise as necessary to provide reasonable advance notice to

<PAGE>   411

                                    EXHIBIT G

allow for the staffing and start-up of the Units.

         3.1.6    Obtain and maintain in force all necessary Pepco Required
Regulatory Approvals and Permits required for the Facilities that are usually
and customarily maintained in force by owners of power generation facilities.

         3.1.7    Provide all relevant equipment warranties or support
agreements to Operator for administration.

         3.1.8    Provide existing operations and maintenance manuals and
records to Operator for use in operating and maintaining the Facilities.

         3.1.9    Make available to Operator an allocated share of fuel storage
capacity at the M Street Terminal under such agreements as shall be executed for
extension of Pepco's rights pursuant to a Throughput and Storage Agreement
presently under negotiation.

         3.1.10   Provide station electrical service as reasonably necessary to
support operation of the Facilities in standby condition during non-dispatch
periods.

         3.1.11   Make available emissions allowances or credits required for
the operation of the Facilities.

         3.1.12   Designate a duly authorized representative as a point of
contact for Operator.

         3.1.13   Cooperate in accomplishing smooth operating transitions of
responsibility for the Facilities (i) from Pepco to Operator effective the
Turnover Date and (ii) from Operator to Pepco effective the Termination Date.

         3.1.14   Cooperate generally with Operator.

                                    ARTICLE 4

                                     BUDGET

         4.1      Establishment of Operating Budget.

         4.1.1    The Operating Budget for the First Contract Year is attached
hereto as Exhibit IIA.

<PAGE>   412

                                    EXHIBIT G

         4.1.2    For years subsequent to the First Contract Year, Operator
shall submit a proposed operating budget to Pepco by August 31. Pepco shall
provide a written response thereto within forty-five (45) days of receipt of
Operator's proposed operating budget. The parties shall establish the Operating
Budget through good faith negotiations thereafter. If the Parties are unable to
agree upon an operating budget, the Operating Budget shall be established at an
amount equal to the Operating Budget for the prior Contract Year, escalated
pursuant to the Escalation Index; and either Party may seek modification of the
Operating Budget pursuant to mediation procedures of the American Arbitration
Association. Mediation shall be the exclusive dispute resolution mechanism with
respect to the matters addressed in this Article 4.

         For purposes of the Operating Budget, the cost of fuel shall be
determined as follows:

         Pepco will compensate Operator each month for fuel use on the following
basis:

         FP = ((Qe x E) + (Qs x S)) x Fi

         Where

         FP       = Fuel Payment
         Qe       = Specified amount of fuel per MWh
         E        = MWh produced in the month
         Qs       = Specified amount of fuel used per start
         S        = Number of starts initiated per month
         Fi       = Fuel index price (Platts' is suggested; for Benning, Fi will
                    be a composite representative of No. 4 Fuel Oil.)

         Qe, Qs and Fi will be established for each Facility.

         4.1.3    Budget Adjustments.

                  (a)      In the event of an Emergency situation requiring the
incurrence of costs not provided for by the Operating Budget, Operator shall
notify Pepco of (i) the costs incurred or to be incurred and (ii) the reasons
for those costs. The Parties shall negotiate in good faith the requirement for,
and the terms of, any amendment to the Operating Budget required by the
Emergency situation.

                  (b)      In the event Pepco directs a material modification in
plans for Facilities operations for an Operation Year from the plans existing at
the time of establishment of the Operating Budget for that Contract Year,

<PAGE>   413

                                    EXHIBIT G

(e.g., postponing a planned maintenance event or scheduling an unanticipated
maintenance event), the Operating Budget shall be appropriately modified.

         4.2      Capital Budget

         4.2.1    The Capital Budget for the First Contract Year is attached
hereto as Exhibit IIB.

         4.2.2    Regular Capital Budget. In conjunction with the Operating
Budget process set forth in Section 4.1.2 above, Operator may submit a proposal
for a Capital Budget for the ensuing Contract Year. Such request shall describe,
with reasonable particularity (i) the capital expenditures requested, (ii) the
anticipated cost thereof, supported by the basis for the cost determination,
(iii) the benefit to be achieved by such expenditures and, (iv) a discussion as
to whether the result could be achieved through alternative means. The Capital
Budget shall be established in conjunction and in accordance with the procedures
for the Operating Budget set forth in Section 4.1.2 above.

         4.2.3    Exceptional Capital Expenditures. In the event of an emergency
situation requiring a capital expenditure not provided for by the Capital
Budget, Operator shall provide a description of the proposed capital expenditure
in accordance with the provisions of Section 4.2.1 above. The Capital Budget
shall be amended as appropriate in accordance with the procedures for
establishing the original Capital Budget for the Contract Year.

                                    ARTICLE 5

                     OPERATOR'S FEE, INVOICING AND PAYMENTS

         Operator shall be entitled to payment of the Operator's Fee and to
reimbursement of costs incurred consistent with the approved Operating Budget
and, to the extent funded by Operator, of costs incurred consistent with the
approved Capital Budget.

         5.1      Operator's Fee.

         Operator shall be entitled to a base Operator's Fee in each Contract
Year for the performance of the Services hereunder. Such Operator's Fee may be
supplemented in each Contract Year by bonuses paid to Operator pursuant to
Section 2.4 hereof. The Operator's Fee is intended to compensate Operator for
(i) performance of all of its obligations under the Agreement other than costs
items to be reimbursed to Operator, and (ii) its profit.

<PAGE>   414

                                    EXHIBIT G

         For each Contract Year of the Initial Term, Pepco shall pay to Operator
an Operator's Fee of five hundred thousand dollars ($500,000). The Operator's
Fee for Contract Years in periods subsequent to the Initial Term shall be
determined by mutual agreement.

         5.2      Invoicing and Payments.

         Operator shall deliver to Pepco an invoice and performance report by
the tenth day of each calendar month, covering the preceding calendar month
("Period"). The invoice shall describe in reasonable detail the costs incurred
consistent with the Operating Budget during the Period. The invoice shall
identify one-twelfth of the Operating Fee for the Contract Year.

         Pepco shall make payments to Operator within forty-five (45) days of
receipt of Operator's invoice and performance report.

         5.2.1    Year End Adjustments.

         Subject to Section 4.1.3, Operator shall not be entitled to
reimbursement of costs incurred by Operator in excess of costs approved in the
Operating Budget or Capital Budget for the Contract Year, except to the extent
such costs were reasonably incurred due to an event of Force Majeure. In the
event Operator incurs costs in any Contract Year less than the costs approved in
the Operating Budget, Pepco shall pay to Operator one-half of the cost savings,
such amount to be paid in conjunction with the payment for the December invoice.

         Any liquidated damages or performance bonus due pursuant to Section 2.3
shall be paid or adjusted, as appropriate, in conjunction with the payment for
the December invoice.

                                    ARTICLE 6

                               FACILITIES CUSTODY

         6.1      Transfer from Pepco to Operator at Term Commencement.

         6.1.1    Pepco shall transfer custody of the Facilities to Operator
effective the Turnover Date. Pepco shall provide to Operator notice of its good
faith estimate of the Turnover Date on or about thirty (30) days prior to

<PAGE>   415

                                    EXHIBIT G

the estimated Turnover Date. Pepco shall provide to Operator notice of the
actual Turnover Date at least ten (10) days prior to the actual Turnover Date.
Pepco and Operator shall work cooperatively to establish a smooth transition of
responsibilities for the Facilities.

         6.1.2    The baseline for assessment of Unit's performance subsequent
to the Turnover Date shall be the final Capability Demonstration Test conducted
during the 2000 Peak Season. Pepco shall give Operator reasonable advance notice
of the timing of such Capability Demonstration Test. On or about the Turnover
Date, in the event Operator has reasonable cause to believe that circumstances
may have caused the Facilities performance to have diminished subsequent to the
performance of that Capability Demonstration Test, the Parties shall mutually
agree upon procedures to determine the existence of such circumstances and to
establish a revised baseline for assessment of a Unit's performance. Operator
and Pepco shall conduct a joint inspection of the Units to determine whether any
other circumstances exist that might adversely affect a Unit's performance.

         6.1.3    On or about the Turnover Date, Pepco and Operator shall
conduct an inventory survey of fuel materials, parts, consumables and supplies
at the Facilities. The results of the inventory survey shall be mutually agreed
by the Parties.

         6.1.4    Pepco and Operator shall undertake an inventory of contracts
primarily relating to the operations and maintenance of the Facilities, and
Pepco shall, to the extent assignable, assign to Operator such contracts as are
selected by Operator for assignment and the costs to be incurred thereunder
shall be included in the Operating Budget. To the extent contracts selected by
Operator are unassignable, Pepco shall designate Operator as its agent for
performance thereunder.

         6.2      Return from Operator to Pepco at Term Conclusion.

         6.2.1    Effective the Termination Date, Operator shall return custody
of the Facilities to Pepco in the same condition as received from Pepco, normal
wear and tear from operation in accordance with Good Utility Practices excepted.
Operator and Pepco shall work cooperatively to establish a smooth return of
responsibility for the Facilities.

         6.2.2    Except as provided in this Section 6.2.2, the performance of
the Units effective the Termination Date shall be the final Capability
Demonstration Test conducted during the most recent Peak Season. Operator shall
give Pepco reasonable advance notice of the timing of such Capability
Demonstration Test. On or about the Termination Date, in the event Pepco has

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

(1)      Pepco currently anticipates that the Turnover Date shall be on or about
         the date of the closing of the transactions contemplated by the Asset
         Purchase and Sale Agreement to be entered into by Pepco and the
         purchaser of certain of Pepco's other generating facilities.

<PAGE>   416

                                    EXHIBIT G

reasonable cause to believe that circumstances may have caused a Unit's
performance to have diminished subsequent to the performance of that Capability
Demonstration Test, the Parties shall mutually agree upon procedures to
determine the existence of such circumstances and to establish a revised
assessment of the Unit's performance. Pepco and Operator shall conduct a joint
inspection of the Unit to determine whether any other circumstances exist that
might adversely affect a Unit's performance.

                                    ARTICLE 7

                              TERM AND TERMINATION

         7.1      Term. This Agreement shall be effective for a period running
from the Effective Date until December 31, 2003 ("Initial Term"). It shall renew
automatically thereafter for three (3) year terms, (the Initial Term and any
renewals, collectively the "Term") unless terminated by either party by written
notice delivered at least one (1) year prior to the expiration of the then
current Term or as otherwise provided in this Article. In the event Pepco
terminates this Agreement upon the conclusion of the Initial Term, Pepco shall
pay to Operator a termination fee of two hundred fifty thousand dollars
($250,000).

         7.2      Termination for Default.

         7.2.1    Termination by Pepco for Operator Default.

         The occurrence of any of the events set forth below shall constitute an
Operator Event of Default under this Agreement:

                  (a)      Operator materially fails to satisfy the performance
commitments set forth in Section 2.3;

                  (b)      Operator voluntarily commences bankruptcy,
insolvency, reorganization, stay, moratorium or similar debtor-relief
proceedings, or shall have become insolvent or generally does not pay its debts
as they become due, or admits in writing its inability to pay its debts, or
makes an assignment for the benefit of creditors;

                  (c)      Insolvency, receivership, reorganization, bankruptcy,
or similar proceedings shall have been commenced against Operator and such
proceedings remain undismissed or unstayed for a period of sixty (60) days;

                  (d)      Operator fails to maintain the insurance coverages
required under Section 2.4; or

<PAGE>   417

                                    EXHIBIT G

                  (e)      Operator breaches any other material term or
condition of this Agreement, including but not limited to any material breach of
a representation, warranty or covenant made in this Agreement which, after
receiving written notice of the breach from Pepco (such notice to set forth in
reasonable detail the nature of the default and, where known and if applicable,
the steps necessary to cure such default), (i) Operator fails to cure the
default, if curable, within thirty (30) days following receipt of the notice or
(ii) if such default is of such a nature that it cannot be cured within thirty
(30) days following receipt of such notice, Operator fails within such thirty
(30) days to commence the necessary cure and fails at any time thereafter
diligently and continuously to prosecute such cure to completion.

         7.2.2    Pepco's Default Remedies Against Operator. If an Operator
Event of Default shall have occurred and be continuing, Pepco shall have the
right to terminate this Agreement by Notice to Operator. In the event of such
termination:

                  (a)      If requested by Pepco, Operator shall withdraw from
the Facility Site, shall assign to Pepco (without future recourse to Operator)
such of Operator's subcontracts as Pepco may request, and shall remove such
materials, equipment, tools and instruments used and any debris or waste
materials generated by Operator in the performance of the Services as Pepco may
direct, and Pepco may take possession of any and all facilities, materials and
equipment at the Facility Site or in transit thereto.

                  (b)      Operator's liability hereunder is in addition to any
other liabilities of Operator provided for or relating to this Agreement.

         7.2.3    Termination by Operator for Pepco Default.

         The occurrence of any of the events set forth below shall constitute a
Pepco Event of Default under this Agreement:

                  (a)      Pepco shall have failed to make any payment to
Operator when due hereunder within thirty (30) days after receipt of written
notice of nonpayment by Operator, unless the payment of such amount is disputed
in good faith;

                  (b)      Pepco voluntarily commences bankruptcy, insolvency,
reorganization, stay, moratorium or similar debtor-relief proceedings, or shall
have become insolvent, or generally does not pay its debts as they become due,
or admits in writing its inability to pay its debts, or makes a deed of trust or
assignment for the benefit of creditors;

<PAGE>   418

                                    EXHIBIT G

                  (c)      Insolvency, receivership, reorganization, bankruptcy,
or similar proceedings shall have been commenced against Pepco and such
proceedings remain undismissed or unstayed for a period of sixty (60) days; or

                  (d)      Pepco breaches any other material term or condition
of this Agreement, including but not limited to any material breach of a
representation, warranty or covenant made in this Agreement which, after
receiving written notice of the breach from Operator (such notice to set forth
in reasonable detail the nature of the default and, where known and if
applicable, the steps necessary to cure such default), (i) Pepco fails to cure
the default, if curable, within thirty (30) days following receipt of the notice
or (ii) if such default is of such a nature that it cannot be cured within
thirty (30) days following receipt of such notice, Pepco fails within such
thirty (30) days to commence the necessary cure and fails at any time thereafter
diligently and continuously to prosecute such cure to completion.

         7.2.4    Operator's Rights Against Pepco. If a Pepco Event of Default
shall have occurred and be continuing, Operator shall have the right to
terminate this Agreement by Notice to Pepco. In such event, Operator shall
promptly submit to Pepco an accounting of Operator's costs and Pepco shall pay
Operator amounts due and owing, including associated fee, not later than thirty
(30) days after receipt of Operator's accounting. The foregoing remedies shall
constitute Operator's sole and exclusive remedies against Pepco with respect to
a Pepco Event of Default.

         7.3      Termination for Abandonment. In the event Pepco determines to
retire any of the Facilities from service, which Pepco shall have the right to
do in its sole discretion, Pepco shall provide Notice to Operator. In such
event, Operator shall promptly submit to Pepco an accounting of Operator's costs
and Pepco shall pay Operator amounts due and owing, including associated fee,
not later than thirty (30) days after receipt of Operator's accounting. The
foregoing remedies shall constitute Operator's sole and exclusive remedies
against Pepco for termination pursuant to this Section 7.3.

                                    ARTICLE 8

                     REPRESENTATIONS AND WARRANTIES OF PEPCO

         Pepco represents and warrants to Operator as follows:

         8.1      Incorporation. Pepco is a corporation duly incorporated,
validly existing and in good standing under the laws of the Commonwealth of
Virginia and the District of Columbia and has all requisite corporate power and
authority to own, operate and contract for Services for the Facilities and to

<PAGE>   419

                                    EXHIBIT G

carry on the business of the Facilities as now being conducted.

         8.2      Authority Relative to This Agreement. Pepco has all necessary
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery by
Pepco of this Agreement and the consummation by Pepco of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Pepco or by a committee thereof to whom such authority has been
delegated and no other corporate proceedings on the part of Pepco are necessary
to authorize this Agreement or the consummation of the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by Pepco
and, assuming that this Agreement constitutes a valid and binding agreement of
Operator, subject to the receipt of the Pepco Required Regulatory Approvals and
the Operator Required Regulatory Approvals, constitutes a valid and binding
agreement of Pepco, enforceable against Pepco in accordance with its terms.

         8.3      Consents and Approvals; No Violation.

                  (a)      Subject to obtaining the Pepco Required Regulatory
Approvals and the Operator Required Regulatory Approvals, neither the execution
and delivery of this Agreement by Pepco nor the performance by Pepco of its
obligations hereunder will (i) conflict with or result in any breach of any
provision of the Certificate of Incorporation or By-laws of Pepco, (ii) result
in a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement, lease or other instrument or
obligation to which Pepco or any of its subsidiaries is a party or by which any
of the Facilities may be bound, or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Pepco or the Facilities,
except in the case of clauses (ii) and (iii) for such failures to obtain a
necessary consent, defaults and violations which would not, individually or in
the aggregate, have a material adverse effect on the ability of Pepco to
discharge its obligations under this Agreement (a "Pepco Material Adverse
Effect").

                  (b)      Except for the Required Regulatory Approvals set
forth on Schedule 8.3(b) attached hereto (collectively, the "Pepco Required
Regulatory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of any Governmental Authority is
necessary for the performance by Pepco of its obligations hereunder, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not obtained or made, would not individually or in the
aggregate, create a Pepco Material Adverse Effect.

<PAGE>   420

                                    EXHIBIT G

         8.4      Labor Matters. Pepco has previously made available to Operator
copies of all collective bargaining agreements to which Pepco is a party or is
subject and which relate to the business or operations of the Facilities. With
respect to the business and operations of the Facilities, as of the date of this
Agreement, Pepco is in compliance with all Applicable Laws regarding employment
and employment practices, terms and conditions of employment and wages and
hours, except, for such matters as would not, individually or in the aggregate,
create a Pepco Material Adverse Effect or an Operator Material Adverse Effect.

         8.5      Survival. The representations and warranties in this Article 8
shall continue in full force and effect for the Term of this Agreement.

         8.6      THE FACILITIES ARE BEING MADE AVAILABLE AND CUSTODY THEREOF IS
TRANSFERRED "AS IS, WHERE IS", AND PEPCO IS NOT MAKING ANY REPRESENTATIONS OR
WARRANTIES WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING SUCH
FACILITIES (INCLUDING ANY RELATING TO LIABILITIES, OPERATION, CONDITION, VALUE
OR QUALITY OF THE FACILITIES OR THE PROSPECTS (FINANCIAL OR OTHERWISE), RISKS OR
OTHER INCIDENTS OF THE FACILITIES) OR WITH RESPECT TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY. PEPCO SPECIFICALLY DISCLAIMS ANY
REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR
A PARTICULAR PURPOSE, WITH RESPECT TO THE FACILITIES, OR ANY PART THEREOF, OR AS
TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER
LATENT OR PATENT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, PEPCO MAKES
NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION SET FORTH IN, OR
CONTEMPLATED BY, THE INFORMATION MEMORANDUM.

                                    ARTICLE 9
                   REPRESENTATIONS AND WARRANTIES OF OPERATOR

         Operator represents and warrants to Pepco as follows:

         9.1      Organization. Operator is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of
______________ and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as is now being
conducted.

<PAGE>   421

         9.2      Authority Relative to This Agreement. Operator has all
necessary corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery by Operator of this Agreement and the consummation by Operator of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Operator and no other corporate proceedings on the part of
Operator are necessary to authorize this Agreement or the consummation of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Operator and, assuming that this Agreement constitutes
a valid and binding agreement of Pepco, subject to the receipt of the Operator
Required Regulatory Approvals and the Pepco Required Regulatory Approvals, this
Agreement constitutes a valid and binding agreement of Operator, enforceable
against Operator in accordance with its terms.

         9.3      Consents and Approvals; No Violation.

                  (a)      Subject to obtaining the Operator Required Regulatory
Approvals and the Pepco Required Regulatory Approvals, neither the execution and
delivery of this Agreement by Operator nor the performance by Operator of its
obligations hereunder will (i) conflict with or result in any breach of any
provision of the [Certificate of Incorporation or By-laws] of Operator, (ii)
result in a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement, lease or other instrument or
obligation to which Operator or any of its subsidiaries is a party or by which
any of their respective assets may be bound or (iii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Operator, or any
of its assets, except, in the case of clauses (ii) and (iii), for such failures
to obtain a necessary consent, defaults and violations which would not,
individually or in the aggregate, have a material adverse effect on the ability
of Operator to discharge its obligations under this Agreement (an "Operator
Material Adverse Effect").

                  (b)      Except for the Required Regulatory Approvals set
forth on Schedule 9.3(b) attached hereto (collectively, the "Operator Required
Regulatory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of any Governmental Authority is
necessary for the performance by Operator of its obligations hereunder, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made, would not individually or
in the aggregate, create an Operator Material Adverse Effect.

         9.4      Facility Sites Inspection. Operator has had a full and
effective opportunity to inspect the Facilities and the Facility Sites, to
determine to the extent pertinent to operate all pertinent surface and
subsurface conditions of Hazardous Substances at the Facility Sites. Operator
accepts

<PAGE>   422

                                    EXHIBIT G

the existing conditions and shall not be entitled to any relief hereunder based
upon such conditions, including the existence of conditions contrary to
Operator's expectations based upon inspections prior to execution of this
Agreement or subsequent thereto.(2)

         9.5      Qualified Operator. Operator is qualified to obtain any
Permits and Environmental Permits necessary for Operator to operate the
Facilities as of the Turnover Date. Without limiting the foregoing, Operator is
not aware of any reason or circumstance that would prevent Operator from
procuring the Operator Required Regulatory Approvals.

                                   ARTICLE 10

                            COVENANTS OF THE PARTIES

         10.1     Conduct of Business Relating to the Facilities. Except with
the prior written consent of Operator (such consent not to be unreasonably
withheld) or as required to effect the transactions contemplated by this
Agreement, during the period from the Effective Date to the Turnover Date, Pepco
will operate the Facilities in the usual, regular and ordinary course in
compliance with Applicable Law and in accordance with Good Utility Practices,
and pursuant to all applicable PJM Requirements, and continue to pay accounts
payable which relate to the Facilities in a timely manner, consistent with past
practice.

         10.2     Consents and Approvals. Pepco and Operator shall cooperate
with each other and (i) prepare and file (or otherwise effect) as soon as
practicable all applications, notices, petitions and filings with respect to and
(ii) use their reasonable best efforts to obtain (A) the Pepco Required
Regulatory Approvals and the Operator Required Regulatory Approvals and (B) any
other consents, approvals or authorizations of any other Governmental
Authorities or third parties that are necessary to consummate the transactions
contemplated by this Agreement, other than such consents, approvals or
authorizations which, if not obtained or made, would not, individually or in the
aggregate, create a Pepco Material Adverse Effect or an Operator Material
Adverse Effect. Without limiting the generality of the foregoing, (1) each Party
agrees to, upon the other Party's request, support such other Party's
applications for regulatory approvals of the transactions contemplated by this
Agreement, and (2) Pepco and Operator agree to defend any lawsuits or other
legal proceedings, whether judicial or administrative, challenging this
Agreement, or the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by

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

(2)      Additional inspections may be undertaken by Operator prior to Agreement
         execution whether before or after bid award.

<PAGE>   423

                                    EXHIBIT G

any Governmental Authority vacated or reversed.

                                   ARTICLE 11

                                EMPLOYEE MATTERS

The Parties shall provide for the employment and pay and benefits of the
employees at the Facilities in accordance with the provisions set forth in
Exhibit III hereto. On the Turnover Date, Pepco shall provide Operator all
personnel files relating to the Transferred Employees, to the extent in Pepco's
possession and readily available and to the extent such files pertain to (1)
skill and development training and resumes, (2) seniority histories, (3) salary
and benefit information, (4) Occupational Safety and Health Act medical reports,
(5) active medical restriction forms and (6) any other matters, disclosure of
which by Pepco to Operator is permitted under Applicable Law without the consent
of the Transferred Employee, but not including any performance evaluations or
disciplinary records (collectively, the "Transferred Employee Records");
provided, however, that Pepco shall be permitted to retain copies, or originals
to the extent it provides Operator with copies of same, of all Transferred
Employee Records.

                                   ARTICLE 12

                                 INDEMNIFICATION

         12.1     Operator's Indemnification. Operator shall indemnify, hold
harmless and defend Pepco, its Affiliates, and their respective officers,
directors, employees, agents, contractors, subcontractors, invitees and
successors, from and against any and all claims, demands, suits, obligations,
payments, liabilities, costs, losses, judgments, damages and expenses (including
the costs and expenses of any and all actions, suits, proceedings, assessments,
judgments, settlements, and compromises relating thereto, reasonable attorneys'
and expert fees and reasonable disbursements in connection therewith) for any
loss or liability, damage to property, injury to or death of any person,
including Pepco's employees, Operator's employees and their Affiliates'
employees, or any third parties, to the extent caused wholly or in part by any
act or omission, negligent or otherwise, by Operator or its officers, directors,
employees, agents, contractors, subcontractors and invitees arising out of or
connected with Operator's performance or breach of this Agreement, or the
exercise by Operator of its rights hereunder.

         12.2     Pepco's Indemnification. Pepco shall indemnify, hold harmless
and defend Operator, its Affiliates, and their respective officers, directors,
employees, agents, contractors, subcontractors, invitees and successors, from
and against any and all claims, demands, suits, obligations, payments,
liabilities, costs, losses, judgments, damages and expenses

<PAGE>   424

                                    EXHIBIT G

(including the costs and expenses of any and all actions, suits, proceedings,
assessments, judgments, settlements, and compromises relating thereto reasonable
attorneys' and expert fees and reasonable disbursements in connection therewith)
for any loss or liability damage to property, injury to or death of any person,
including Operator's employees, Pepco's employees and their Affiliates'
employees, or any third parties, to the extent caused wholly or in part by (i)
any negligent act or omission by Pepco or its officers, directors, employees,
agents, contractors, subcontractors and invitees arising out of or connected
with Pepco's performance of this Agreement, or (ii) the presence of Hazardous
Substances on the Facility Sites prior to the Turnover Date.

         12.3     Indemnification Procedures. Any Party seeking indemnification
under this Agreement shall give the other Party notice of such claim promptly
but in no event later than ninety (90) days from the later of the commencement
of, or the Party's actual knowledge of, such claim or action. Such notice shall
describe the claim in reasonable detail, and shall indicate the amount
(estimated if necessary) of the claim that has been, or may be sustained by,
said Party. The failure to provide such notice shall not excuse any Party from
its continuing obligations hereunder; however, any claim shall be reduced by the
damages resulting from such Party's delay or failure to provide such notice.
Neither Party may settle or compromise any claim for which indemnification is
sought under this Agreement without the prior consent of the other Party;
provided, however, said consent shall not be unreasonably withheld or delayed.

         12.4     Survival. The indemnification obligations of each Party under
this Article 12 for acts or occurrences that occur prior to expiration,
termination, or cancellation of this Agreement shall survive the Effective Date
and continue in full force and effect regardless of whether this Agreement
expires or terminates, or is canceled, surrendered or completed.

         12.5     Limitation of Liability. Except as provided in Section 2.3,
neither Party nor their respective officers, directors, agents, employees,
parents, Affiliates, successors, assigns, contractors or subcontractors shall be
liable to the other Party or its shareholders, subsidiaries, Affiliates,
officers, directors, agents, employees, successors, assigns, contractors or
subcontractors for any claims, demands or suits for consequential, incidental,
special, exemplary, punitive, indirect or multiple damages connected with or
resulting from any breach after the Effective Date of this Agreement (other than
breach of this Article 12), or any actions undertaken in connection with or
related hereto or thereto, including any such damages which are based upon
breach of contract, tort (including negligence and misrepresentation), breach of
warranty, strict liability, statute, operation of law or any other theory of
recovery. In any Contract Year, the aggregate liability of Operator for claims
of Pepco arising out of or relating to the performance or non-performance of
this Agreement shall be limited to one million dollars ($1,000,000) per Contract
Year.

<PAGE>   425

                                    EXHIBIT G

         The foregoing limitations shall not prevent any Party from recovering
damages of the foregoing nature in a claim for indemnification hereunder for
such damages asserted by a third party.

                                   ARTICLE 13

                                  FORCE MAJEURE

         13.1     Force Majeure. Notwithstanding anything in this Agreement to
the contrary, the Parties shall be excused from performing their respective
obligations hereunder and shall not be liable in damages or otherwise to the
extent that a Party is unable to perform or is prevented from performing by an
event of Force Majeure and has complied with Section 13.3. The Parties recognize
and agree that an event of Force Majeure will not relieve any Party of its
obligation to make payments when due hereunder.

         13.2     Definition of Force Majeure. The term "Force Majeure" as used
herein means those causes beyond the reasonable control of the Party affected,
that, by the exercise of reasonable diligence, including Good Utility Practices,
such Party is unable to prevent, avoid, mitigate, or overcome, including the
following: any act of God, changes in Applicable Law, act of the public enemy,
war, civil disturbance, insurrection, riot, fire (unless resulting from the
fault or negligence of the Party asserting Force Majeure), storm or flood,
lightning or explosion (unless resulting from the fault or negligence of the
Party asserting Force Majeure) or any other cause of a similar nature beyond
such Party's reasonable control. Neither the cost to operate and maintain the
Facilities, lack of economic feasibility, adverse general economic conditions
nor economic hardship affecting a Party's performance hereunder due to any
reason other than an event which itself constitutes an event of Force Majeure
shall be deemed an event of Force Majeure.

         13.3     Force Majeure Procedures. A Party shall not be entitled to
rely on the occurrence of an event of Force Majeure as a basis for being excused
from performance of its obligations under this Agreement unless the Party
relying on the event or condition shall: (a) provide prompt written notice of
such Force Majeure event to the other Party, including an estimation of its
expected duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts in accordance with Good Utility
Practice to continue to perform its obligations under this Agreement; (c)
expeditiously take action to correct or cure the event or condition excusing
performance; (d) exercise all reasonable efforts to mitigate or limit damages to
the other Party; and (e) provide prompt notice to the other Party of the
cessation of the event or condition giving rise to its excuse from performance.
Subject to this Section 13.3, any obligation under this Agreement shall be
suspended only to the extent caused by such Force Majeure and only during the
continuance of any inability of performance caused by such Force Majeure but for
no longer period.

<PAGE>   426

                                   ARTICLE 14

                                 CONFIDENTIALITY

         14.1     Confidentiality Obligations of Pepco. Pepco shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or other provisions of law, all documents and information furnished by Operator
in connection with this Agreement. Except to the extent that such information or
documents are (i) generally available to the public other than as a result of a
disclosure by Pepco in breach of this Agreement, (ii) available to Pepco on a
non-confidential basis prior to disclosure to Pepco by Operator, or (iii)
available to Pepco on a non-confidential basis from a source other than
Operator, provided that such source is not known, and by reasonable effort could
not be known, by Pepco to be bound by a confidentiality agreement with Operator
or otherwise prohibited from transmitting the information to Pepco by a
contractual, legal or fiduciary obligation, Pepco shall not release or disclose
such information to any other person, except to its employees, representatives
or agents on a need-to-know basis, in connection with this Agreement who has not
first been advised of the confidentiality provisions of this Section 14.1 and
has agreed in writing to comply with such provisions. Pepco shall promptly
notify Operator if it receives notice or otherwise concludes that the production
of any information subject to this Section 14.1 is being sought under any
provision of law and Pepco shall use reasonable efforts in cooperation with
Operator to seek confidential treatment for such confidential information
provided thereto.

         14.2     Confidentiality Obligations of Operator. Operator shall hold
in confidence, unless compelled to disclose by judicial or administrative
process or other provisions of law, all documents and information furnished by
Pepco in connection with this Agreement. Except to the extent that such
information or documents are (i) generally available to the public other than as
a result of a disclosure by Operator in breach of this Agreement, (ii) available
to Operator on a non-confidential basis prior to disclosure to Operator by
Pepco, or (iii) available to Operator on a non-confidential basis from a source
other than Pepco, provided that such source is not known, and by reasonable
effort could not be known, by Operator to be bound by a confidentiality
agreement with Pepco or otherwise prohibited from transmitting the information
to Operator by a contractual, legal or fiduciary obligation, Operator shall not
release or disclose such information to any other person, except to its
employees, representatives or agents on a need-to-know basis, in connection with
this Agreement who has not first been advised of the confidentiality provisions
of this Section 14.2 and has agreed in writing to comply with such provisions.
Operator shall promptly notify Pepco if it receives notice or otherwise
concludes that the production of any information subject to this Section 14.2 is
being sought under any provision of law and Operator shall use reasonable
efforts in cooperation with Pepco to seek confidential treatment for such
confidential information provided thereto.

<PAGE>   427

                                    EXHIBIT G

         14.3     Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its obligations
under Section 14.1 or 14.2, above, as applicable. Each Party accordingly agrees,
that the other Party shall be entitled to equitable relief, by way of injunction
or otherwise, if a Party breaches or threatens to breach its obligations under
Section 14.1 or 14.2 of this Agreement, as applicable, which equitable relief
shall be granted without bond or proof of damages, and the receiving Party shall
not plead in defense that there would be an adequate remedy at law.

                                   ARTICLE 15

                               DISPUTE RESOLUTION

         15.1     Disputes. Except as provided in Article 4, a Party with a
claim or dispute under this Agreement shall submit to the other Party a
notification of such claim or dispute within sixty (60) days after the
circumstances that gave rise to the claim or the question or issue in dispute.
The notification shall be in writing and shall include a concise statement of
the claim or the issue or question in dispute, a statement of the relevant facts
and documentation to support the claim. In the event the Parties are unable, in
good faith, to resolve their disagreement in a manner satisfactory to both
Parties within thirty (30) days after receipt by a Party of a notification
specifying the claim, issue or question in dispute, the Parties shall refer the
dispute to their respective senior management. If, after using their good faith
best efforts to resolve the dispute, senior management cannot resolve the
dispute within thirty (30) days, the Parties shall, except as provide in Article
4, utilize the arbitration procedures set forth below in Section 15.2 to resolve
a dispute, provided that nothing herein or therein shall prohibit Pepco or
Operator from at any time requesting from a court of competent jurisdiction a
temporary restraining order, preliminary injunction, or other similar form of
equitable relief to enforce performance of the provisions of this Agreement.

         15.2     Arbitration.

                  (a)      Any arbitration initiated under this Agreement shall
be conducted before a single neutral arbitrator appointed by the Parties within
thirty (30) days of receipt by respondent of the demand for arbitration. If the
Parties are unable to agree on an arbitrator, such arbitration shall be
appointed by the American Arbitration Association. Unless the Parties agree
otherwise, the arbitrator shall be an attorney or retired judge with at least
fifteen (15) years of experience, and shall not have any current or past
substantial business or financial relationships with any Party to the
arbitration. If possible, the arbitrator shall have experience in the electric
utility industry. Unless otherwise agreed, the arbitration shall be conducted in
accordance with the American Arbitration

<PAGE>   428

                                    EXHIBIT G

Association's Commercial Arbitration Rules, then in effect, in the District of
Columbia. Any arbitration proceedings, decision or award rendered hereunder and
the validity, effect and interpretation of this arbitration agreement shall be
governed by the Federal Arbitration Act of the United States, 9 U.S.C. Sections
1 et seq.

                  (b)      The arbitration shall, if possible, be concluded not
later than six (6) months after the date that it is initiated. The arbitrator
shall be authorized only to interpret and apply the provisions of this Agreement
or any related agreements entered into under this Agreement and shall have no
power to modify or change any of the above in any manner. The arbitrator shall
have no authority to award punitive or multiple damages or any damages
inconsistent with this Agreement. The arbitrator shall, within thirty (30) days
of the conclusion of the hearing, unless such time is extended by agreement of
the Parties, notify the Parties in writing of his or her decision, stating his
or her reasons for such decision and separately listing his or her findings of
fact and conclusions of law. The decision of the arbitrator rendered in such a
proceeding shall be final and binding on the Parties. Judgment on the award may
be entered upon it in any court having jurisdiction.

                                   ARTICLE 16

                            MISCELLANEOUS PROVISIONS

         16.1     Expenses. Except to the extent specifically provided herein,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be borne by the Party incurring such
costs and expenses, whether or not the transactions contemplated hereby are
consummated.

         16.2     Amendment and Modification; Extension; Waiver. This Agreement
may be amended, modified or supplemented only by an instrument in writing signed
on behalf of each of the Parties. Either Party may (i) extend the time for the
performance of any of the obligations or other acts of the other Party, (ii)
waive any inaccuracies in the representations and warranties of the other Party
contained in this Agreement or (iii) waive compliance by the other Party with
any of the agreements or conditions contained in this Agreement. Any agreement
on the part of a Party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such Party. The
failure of a Party to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights.

         16.3     Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (as of the time of delivery or, in the
case of a telecopied communication, of confirmation) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier

<PAGE>   429

                                    EXHIBIT G

(providing proof of delivery) to the Parties at the following addresses (or at
such other address for a Party as shall be specified by like notice):

                  if to Pepco, to:

                  Potomac Electric Power Company
                  1900 Pennsylvania Avenue, N.W.
                  Washington, D.C.  20068
                  Telecopier:  (202) 261-7889
                  Attention:  William T. Torgerson, General Counsel

                  with a copy to:

                  Dickstein Shapiro Morin & Oshinsky LLP
                  2101 L Street, N.W.
                  Washington, D.C. 20037
                  Telecopier: (202) 887-0689
                  Attention: Kenneth M. Simon, Esq.

                  if to Operator, to:

                  Southern Energy, Inc.
                  900 Ashwood Parkway
                  Suite 500
                  Atlanta, Georgia  30338-4780
                  Telecopier: (770) 821-6575
                  Attention:

                  with a copy to:

                  Troutman Sanders LLP
                  1300 I Street, NW
                  Suite 300 East
                  Washington, DC  20005
                  Telecopier: (202) 274-2994
                  Attention:  Benjamin L. Israel, Esq.

         16.4     Assignment; No Third Party Beneficiaries.

                  (a)      This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the Parties and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any Party,

<PAGE>   430

                                    EXHIBIT G

including by operation of law, without the prior written consent of the other
Party, except (i) in the case of Pepco, (A) to an Affiliate of Pepco, (B) to a
third party in connection with the transfer of Pepco's transmission system to
such third party or (C) to a lending institution or trustee in connection with a
pledge or granting of a security interest in all or any part of the this
Agreement, and (ii) in the case of Operator, to a lending institution or trustee
in connection with a pledge or granting of a security interest in this
Agreement; provided, however, that no assignment or transfer of rights or
obligations by either Party shall relieve it from the full liabilities and the
full financial responsibility, as provided for under this Agreement, unless and
until the transferee or assignee shall agree in writing to assume such
obligations and duties and the other Party has consented in writing to such
assumption.

                  (b)      Nothing in this Agreement is intended to confer upon
any other person except the Parties any rights or remedies hereunder or shall
create any third party beneficiary rights in any person, including, with respect
to continued or resumed employment, any employee or former employee of Pepco
(including any beneficiary or dependent thereof). No provision of this Agreement
shall create any rights in any such persons in respect of any benefits that may
be provided, directly or indirectly, under any employee benefit plan or
arrangement except as expressly provided for thereunder.

         16.5     Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the District of Columbia (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).

         16.6     Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

         16.7     Interpretation. When a reference is made in this Agreement to
an Article, Section, Appendix, Exhibit or Schedule, such reference shall be to
an Article or Section of, or Appendix, Exhibit or Schedule to, this Agreement
unless otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation" or equivalent words. The words
"hereof", "herein" and "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. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms and to the
masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument, statute, regulation, rule or order defined or referred to
herein or in any agreement or instrument

<PAGE>   431

                                    EXHIBIT G

that is referred to herein means such agreement, instrument, statute,
regulation, rule or order as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver or
consent and (in the case of statutes, regulations, rules or orders) by
succession of comparable successor statutes, regulations, rules or orders and
references to all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns. Each
Party acknowledges that it has been represented by counsel in connection with
the review and execution of this Agreement, and, accordingly, there shall be no
presumption that this Agreement or any provision hereof be construed against the
Party that drafted this Agreement.

         16.8     Jurisdiction and Enforcement. Except as provided in Articles 4
and 15, each of the Parties irrevocably submits to the exclusive jurisdiction of
(i) the Superior Court of the District of Columbia, and (ii) the United States
District Court for the District of Columbia, for the purposes of any suit,
action or other proceeding arising out of this Agreement or any transaction
contemplated hereby. Except as provided in Articles 4 and 15, each of the
Parties agrees to commence any action, suit or proceeding relating hereto either
in the United States District Court for the District of Columbia or, if such
suit, action or proceeding may not be brought in such court for jurisdictional
reasons, in the Superior Court for the District of Columbia. Except as provided
in Articles 4 and 15, each of the Parties further agrees that service of
process, summons, notice or document by hand delivery or U.S. registered mail at
the address specified for such Party in Section 16.3 (or such other address
specified by such Party from time to time pursuant to Section 16.3) shall be
effective service of process for any action, suit or proceeding brought against
such Party in any such court. Except as provided in Articles 4 and 15, each of
the Parties irrevocably and unconditionally waives any objection to the laying
of venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the Superior Court for the District of
Columbia, or (ii) the United States District Court for the District of Columbia,
and hereby further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.

         16.9     Entire Agreement. This Agreement and the Asset Sale Agreement,
including the Appendices, Exhibits, Schedules, documents, certificates and
instruments referred to herein or therein and other contracts, agreements and
instruments contemplated hereby or thereby, embodies the entire agreement and
understanding of the Parties in respect of the transactions contemplated by this
Agreement. There are no restrictions, promises, representations, warranties,
covenants or undertakings other than those expressly set forth or referred to
herein or therein. This Agreement and the Asset Sale Agreement supersede all
prior agreements and understandings between the Parties with respect to the
transactions contemplated by this Agreement.

<PAGE>   432

                                    EXHIBIT G

         16.10    Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the Parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the Parties as closely as possible to the fullest extent permitted by
Applicable Law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.

         16.11    Conflicts. Except with respect to the indemnification,
liability, default and remedies provisions contained herein or as otherwise
expressly provided herein, in the event of any conflict or inconsistency between
the terms of this Agreement and the terms of the Asset Sale Agreement, the terms
of the Asset Sale Agreement shall prevail.

         16.12    Attorney-in-Fact. Pepco hereby appoints _______________, a
_______________ of Pepco, to be its duly authorized Attorney-in-Fact and in
Pepco's name to execute, acknowledge and deliver this Agreement as its act and
deed. Operator hereby appoints _____________, its ______________, to be its duly
authorized Attorney-in-Fact and in Operator's name to execute, acknowledge and
deliver this Agreement as its act and deed.

<PAGE>   433

                                   EXHIBIT G

         IN WITNESS WHEREOF, Pepco and Operator have caused this Operation and
Maintenance Agreement to be signed by their respective duly authorized officers
as of the date first above written.

                                    POTOMAC ELECTRIC POWER COMPANY

                                    By:
                                        ---------------------------------------
                                          Name:
                                          Title:

                                   [OPERATOR]

                                    By:
                                        ---------------------------------------
                                          Name:
                                          Title:

<PAGE>   434

                                    EXHIBIT G

                              )
DISTRICT OF COLUMBIA          )  SS:
                              )

         The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for Pepco
as named in the foregoing Instrument, personally appeared before me in said
jurisdiction, and as such attorney-in-fact and by virtue of the authority vested
in him by said Instrument, acknowledged the same to be the act and deed of said
corporation, and that he executed and delivered the same as such.

         WITNESS my hand and official seal this ___ day of ___________, 2000.

                                          ------------------------------
My Commission Expires:                    Notary Public in and for
                                          the District of Columbia

<PAGE>   435

                                   EXHIBIT G

                              )
DISTRICT OF COLUMBIA          )  SS:
                              )

         The undersigned, a Notary Public in and for the jurisdiction aforesaid,
does hereby certify that ______________, personally known to me (or
satisfactorily proven) to be the person who signed as attorney-in-fact for
Operator named in the foregoing Instrument, personally appeared before me in
said jurisdiction, and as such attorney-in-fact and by virtue of the authority
vested in him by said Instrument, acknowledged the same to be the act and deed
of said corporation, and that he executed and delivered the same as such.

         WITNESS my hand and official seal this ___ day of ___________, 2000.

                                          ------------------------------
My Commission Expires:                    Notary Public in and for
                                          the District of Columbia

<PAGE>   436

                                   APPENDIX A

                                   DEFINITIONS

         As used in this Agreement, the following terms have the following
meanings:

         "Affiliate" shall have the meaning set forth in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended.

         "Agreement" means this Operation and Maintenance Agreement dated _____,
2000 and any schedules, appendices or exhibits attached thereto.

         "Applicable Law" means all current and future Federal, state and local
laws (including common law and Environmental Laws), treaties, regulations,
rules, ordinances, codes, decrees, judgments, directives or orders (including
consent orders) and Permits, in each case, relating to the Services or the
Facilities or otherwise related to the transactions contemplated by this
Agreement.

         "Business Day" means any day other than Saturday, Sunday and any day
which is a legal holiday or a day on which banking institutions in Washington,
D.C. are authorized or required by law or other action of a Governmental
Authority to close.

         "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1984.

         "Capability Demonstration Test" means the PJM Summer Capability
Demonstration Test.

         "Capital Budget" shall have the meaning set forth in Section 4.2.
Improvement projects with a cost of greater than $500,000 shall be included in
the Capital Budget, as such amount may be revised by Pepco in consideration of
accounting or tax regulations.

         "Cause" means (a) the commission of any act by an employee constituting
financial dishonesty against Operator (or any of its affiliates), or (b)
substantial violations of directions from a supervising executive, repeated poor
performance or nonperformance of such employee's duties, responsibilities or
activities; provided that, in the case of clause (b) only, Operator (or any of
its affiliates) has given the employee written notice of such violations, poor
performance or nonperformance and the employee has failed to cure.

         "Code" means the United States Internal Revenue Code of 1986, as
amended.

         "Contract Year" means a calendar year, provided however that the first
Contract Year shall commence on the Turnover Date and end on December 31, 2001
("First Contract Year") and any financial obligations stated on the

<PAGE>   437

                                    EXHIBIT G

basis of a Contract Year shall be adjusted by multiplying those obligations by a
fraction of which the numerator shall be number of days in that Contract Year
and the denominator shall be 365.

         "Effective Date" means the date set forth in the preamble hereto.

         "EFORD" means the "Equivalent Forced Outage Rate Demand" as determined
in accordance with PJM procedures.

         "EFORD Standard" means an average EFORD rating, calculated as the
average of the EFORDS of all Units of a Facility in a Contract Year: for
purposes of determining liquidated damages pursuant to Section 2.4.1(a) for
Benning, eighteen percent (18%), and for Buzzard, twelve percent (12%); and for
purposes of determining Performance Bonus pursuant to Sections 2.4.1(b) ten
percent (10%).

         "Emergency" means any event or circumstance arising in the course of
the operations and maintenance of the Facilities which: (i) requires prompt
actions; and (ii) in the reasonable opinion of Operator in accordance with Good
Utility Practices, could be expected to: (A) endanger the health or safety of
any employee or any person at or in the vicinity of the Facilities or the
Facility Sites, (B) have a material adverse effect on the transmission system,
or (C) have a material adverse effect on the Facilities or the Facility Sites.

         "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

         "Employees" shall have the meaning set forth in Exhibit III.

         "Environmental Laws" means all current and future Federal, state, local
and foreign laws (including common law), treaties, regulations, rules,
ordinances, codes, decrees, judgments, directives or orders (including consent
orders) and Environmental Permits, in each case, relating to pollution or
protection of the environment or natural resources, including laws relating to
Releases or threatened Releases, or otherwise relating to the generation,
manufacture, processing, distribution, use, treatment, storage, arrangement for
disposal, transport, recycling or handling, of Hazardous Substances.

         "Environmental Permits" means the permits, licenses, consents,
approvals and other governmental authorizations with respect to Environmental
Laws relating primarily to the power generation operations of the Facilities.

         "Escalation Index" means three percent (3%) per Contract Year.

         "FERC" means the Federal Energy Regulatory Commission or its successor.

<PAGE>   438
                                    EXHIBIT G

         "Facilities" means the Buzzard Point Generating Station and the Benning
Generating Station.

         "Facility Sites" means the real property on which the Facilities are
located as set forth in Exhibit I.

         "Force Majeure" shall have the meaning set forth in Section 13.2.

         "Good Utility Practices" means any of the applicable practices, methods
and acts:

                  (i)      required by FERC, NERC, MAAC, PJM, the PJM System
Operator, or the successor of any of them, whether or not the Party whose
conduct is at issue is a member thereof;

                  (ii)     required by Applicable Law;

                  (iii)    required by the Pepco Interconnection Standards or
the policies and standards of Pepco relating to emergency operations;

                  (iv)     otherwise engaged in or approved by a significant
portion of the electric utility industry during the relevant time period; which,
in the exercise of reasonable judgment in light of the facts known at the time
the decision was made, could have been expected to accomplish the desired result
at a reasonable cost consistent with law, regulation, good business practices,
reliability, safety, and expedition. Good Utility Practices are not intended to
be limited to the optimum practice, method, or act to the exclusion of all
others, but rather to be acceptable practices, methods, or acts generally
accepted in the region.

         "Governmental Authority" means any court, administrative or regulatory
agency or commission or other governmental entity or instrumentality or any
department thereof.

         "Hazardous Substances" means (i) any petrochemical or petroleum
products, crude oil or any fraction thereof, ash, radioactive materials, radon
gas, asbestos in any form, urea formaldehyde foam insulation or polychlorinated
biphenyls, (ii) any chemicals, materials, substances or wastes defined as,
included in, or that are alleged or determined by any Person or Governmental
Authority to be included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "restricted hazardous materials," "extremely
hazardous substances," "toxic substances," "PCBs," "contaminants," "asbestos" or
"pollutants" or similar term in any Environmental Law, (iii) any other chemical,
material, substance or waste which is prohibited, limited or regulated by any
Environmental Law or (iv) any noise, electromagnetic radiation, and any other
substance or energy which causes or is alleged to cause personal injury
(including wrongful death, pain,

<PAGE>   439

                                    EXHIBIT G

suffering and loss of consortium) or property damage (including nuisance,
trespass and diminution of value).

         "IBEW" means Local Union #1900 of the International Brotherhood of
Electrical Workers.

         "IBEW Collective Bargaining Agreement" means that certain Collective
Bargaining Agreement, between Pepco and the IBEW, effective December 8, 1998, as
amended from time to time.

         "Income Tax" means any Federal, state and local Tax or surtax (i) based
upon, measured by or calculated with respect to income, profits or receipts, or
(ii) based upon, measured by or calculated with respect to multiple bases
(including corporate franchise taxes) if one or more of the bases on which such
Tax may be based, measured by or calculated with respect to, is described in
clause (i), in each case, together with any interest, penalties, or additions to
such Tax.

         "Information Memorandum" means the Information Memorandum, prepared on
behalf of Pepco, describing the Facilities, and the materials delivered with
such Information Memorandum, as such Information Memorandum and such materials
may have been amended or supplemented.

         "Initial Term" shall have the meaning set forth in Section 7.1.

         "MAAC" means the Mid-Atlantic Area Council, a reliability council under
Section 202 of the Federal Power Act established pursuant to the MAAC Agreement,
dated August 1, 1994, as amended from time to time, and any successor entity
thereto.

         "NERC" means the North American Electric Reliability Council and any
successor entity thereto.

         "Non-Union Employees" shall have the meaning set forth in Exhibit III.

         "Notice" shall mean a written notice satisfying the requirements of
Section 16.3.

         "Operating Budget" shall have the meaning set forth in Section 4.1.

         "Operator Event of Default" shall have the meaning set forth in Section
7.2.1.

         "Operator Material Adverse Effect" shall have the meaning set forth in
Section 9.3(a).

<PAGE>   440

                                    EXHIBIT G

         "Operator Required Regulatory Approvals" shall have the meaning set
forth in Section 9.3(b).

         "Operator's Fee" shall have the meaning set forth in Section 5.1.

         "Operator's Pension Plan" shall have the meanings set forth in Exhibit
III.

         "Operator's Savings Plan" shall have the meaning set forth in Exhibit
III.

         "Party or Parties" shall have the meaning set forth in the Preamble.

         "Peak Season" shall mean the months of May, June, July, August and
September of any Contract Year.

         "Pepco Event of Default" shall have the meaning set forth in Section
7.2.3.

         "Pepco Interconnection Standards" means Pepco's Interconnection and
Parallel Operating Guidelines as amended from time to time. A copy of the
existing Pepco Interconnection Standards is attached hereto as Exhibit IV.

         "Pepco Material Adverse Effect" shall have the meaning set forth in
Section 8.3(a).

         "Pepco Required Regulatory Approvals" shall have the meaning set forth
in Section 8.3(b).

         "Pepco's Pension Plan" shall have the meaning set forth in Exhibit III.

         "Pepco's Savings Plan" shall have the meaning set forth in Exhibit III.

         "Period" shall have the meaning set forth in Section 5.2.

         "Permits" means the permits, licenses, consents, approvals and other
governmental authorizations (other than with respect to Environmental Laws)
primarily relating to the power generation operations of the Facilities.

         "Person" means any individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated organization or Governmental
Authority.

         "PJM" means the Pennsylvania-New Jersey-Maryland interconnected power
pool operated under the PJM Agreement and any successor thereto, including any
regional transmission operator/independent system operator, transco or any other
independent system administrator that possesses operational or planning

<PAGE>   441

                                    EXHIBIT G

control over Pepco's transmission system.

         "PJM Agreement" means the Amended and Restated Operating Agreement of
the PJM Interconnection LLC, dated as of June 2, 1997.

         "PJM Control Area" shall mean the control area recognized by NERC as
the PJM Control Area.

         "PJM Interconnection LLC" means the independent system operator of the
PJM Control Area pursuant to the PJM Agreement and the PJM Tariff.

         "PJM Reliability Agreement" means the Reliability Assurance Agreement
dated June 2, 1997 among the load serving entities of PJM.

         "PJM Requirements" means the rules, regulations or other requirements
of PJM or MAAC contained or adopted pursuant to the PJM Agreement, the PJM
Reliability Agreement or the PJM Tariff which are applicable to Pepco and
Operator, with respect to the Facilities.

         "PJM System Operator" shall mean the PJM Interconnection energy control
center staff responsible for central dispatch as provided in the PJM Agreement.

         "PJM Tariff" means the PJM Open Access Transmission Tariff providing
transmission service within the PJM Control Area.

         "Qualified Offer" shall have the meaning set forth in Exhibit III.

         "Regulatory Approval" means with respect to a Party, any consent or
approval of, filing with, or notice to, any Governmental Authority that is
necessary for the execution and delivery of the Agreement by such Party or the
consummation thereby of the transactions contemplated hereby.

         "Release" means any release, spill, emission, leaking, dumping,
injection, pouring, deposit, disposal, discharge, dispersal, leaching or
migration into the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata) or within any building,
structure, facility or fixture.

         "Services" means all activities to be performed by Operator hereunder.

         "Taxes" means all taxes, surtaxes, charges, fees, levies, penalties or
other assessments imposed by any United States Federal, state or local or
foreign taxing authority, including Income Taxes, excise, property, sales,
transfer, franchise, special franchise, payroll, recording, withholding,

<PAGE>   442

                                    EXHIBIT G

social security or other taxes, including any interest, penalties or additions
attributable thereto.

         "Term" shall have the meaning set forth in Section 7.1.

         "Termination Date" means the last day of the Term.

         "Total Cash Compensation" shall have the meaning set forth in Exhibit
III.

         "Transferred Employee Records" shall have the meaning set forth in
Article 11.

         "Transferred Employees" shall have the meaning set forth in Exhibit
III.

         "Transferred Non-Union Employees" shall have the meaning set forth in
Exhibit III.

         "Transferred Savings Employees" shall have the meaning set forth in
Exhibit III.

         "Transferred Union Employees" shall have the meaning set forth in
Exhibit III.

         "Turnover Date" shall mean the date established pursuant to Section
6.1.

         "Turnover Date Benefits" shall have the meaning set forth in Exhibit
III.

         "Union Employees" shall have the meaning set forth in Exhibit III.

         "Units" shall mean each of (i) the two (2) steam turbines at Benning
and (ii) the sixteen (16) combustion turbines at Buzzard Point.

         "WARN Act" means the Federal Worker Adjustment Retraining and
Notification Act of 1988, as amended.

<PAGE>   443

                                    EXHIBIT H

                              SITE LEASE AGREEMENT

                                 by and between

                         POTOMAC ELECTRIC POWER COMPANY

                                       and

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

<PAGE>   444

                                    EXHIBIT H

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                      Page

<S>         <C>                                                       <C>
ARTICLE 1   PREMISES                                                    1
ARTICLE 2   TERM                                                        2
ARTICLE 3   DELIVERY OF THE PREMISES TO TENANT                          2
ARTICLE 4   ACCEPTANCE OF THE PREMISES BY TENANT                        2
ARTICLE 5   RENTAL                                                      3
ARTICLE 6   PAYMENT OF REAL ESTATE TAXES                                4
ARTICLE 7   OPERATION, MANAGEMENT AND MAINTENANCE                       6
ARTICLE 8   UTILITIES                                                   6
ARTICLE 9   USE                                                         6
ARTICLE 10  LAWS, ORDINANCES AND REQUIREMENTS OF PUBLIC
            AUTHORITIES                                                 7
ARTICLE 11  QUIET ENJOYMENT                                             7
ARTICLE 12  ALTERATIONS                                                 8
ARTICLE 13  LIENS                                                       8
ARTICLE 14  REPAIRS                                                     9
ARTICLE 15  INSURANCE                                                   9
ARTICLE 16  DAMAGE BY FIRE OR OTHER CASUALTY                            10
ARTICLE 17  CONDEMNATION                                                10
ARTICLE 18  ASSIGNMENT AND SUBLETTING                                   11
ARTICLE 19  INDEMNIFICATION                                             11
ARTICLE 20  SURRENDER OF THE PREMISES                                   11
ARTICLE 21  LEASEHOLD MORTGAGES                                         12
ARTICLE 22  PRIORITY                                                    14
ARTICLE 23  DEFAULT AND REMEDIES                                        15
ARTICLE 24  ESTOPPEL CERTIFICATES                                       15
ARTICLE 25  SECURITY DEPOSIT                                            16
ARTICLE 26  FORCE MAJEURE                                               16
ARTICLE 27  NOTICES                                                     17
ARTICLE 28  MISCELLANEOUS                                               18
</TABLE>

Appendix and Exhibits:
<TABLE>
      <S>               <C>
      Appendix A        Definitions
      Exhibit A         Legal Description of the Premises
      Exhibit A-1       Description of the Building Addition
      Exhibit B         Legal Description of the Landlord's Land
      Exhibit C         Form of Easement Agreement
</TABLE>

<PAGE>   445

                                    EXHIBIT H

                              SITE LEASE AGREEMENT

         THIS SITE LEASE AGREEMENT (as amended from time to time and with all
Appendices and Exhibits attached hereto, this "Lease") is made as of the ___ day
of ______________, 2000 by and between Potomac Electric Power Company, a
District of Columbia and Virginia corporation ("Landlord"), and
_______________________________ ("Tenant"). Landlord and Tenant are sometimes
hereafter collectively referred to herein as the "Parties."

                               W I T N E S S E T H

         WHEREAS, Landlord and Tenant have entered into an Asset Purchase and
Sale Agreement for Generating Plants and Related Assets, dated June 7, 2000 (as
amended from time to time, the "Asset Sale Agreement"), for the sale by Landlord
to Tenant of, among other things, the Potomac River Station generating facility
and associated generating assets (the "Generating Station"); and

         WHEREAS, Tenant desires to lease from Landlord the land upon which the
Generating Station is located, consisting of approximately ___ acres and as more
particularly described in Exhibit A hereto, together with all appurtenances
thereto including, without limitation, that certain Building Addition more
particularly described in Exhibit A-1 attached hereto (the "Building Addition"),
but excluding the Generating Station and all other improvements besides the
Building Addition located upon such land (collectively, the "Premises").

         NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and intending to be
legally bound hereby, the Parties hereto agree as follows:

                                    ARTICLE 1

                                    PREMISES

         Section 1.01 Lease of Premises. Landlord leases to Tenant, and Tenant
leases from Landlord, for the Term (as defined below) and subject to the
provisions hereof, to each of which Landlord and Tenant mutually agree, the
Premises. The Premises adjoins a parcel of land owned by Landlord upon which is
located a transmission and distribution substation and certain other
transmission and distribution facilities owned by Landlord (collectively, the
"Transmission and Distribution Facilities"). The overall parcel owned by
Landlord that includes the Premises and the adjoining land upon which the
Transmission and Distribution Facilities are located is more particularly
described in Exhibit B (the "Landlord's Land"). Tenant shall grant to Landlord
certain access and other rights to the Premises, and Landlord shall

<PAGE>   446

                                    EXHIBIT H

grant to Tenant certain access and other rights to the Landlord's Land, pursuant
to an Easement Agreement substantially in the form attached hereto as Exhibit C.

                                    ARTICLE 2

                                      TERM

         Section 2.01 Term. The term of this Lease (the "Term") shall commence
upon consummation of the Closing (as defined in the Asset Sale Agreement) (the
"Commencement Date") and shall continue for a term of ninety-nine (99) years
unless sooner terminated as provided herein.

         The first "Lease Year" shall be twelve (12) months, commencing on the
Commencement Date, except if the Commencement Date is not the first day of a
month, the first "Lease Year" shall include the partial month in which the
Commencement Date occurs plus the ensuing twelve (12) month period. Each
subsequent "Lease Year" shall mean each subsequent twelve (12) month period
commencing immediately upon the expiration of the prior Lease Year.

         Section 2.02 Quiet Enjoyment. Provided Tenant performs all of Tenant's
obligations under this Lease, including the payment of Rental (as defined
below), Tenant shall, during the Term, enjoy the Premises without disturbance
from Landlord or any other persons claiming or acting by, through, or under
Landlord; subject, however, to the terms of this Lease. This covenant and all
other covenants of Landlord now or hereafter in this Lease shall be binding upon
Landlord and its successors.

                                    ARTICLE 3

                       DELIVERY OF THE PREMISES TO TENANT

         Tenant hereby acknowledges Landlord's delivery of possession of the
Premises to Tenant in the condition required pursuant to this Lease.

                                    ARTICLE 4

                      ACCEPTANCE OF THE PREMISES BY TENANT

         Tenant hereby acknowledges and agrees that the Premises are in good and
tenantable condition, and accepts same in "as is" condition, and agrees that
Landlord has no obligation to perform any work in connection with the Premises
to make same fit for Tenant's use and occupancy pursuant to this Lease.

<PAGE>   447

                                    EXHIBIT H

                                    ARTICLE 5

                                     RENTAL

         Section 5.01       Payment of Annual Base Rental. Commencing on the
Commencement Date, Tenant shall pay to Landlord for each Lease Year, an annual
rental ("Annual Base Rental") in the amount set forth in Section 5.02 hereof.

         Section 5.02      Annual Base Rental. Tenant hereby covenants and
agrees to pay Landlord, as Annual Base Rental for the Premises on the first day
of each Lease Year and in the manner provided herein, an amount equal to $1.00.
Tenant may prepay the Annual Base Rental for the Term (or portions thereof) at
any time.

         Section 5.03      Payment of Rental. All Rental shall be paid to
Landlord by Tenant when due, without deduction, offset or counterclaims unless
otherwise permitted herein, or by applicable state law, in lawful money of the
United States, at Landlord's address for notices as specified in Article 27
hereof, or such other place as Landlord may from time to time designate. The
term "Rental" as used herein means the then applicable Annual Base Rental and
Real Estate Taxes (as hereinafter described) to the extent such Real Estate
Taxes are required to be paid by Tenant to Landlord pursuant to Section 6.01(c).
All past due amounts of Rental shall bear interest, which interest shall be
deemed to be Rental, from the date due until paid at a rate per annum equal to
two (2) percentage points above the prime rate of interest (the "Prime Rate")
charged by U.S. money center commercial banks as published in The Wall Street
Journal, such prime rate to change from time to time as and when the change is
reported; provided, however, that any interest payable pursuant to this Section
5.03 shall never exceed the maximum rate of interest from time to time permitted
to be charged under applicable law to Tenant with respect to the indebtedness
for which such interest is charged under this Lease (the "The Highest Lawful
Rate"). If The Wall Street Journal ceases to publish the prime rate of interest
charged by U.S. money center commercial banks, Landlord shall have the right to
reasonably substitute the prime rate of interest published by another reasonably
comparable financial newspaper. In addition, if any amount of Rental is not paid
within ten (10) days after written notice that the same is due and payable,
Tenant shall pay to Landlord a late charge, which late charge shall be deemed to
be Rental, in the amount of four percent (4%) of the amount in default.

         Section 5.04      Rental Not Based on Income. It is agreed by Landlord
and Tenant that no Rental for the use, occupancy or utilization of the Premises
shall be, or is, based in whole or in part on the net income or profits derived
by any person from the Generating Station or the Premises.

         Section 5.05      Application of Rental. Payment by Tenant or receipt
by Landlord of lesser amounts of Rental than that stipulated in this Lease shall
be applied to amounts owing by Tenant to Landlord in any order

<PAGE>   448

                                    EXHIBIT H

determined by Landlord. No endorsement or statement on any check or any letter
accompanying any check or payment as Rental shall be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rental or pursue any other
remedy provided in this Lease. Any credit due to Tenant hereunder by reason of
overpayment of Rental shall first be applied to any Rental owed to Landlord by
Tenant if Tenant shall be in default when said credit shall be owed.

                                    ARTICLE 6

                          PAYMENT OF REAL ESTATE TAXES

         Section  6.01     Real Estate Taxes.

                  (a)      The term "Real Estate Taxes" means the total of all
taxes and assessments, general and special, ordinary and extraordinary, foreseen
and unforeseen, including assessments for public improvements and betterments
assessed, levied or imposed, directly or indirectly, with respect to the
Premises. Real Estate Taxes shall not include any income taxes, inheritance
taxes or gift taxes.

                  (b)      To the extent that the Premises and the Generating
Station constitute a separate tax lot or parcel (or separate tax lots or
parcels): (i) Tenant shall pay directly to the pertinent taxing authority all
Real Estate Taxes due with respect to the Premises and the Generating Station
during the Term, such payment obligations to commence upon the Commencement Date
(subject to adjustment between Landlord and Tenant during the first and last
years of the Term if such Lease years do not coincide with the pertinent fiscal
year for Real Estate Taxes); (ii) Tenant shall timely provide evidence to
Landlord of the timely payment of said Real Estate Taxes; and (iii) Tenant shall
have the right to contest any Real Estate Taxes (in Landlord's name, provided
Tenant indemnifies Landlord on account thereof), provided it does so at its own
cost and expense by appropriate proceedings conducted in good faith. In the
event Tenant contests any such Real Estate Taxes, it shall furnish Landlord with
a detailed description of the contested matter and all actions taken by it in
connection therewith. To the extent that the Premises constitutes a separate tax
lot, but the Real Estate Taxes attributable thereto (including the Generating
Station) are not billed separately to Tenant, Landlord shall promptly, upon its
receipt of the same, submit to Tenant copies of all bills for such Real Estate
Taxes for direct payment by Tenant to the pertinent taxing authority. Landlord
shall be solely responsible for any penalties which may be assessed as a result
of its failure to promptly submit to Tenant the bills required pursuant to this
Section 6.01(b).

                  (c)      To the extent that the Premises and the Generating
Station do not constitute a separate tax lot or parcel (or separate tax lots or
parcels), and are taxed as part of a larger tax lot or parcel which consists of
or includes Landlord's Land: (i) the Real Estate Taxes attributable to the
Premises and the Generating Station shall be that portion of the overall Real

<PAGE>   449

                                    EXHIBIT H

Estate Taxes payable with respect to such larger tax lot that the aggregate
assessed tax value of the Generating Station and the Premises bears to the
aggregate assessed tax value of the larger tax lot and all improvements located
within said larger tax lot, provided that if such assessed tax values are not
separately stated, such Real Estate Taxes shall be based upon relative fair
market values as reasonably determined by Landlord in good faith; (ii) Landlord
shall periodically provide to Tenant a written statement showing the amount of
Real Estate Taxes attributable to the Premises and the Generating Station
(determined as aforesaid) then due and payable, which statement shall attach a
copy of the tax bill due and payable, and shall show in reasonable detail the
amount thereof attributable to the Premises (determined as aforesaid); and (iii)
Tenant shall pay to Landlord the amount of Real Estate Taxes attributable to the
Premises and the Generating Station within thirty (30) days of receipt of
Landlord's statement. Landlord shall provide Tenant with reasonable proof of
payment of Real Estate Taxes attributable to the larger tax lot reasonably
promptly after Tenant's request therefor. Landlord shall have the right to
contest the amount of Real Estate Taxes attributable to the larger tax lot or
parcel by appropriate proceedings diligently conducted in good faith and
provided Landlord shall have satisfactorily bonded the amount of contested Real
Estate Taxes or set up reserves therefor adequate under generally accepted
accounting principles, and Tenant shall continue to pay to Landlord, as and when
required hereunder, Tenant's proportionate share (determined as aforesaid) of
the Real Estate Taxes attributable to the Premises and the Generating Station,
and shall also pay to Landlord Tenant's proportionate share (determined as
aforesaid) of the reasonable costs of any such contest. The benefit of any
refund of Real Estate Taxes obtained as a result of any such contest shall be
shared by Landlord and Tenant in the proportion that such refunded Real Estate
Taxes were paid (or payable) by Landlord and Tenant. In the event Landlord
contests any such Real Estates Taxes, it shall furnish Tenant with a description
of the contested matter and all actions to be taken by it in connection
therewith. In the event Tenant desires to contest the amount of Real Estate
Taxes attributable to the larger tax lot or parcel, Tenant shall furnish to
Landlord a detailed description of the contested matter and all actions to be
taken by it in connection with such contest, and Tenant shall continue to pay to
Landlord, as and when required hereunder, Tenant's proportionate share
(determined as aforesaid) of the Real Estate Taxes attributable to the Premises
and the Generating Station. Any such contest by Tenant shall be conducted
pursuant to appropriate proceedings diligently conducted by Tenant in good faith
and at Tenant's own cost and expense. Any refund of Real Estate Taxes obtained
as a result of any such contest by Tenant (after reimbursement to Tenant of the
reasonable costs of any such contest) shall be shared by Landlord and Tenant in
the proportion that such refunded Real Estate Taxes were paid (or payable) by
Landlord and Tenant.

                  (d)      Tenant may, at its sole cost and expense, seek to
have the Premises treated as a separate tax lot or parcel provided such new tax
lot or parcel does not have an adverse effect on the remainder of the Landlord's
Land or the Transmission and Distribution Facilities. Landlord shall reasonably
cooperate with Tenant, at Tenant's sole cost and expense, in obtaining the
separate tax lot or parcel for the Premises.

<PAGE>   450

                                    EXHIBIT H

                                    ARTICLE 7

                      OPERATION, MANAGEMENT AND MAINTENANCE

         Section  7.01     Operation and Maintenance.

                  (a)      Tenant shall operate and maintain the entirety of the
Premises, including landscaping, during the Term of this Lease at its sole cost
and expense, and shall be responsible for payment for all utilities and other
costs associated with its occupancy and use of the Premises.

                  (b)      Without limitation of the foregoing, Tenant shall at
all times use, operate and maintain the Premises in compliance with all Legal
Requirements now or hereinafter in effect and any recorded covenants, conditions
and restrictions affecting the Premises.

                                    ARTICLE 8

                                    UTILITIES

         Section  8.01     Utility Capacity. Tenant acknowledges that all
necessary mains, conduits and other facilities necessary to supply water,
electricity, gas, telecommunication service, sewer service and other utilities
necessary for the operation of the Generating Station are available to the
Premises and in place, and are of sufficient quantity and quality, as of the
Commencement Date. Tenant shall pay directly all costs associated with its
consumption of such service at the Premises. Tenant shall immediately cause all
such utility service to be billed directly to Tenant.

         Section  8.02      No Landlord Liability. No cessation or interruption
of any services to the Premises will make Landlord liable in any respect for
damages to either person, property or business, nor be construed as an eviction
of Tenant, nor relieve Tenant from any of its obligations under this Lease,
except to the extent caused by the negligence of Landlord, its agents, employees
or contractors.

                                    ARTICLE 9

                                       USE

         Tenant agrees to use and maintain the Premises in a lawful and proper
manner, and in a manner which does not interfere with Landlord's operation of
its Transmission and Distribution Facilities or that portion of the Landlord's
Land that is not the subject of this Lease. Landlord agrees to use and maintain
its Transmission and Distribution Facilities and that portion of the Landlord's
Land that is not the subject of this Lease in a manner which does not materially
interfere with Tenant's operation of the Generating Station or the Premises.

<PAGE>   451

                                    EXHIBIT H

                                   ARTICLE 10

             LAWS, ORDINANCES AND REQUIREMENTS OF PUBLIC AUTHORITIES

         Except as otherwise provided in this Lease and subject to Tenant's
obligations in respect of the Assumed Obligations in accordance with the terms
of the Asset Sale Agreement, Tenant shall, at its sole expense, in its use of
the Premises and in its operation and maintenance of the Premises during the
Term: (i) comply with, and be responsible under, all laws (including the
Americans with Disabilities Act, 42 U.S.C. Sections 12101 et seq., as amended),
all Environmental Laws (as defined in the Asset Sale Agreement) and other laws,
regulations, ordinances and orders of Federal, state, county, municipal and
other authorities having jurisdiction over the Premises (collectively, the
"Legal Requirements") as such Legal Requirements relate to the Premises, and
(ii) comply with any direction, order or request (subject to Tenant's right to
reasonably protest such direction, order or request) made pursuant to law by any
court or public officers requiring abatement of any nuisance or responses to any
presence or release of materials, or which imposes upon Landlord or Tenant any
duty or obligation arising from conditions which have been created by Tenant or
which otherwise exist with respect to the Premises (except for any such
obligations expressly retained by Landlord as Retained Obligations pursuant to
the Asset Sale Agreement or any such condition directly caused by Landlord, its
agents, employees or invitees after the Commencement Date). If Tenant receives
notice of any such direction or of violation of any such law, order, ordinance,
or regulation, it shall promptly notify Landlord thereof. Tenant agrees that all
alterations developed by it in the Premises pursuant to Article 12 hereof shall
be developed in compliance with all such Legal Requirements. Without limitation
of the foregoing, the Tenant will, at its sole cost and expense, keep the
Premises and every part thereof free from contamination from any Hazardous
Substances (as defined in the Asset Sale Agreement).

                                   ARTICLE 11

                                 QUIET ENJOYMENT

         Landlord covenants and agrees that Tenant, upon paying the Annual Base
Rental and all other charges herein provided for and performing and observing
the covenants, conditions and agreements on the part of the Tenant hereunder to
be performed and observed, shall and may peaceably hold and enjoy the Premises
during the Term hereof for all purposes set forth herein, subject to such
limitations as are set forth herein.

<PAGE>   452

                                    EXHIBIT H

                                   ARTICLE 12

                                   ALTERATIONS

         Section  12.01    Alterations. Tenant may, at all times during the
Term, make alterations to the Premises. The above notwithstanding, Tenant may
not, without Landlord's prior written consent, make any alterations which in any
way interfere with the Landlord's operation of its Transmission and Distribution
Facilities or that portion of the Landlord's Land that is not subject to this
Lease.

         All alterations shall be made at Tenant's sole cost and expense. All
such construction, alterations, and maintenance work done by, or for, Tenant
shall (a) not adversely affect the structure or the safety of the Transmission
and Distribution Facilities, (b) comply with all building, safety, fire,
plumbing, electrical, and other codes and governmental and insurance
requirements, (c) be completed in a good and workmanlike manner, and (d) be
performed by reputable contractors. Landlord agrees hereby to reasonably
cooperate, at no cost or liability to Landlord, in Tenant's efforts to obtain
such governmental consents, approvals and land permits as may be required for
any alterations to the Premises made by Tenant pursuant to this Article 12.

         All alterations constructed by Tenant hereunder shall be constructed
and maintained in accordance with all Legal Requirements.

                              ARTICLE 13

                                 LIENS

         Tenant shall keep the Premises free from any liens arising from any
work performed, materials furnished, or obligations incurred by or at the
request of Tenant. All persons either contracting with Tenant or furnishing or
rendering labor and materials to Tenant shall be notified in writing by Tenant
that they must look only to Tenant for payment. If any lien is filed against the
Premises or Tenant's leasehold interest therein, Tenant shall discharge the same
by payment or bonding within sixty (60) days after receipt of notice of its
filing. To the extent Tenant desires to contest the application or validity of
any lien filed against the Premises or Tenant's leasehold interest therein, it
may do so by appropriate proceedings diligently conducted by Tenant in good
faith provided it adequately bonds off, or sets aside sufficient reserves for
payment of, any such contested lien.

<PAGE>   453

                                    EXHIBIT H

                                   ARTICLE 14

                                     REPAIRS

         Subject to Tenant's obligations to satisfy the Assumed Obligations
pursuant to the Asset Sale Agreement and to maintain the Premises in compliance
with said Assumed Obligations, and except as may be otherwise expressly set
forth herein, Tenant shall keep the Premises and every part thereof in such
condition and repair as Tenant deems appropriate during the Term, at Tenant's
sole cost and expense. Landlord has no obligation, and has made no promise, to
alter, remodel, improve, repair, redecorate, or paint the Premises or any part
thereof. No representations respecting the condition of the Premises have been
made by Landlord to Tenant (other than those, if any, which may be set forth in
the Asset Sale Agreement).

                                   ARTICLE 15

                                    INSURANCE

         Section  15.01    Tenant's Insurance. During the Term, Tenant, at its
sole expense, shall obtain and keep in force such insurance as is customarily
carried by owners of comparable facilities in the geographic area which the
Premises are located.

         All policies under this Section 15.01 shall be issued by insurers that
are authorized to do business in the Commonwealth of Virginia and shall name the
Landlord as an additional insured and shall contain an undertaking by the
insurers to notify the parties in writing, by certified or registered United
States mail, return receipt requested, not less than thirty (30) days before any
material adverse change, reduction in coverage, cancellation, or other
termination thereof.

         Section 15.02     Waiver of Subrogation. All policies covering real or
personal property which Tenant obtains affecting the Premises or the Generating
Station shall include a clause or endorsement denying the insurer any rights of
subrogation against the Landlord. Landlord shall not be liable or responsible
for, and Tenant hereby releases the Landlord, the partners, employees, officers,
directors and agents of the other from any and all liability and responsibility
to the Tenant, or any person claiming by, through or under the Tenant, by way of
subrogation or otherwise for any damage or loss to property due to hazards
covered or which should be covered by policies of insurance obtained or which
should be or have been obtained pursuant to this Lease, to the extent of the
injury or loss covered or which should have been covered thereby, assuming that
any deductible shall be deemed to be insurance coverage. All policies of
insurance covering the Transmission and Distribution Facilities and that portion
of Landlord's Land not subject to

<PAGE>   454

                                   EXHIBIT H

this Lease shall include a clause or endorsement denying any insurer any rights
of subrogation against Tenant.

                                   ARTICLE 16

                        DAMAGE BY FIRE OR OTHER CASUALTY

         Tenant shall promptly notify Landlord of any material damage to the
Premises by fire or other casualty. If the Premises is damaged by fire or other
casualty, Tenant may, at its option, repair the damage to the Premises at its
own expense. There shall be no abatement of Rental after the occurrence of any
casualty and/or during the period of any repairs.

                                   ARTICLE 17

                                  CONDEMNATION

         Section 17.01     Condemnation of All or Materially All of the
Premises. In the event that all or materially all of the Premises are taken or
condemned for any public purpose, this Lease shall terminate as of the date of
such taking; provided, however, that those provisions of this Lease which are
designated to cover matters of termination and the period thereafter shall
survive the termination hereof.

         Section 17.02     Condemnation of Part of Premises. In the event that
a portion, but less than all or materially all, of the Premises should be taken
or condemned for any public purpose, then this Lease shall terminate as of the
date of such taking as to the portion of the Premises so taken but this Lease
shall remain in full force and effect as to the remainder of the Premises. In
the event of a taking of a portion of the Premises which does not result in a
termination of the Lease, the Rental shall not be adjusted to take into account
the portion of the Premises so taken.

         Section 17.03     Condemnation Award. Tenant shall be entitled to
receive the entire award in any condemnation proceeding or action for the value
of its leasehold interest in the Premises, and any other losses suffered by
Tenant that are attributable to such taking.

         Section 17.04     Temporary Condemnation. If the temporary use or
occupancy of all or any part of the Premises shall be condemned or taken for any
public or quasi-public use during the Term, this Lease shall be and remain
unaffected by such condemnation or taking and Tenant shall continue to pay in
full the Rental payable hereunder for any period during such temporary use or
occupancy during the Term. In the event of any such condemnation or taking,
Tenant shall be entitled to appear, claim, prove and receive the portion of the
award for such taking that represents compensation for use or occupancy of the
Premises during the Term.

<PAGE>   455

                                    EXHIBIT H

                                   ARTICLE 18

                            ASSIGNMENT AND SUBLETTING

         This Lease and all of the provisions hereof shall be binding upon and
inure to the benefit of the Parties and their respective successors and
permitted assigns, but neither this Lease nor any of the rights, interests or
obligations hereunder shall be assigned by Tenant, including by operation of
law, nor shall the Premises or any portion thereof be sublet by Tenant, in each
case, without the prior written consent of Landlord, except (i) prior to the
Closing, to a wholly-owned subsidiary so long as Tenant shall have duly executed
and delivered the Guarantee Agreement and such assignment is for all of Tenant's
rights, interests and obligations hereunder, (ii) to an Affiliate (as defined in
the Asset Sale Agreement) of Tenant in connection with the transfer of the
Generating Station to such Affiliate and (iii) to the extent permitted under
Article 21 hereto; provided, however, that no assignment, transfer or sublet of
rights or obligations by Tenant shall relieve it from the full liabilities and
the full financial responsibility, as provided for under this Lease, unless and
until the transferee or assignee shall agree in writing to assume such
obligations and duties and Landlord has consented in writing to such assumption.
To the extent Landlord's consent is required pursuant to the provisions of this
Article 18, such consent shall not be unreasonably withheld, delayed or
conditioned.

         Nothing in this Lease is intended to confer upon any other person
except the Parties any rights or remedies hereunder or shall create any third
party beneficiary rights in any person.

                                   ARTICLE 19

                                 INDEMNIFICATION

         This Lease is an Ancillary Agreement (as defined in the Asset Sale
Agreement) and the provisions of Article X of the Asset Sale Agreement shall
apply ceteris paribus to this Agreement.

                                   ARTICLE 20

                            SURRENDER OF THE PREMISES

         Section 20.01 Surrender. Upon the expiration of the Term or other
termination of this Lease for any cause whatsoever, except as otherwise provided
in Article 16 hereof, Tenant shall peacefully vacate the Premises in the same
condition as they were at the beginning of the Term (as same may thereafter have
been improved by Tenant and subject to Tenant's obligations pursuant to the
Asset Sale Agreement), condemnation, reasonable use and wear and tear thereof
excepted. Should Tenant continue to hold the Premises after the termination of
this Lease, whether the termination occurs by lapse of time or otherwise, such
holding over shall constitute and be construed as a tenancy

<PAGE>   456

                                    EXHIBIT H

from month-to-month at a rental equal to the fair market value of such
month-to-month tenancy, as determined by an independent appraiser chosen by
Landlord in good faith, and subject to all of the other terms set forth herein
except any right to renew this Lease, but the foregoing shall not constitute a
consent by Landlord to such holding over and shall not prevent Landlord from
exercising any of its remedies under this Lease or applicable law by reason of
such holding over. Tenant shall be liable to Landlord for all direct damage,
which Landlord suffers because of any holding over by Tenant.

         Section 20.02     Removal of Personal Property and Alterations. Prior
to the expiration of the Term, or promptly upon the earlier termination of this
Lease, Tenant shall remove, at Tenant's expense, all of its furniture,
furnishings, personal property, trade fixtures and shall promptly repair all
damage done to the Premises by such removal. Any items not so removed shall be
deemed abandoned and shall thereupon become the property of Landlord.

                                   ARTICLE 21

                               LEASEHOLD MORTGAGES

         Section 21.01     Leasehold Mortgages. Tenant is hereby given the
right by Landlord, in addition to any other rights herein granted, with or
without Landlord's prior written consent, to mortgage its interests in this
Lease, including, without limitation, any easements granted by Landlord for the
benefit of the Premises, under one or more leasehold deed(s) of trust or
mortgage(s) (individually, a "Mortgage" and collectively, the "Mortgages"), and
to give to the holder of any such Mortgage (a "Mortgagee") a lien, assignment
and/or security interest in (i) any personal property included within this
Lease, (ii) the rents, income, receipts, revenues and profits of the Premises,
(iii) any assignment, subleases or other transfer of all or any part of Tenant's
rights under this Lease (iv) any rights of extension, renewal or expansion
contained in this Lease, as collateral security for such Mortgage(s), upon the
condition that all rights acquired under such Mortgage(s) shall be subject to
each and all of the covenants, conditions and restrictions set forth in this
Lease and to all rights and interests of Landlord herein, none of which
covenants, conditions, restrictions, rights and interests is or shall be waived
by Landlord by reason of the right so given to Tenant to mortgage such interest
in this Lease, except as expressly provided herein. If Tenant shall mortgage
this Lease and if the Mortgagee under such Mortgage shall send to Landlord a
true copy of any such Mortgage, together with a written notice specifying the
name and addresses of the Mortgagee and the pertinent recording date with
respect to such Mortgage(s), Landlord agrees that so long as any obligations
secured by such leasehold Mortgage(s) shall remain unsatisfied, the following
provisions shall apply:

         (a)      If at any time there shall be more than one Mortgage, the
holder of the Mortgage prior in lien, shall be vested with the rights of the

<PAGE>   457

                                   EXHIBIT H

Mortgagee under this Article 21 (including, without limitation, the right to
give consents or approval or any other right vested in any Mortgagee by this
Lease) to the exclusion of the holder of any junior Mortgage.

         (b)      Landlord shall, upon sending Tenant any notice of default,
simultaneously send a copy of such notice to the Mortgagee, using such
reasonable method and to such address as may be designated in a written notice
from such Mortgagee to Landlord. No notice given by Landlord to Tenant shall be
binding upon or affect a Mortgagee or Tenant unless a copy of such notice shall
be given to the Mortgagee pursuant to this subsection (b) of this Section 21.01
and Article 27 hereof. In addition to the other rights of the Mortgagee set
forth in this Article 21, the Mortgagee shall, after service of any such notice
upon it, have the right to cure or cause the cure of any default by Tenant
hereunder, and Landlord shall accept such performance by or at the instigation
of such Mortgagee as if the same had been done by Tenant. All notices to the
Mortgagee shall be sent return receipt requested and shall not be effective
until received by such Mortgagee.

         (c)      Landlord shall allow the Mortgagee concurrently the same cure
period given to Tenant hereunder to cure such default, plus an additional thirty
(30) days within which to cure the default, or, in the case of non-monetary
default or other condition which cannot in the exercise of due diligence be
cured by Mortgagee prior to the expiration of such additional thirty (30) day
period, shall allow the Mortgagee such additional days as is reasonably
necessary for the curing of the default, in which event Landlord may not
exercise any remedies on account of such default so long as the Mortgagee is
diligently and with continuity engaged in curing the default. The rights of the
Mortgagee under this subsection (c) are in addition to the rights provided to
the Mortgagee under subsection (d) of this Section 21.01.

         (d)      If the Mortgagee, its nominee, or a purchaser at a foreclosure
or other sale shall acquire title to Tenant's interest in this Lease and shall
cure all of Tenant's defaults under this Lease which are susceptible of being
cured by such Mortgagee or by such nominee or purchaser, as the case may be,
within the time reasonably required therefor, then the defaults of any prior
holder of Tenant's interest in this Lease which are not susceptible of being
cured by such Mortgagee (or by such nominee or purchaser) shall not be deemed to
be defaults under this Lease as between Landlord and the Mortgagee, its nominee
or such purchaser. If Mortgagee does obtain possession of the Premises, Landlord
agrees to acknowledge Mortgagee, or its nominee as a successor to Tenant under
this Lease, provided Mortgagee agrees to be bound by the terms and provisions of
all other agreements between Landlord and Tenant relating to the Premises
existing both as of the Commencement Date and the date of succession.

         (e)      To the extent permitted by law, Landlord acknowledges that as
between Landlord and the Mortgagee, its nominee or a purchaser at a foreclosure
or other sale, this Lease shall not be deemed to be terminated

<PAGE>   458

                                    EXHIBIT H

notwithstanding the rejection of this Lease by operation of law, by Tenant or by
its representative, or by any trustee appointed in Tenant's bankruptcy case,
pursuant to the U.S. Bankruptcy Code (Title 11 of the United States Code) or any
other insolvency law. The Mortgagee shall be deemed to have satisfied its
obligation to commence foreclosure proceedings or cause Tenant's interest in
this Lease to be sold under a power of sale by asserting a claim in Tenant's
case under the U.S. Bankruptcy Code or other insolvency proceeding, and the
Mortgagee shall not be deemed to have failed to satisfy such obligation if the
Mortgagee is unable to do so as a result of the provisions of Section 362 of the
U.S. Bankruptcy Code or similar provisions of any other insolvency law.

         (f)      No Mortgagee or its nominee shall become liable under the
provisions of this Lease unless and until such time as it becomes, and then only
for as long as it remains, the owner of Tenant's interest in this Lease, and
such liability shall be limited to such Mortgagee's or nominee's interest in the
Premises.

         (g)      Landlord shall, upon request, execute, acknowledge and deliver
to each leasehold Mortgagee(s) an agreement (prepared at the sole cost and
expense of Tenant and in form reasonably satisfactory to Landlord and such
leasehold Mortgagee(s)) among Landlord, Tenant and the leasehold Mortgagee(s),
agreeing to all of the provisions of this Article 21.

                                   ARTICLE 22

                                    PRIORITY

         Section 22.01     Priority of Lease. This Lease and all Mortgages shall
be superior in all respects to the lien of any deeds of trust, mortgages or
other security instruments securing indebtedness of Landlord (collectively,
"Subordinate Instruments") which may hereafter from time to time during the Term
cover the Premises, or any interest of Landlord therein, and to any advances
made on the security thereof, and to any refinancings, increases, renewals,
modifications, consolidations, replacements and extensions thereof. As of the
date hereof, the Premises shall not be subject to the lien, operation and effect
of any deeds of trust, mortgages or other security instruments securing
indebtedness of Landlord.

      Section 22.02         Attornment. At any time that any mortgagee (which,
for these purposes, shall include the beneficiary under a deed of trust or any
Subordinate Instruments), foreclosure purchaser or other party acquires the
interest of Landlord in the Premises, Tenant shall attorn to such mortgagee or
purchaser upon any such sale or the grantee under any deed in lieu of such
foreclosure and shall recognize such mortgagee, purchaser or grantee as the case
may be, as Landlord under this Lease. The foregoing agreement of Tenant to
attorn shall survive any such foreclosure sale, trustee's sale, or conveyance in
lieu thereof. Tenant shall, upon demand at any time, before or after any such
foreclosure sale, trustee's sale, or conveyance in lieu thereof, execute,
acknowledge, and deliver to Landlord's mortgagee or any

<PAGE>   459

                                    EXHIBIT H

successor thereof or any then owner of the Premises, any written instruments and
certificates evidencing such attornment as such mortgagee, successor or owner
may reasonably require.

                                   ARTICLE 23

                              DEFAULT AND REMEDIES

         Section 23.01     Tenant Default and Landlord Remedies. In the event:
(a) Tenant shall fail to pay any Rental or other sums payable by Tenant
hereunder as and when such Rental or other sums become due and payable and such
failure shall continue for more than sixty (60) days after written notice from
Landlord; or (b) Tenant shall fail to perform or observe any other material
covenant or obligation hereunder and such failure shall continue for more than
sixty (60) days after written notice from Landlord, provided, however, that if
Tenant has commenced curative action prior to the expiration of the sixty (60)
day period and diligently pursues same to completion thereafter, Tenant shall
have such longer period of time as is reasonably necessary to cure such default,
then Landlord may do whatever Tenant is obligated to do under this Lease and
enter the Premises (in accordance with applicable judicial procedures) without
being liable to prosecution or any claim for damages therefor to accomplish this
purpose. Tenant shall reimburse Landlord immediately upon demand for any
reasonable expenses which Landlord incurs in thus effecting compliance with this
Lease on Tenant's behalf, and Landlord shall not be liable for any damages
suffered by Tenant from such action, unless caused by the gross negligence or
willful conduct of Landlord, its agents, employees or contractors.

         Section 23.02      No Acceptance of Surrender. No act or thing done by
Landlord or its agents during the Term shall constitute an acceptance of an
attempted surrender of the Premises, and no agreement to accept a surrender of
the Premises shall be valid unless made in writing and signed by Landlord.. No
waiver by either Party of any breach of this Lease shall constitute a waiver of
any other violation or breach of any of the terms hereof. Forbearance by either
Party to enforce one or more of the remedies herein provided upon a breach
hereof shall not constitute a waiver of any other breach of this Lease.

         Section 23.03      Rights Cumulative. The rights granted to either
Party in this Lease shall be cumulative of every other right or remedy which
either Party may otherwise have at law or in equity or by statute, and the
exercise of one or more rights or remedies shall not prejudice or impair the
concurrent or subsequent exercise of other rights or remedies.

                                   ARTICLE 24

                             ESTOPPEL CERTIFICATES

         Upon the request of Landlord, Tenant or a Mortgagee, Landlord and/or
Tenant will execute and deliver to the requesting party an instrument stating,

<PAGE>   460

                                    EXHIBIT H

if the same be true, that this Lease has not been modified or amended (or
stating what modifications or amendments may be in effect), that the Lease is
then in full force and effect and that, to the best of such Party's knowledge,
there are then no offsets, defenses or counterclaims with respect to the payment
of rent reserved hereunder or in the performance of any of the other terms,
covenants and conditions hereof on the part of such Party to be performed, and
that as of such date no default has been declared hereunder by either Party
hereto and that such Party at the time has no knowledge of any fact or
circumstance which might reasonably give rise to a default by either Party.

                                   ARTICLE 25

                                SECURITY DEPOSIT

         No security deposit shall be required in connection with this Lease.

                                   ARTICLE 26

                                  FORCE MAJEURE

         Section 26.01     Force Majeure. Notwithstanding anything in this
Lease to the contrary, the Parties shall be excused from performing their
respective obligations hereunder, and shall not be liable in damages or
otherwise, to the extent that a Party is unable to perform or is prevented from
performing by an event of Force Majeure and has complied with Section 26.03. The
Parties recognize and agree that an event of Force Majeure will not relieve any
Party of its obligation to make payments when due hereunder.

         Section 26.02     Definition of Force Majeure. The term "Force Majeure"
as used herein means those causes beyond the reasonable control of the Party
affected, that, by the exercise of reasonable diligence, such Party is unable to
prevent, avoid, mitigate, or overcome, including the following: any act of God,
act of the public enemy, war, civil disturbance, insurrection, riot, fire
(unless resulting from the fault or negligence of the Party asserting Force
Majeure), storm or flood, lightning or explosion (unless resulting from the
fault or negligence of the Party asserting Force Majeure) or any other cause of
a similar nature beyond such Party's reasonable control.

         Section 26.3       Force Majeure Procedures. A Party shall not be
entitled to rely on the occurrence of an event of Force Majeure as a basis for
being excused from performance of its obligations under this Lease unless the
Party relying on the event or condition shall: (a) provide prompt written notice
of such Force Majeure event to the other Party, including an estimation of its
expected duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts to continue to perform its
obligations under this Lease; (c) expeditiously take action to correct or cure
the event or condition excusing performance; (d) exercise all reasonable efforts
to mitigate or limit damages to the other Party; and (e) provide prompt notice
to the other Party of the cessation of the event or

<PAGE>   461

                                   EXHIBIT H

condition giving rise to its excuse from performance. Subject to this Section
26.03, any obligation under this Lease shall be suspended only to the extent
caused by such Force Majeure and only during the continuance of any inability of
performance caused by such Force Majeure but for no longer period.

                                   ARTICLE 27

                                     NOTICES

         All notices and other communications hereunder shall be in writing and
shall be deemed given (as of the time of delivery or, in the case of a
telecopied communication, of confirmation) if delivered personally, telecopied
(which is confirmed) or sent by overnight courier (providing proof of delivery)
to the Parties at the following addresses (or at such other address for a Party
as shall be specified by like notice):

            if to Landlord, to:

                        Potomac Electric Power Company
                        1900 Pennsylvania Avenue, N.W.
                        Washington, D.C.  20068
                        Telecopier: (202) 261-7889
                        Attention: William T. Torgerson, General Counsel

            with a copy to:

                        Dickstein Shapiro Morin & Oshinsky LLP
                        2101 L Street, N.W.
                        Washington, D.C.  20037
                        Telecopy No.: (202) 887-0689
                        Attention: Kenneth M. Simon, Esq.

<PAGE>   462

                                    EXHIBIT H

            if to Tenant, to:

                        Southern Energy, Inc.
                        900 Ashwood Parkway
                        Suite 500
                        Atlanta, Georgia  30338-4780
                        Telecopier: (770) 821-6575
                        Attention:

            with a copy to:

                        Troutman Sanders LLP
                        1300 I Street, N.W.
                        Suite 500 East
                        Washington, DC  20005
                        Telecopier:  (202) 274-2994
                        Attention:  Benjamin L. Israel, Esq.

                                   ARTICLE 28

                                  MISCELLANEOUS

         Section 28.01     Payments and Reimbursements. Where this Lease
requires either Party to pay or to reimburse directly to other Party for any
item, such payment or reimbursement will be the actual costs (unless
"reasonable" costs are otherwise specified) incurred therefor by the Party
entitled to reimbursement. The party requesting reimbursement shall provide
reasonable back-up for the reimbursement amount requested. Failure by Tenant to
pay any such amounts shall be considered as a failure to pay Rental, and, as a
result, Landlord shall be entitled to all applicable rights and remedies.

         Section 28.02     No Merger. There shall be no merger of this Lease or
of the leasehold estate hereby created with the fee estate in the Premises or
any part thereof by reason of the fact that the same person may acquire or hold,
directly or indirectly, this Lease or the leasehold estate hereby created or any
interest in this Lease or in such leasehold estate as well as the fee estate in
the Premises or any interest in such fee estate. In the event of a voluntary or
other surrender of this Lease, or a mutual cancellation hereof, Landlord may, at
its option, terminate all subleases.

<PAGE>   463

                                    EXHIBIT H

         Section 28.03     No Representations. Neither Landlord nor Landlord's
agents or brokers, nor Tenant nor Tenant's agents or brokers, have made any
representations or promises with respect to the Premises or this Lease except as
herein expressly set forth or as set forth in the Asset Sale Agreement and all
reliance with respect to any representations or promises is based solely on
those contained herein or therein. No rights, easements, or licenses are
acquired by Tenant under this Lease by implication or otherwise except as
expressly set forth in this Lease.

         Section 28.04     No Offer. The submission of this Lease to Tenant
shall not be construed as an option, reservation or offer, nor shall Tenant have
any rights with respect thereto unless both Landlord and Tenant execute and
receive a copy of this Lease.

         Section 28.0      Light, Air and View Obstruction. Any elimination or
shutting off of light, air, or view by any structure which may be erected on
lands (other than the Premises) adjacent to the Premises shall in no way affect
this Lease or impose any liability on Landlord.

         Section 28.06     Time of the Essence. Time is of the essence with
respect to Tenant's and Landlord's obligations under this Lease.

         Section 28.07     Recordation. At the request of either Party, this
Lease, or a memorandum thereof, may be recorded among the pertinent land records
by either party. All costs associated with such recordation shall be borne by
the party desiring recordation.

         Section 28.08     Expenses. Except to the extent specifically provided
herein, all costs and expenses incurred in connection with this Lease and the
transactions contemplated hereby shall be borne by the Party incurring such
costs and expenses, whether or not the transactions contemplated hereby are
consummated.

         Section 28.09     Amendment and Modification; Extension; Wavier. This
Lease may be amended, modified or supplemented only by an instrument in writing
signed on behalf of each of the Parties. Either Party may (i) extend the time
for the performance of any of the obligations or other acts of the other Party,
or (ii) waive compliance by the other Party with any of the agreements or
conditions contained in this Lease. Any agreement on the part of a Party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such Party. The failure of a Party to this Lease to
assert any of its rights under this Lease or otherwise shall not constitute a
waiver of such rights.

         Section 28.10     Governing Law. This Lease shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia
(regardless of the laws that might otherwise govern under applicable principles
of conflicts of law).

         Section 28.11     Jurisdiction and Enforcement.

<PAGE>   464

                                    EXHIBIT H

         (a)      Each of the parties irrevocably submits to the exclusive
jurisdiction of (i) the Superior Court of the District of Columbia and (ii) the
United States District Court for the District of Columbia, for the purposes of
any suit, action or other proceeding arising out of this Lease or any
transaction contemplated hereby. Each of the parties agrees to commence any
action, suit or proceeding relating hereto either in the United States District
Court for the District of Columbia or, if such suit, action or proceeding may
not be brought in such court for jurisdictional reasons, in the Superior Court
of the District of Columbia. Each of the parties further agrees that service of
process, summons, notice or document by hand delivery or U.S. registered mail at
the address specified for such Party in Article 27 (or such other address
specified by such Party from time to time pursuant to Article 27) shall be
effective service of process for any action, suit or proceeding brought against
such Party in any such court. Each of the parties irrevocably and
unconditionally waives any objection to the laying of venue of any action, suit
or proceeding arising out of this Lease or the transactions contemplated hereby
in (i) the Superior Court of the District of Columbia and (ii) the United States
District Court for the District of Columbia, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.

         (b)      The Parties agree that irreparable damage would occur in the
event that any of the provisions of this Lease were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the Parties shall be entitled to an injunction or injunctions to prevent
breaches of this Lease and to enforce specifically the terms and provisions of
this Lease, this being in addition to any other remedy to which they are
entitled at law or in equity.

         Section 28.12     Counterparts. This Lease may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

         Section 28.13     Interpretation. When a reference is made in this
Lease to an Article or Section, such reference shall be to an Article or Section
of this Lease unless otherwise indicated. The table of contents and headings
contained in this Lease are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Lease. Whenever the words
"include", "includes" or "including" are used in this Lease, they shall be
deemed to be followed by the words "without limitation" or equivalent words. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Lease shall refer to this Lease as a whole and not to any particular
provision of this Lease. The definitions contained in this Lease are applicable
to the singular as well as the plural forms of such terms and to the masculine
as well as to the feminine and neuter genders of such term. Any agreement,
instrument, statute, regulation, rule or order defined or referred to herein or
in any agreement or instrument that is referred to herein means such agreement,
instrument, statute, regulation, rule or order as from time to time amended,
modified or supplemented, including (in the case of agreements or instruments)
by waiver or consent and (in the case of statutes,

<PAGE>   465

                                    EXHIBIT H

regulations, rules or orders) by succession of comparable successor statutes,
regulations, rules or orders and references to all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns. Each Party acknowledges that it has been
represented by counsel in connection with the review and execution of this
Lease, and, accordingly, there shall be no presumption that this Lease or any
provision hereof be construed against the Party that drafted this Lease.

         Section 28.14     Entire Agreement. This Lease, including the
documents, certificates and instruments referred to herein and other contracts,
agreements and instruments contemplated hereby, embody the entire agreement and
understanding of the parties in respect of the transactions contemplated by this
Lease. There are no restrictions, promises, representations, warranties,
covenants or undertakings other than those expressly set forth or referred to
herein or therein. This Lease supersedes all prior agreements and understandings
between the parties with respect to the transactions contemplated by this Lease.

         Section 28.15     Severability. If any term or other provision of this
Lease is invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Lease shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Lease so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.

         Section 28.16     Conflicts. Except as expressly provided otherwise
herein or therein, in the event of any conflict or inconsistency between the
terms of this Lease and the terms of the Asset Sale Agreement, the terms of the
Asset Sale Agreement shall prevail.

         IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
signed by their respective duly authorized officers as of the date first above
written.

ATTEST:                             LANDLORD
                                    POTOMAC ELECTRIC POWER COMPANY

By:                                 By:                                  (SEAL)
   ---------------------------          -------------------------------

Name:                               Name:
     -------------------------            -----------------------------
Title:                              Title:
       -----------------------            -----------------------------

ATTEST:                             TENANT

<PAGE>   466

                                    EXHIBIT H

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

By:                                 By:                                  (SEAL)
   ---------------------------          -------------------------------
Name:                               Name:
     -------------------------            -----------------------------
Title:                              Title:
       -----------------------            -----------------------------

<PAGE>   467

                                    EXHIBIT H

                                   APPENDIX A

                                   DEFINITIONS

         The following terms have the meanings specified in the references set
forth opposite each such term:

Term                                                  Reference

"Annual Base Rental"                                  Section 5.01

"Asset Sale Agreement"                                Recitals

"Building Addition"                                   Recitals

"Closing"                                             Asset Sale Agreement

"Commencement Date"                                   Section 2.01

"Environmental Laws"                                  Asset Sale Agreement

"Force Majeure"                                       Section 26.02

"Generating Station"                                  Recitals

"Hazardous Substances"                                Asset Sale Agreement

"Highest Lawful Rate"                                 Section 5.3

"Landlord"                                            Preamble

"Landlord's Land"                                     Section 1.01

"Lease"                                               Preamble

"Lease Year"                                          Section 2.01

"Legal Requirements"                                  Article 10

"Mortgagee"                                           Section 21.01

"Mortgages"                                           Section 21.01

"New Lease"                                           Section 21.01

"Premises"                                            Recitals

"Prime Rate"                                          Section 5.03

<PAGE>   468

                                    EXHIBIT H

"Real Estate Taxes"                                   Section 6.01

"Rental"                                              Section 5.03

"Subordinate Instruments"                             Section 22.01

"Tenant"                                              Preamble

"Term"                                                Section 2.01

"Transmission and Distribution Facilities"            Section 1.01

<PAGE>   469

                                  EXHIBIT - I-1

                           TRANSITION POWER AGREEMENT
                             (District of Columbia)

                                 By and Between

                         POTOMAC ELECTRIC POWER COMPANY

                                       and

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

                        Dated ____________, 2000

<PAGE>   470

                                TABLE OF CONTENTS
<TABLE>
<S>                                                                    <C>
ARTICLE 1 - DEFINITIONS                                                 1
ARTICLE 2 - TERM AND TERMINATION                                        2
      2.1 - Term                                                        2
      2.2 - Termination                                                 2
ARTICLE 3 - CAPACITY RESOURCES                                          2
      3.1 - Capacity Resources Obligations                              2
      3.2 - Capacity Resources Information Requirements                 3
ARTICLE 4 - ANCILLARY SERVICES                                          4
ARTICLE 5 - ENERGY                                                      4
      5.1 - Required Energy                                             4
      5.2 - Optional Energy                                             4
      5.3 - Determination of Energy Requirements; Losses                5
ARTICLE 6 - PRICING                                                     5
      6.1 - Compensation for Services                                   5
      6.2 - Taxes                                                       6
ARTICLE 7 - SERVICES OBTAINED BY GENERATOR FROM PJM                     7
ARTICLE 8 - ALTERNATIVE SERVICES AND LIMITED LIABILITY                  7
      8.1 - Alternative Services                                        7
      8.2 - Limitation on Liability                                     7
ARTICLE 9 - FORCE MAJEURE                                               8
      9.1 - Effect of Force Majeure                                     8
      9.2 - Force Majeure Defined                                       8
      9.3 - Notification                                                8
ARTICLE 10 - INDEMNIFICATION FOR THIRD PARTY CLAIMS                     9
      10.1 - Generator's Indemnification                                9
      10.2 - Pepco's Indemnification                                    9
      10.3 - Indemnification Procedures                                 10
      10.4 - Survival                                                   10
ARTICLE 11 - DEFAULT                                                    10
      11.1 - Event of Default                                           10
      11.2 - Remedies                                                   11
ARTICLE 12 - PROJECTIONS AND OPERATING COMMITTEE                        11
      12.1 - Projections                                                11
      12.2 - Operating Committee                                        11
ARTICLE 13 - COST RESPONSIBILITIES AND BILLING PROCEDURES               12
      13.1 - Billing Procedures                                         12
      13.2 - Billing Disputes                                           13
      13.3 - Interest on Unpaid Balances                                13
</TABLE>

<PAGE>   471

<TABLE>
<S>                                                                     <C>
ARTICLE 14 - CONFIDENTIALITY                                            13
      14.1 - Confidentiality Obligations of Pepco                       13
      14.2 - Confidentiality of Audits                                  14
      14.3 - Remedies                                                   14
ARTICLE 15 - DISPUTE RESOLUTION                                         14
      15.1 - Disputes                                                   14
      15.2 - Arbitration                                                15
ARTICLE 16 - REPRESENTATIONS                                            16
      16.1 - Representations of Pepco                                   16
      16.2 - Representations of Generator                               17
ARTICLE 17 - ASSIGNMENT/CHANGE IN CORPORATE IDENTITY                    19
      17.1 - Generally                                                  19
      17.2 - Pepco's Assignment Rights                                  19
      17.3 - Generator's Assignment Rights                              19
      17.4 - Mergers or Consolidations                                  19
      17.5 - Limitations                                                19
      17.6 - Successors                                                 20
ARTICLE 18 - NOTICES                                                    20
ARTICLE 19 - AMENDMENTS                                                 21
      19.1 - Amendments                                                 21
      19.2 - PJM Agreement Modifications                                21
ARTICLE 20 - AUDITS                                                     22
ARTICLE 21 - MISCELLANEOUS PROVISIONS                                   22
      21.1 - Waiver                                                     22
      21.2 - No Third Party Beneficiaries                               22
      21.3 - Governing Law                                              23
      21.4 - Counterparts                                               23
      21.5 - Interpretation                                             23
      21.6 - Jurisdiction and Enforcement                               23
      21.7 - Entire Agreement                                           24
      21.8 - Severability                                               24
      21.9 - Further Assurances                                         25
      21.10-Independent Contractor Status                               25
      21.11-Conflicts                                                   25
</TABLE>

SCHEDULE 1 -  DEFINITIONS                                               27

EXHIBIT A  -  Pepco's Non-Binding Estimate for Calendar Year 2001
              of Capacity Resources for the Service Load                31

EXHIBIT B  -  Capacity Resources Plan for Contract Year 1               32

<PAGE>   472

                                  EXHIBIT I-1

                TRANSITION POWER AGREEMENT (District of Columbia)

         This Transition Power Agreement ("Agreement") dated as of _________,
2000 by and between Potomac Electric Power Company ("Pepco") a District of
Columbia and Virginia corporation, and _____________ ("Generator") a ___________
[corporation]. Pepco and Generator are each referred to herein as a "Party," and
collectively referred to herein as the "Parties."

                                   WITNESSETH:

         WHEREAS, Pepco and Generator have entered into an Asset Sale and
Purchase Agreement ("Asset Sale Agreement") dated June 7, 2000 for (i) the sale
and purchase of certain of Pepco's generating resources and (ii) the assignment
of rights and obligations under five power purchase agreements ("PPAs") or for
alternative arrangements relating to such PPAs;

         WHEREAS, certain of the PPAs provide for the purchase and sale of
renewable energy resources;

         WHEREAS, Pepco will continue to operate its transmission and
distribution businesses which includes obligations to sell power to its retail
customers; and

         WHEREAS, the Parties have agreed in the Asset Sale Agreement to execute
this Agreement in order to provide for the sale by Generator, and purchase by
Pepco, of capacity, electric energy and certain ancillary services in accordance
with the terms and conditions of this Agreement.

         NOW THEREFORE, in consideration of the mutual representations,
covenants and agreements hereinafter set forth, and intending to be legally
bound hereby, the Parties hereto agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

         Unless otherwise defined herein, capitalized terms used in this
Agreement shall have the meanings specified or referred to in Schedule 1 of this
Agreement.

                                    ARTICLE 2
                              TERM AND TERMINATION

         2.1      Term. This Agreement shall become effective upon consummation
of the Closing ("Effective Date"). Unless terminated sooner in accordance with
the

<PAGE>   473

terms of this Agreement, this Agreement shall continue in full force and effect
from the Effective Date until the end of Contract Year 4.

         2.2      Termination. The applicable provisions of this Agreement shall
continue in effect after cancellation or termination hereof to the extent
necessary to provide for final billings, billing adjustments and payments
pertaining to liability and indemnification obligations arising from acts or
events that occurred while this Agreement was in effect.

                                   ARTICLE 3
                               CAPACITY RESOURCES

         3.1      Capacity Resources Obligations

                  (a)      During the term of this Agreement, Generator shall
supply to Pepco and make available within PJM on Pepco's behalf, and Pepco shall
purchase from Generator, Pepco's full requirements for Capacity Resources to
serve the Service Load ("Capacity Resource Requirements") at the prices set
forth in Article 6 of this Agreement. Capacity Resources shall be determined,
and provided by the Generator, in accordance with the PJM Reliability Agreement
and other applicable PJM requirements. Capacity Resource Requirements shall mean
the portion of Pepco's Accounted-For Obligation, as that term is defined and
determined in accordance with the PJM Reliability Agreement and applicable PJM
requirements, that is located in the District of Columbia.

                  (b)      To the extent that PJM assigns to Pepco Fixed
Transmission Rights for Capacity Resources contained in a Capacity Resource Plan
and designated for Fixed Transmission Rights, Pepco shall transfer such Fixed
Transmission Rights to Generator pursuant to PJM's procedures for assigning
Fixed Transmission Rights.

                  (c)      Generator shall provide to the PJM System Operator or
PJM Interconnection LLC, as applicable, all information and data required with
respect to the Capacity Resources Requirements, with copies to Pepco, and
Generator shall be responsible for any charges levied by the PJM System Operator
or the PJM Interconnection LLC on Pepco or Generator due to the delayed receipt
of such information and data in accordance with the PJM Reliability Agreement
unless the delay is due to Pepco's delay in providing Generator with information
that Pepco is required to provide.

<PAGE>   474

         3.2      Capacity Resources Information Requirements

                  (a)      Generator shall provide in accordance with this
Section 3.2 its proposed plan to satisfy its obligations hereunder to provide
the Capacity Resources Requirements under this Agreement ("Capacity Resources
Plan").

                  (b)      Exhibit A hereto sets forth Pepco's non-binding
estimate of the Capacity Resources required to supply the Service Load for each
month during the 2001 calendar year. On or before April 1 preceding each
Planning Period thereafter, Pepco shall provide Generator with a non-binding
estimate of the Capacity Resources required to supply the Service Load for each
month in the following Planning Period.

                  (c)      Exhibit B hereto sets forth the Generator's Capacity
Resources Plan for Contract Year 1.

                  (d)      On or before May 1 preceding each Planning Period
thereafter during the term of this Agreement, the Generator shall provide to the
Operating Committee, for review and approval (such approval not to be
unreasonably withheld or delayed), its proposed Capacity Resources Plan
(including Generator's proposed designation of Capacity Resources for associated
Fixed Transmission Rights) to be submitted to the PJM Interconnection LLC in
accordance with Schedule 6 of the PJM Reliability Agreement for the upcoming
Planning Period.

                  (e)      If the Generator intends to propose any material
change to a Capacity Resources Plan (including any change in a designation of
Capacity Resources eligible for Fixed Transmission Rights) which has previously
been approved by the Operating Committee, the Generator shall provide such
proposed changes to the Operating Committee before it is submitted for approval
pursuant to the PJM Reliability Agreement and such change shall be subject to
the Operating Committee for review and approval (such approval not to be
unreasonably withheld or delayed) if the change (1) adds a resource other than
(x) capacity already certified by the PJM Interconnection LLC or PJM System
Operator, as applicable, as a Capacity Resource or (y) Capacity Credits, or (2)
proposes to change a designation of Capacity Resources eligible for Fixed
Transmission Rights.

<PAGE>   475

                                    ARTICLE 4
                               ANCILLARY SERVICES

         During the term of this Agreement, Generator shall supply to Pepco and
deliver within PJM on Pepco's behalf, and Pepco shall purchase, Pepco's full
requirements for Ancillary Services for the Service Load ("Ancillary Services
Requirements") at the prices set forth in Article 6 of this Agreement. Ancillary
Services mean Regulation and Frequency Response Service (as defined in Schedule
3 of the PJM Tariff) and Operating Reserves (as defined in Schedules 5 and 6 of
the PJM Tariff).

                                    ARTICLE 5
                                     ENERGY

         5.1      Required Energy. During the term of this Agreement, Generator
shall supply to Pepco at the Delivery Points, and Pepco shall purchase, the
following percentages of Pepco's Full Energy Requirements in the year indicated
below (the "Required Energy Percent") at the prices set forth in Article 6 of
this Agreement:

<TABLE>
<CAPTION>
                     Year                 Required Energy Percent

                     <S>                  <C>
                     Contract Year 1                100%

                     Contract Year 2                 75%
</TABLE>

         5.2      Optional Energy

                  (a)      For the duration of each of Contract Year 2, Contract
Year 3 and Contract Year 4, Pepco shall have the right to purchase from
Generator (the "Call Options") the percentages of the Full Energy Requirements
indicated below (the "Optional Energy Percent"). To the extent Pepco exercises a
Call Option for a given year, Generator shall supply to Pepco at the Delivery
Points the Optional Energy Percent at the price set forth in Article 6 of this
Agreement.

<TABLE>
<CAPTION>
                Year                Optional Energy Percent

                <S>                 <C>
                Contract Year 2               25%
</TABLE>

<PAGE>   476

<TABLE>
                <S>                       <C>
                Contract Year 3           100% (in 25% increments)

                Contract Year 4           100% (in 25% increments)
</TABLE>

         Notwithstanding the foregoing, the total of Pepco's Call Options
exercised with respect to the Optional Energy Percent for Contract Year 3 and
Contract Year 4, respectively, shall not exceed the percentage of the Full
Energy Requirements that Pepco elected to purchase in the immediately preceding
contract year.

                  (b)      By each October 1 prior to the contract year in which
the applicable Optional Energy Percent is deliverable ("Strike Date"), Pepco
shall notify Generator in writing whether it is exercising any of its Call
Options for the upcoming contract year, and if so, the percentage of its Full
Energy Requirements it elects to purchase.

         5.3      Determination of Energy Requirements. The amount of Full
Energy Requirements shall be as determined by PJM in accordance with Schedule 1,
Section 3.2 of the PJM Operating Agreement at the respective PJM load buses
measured by PJM for the Service Load served by Pepco (the "Delivery Points").
Generator shall be responsible for all energy losses (including allocated PJM
losses, unaccounted-for energy and distribution losses) associated with delivery
of Required Energy Percent and Optional Energy Percent to the Service Load.

                                    ARTICLE 6
                                     PRICING

         6.1      Compensation for Services Subject to the terms of this
Agreement, Pepco shall be obligated to make a monthly payment to Generator for
the Services it provides which shall be comprised of the following components:

                  (a)      For each Month during the term of the Agreement, a
Capacity Payment for the Capacity Resources Requirements and Ancillary Services
Requirements that Generator provides to Pepco in such Month calculated as
follows:

         Capacity Payment = (Capacity Price + Ancillary Services Price) x
Metered Energy Requirements

                  Where:

<PAGE>   477

                  Capacity Price = $3.50/MWh

                  Ancillary Services Price = $0.50/MWh

                  (b)      For each Month during the term of the Agreement, an
Energy Payment for the Required Energy Percent and Optional Energy Percent, if
any, that Generator delivers to Pepco at the Delivery Points in each Month
calculated as follows:

         Energy Payment = [Metered Energy Requirements x (Required
         Energy Percent + Optional Energy Percent)] x Energy Price

         Where:

         Energy Price = $35.50/MWh during a Summer Month
         and $25.30/MWh during a Winter Month.

                  (c)      Pepco's monthly payment to Generator will be
decreased by (i) any PJM charges for transmission congestion, allocated losses
and unaccounted-for energy that Pepco incurs in connection with the Services
Generator delivers to Pepco pursuant to Articles 4, 5 and 6 of this Agreement,
and (ii) the amounts of any payments Generator owes to Pepco pursuant to Article
8 of this Agreement.

         6.2      Taxes. Generator shall be responsible for taxes related to the
sale or provision of Services hereunder.

                                    ARTICLE 7
                     SERVICES OBTAINED BY GENERATOR FROM PJM

         Pepco shall, upon Generator's request, reasonably cooperate with
Generator to facilitate its acquisition in the PJM marketplace and resale to
Pepco of the Services Generator is obligated to provide to Pepco under this
Agreement. Pepco shall follow Generator's instructions with respect to
scheduling load in the day ahead PJM market.

<PAGE>   478

                                    ARTICLE 8
                ALTERNATIVE SERVICES AND LIMITATION OF LIABILITY

         8.1      Alternative Services. To the extent that Generator does not
provide Capacity Resources Requirements, Ancillary Services Requirements, the
Required Energy and/or Optional Energy ("Services") to Pepco as required under
this Agreement, Generator, as an alternative method of performing such
obligations, shall pay Pepco the positive difference between the price Pepco
pays for such Services in the appropriate PJM marketplace, or if not available
in the PJM market, any other market ("Alternative Services") and the price Pepco
would have paid to Generator for such Services under this Agreement, plus
penalties and nonperformance charges, if any, assessed on Pepco by the PJM
Interconnection LLC or PJM System Operator as a result of the Generator not
providing the Services. Calculation of the cost of Alternative Services
hereunder shall include all reasonable direct costs associated with the
procurement and delivery of Alternative Services, including legal or
transactional costs and expenses; taxes, energy, demand, capacity, or
reservation charges; energy losses; emergency energy; and any transmission or
congestion costs but does not include the cost of PJM network service. For
purposes of determining the amount of Alternative Services Pepco purchases to
satisfy its energy requirements, energy requirements for any day shall be the
net amount of energy Pepco purchases for the Service Load in the PJM day-ahead
and second settlement markets.

         8.2      Limitation of Liability. Except for indemnity obligations set
forth in Article 10 and the damages, charges or penalties set forth in Sections
3.1(c), 5.3, 8.1 and 13.3 of this Agreement, neither Party, nor their respective
officers, directors, agents, employees, Affiliates, or successors or assigns of
any of them, shall be liable to the other Party or its Affiliates, officers,
directors, agents, employees, successors or assigns for claims, suits, actions
or causes of action for incidental, punitive, special, indirect, multiple or
consequential damages (including, without limitation, lost revenues, claims of
customers, attorneys' fees and litigation costs) connected with, or resulting
from, performance or non-performance of this Agreement, or any actions
undertaken in connection with or related to this Agreement, including, without
limitation, any such damages which are based upon causes of action for breach of
contract, tort (including negligence and misrepresentation), breach of warranty
or strict liability. The provisions of this Section 8.2 shall apply regardless
of fault and shall survive termination, cancellation, suspension, completion, or
expiration of this Agreement.

<PAGE>   479

                                    ARTICLE 9
                                  FORCE MAJEURE

         9.1      Effect of Force Majeure. Notwithstanding anything in this
Agreement to the contrary, the Parties shall be excused from performing their
respective obligations hereunder (except for the obligation to pay sums of money
due and owing hereunder) and shall not be liable in damages or otherwise, to the
extent that a Party is unable to perform or is prevented from performing by an
event of Force Majeure and has complied with Section 9.3.

         9.2      Force Majeure Defined. Force Majeure includes, without
limitation, storm, flood, lightning, drought, earthquake, fire, explosion, civil
disturbance, acts of God or the public enemy, civil disturbance, or any other
cause beyond a Party's reasonable control but only if and to the extent that the
event directly affects the availability of the transmission or distribution
facilities of PJM or Pepco which are necessary to deliver capacity or energy to
the Service Load. Force Majeure shall not include events affecting the
availability or cost of operating any generating facility or resource.

         9.3      Notification. A Party shall not be entitled to rely on the
occurrence of an event of Force Majeure as a basis for being excused from
performance of its obligations under this Agreement unless the Party relying on
the event or condition shall: (a) provide prompt written notice of such Force
Majeure event to the other Party, including an estimation of its expected
duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts to continue to perform its
obligations under this Agreement; (c) expeditiously take action to correct or
cure the event or condition excusing performance; (d) exercise all reasonable
efforts to mitigate or limit damages to the other Party; and (e) provide prompt
notice to the other Party of the cessation of the event or condition giving rise
to its excuse from performance. Subject to this Section 9.3, any obligation
under this Agreement shall be suspended only to the extent caused by such Force
Majeure and only during the continuance of any inability of performance caused
by such Force Majeure but for no longer period.

                                   ARTICLE 10
                     INDEMNIFICATION FOR THIRD PARTY CLAIMS

         10.1     Generator's Indemnification. Generator shall indemnify, hold
harmless, and defend Pepco and its Affiliates, as the case may be, and their
respective

<PAGE>   480

officers, directors, employees, agents, contractors, subcontractors, invitees,
successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between Pepco and a third party or Generator) for
damage to property of unaffiliated third parties, injury to or death of any
person, including Pepco's employees or any third parties, to the extent caused,
by the negligence or willful misconduct of Generator's and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Generator's performance or breach of this Agreement, or
the exercise by Generator of its rights hereunder.

         10.2     Pepco's Indemnification. Pepco shall indemnify, hold harmless,
and defend Generator and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between the Generator and a third party or Pepco)
for damage to property of unaffiliated third parties, injury to or death of any
person, including Generator's employees or any third parties, to the extent
caused by the negligence or willful misconduct of Pepco and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Pepco's performance or breach of this Agreement, or the
exercise by Pepco of its rights hereunder.

         10.3     Indemnification Procedures. If either Party intends to seek
indemnification under this Article 10 from the other Party, the Party seeking
indemnification shall give the other Party notice of such claim within ninety
(90) days of the later of the commencement of, or the Party's actual knowledge
of, such claim or action. Such notice shall describe the claim in reasonable
detail, and shall indicate the amount (estimated if necessary) of the claim that
has been, or may be sustained by, said Party. To the extent that the other Party
will have been actually and materially prejudiced as a result of the failure to
provide such notice, such notice will be a condition precedent to any liability
of the other Party under the provisions for indemnification contained in this
Agreement. Neither Party may settle or compromise any claim without the prior
consent of the other Party; provided, however, said consent shall not be
unreasonably withheld or delayed.

<PAGE>   481

         10.4     Survival. The indemnification obligations of each Party under
this Article 10 shall continue in full force and effect regardless of whether
this Agreement has either expired or been terminated or canceled.

                                   ARTICLE 11
                                     DEFAULT

         11.1     Event of Default. Unless excused by Force Majeure, each of the
following events shall constitute an event of default (an "Event of Default")
under this Agreement:

                  (a)      the failure by a Party to pay any amount due within
thirty (30) days after receipt of written notice of nonpayment by the other
Party, unless the payment of such amount is disputed in good faith;

                  (b)      a Party's breach of any material term or condition of
this Agreement including any material breach of a representation, warranty or
covenant made in this Agreement which, after receiving written notice of the
breach from the non-breaching Party (such notice to set forth in reasonable
detail the nature of the default and, where known and if applicable, the steps
necessary to cure such default), (i) the breaching Party fails to cure within
thirty (30) days following receipt of the notice or (ii) if such default is of
such a nature that it cannot be cured within thirty (30) days following receipt
of such notice, the breaching Party fails within such thirty (30) days to
commence the necessary cure and fails at any time thereafter diligently and
continuously to prosecute such cure to completion provided that the cure is
completed no later than 180 days after the receipt of the default notice;

                  (c)      the appointment of a receiver or liquidator or
trustee for either Party and such receiver, liquidator or trustee is not
discharged within sixty (60) days;

                  (d)      the entry of a decree adjudicating a Party as
bankrupt or insolvent, and such decree is continued undischarged and unstayed
for a period of sixty (60) days; or

                  (e)      the filing of a voluntary or involuntary petition in
bankruptcy under any provision of any federal or state bankruptcy law by a Party
or against it, and, with respect to an involuntary petition in bankruptcy, such
petition continues undischarged and unstayed for a period of sixty (60) days.

<PAGE>   482

         11.2     Remedies. Upon the occurrence of an Event of Default, the
non-defaulting Party may (a) terminate this Agreement by providing sixty (60)
days' prior written notice to the defaulting Party and this Agreement shall
thereupon terminate upon receipt of regulatory approval for such termination,
but not before the date specified in the notice, and/or (b) subject to Section
8.2 of this Agreement, exercise all such rights and remedies as may be available
to it under this Agreement or at law or equity with respect to such Event of
Default.

                                   ARTICLE 12
                       PROJECTIONS AND OPERATING COMMITTEE

         12.1     Projections. No later than three (3) business days prior to
each Monday during the term of this Agreement, Pepco shall provide Generator
with non-binding projections of the Services to be provided by Generator to
Pepco under this Agreement for the week beginning that Monday.

         12.2     Operating Committee. The Parties shall establish an operating
committee consisting of one representative for each Party ("Operating
Committee"). The Operating Committee shall act only by unanimous agreement or
consent. The Parties shall designate their respective representatives to the
Operating Committee, plus an alternate by written notice. Each Party's
representative on the Operating Committee is authorized to act on behalf of such
Party with respect to any matter arising under this Agreement which is to be
decided by the Operating Committee, however, the Operating Committee shall not
have any authority to modify or otherwise alter the rights and obligations of
the Parties hereunder. The Operating Committee shall develop and implement
suitable policies and procedures with to coordinate the interaction of the
Parties with respect to the performance of their duties and obligations under
this Agreement.

                                   ARTICLE 13
                  COST RESPONSIBILITIES AND BILLING PROCEDURES

         13.1     Billing Procedures.

                  (a)      Within ten (10) days after the first day of each
Month Pepco shall provide to Generator a written invoice setting forth (a) the
amount Pepco owes to Generator pursuant to Article 6 of this Agreement for
Services and any other payments which may be due hereunder, and (b) the amounts,
if any, that Generator owes to Pepco pursuant to this Agreement. Each invoice
shall (i) delineate

<PAGE>   483

the Month in which the Services or Alternative Services were provided or
reimbursable charges were incurred, (ii) fully describe the Services or
Alternative Services rendered or reimbursable charges incurred, (iii) be
itemized to reflect the Services or Alternative Services performed or provided
or reimbursable charges incurred, and (iv) provide reasonable detail as to the
calculation of the amounts involved.

                  (b)      All invoices shall be paid within fifteen (15) days
after the date of issuance, but not earlier than the 25th day of the month in
which the invoice is rendered. All payments shall be made by wire transfer to a
bank designated in writing by such Party. Payment of invoices shall not relieve
the paying Party from any responsibilities or obligations it has under this
Agreement, nor shall such payment constitute a waiver of any claims arising
hereunder.

                  (c)      To the extent that, for any billing period, Generator
is obligated to pay to Pepco amounts due and calculated pursuant to this Section
13.1, Pepco may use such amounts as a set-off against any amounts owed by Pepco
to Generator.

         13.2     Billing Disputes. In the event of a billing dispute between
the Parties, (i) each Party shall continue to perform its obligations in
accordance with the terms of this Agreement subject to the other Party's rights
hereunder, and (ii) the Party required to make payments hereunder shall pay to
the other Party all invoiced amounts when due, net of any set-offs permitted
under Section 13.1(d), that are not in dispute. Payment of invoices by either
Party shall not relieve the paying Party from any responsibilities or
obligations it has under this Agreement; nor shall it constitute a waiver of any
claims arising hereunder.

         13.3     Interest on Unpaid Balances. Interest on any unpaid amounts
shall be calculated in accordance with the methodology specified for interest on
refunds in FERC regulations at 18 C.F.R. Section 35.19a(a)(2)(iii). Interest on
delinquent amounts shall be calculated from the due date of the bill to the date
of payment. When payments are made by mail, bills shall be considered as having
been paid on the date of receipt by the other Party.

                                   ARTICLE 14
                                 CONFIDENTIALITY

         14.1     Confidentiality Obligations of Pepco. Each Party shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or

<PAGE>   484

other provisions of law, all documents and information furnished by one Party to
the other Party in connection with this Agreement marked "Confidential" or
"Proprietary." Except to the extent that such information or documents are (i)
generally available to the public other than as a result of a disclosure by a
receiving Party in breach of this Agreement, (ii) available to the receiving
Party on a non-confidential basis prior to disclosure by the other Party , or
(iii) available to the receiving Party on a non-confidential basis from a source
other than the other Party, provided that such source is not known, and by
reasonable effort could not be known, by the receiving Party to be bound by a
confidentiality agreement with the other Party or otherwise prohibited from
transmitting the information to the receiving Party by a contractual, legal or
fiduciary obligation, the receiving Party shall not release or disclose such
information to any other person, except to its employees, representatives or
agents on a need-to-know basis, in connection with this Agreement who has not
first been advised of the confidentiality provisions of this Section 14.1 and
has agreed in writing to comply with such provisions. In no event shall such
information be disclosed in violation of the requirements of FERC Orders 889 and
889-A, and any successor thereto. The Party receiving confidential information
from the other Party shall promptly notify the other Party if it receives notice
or otherwise concludes that the production of any information subject to this
Section 14.1 is being sought under any provision of law and the receiving Party
shall use reasonable efforts in cooperation with the other Party to seek
confidential treatment for such confidential information provided thereto.

         14.2     Confidentiality of Audits. The independent auditor performing
any audit, as referred to in Article 20, shall be subject to a confidentiality
agreement between the auditor and the Party being audited. Such audit
information shall be treated as confidential except to the extent that its
disclosure is required by regulatory or judicial order, for reliability purposes
pursuant to PJM requirements and pursuant to the FERC's rules and regulations.
Except as provided herein, neither Party will disclose the audit information to
any third party, without the other Party's prior written consent. Audit
information in the hands of the Party not being audited shall be subject to all
provisions of Article 20.

         14.3     Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its obligations
under Sections 14.1 and 14.2. Each Party accordingly agrees, subject to Section
8.2, that the other Party shall be entitled to equitable relief, by way of
injunction or otherwise, if the first Party breaches or threatens to breach its
obligations under Sections 14.1 or 14.2 of this Agreement, as applicable, which
equitable relief

<PAGE>   485

shall be granted without bond or proof of damages, and the receiving Party shall
not plead in defense that there would be an adequate remedy at law.

                                   ARTICLE 15
                               DISPUTE RESOLUTION

         15.1     Disputes. A Party with a claim or dispute under this Agreement
shall submit to the Operating Committee a notification of such claim or dispute
within sixty (60) days after the circumstances that gave rise to the claim or
the question or issue in dispute. The notification shall be in writing and shall
include a concise statement of the claim or the issue or question in dispute, a
statement of the relevant facts and documentation to support the claim. In the
event the Operating Committee is unable, in good faith, to resolve their
disagreement in a manner satisfactory to both Parties within thirty (30) days
after receipt by the Operating Committee of a notification specifying the claim,
issue or question in dispute, the Parties shall refer the dispute to their
respective senior management. If, after using their good faith best efforts to
resolve the dispute, senior management cannot resolve the dispute within thirty
(30) days, the Parties shall utilize the arbitration procedures set forth below
in Section 15.2 to resolve a dispute, provided that nothing herein or therein
shall prohibit a Party from at any time requesting from a court of competent
jurisdiction a temporary restraining order, preliminary injunction, or other
similar form of equitable relief to enforce performance of the provisions of
this Agreement.

         15.2     Arbitration.

                  (a)      Unless the Parties otherwise mutually agree in
writing to another form of dispute resolution such as dispute resolution under
the PJM Agreement or the MAAC agreement, any arbitration initiated under this
Agreement shall be conducted before a single neutral arbitrator appointed by the
Parties within thirty (30) days of receipt by respondent of the demand for
arbitration. If the Parties are unable to agree on an arbitrator, such
arbitrator shall be appointed by the American Arbitration Association. Unless
the Parties agree otherwise, the arbitrator shall be an attorney or retired
judge with at least fifteen (15) years of experience, and shall not have any
current or past substantial business or financial relationships with any Party
to the arbitration. If possible, the arbitrator shall have experience in the
electric utility industry. Unless otherwise agreed, the arbitration shall be
conducted in accordance with the American Arbitration Association's Commercial

<PAGE>   486

Arbitration Rules, then in effect. Any arbitration proceedings, decision or
award rendered hereunder and the validity, effect and interpretation of this
arbitration agreement shall be governed by the Federal Arbitration Act of the
United States, 9 U.S.C. Sections 1 et seq. The location of any arbitration
hereunder shall be in the District of Columbia.

                  (b)      The arbitration shall, if possible, be concluded not
later than six (6) months after the date that it is initiated. The arbitrator
shall be authorized only to interpret and apply the provisions of this Agreement
or any related agreements entered into under this Agreement and shall have no
power to modify or change any of the above in any manner. The arbitrator shall
have no authority to award punitive or multiple damages or any damages
inconsistent with this Agreement. The arbitrator shall, within thirty (30) days
of the conclusion of the hearing, unless such time is extended by agreement of
the Parties, notify the Parties in writing of his or her decision, stating his
or her reasons for such decision and separately listing his or her findings of
fact and conclusions of law. The decision of the arbitrator rendered in such a
proceeding shall be final and binding on the Parties. Judgment on the award may
be entered upon it in any court having jurisdiction.

                  (c)      Nothing in this Agreement shall preclude, or be
construed to preclude, any Party from filing a petition or complaint with FERC
with respect to any arbitrable claim over which FERC has jurisdiction. In such
case, the other Party may request FERC to reject or to waive jurisdiction. If
FERC rejects or waives jurisdiction with respect to all or a portion of the
claim, the portion of the claim not so accepted by FERC shall be resolved
through arbitration, as provided in this Agreement. To the extent that FERC
asserts or accepts jurisdiction over the claim, the decision, finding of fact or
order of FERC shall be final and binding, subject to judicial review under the
Federal Power Act, and any arbitration proceedings that may have commenced with
respect to the claim prior to the assertion or acceptance of jurisdiction by
FERC shall be terminated.

                                   ARTICLE 16
                                 REPRESENTATIONS

         16.1     Representations of Pepco. Pepco hereby represents and warrants
to Generator as follows:

<PAGE>   487

                  (a)      Incorporation. Pepco is a corporation duly organized,
validly existing and in good standing under the laws of the District of Columbia
and the Commonwealth of Virginia, and has all requisite corporate power and
authority to own, lease and operate its material assets and properties and to
carry on its business as now being conducted.

                  (b)      Authority. Pepco has all necessary corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Pepco of this
Agreement and the consummation by Pepco of the transactions contemplated
hereunder have been duly and validly authorized by the Board of Directors of
Pepco or by a committee thereof to whom such authority has been delegated and no
other corporate proceedings on the part of Pepco are necessary to authorize this
Agreement or the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Pepco and, assuming that this Agreement
constitutes a valid and binding agreement of Generator, constitutes a valid and
binding agreement of Pepco, enforceable by Pepco in accordance with its terms.

                  (c)      Consents and Approvals; No Violation.

                  (i)      Neither the execution and delivery of this Agreement
by Pepco nor performance by Pepco of its obligations hereunder will (A) conflict
with or result in any breach of any provision of the Certificate of
Incorporation or By-laws of Pepco, (B) result in a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Pepco or any of its
subsidiaries is a party or by which any of their respective assets may be bound
or (C) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Pepco, or any of its assets, except in the case of clauses (B) and
(C) for such failures to obtain a necessary consent, defaults and violations
which would not, individually or in the aggregate, have a material adverse
effect on the ability of Pepco to discharge its obligations under this Agreement
(a "Pepco Material Adverse Effect").

                  (ii)     No declaration, filing or registration with, or
notice to, or authorization, consent or approval of any governmental authority
is necessary for performance by Pepco of its obligations hereunder, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not

<PAGE>   488

obtained or made would not, individually or in the aggregate, have a Pepco
Material Adverse Effect.

         16.2     Representations of Generator. Generator hereby represents and
warrants to Pepco as follows:

                  (a)      Incorporation. Generator is a [corporation] duly
[incorporated], validly existing and in good standing under the laws of the
State of __________, and has all requisite [corporate] power and authority to
own, lease and operate its material assets and properties and to carry on its
business as now being conducted.

                  (b)      Authority. Generator has all necessary [corporate]
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by the Generator of
this Agreement and the consummation by Generator of the transactions
contemplated hereby have been duly and validly authorized the [Board of
Directors] of Generator or by a committee thereof to whom such authority has
been delegated and no other [corporate] proceedings on the part of Generator are
necessary to authorize this Agreement or the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Generator
and, assuming that this Agreement constitutes a valid and binding agreement of
Pepco, constitutes a valid and binding agreement of Generator, enforceable
against Generator in accordance with its terms.

                  (c)      Consents and Approvals.

                  (i)      Neither the execution and delivery of this Agreement
by Generator nor performance by Generator of its obligations hereunder will (A)
conflict with or result in any breach of any provision of the [Certificate of
Incorporation or By-laws] of Generator, (B) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Generator or any of
its subsidiaries is a party or by which any of their respective assets may be
bound or (C) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Generator, or any of its assets, except in the case of
clauses (B) and (C) for such failures to obtain a necessary consent, defaults
and violations which would not, individually or in the aggregate, have a
material adverse effect on the ability of Generator to discharge its obligations
under this Agreement (a "Generator Material Adverse Effect").

<PAGE>   489

                  (ii)     No declaration, filing or registration with, or
notice to, or authorization, consent or approval of any Governmental Authority
is necessary for performance by Generator of its obligations hereunder, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made would not, individually or
in the aggregate, have a Generator Material Adverse Effect.

                                   ARTICLE 17
                     ASSIGNMENT/CHANGE IN CORPORATE IDENTITY

         17.1     Generally. Except as otherwise set forth in this Article 17,
neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned by either Party hereto, without the prior written
consent of the other Party, which consent shall not be unreasonably withheld or
delayed.

         17.2     Pepco's Assignment Rights. Subject to Section 17.5 below, upon
ten (10) days prior written notice to Generator, Pepco may assign this
Agreement, and Pepco's rights, interests and obligations hereunder, to an
Affiliate of Pepco that assumes Pepco's obligations to provide Services to the
Service Load.

         17.3     Generator's Assignment Rights. Subject to Section 17.5 below,
Generator may assign, transfer, pledge or otherwise dispose of its rights and
interests hereunder to a trustee, lending institution, or other Person for the
purposes of financing or refinancing the Auctioned Assets, including upon or
pursuant to the exercise of remedies under such financing or refinancing, or by
way of assignments, transfers, conveyances of dispositions in lieu thereof;
provided, however, that no such assignment in accordance with this Section 17.3
shall relieve or in any way discharge Generator from the performance of its
duties and obligations under this Agreement. Pepco agrees to execute and
deliver, at Generator's expense, such documents as may be reasonably necessary
to accomplish any such assignment, transfer, conveyance, pledge or disposition
of rights hereunder for purposes of the financing or refinancing of the
Facility, so long as Pepco's rights under this Agreement are not thereby
altered, amended, diminished or otherwise impaired.

         17.4     Mergers or Consolidations. Subject to Section 17.5 below,
either Party may assign this Agreement to a successor to all or substantially
all of the assets of such Party by way of merger, consolidation, sale or
otherwise, provided such successor assumes in writing and becomes liable for all
of such Party's duties and obligations hereunder.

<PAGE>   490

         17.5     Limitations

                  (a)      No assignment, transfer, conveyance, pledge or
disposition of rights, interests, duties or obligations under this Agreement by
a Party shall relieve that Party from liability and financial responsibility for
the performance thereof after any such transfer, assignment, conveyance, pledge
or disposition unless and until (i) the transferee or assignee shall agree in
writing to assume the obligations and duties of that Party under this Agreement
and to impose such obligations on subsequent permitted transferees and assignees
and (ii) the non-assigning Party has consented in writing to such assumption and
to a release of the assigning Party from such liability, such consent not to be
unreasonably withheld or delayed.

                  (b)      If Generator terminates its existence as a
[corporate] entity by merger, acquisition, sale, consolidation or otherwise, or
if all or substantially all of Generator's assets are transferred to another
person or business entity without complying with this Article 17, Pepco shall
have the right, enforceable in a court of competent jurisdiction, to enjoin
Generator's successor from using its assets in any manner that does not comply
with the requirements of this Agreement or that impedes Pepco's ability to carry
on its ongoing business operations.

         17.6     Successors. This Agreement and all of the provisions hereof
are binding upon, and inure to the benefit of, the Parties and their respective
successors and permitted assigns.

                                   ARTICLE 18
                                     NOTICES

         Except as otherwise expressly set forth in this Agreement, all notices
and other communications hereunder shall be in writing and shall be deemed given
(as of the time of delivery or, in the case of a telecopied communication, of
confirmation) if delivered personally, telecopied (which is confirmed) or sent
by overnight courier (providing proof of delivery) to the Parties at the
following addresses (or at such other address for a Party as shall be specified
by like notice):

<PAGE>   491

            if to Pepco, to:

                  Potomac Electric Power Company
                  1900 Pennsylvania Avenue, N.W.
                  Washington, D.C. 20068
                  Telecopier: (202) ________________
                  Attention: ___________________

            if to Generator, to:

                  c/o Southern Energy, Inc.
                  900 Ashwood Parkway
                  Suite 500
                  Atlanta, Georgia 30338-4780
                  Telecopier: (770) 821-6575
                  Attention:

                                   ARTICLE 19
                                   AMENDMENTS

         19.1     Amendments. Except as provided in Section 19.2, this Agreement
shall not be amended, modified, or supplemented unless mutually agreed to by the
Parties in writing. Except as provided in Section 19.2(b) below, the rates,
terms and conditions contained in this Agreement are not subject to change under
Sections 205 or 206 of the Federal Power Act absent the mutual written agreement
of the Parties. It is the intent of this Section 19.1 that, except as provided
in Section 19.2(b) below, the rates, terms and conditions of this Agreement
shall not be subject to change except by mutual written agreement by the
Parties.

         19.2     PJM Agreement Modifications

                  (a)      If the PJM Agreements are amended or modified so that
any schedule or section references herein to such agreements is changed, such
schedule or section references herein shall be deemed to automatically (and
without any further action by the Parties) refer to the new or successor
schedule or section in the PJM Agreements which replaces that originally
referred to in this Agreement.

                  (b)      If the applicable provisions of the PJM Agreements
referenced herein, or any other PJM rules relating to the implementation of this
Agreement, are changed materially from those in effect on May 31, 2000, the
Operating

<PAGE>   492

Committee shall cooperate to make conforming changes to this Agreement to
fulfill the purposes of this Agreement; provided that no such changes shall
alter the economic benefits of this Agreement between the Parties. If the
Operating Committee fails to agree on such changes within 15 days, Pepco may
unilaterally make conforming changes to this Agreement to fulfill the purposes
of this Agreement, and shall file such changes with the FERC on behalf of both
Parties; provided that nothing herein shall prejudice the Generator's rights to
protest such change.

                                   ARTICLE 20
                                     AUDITS

         The Parties shall have the right, during normal business hours, to
audit each other's accounts and records pertaining to transactions under this
Agreement, upon twenty (20) days prior written notice, at the offices where such
accounts and records are maintained. Any such audit of a Party's accounts and
records will be at the expense of the auditing Party, shall not be made more
frequently than once in any twelve (12) month period, and no such audit may be
made with respect to accounts and records relating to periods more than
twenty-four (24) months prior to the date of the audit notice. The Party being
audited will be entitled to review the audit report and any supporting
materials. The Party conducting the audit shall maintain the confidentiality of
all information obtained during the audit in compliance with Section 14.2 of
this Agreement. To the extent that audited information includes confidential
information, the auditing Party shall designate an independent auditor at its
expense to perform such audit.

                                   ARTICLE 21
                            MISCELLANEOUS PROVISIONS

         21.1     Waiver. Except as otherwise provided in this Agreement, any
failure of a Party to comply with any obligation, covenant, agreement, or
condition herein may be waived by the Party entitled to the benefits thereof
only by a written instrument signed by the Party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement, or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.

         21.2     No Third Party Beneficiaries. Nothing in this Agreement is
intended to confer upon any other person except the Parties any rights or
remedies hereunder or shall create any third party beneficiary rights in any
person. No

<PAGE>   493

provision of this Agreement shall create any rights in any such persons in
respect of any benefits that may be provided, directly or indirectly, under any
employee benefit plan or arrangement except as expressly provided for
thereunder.

         21.3     Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the District of Columbia (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).

         21.4     Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         21.5     Interpretation. When a reference is made in this Agreement to
an article, section, schedule or exhibit, such reference shall be to an article
or section of, or schedule or exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation" or equivalent words. The words "hereof", "herein"
and "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. The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such term. Unless otherwise expressly
stated otherwise herein, the word "day" shall mean any calendar day including
weekends and holidays. Any agreement, instrument, statute, regulation, rule or
order defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument, statute, regulation, rule
or order as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes, regulations, rules or orders) by succession of comparable successor
statutes, regulations, rules or orders and references to all attachments thereto
and instruments incorporated therein. References to a person are also to its
permitted successors and assigns. Each Party acknowledges that it has been
represented by counsel in connection with the review and execution of this
Agreement, and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

<PAGE>   494

         21.6     Jurisdiction and Enforcement. Each of the Parties irrevocably
submits to the exclusive jurisdiction of (i) the Superior Court of the District
of Columbia and (ii) the United States District Court for the District of
Columbia, for the purposes of any suit, action or other proceeding arising out
of this Agreement or any transaction contemplated hereby. Each of the Parties
agrees to commence any action, suit or proceeding relating hereto either in the
United States District Court for the District of Columbia or, if such suit,
action or proceeding may not be brought in such court for jurisdictional
reasons, in the Superior Court of the District of Columbia. Each of the Parties
further agrees that service of process, summons, notice or document by hand
delivery or U.S. registered mail at the address specified for such Party in
Article 18 (or such other address specified by such Party from time to time
pursuant to Article 18) shall be effective service of process for any action,
suit or proceeding brought against such Party in any such court. Each of the
Parties irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the Superior Court of the District of
Columbia and (ii) the United States District Court for the District of Columbia,
and hereby further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.

         21.7     Entire Agreement. This Agreement, the Asset Sale Agreement,
the Confidentiality Agreement and the Ancillary Agreements including the
exhibits, schedules, documents, certificates and instruments referred to herein
or therein and other contracts, agreements and instruments contemplated hereby
or thereby, embody the entire agreement and understanding of the Parties in
respect of the transactions contemplated by this Agreement. There are no
restrictions, promises, representations, warranties, covenants or undertakings
other than those expressly set forth or referred to herein or therein. This
Agreement, the Asset Sale Agreement and the Ancillary Agreements supersede all
prior agreements and understandings between the Parties with respect to the
transactions contemplated by this Agreement other than the Confidentiality
Agreement.

         21.8     Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the Parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the Parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable

<PAGE>   495

manner to the end that the transactions contemplated hereby are fulfilled to
the extent possible.

         21.9     Further Assurances. The Parties hereto agree to execute and
deliver promptly, at the expense of the Party requesting such action, any and
all other and further instruments, documents and information which may be
reasonably requested in order to effectuate the transactions contemplated
hereby. Each Party agrees to cooperate with, assist and accommodate all
reasonable requests made by the other Party in respect of any regulatory
approval necessary for, or any regulatory proceeding relating to, the execution,
delivery or performance of this Agreement. Each Party further agrees to comply
in all material respects with all laws of governmental authorities relating to
this Agreement and the consummation of the transactions contemplated hereby.

         21.10    Independent Contractor Status. Nothing in this Agreement shall
be construed as creating any relationship between Pepco and Generator other than
that of independent contractors.

         21.11    Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

<PAGE>   496

         IN WITNESS WHEREOF, Pepco and Generator have caused this Transition
Power Agreement (District of Columbia) to be signed by their respective duly
authorized officers as of the date first above written.

                                    POTOMAC ELECTRIC POWER COMPANY

                                    By:
                                       ---------------------------------
                                          Name:
                                          Title:

                                    [GENERATOR]

                                    By:
                                       ---------------------------------
                                          Name:
                                          Title:

<PAGE>   497

                                   SCHEDULE 1
                                   DEFINITIONS

Part A.  Capitalized terms not defined in the body of the Agreement shall have
         the meaning set forth in Part A of this Schedule 1. (Part B of this
         Schedule 1 sets forth capitalized terms defined within the Agreement.)

         1.       " Affiliate" has the meaning set forth in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934.

         2.       "Auctioned Assets" has the meaning set forth in the Asset Sale
Agreement.

         3.       "Capacity Credits" has the meaning set forth in the PJM
Reliability Agreement.

         4.       "Capacity Resources" has the meaning set forth in the PJM
Reliability Agreement.

         5.       "Contract Year 1" means the period beginning on the Effective
Date and ending thirteen calendar months thereafter.

         6.       "Contract Year 2" means the period beginning immediately after
the end of Contract Year 1 and ending twelve calendar months thereafter.

         7.       "Contract Year 3" means the period beginning immediately after
the end of Contract Year 2 and ending twelve calendar months thereafter.

         8.       "Contract Year 4" means the period beginning immediately after
the end of Contract Year 3 and ending twelve calendar months thereafter.

         9.       "Closing" has the meaning set forth in the Asset Sale
Agreement.

         10.      "Confidentiality Agreement" has the meaning set forth in the
Asset Sale Agreement.

         11.      "FERC" means the Federal Energy Regulatory Commission or its
successors.

         12.      "Fixed Transmission Rights" has the meaning set forth in the
PJM Operating Agreement.

<PAGE>   498

         13.      "Full Energy Requirements" means the full electric energy
requirements of the Service Load in any hour, measured in megawatt hours at the
Delivery Points.

         14.      "Generator" has the meaning set forth in the preamble of this
Agreement and shall include its permitted successors and assigns.

         15.      "Metered Energy Requirements" means the full electric energy
requirements of the Service Load in any hour, measured in megawatt hours at the
retail (customer revenue meter) level. For customers without, interval metering,
Pepco will use customer or retail class profiles in accordance with the District
of Columbia Public Service Commission regulations to distribute periodic metered
energy usage to obtain hourly customer energy usage. When Pepco curtailable load
programs are operated, customer loads which are curtailed will be increased by
Pepco to reflect the hourly energy usage which would have occurred if
curtailments had not taken place.

         16.      "Month" means a calendar month.

         17.      "Network Customer" has the meaning set forth in the PJM
Tariff.

         18.      "Network Load" has the meaning set forth in the PJM Tariff.

         19.      "Optional Energy" means the Optional Energy Percent, as
elected by Pepco through the exercise of its Call Options, of Pepco's Full
Energy Requirements.

         20.      "Pepco" has the meaning set forth in the preamble of this
Agreement and shall include its permitted successors or assigns.

         21.      "PJM" means the Pennsylvania New Jersey-Maryland
interconnected power pool operated under the PJM Operating Agreement and any
successor thereto including any regional transmission organization, independent
system operator, transco, or any other independent system administrator that
possesses operational control or planning control over Pepco's transmission
system.

         22.      "PJM Agreements" means the PJM Operating Agreement, PJM
Reliability Agreement, and PJM Tariff.

         23.      "PJM Control Area" has the meaning set forth in the PJM
Reliability Agreement.

         24.      "PJM Operating Agreement" means the Amended and Restated
Operating Agreement of the PJM Interconnection LLC dated as of June 2, 1997.

<PAGE>   499

         25.      "PJM Interconnection LLC" means the independent system
operator of the PJM Control Area pursuant to the PJM Operating Agreement and the
PJM Tariff.

         26.      "PJM Reliability Agreement" means the PJM Reliability
Assurance Agreement dated June 2, 1997, establishing obligations, standards and
procedures for maintaining the reliable operation of the PJM Control Area.

         27.      "PJM System Operator" means the PJM Interconnection LLC energy
control center staff responsible for central dispatch as provided in the PJM
Agreement.

         28.      "PJM Tariff" means the PJM Open Access Transmission Tariff
providing transmission service within the PJM Control Area.

         29.      "Planning Period" has the meaning set forth in the PJM
Reliability Agreement.

         30.      "Required Energy" means the Required Energy Percent of Pepco's
Full Energy Requirements.

         31.      "Service Load" means (i) all of Pepco's default service retail
electric energy customers located in Pepco's service territory, as such
territory exists on the Effective Date, in the District of Columbia, and (ii)
the energy requirements of the Washington Metropolitan Area Transit Authority in
the Commonwealth of Virginia which Pepco is required to provide.

         32.      "Summer Month" means each Month during the period of May 1
through September 30.

         33.      "Winter Month" means each Month during the period of October 1
through April 30.

Part B.           The following terms have the meaning specified in the section
of this Agreement set forth opposite to such term:

<TABLE>
<S>                                 <C>
Term                                Agreement Reference
Agreement                           Preamble
Alternative Services                Section 8.1
Ancillary Services                  Article 4
Ancillary Services Requirements     Article 4
Asset Sale Agreement                First Recital
Call Options                        Section 5.2(a)
</TABLE>

<PAGE>   500

<TABLE>
<S>                                 <C>
Capacity Resources Plan             Section 3.2(a)
Capacity Resources Requirements     Section 3.1(a)
Delivery Points                     Section 5.3
Effective Date                      Section 2.1
Event of Default                    Section 11.1
Force Majeure                       Section 9.2
Generator Material Adverse Effect   Section 16.2(c)(i)
Operating Committee                 Article 12
Optional Energy Percent             Section 5.2(a)
Pepco Material Adverse Effect       Section 16.1(c)(i)
Party or Parties                    Preamble
PPAs                                First Recital

Required Energy Percent             Section 5.1
Services                            Section 8.1
</TABLE>

<PAGE>   501

                                  EXHIBIT I-2

                           TRANSITION POWER AGREEMENT
                                   (Maryland)

                                 By and Between

                         POTOMAC ELECTRIC POWER COMPANY

                                       and

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

                            Dated ____________, 2000

<PAGE>   502

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                    <C>
ARTICLE 1 - DEFINITIONS                                                 1
ARTICLE 2 - TERM AND TERMINATION                                        2
      2.1 - Term                                                        2
      2.2 - Termination                                                 2
ARTICLE 3 - CAPACITY RESOURCES                                          2
      3.1 - Capacity Resources Obligations                              2
      3.2 - Capacity Resources Information Requirements                 3
ARTICLE 4 - ANCILLARY SERVICES                                          4
ARTICLE 5 - ENERGY                                                      4
      5.1 - Required Energy                                             4
      5.2 - Optional Energy                                             5
      5.3 - Determination of Energy Requirements; Losses                5
ARTICLE 6 - PRICING                                                     6
      6.1 - Compensation for Services                                   6
      6.2 - Taxes                                                       7
ARTICLE 7 - SERVICES OBTAINED BY GENERATOR FROM PJM                     7
ARTICLE 8 - ALTERNATIVE SERVICES AND LIMITED LIABILITY                  7
      8.1 - Alternative Services                                        7
      8.2 - Limitation on Liability                                     8
ARTICLE 9 - FORCE MAJEURE                                               9
      9.1 - Effect of Force Majeure                                     9
      9.2 - Force Majeure Defined                                       9
      9.3 - Notification                                                9
ARTICLE 10 - INDEMNIFICATION FOR THIRD PARTY CLAIMS                    10
      10.1 - Generator's Indemnification                               10
      10.2 - Pepco's Indemnification                                   10
      10.3 - Indemnification Procedures                                10
      10.4 - Survival                                                  11
ARTICLE 11 - DEFAULT                                                   11
      11.1 - Event of Default                                          11
      11.2 - Remedies                                                  12
ARTICLE 12 - PROJECTIONS AND OPERATING COMMITTEE                       12
      12.1 - Projections                                               12
      12.2 - Operating Committee                                       12
ARTICLE 13 - COST RESPONSIBILITIES AND BILLING PROCEDURES              13
      13.1 - Billing Procedures                                        13
      13.2 - Billing Disputes                                          14
</TABLE>

<PAGE>   503

<TABLE>
<S>                                                                     <C>
      13.3 - Interest on Unpaid Balances                                14
ARTICLE 14 - CONFIDENTIALITY                                            14
      14.1 - Confidentiality Obligations of Pepco                       14
      14.2 - Confidentiality of Audits                                  15
      14.3 - Remedies                                                   15
ARTICLE 15 - DISPUTE RESOLUTION                                         15
      15.1 - Disputes                                                   15
      15.2 - Arbitration                                                16
ARTICLE 16 - REPRESENTATIONS                                            17
      16.1 - Representations of Pepco                                   17
      16.2 - Representations of Generator                               18
ARTICLE 17 - ASSIGNMENT/CHANGE IN CORPORATE IDENTITY                    20
      17.1 - Generally                                                  20
      17.2 - Pepco's Assignment Rights                                  20
      17.3 - Generator's Assignment Rights                              20
      17.4 - Mergers or Consolidations                                  20
      17.5 - Limitations                                                20
      17.6 - Successors                                                 21
ARTICLE 18 - NOTICES                                                    21
ARTICLE 19 - AMENDMENTS                                                 22
      19.1 - Amendments                                                 22
      19.2 - PJM Agreement Modifications                                22
ARTICLE 20 - AUDITS                                                     23
ARTICLE 21 - MISCELLANEOUS PROVISIONS                                   23
      21.1 - Waiver                                                     23
      21.2 - No Third Party Beneficiaries                               23
      21.3 - Governing Law                                              24
      21.4 - Counterparts                                               24
      21.5 - Interpretation                                             24
      21.6 - Jurisdiction and Enforcement                               25
      21.7 - Entire Agreement                                           25
      21.8 - Severability                                               26
      21.9 - Further Assurances                                         26
      21.10-Independent Contractor Status                               26
      21.11-Conflicts                                                   26
SCHEDULE 1 - DEFINITIONS                                                28
EXHIBIT A - Pepco's Non-Binding Estimate for Calendar Year 2001 of
Capacity Resources for the Service Load                                 32
EXHIBIT B - Capacity Resources Plan for Contract Year 1                 33
</TABLE>

<PAGE>   504

                                  EXHIBIT I-2

                      TRANSITION POWER AGREEMENT (Maryland)

         This Transition Power Agreement ("Agreement") dated as of _________,
2000 by and between Potomac Electric Power Company ("Pepco") a District of
Columbia and Virginia corporation, and _____________ ("Generator") a ___________
[corporation]. Pepco and Generator are each referred to herein as a "Party," and
collectively referred to herein as the "Parties."

                                   WITNESSETH:

         WHEREAS, Pepco and Generator have entered into an Asset Sale and
Purchase Agreement ("Asset Sale Agreement") dated June 7, 2000 for (i) the sale
and purchase of certain of Pepco's generating resources and (ii) the assignment
of rights and obligations under five power purchase agreements ("PPAs") or for
alternative arrangements relating to such PPAs;

         WHEREAS, certain of the PPAs provide for the purchases and sale of
Renewable Energy Resources;

         WHEREAS, Pepco will continue to operate its transmission and
distribution businesses which includes obligations to sell power to its retail
customers; and

         WHEREAS, the Parties have agreed in the Asset Sale Agreement to execute
this Agreement in order to provide for the sale by Generator, and purchase by
Pepco, of capacity, electric energy and certain ancillary services in accordance
with the terms and conditions of this Agreement.

         NOW THEREFORE, in consideration of the mutual representations,
covenants and agreements hereinafter set forth, and intending to be legally
bound hereby, the Parties hereto agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

         Unless otherwise defined herein, capitalized terms used in this
Agreement shall have the meanings specified or referred to in Schedule 1 of this
Agreement.

                                    ARTICLE 2
                              TERM AND TERMINATION

         2.1      Term. This Agreement shall become effective upon the
consummation of the Closing ("Effective Date"). Unless terminated sooner in

<PAGE>   505

accordance with the terms of this Agreement, this Agreement shall continue in
full force and effect from the Effective Date through and including June 30,
2004.

         2.2      Termination. The applicable provisions of this Agreement shall
continue in effect after cancellation or termination hereof to the extent
necessary to provide for final billings, billing adjustments and payments
pertaining to liability and indemnification obligations arising from acts or
events that occurred while this Agreement was in effect.

                                    ARTICLE 3
                               CAPACITY RESOURCES

         3.1      Capacity Resources Obligations

                  (a)      During the term of this Agreement, Generator shall
supply to Pepco and make available within PJM on Pepco's behalf, and Pepco shall
purchase from Generator, Pepco's full requirements for Capacity Resources to
serve the Service Load ("Capacity Resource Requirements") at the prices set
forth in Article 6 of this Agreement. Capacity Resources shall be determined,
and provided by the Generator, in accordance with the PJM Reliability Agreement
and other applicable PJM requirements. Capacity Resource Requirements shall mean
the portion of Pepco's Accounted-For Obligation, as that term is defined and
determined in accordance with the PJM Reliability Agreement and applicable PJM
requirements, that is located in the State of Maryland.

                  (b)      To the extent that PJM assigns to Pepco Fixed
Transmission Rights for Capacity Resources contained in a Capacity Resource Plan
and designated for Fixed Transmission Rights, Pepco shall transfer such Fixed
Transmission Rights to Generator pursuant to PJM's procedures for assigning
Fixed Transmission Rights

                  (c)      Generator shall provide to the PJM System Operator or
PJM Interconnection LLC, as applicable, all information and data required with
respect to the Capacity Resources Requirements, with copies to Pepco, and
Generator shall be responsible for any charges levied by the PJM System Operator
or the PJM Interconnection LLC on Pepco or Generator due to the delayed receipt
of such information and data in accordance with the PJM Reliability Agreement
unless the delay is due to Pepco's delay in providing Generator with information
that Pepco is required to provide.

<PAGE>   506

         3.2      Capacity Resources Information Requirements

                  (a)      Generator shall provide in accordance with this
Section 3.2 its proposed plan to satisfy its obligations hereunder to provide
the Capacity Resources Requirements under this Agreement ("Capacity Resources
Plan").

                  (b)      Exhibit A hereto sets forth Pepco's non-binding
estimate of the Capacity Resources required to supply the Service Load for each
month during the 2001 calendar year. On or before April 1 preceding each
Planning Period thereafter, Pepco shall provide Generator with a non-binding
estimate of the Capacity Resources required to supply the Service Load for each
month in the following Planning Period.

                  (c)      Exhibit B hereto sets forth the Generator's Capacity
Resources Plan for Contract Year 1.

                  (d)      On or before May 1 preceding each Planning Period
thereafter during the term of this Agreement, the Generator shall provide to the
Operating Committee, for review and approval (such approval not to be
unreasonably withheld or delayed), its proposed Capacity Resources Plan
(including Generator's proposed designation of Capacity Resources for associated
Fixed Transmission Rights) to be submitted to the PJM Interconnection LLC in
accordance with Schedule 6 of the PJM Reliability Agreement for the upcoming
Planning Period.

                  (e)      If the Generator intends to propose any material
change to a Capacity Resources Plan (including any change in a designation of
Capacity Resources eligible for Fixed Transmission Rights) which has previously
been approved by the Operating Committee, the Generator shall provide such
proposed changes to the Operating Committee before it is submitted for approval
pursuant to the PJM Reliability Agreement and such change shall be subject to
the Operating Committee for review and approval (such approval not to be
unreasonably withheld or delayed) if the change (1) adds a resource other than
(x) capacity already certified by the PJM Interconnection LLC or PJM System
Operator, as applicable, as a Capacity Resource or (y) Capacity Credits, or (2)
proposes to change a designation of Capacity Resources eligible for Fixed
Transmission Rights.

<PAGE>   507

                                    ARTICLE 4
                               ANCILLARY SERVICES

         During the term of this Agreement, Generator shall supply to Pepco and
deliver within PJM on Pepco's behalf, and Pepco shall purchase, Pepco's full
requirements for Ancillary Services for the Service Load ("Ancillary Services
Requirements") at the prices set forth in Article 6 of this Agreement. Ancillary
Services mean Regulation and Frequency Response Service (as defined in Schedule
3 of the PJM Tariff) and Operating Reserves (as defined in Schedules 5 and 6 of
the PJM Tariff).

                                    ARTICLE 5
                                     ENERGY

         5.1      Required Energy.

                  (a)      During the term of this Agreement, Generator shall
supply to Pepco at the Delivery Points, and Pepco shall purchase, the following
percentages of Pepco's Full Energy Requirements in the year indicated below (the
"Required Energy Percent"), including the applicable Renewable Energy Percent,
at the prices set forth in Article 6 of this Agreement:

<TABLE>
<CAPTION>
                     Year                 Required Energy Percent

                     <S>                  <C>
                     Contract Year 1               100%
                     Contract Year 2                75%
</TABLE>

         5.2      Optional Energy

                  (a)      For the duration of each of Contract Year 2, Contract
Year 3 and Contract Year 4, Pepco shall have the right to purchase from
Generator (the "Call Options") the percentages of the Full Energy Requirements
indicated below (the "Optional Energy Percent"), including the applicable
Renewable Energy Percent. To the extent Pepco exercises a Call Option for a
given year, Generator shall supply to Pepco at the Delivery Points the Optional
Energy Percent at the price set forth in Article 6 of this Agreement.

<PAGE>   508

<TABLE>
<CAPTION>
                Year                Optional Energy Percent

                <S>                 <C>
                Contract Year 2     25%

                Contract Year 3     100% (in 25% increments)

                Contract Year 4     100% (in 25% increments)
</TABLE>

         Notwithstanding the foregoing, the total of Pepco's Call Options
exercised with respect to the Optional Energy Percent for Contract Year 3 and
Contract Year 4, respectively, shall not exceed the percentage of the Full
Energy Requirements that Pepco elected to purchase in the immediately preceding
contract year.

                  (b)      By each October 1 prior to the contract year in which
the applicable Optional Energy Percent is deliverable ("Strike Date"), Pepco
shall notify Generator in writing whether it is exercising any of its Call
Options for the upcoming contract year, and if so, the percentage of its Full
Energy Requirements it elects to purchase.

         5.3      Determination of Energy Requirements. The amount of Full
Energy Requirements shall be as determined by PJM in accordance with Schedule 1,
Section 3.2 of the PJM Operating Agreement at the respective PJM load buses
measured by PJM for the Service Load served by Pepco (the "Delivery Points").
Generator shall be responsible for all energy losses (including allocated PJM
losses, unaccounted-for energy and distribution losses) associated with delivery
of Required Energy Percent and Optional Energy Percent to the Service Load.

         5.4      Renewable Energy Resources Reporting Requirements. Generator
acknowledges that under Maryland law and MDPSC requirements, Pepco is required
to provide the Renewable Energy Percentage to its Service Load and to satisfy
MDPSC reporting requirement with respect thereto. Upon Pepco's written request,
Generator shall provide to Pepco in writing no later than thirty (30) days after
such request, the information and data requested by Pepco to demonstrate that
Generator has provided the Renewable Energy Percent required under this
Agreement and if Generator has failed to provide all of such Renewable Energy
Percent, the reasons for such failure.

<PAGE>   509

                                    ARTICLE 6
                                     PRICING

         6.1      Compensation for Services Subject to the terms of this
Agreement, Pepco shall be obligated to make a monthly payment to Generator for
the Services it provides which shall be comprised of the following components:

                  (a)      For each Month during the term of the Agreement, a
Capacity Payment for the Capacity Resources Requirements and Ancillary Services
Requirements that Generator provides to Pepco in such Month calculated as
follows:

        Capacity Payment = (Capacity Price + Ancillary Services Price) x Metered
        Energy Requirements

                  Where:

                           Capacity Price = $3.50/MWh

                           Ancillary Services Price = $0.50/MWh

                  (b)      For each Month during the term of the Agreement, an
Energy Payment for the Required Energy Percent and Optional Energy Percent, if
any, that Generator delivers to Pepco at the Delivery Points in each Month
calculated as follows:

      Energy Payment = [Metered Energy Requirements x (Required Energy Percent
      + Optional Energy Percent)] x Energy Price

      Where:

                  Energy Price = $40.00/MWh during a Summer Month and $22.20/MWh
during a Winter Month.

                  (c)      Pepco's monthly payment to Generator will be
decreased by (i) any PJM charges for transmission congestion, allocated losses
and unaccounted-for energy that Pepco incurs in connection with the Services
Generator delivers to Pepco pursuant to Articles 4, 5 and 6 of this Agreement,
and (ii) the amounts of any payments Generator owes to Pepco pursuant to Article
8 of this Agreement.

<PAGE>   510

         6.2      Taxes. Generator shall be responsible for taxes related to the
sale or provision of Services hereunder.

                                    ARTICLE 7
                     SERVICES OBTAINED BY GENERATOR FROM PJM

         Pepco shall, upon Generator's request, reasonably cooperate with
Generator to facilitate its acquisition in the PJM marketplace and resale to
Pepco of the Services Generator is obligated to provide to Pepco under this
Agreement. Pepco shall follow Generator's instructions with respect to
scheduling load in the day ahead PJM market.

                                    ARTICLE 8
                ALTERNATIVE SERVICES AND LIMITATION OF LIABILITY

         8.1      Alternative Services. To the extent that Generator does not
provide Capacity Resources Requirements, Ancillary Services Requirements, the
Required Energy and/or the Optional Energy ("Services") to Pepco as required
under this Agreement, Generator, as an alternative method of performing such
obligations, shall pay Pepco the positive difference between the price Pepco
pays for such Services in the appropriate PJM marketplace, or if not available
in the PJM market, any other market ("Alternative Services") and the price Pepco
would have paid to Generator for such Services under this Agreement, plus
penalties and nonperformance charges, if any, assessed on Pepco by the PJM
Interconnection LLC or PJM System Operator as a result of the Generator not
providing the Services. Calculation of the cost of Alternative Services
hereunder shall include all reasonable direct costs associated with the
procurement and delivery of Alternative Services, including legal or
transactional costs and expenses; taxes, energy, demand, capacity, or
reservation charges; energy losses; emergency energy; and any transmission or
congestion costs but does not include the cost of PJM network service. For
purposes of determining the amount of Alternative Services Pepco purchases to
satisfy its energy requirements, energy requirements for any day shall be the
net amount of energy Pepco purchases for the Service Load in the PJM day-ahead
and second settlement markets. Notwithstanding the foregoing, Generator shall
not have satisfied its obligations to provide electricity from Renewable Energy
Resources under the provisions of this Section 8.1 unless Pepco acquires such
electricity in the PJM market or such other market in which Pepco acquires
Services.

<PAGE>   511

         8.2      Limitation of Liability. Except for indemnity obligations set
forth in Article 10 and the damages, charges or penalties set forth in Sections
3.1(c), 5.3, 8.1 and 13.3 of this Agreement, neither Party, nor their respective
officers, directors, agents, employees, Affiliates, or successors or assigns of
any of them, shall be liable to the other Party or its Affiliates, officers,
directors, agents, employees, successors or assigns for claims, suits, actions
or causes of action for incidental, punitive, special, indirect, multiple or
consequential damages (including, without limitation, lost revenues, claims of
customers, attorneys' fees and litigation costs) connected with, or resulting
from, performance or non-performance of this Agreement, or any actions
undertaken in connection with or related to this Agreement, including, without
limitation, any such damages which are based upon causes of action for breach of
contract, tort (including negligence and misrepresentation), breach of warranty
or strict liability. The provisions of this Section 8.2 shall apply regardless
of fault and shall survive termination, cancellation, suspension, completion, or
expiration of this Agreement.

                                    ARTICLE 9
                                  FORCE MAJEURE

         9.1      Effect of Force Majeure. Notwithstanding anything in this
Agreement to the contrary, the Parties shall be excused from performing their
respective obligations hereunder (except for the obligation to pay sums of money
due and owing hereunder) and shall not be liable in damages or otherwise, to the
extent that a Party is unable to perform or is prevented from performing by an
event of Force Majeure and has complied with Section 9.3.

         9.2      Force Majeure Defined. Force Majeure includes, without
limitation, storm, flood, lightning, drought, earthquake, fire, explosion, civil
disturbance, acts of God or the public enemy, civil disturbance, or any other
cause beyond a Party's reasonable control but only if and to the extent that the
event directly affects the availability of the transmission or distribution
facilities of PJM or Pepco which are necessary to deliver capacity or energy to
the Service Load. Force Majeure shall not include events affecting the
availability or cost of operating any generating facility or resource.

         9.3      Notification. A Party shall not be entitled to rely on the
occurrence of an event of Force Majeure as a basis for being excused from
performance of its obligations under this Agreement unless the Party relying on
the event or condition shall: (a) provide prompt written notice of such

<PAGE>   512

Force Majeure event to the other Party, including an estimation of its expected
duration and the probable impact on the performance of its obligations
hereunder; (b) exercise all reasonable efforts to continue to perform its
obligations under this Agreement; (c) expeditiously take action to correct or
cure the event or condition excusing performance; (d) exercise all reasonable
efforts to mitigate or limit damages to the other Party; and (e) provide prompt
notice to the other Party of the cessation of the event or condition giving rise
to its excuse from performance. Subject to this Section 9.3, any obligation
under this Agreement shall be suspended only to the extent caused by such Force
Majeure and only during the continuance of any inability of performance caused
by such Force Majeure but for no longer period.

                                   ARTICLE 10
                     INDEMNIFICATION FOR THIRD PARTY CLAIMS

         10.1     Generator's Indemnification. Generator shall indemnify, hold
harmless, and defend Pepco and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between Pepco and a third party or Generator) for
damage to property of unaffiliated third parties, injury to or death of any
person, including Pepco's employees or any third parties, to the extent caused,
by the negligence or willful misconduct of Generator's and/or its officers,
directors, employees, agents, contractors, subcontractors or invitees arising
out of or connected with Generator's performance or breach of this Agreement, or
the exercise by Generator of its rights hereunder.

         10.2     Pepco's Indemnification. Pepco shall indemnify, hold harmless,
and defend Generator and its Affiliates, as the case may be, and their
respective officers, directors, employees, agents, contractors, subcontractors,
invitees, successors and permitted assigns from and against any and all claims,
liabilities, costs, damages, and expenses (including, without limitation,
reasonable attorney and expert fees, and disbursements incurred by any of them
in any action or proceeding between the Generator and a third party or Pepco)
for damage to property of unaffiliated third parties, injury to or death of any
person, including Generator's employees or any third parties, to the extent
caused by the negligence or willful misconduct of Pepco and/or its officers,
directors, employees, agents, contractors, subcontractors

<PAGE>   513

or invitees arising out of or connected with Pepco's performance or breach of
this Agreement, or the exercise by Pepco of its rights hereunder.

         10.3     Indemnification Procedures. If either Party intends to seek
indemnification under this Article 10 from the other Party, the Party seeking
indemnification shall give the other Party notice of such claim within ninety
(90) days of the later of the commencement of, or the Party's actual knowledge
of, such claim or action. Such notice shall describe the claim in reasonable
detail, and shall indicate the amount (estimated if necessary) of the claim that
has been, or may be sustained by, said Party. To the extent that the other Party
will have been actually and materially prejudiced as a result of the failure to
provide such notice, such notice will be a condition precedent to any liability
of the other Party under the provisions for indemnification contained in this
Agreement. Neither Party may settle or compromise any claim without the prior
consent of the other Party; provided, however, said consent shall not be
unreasonably withheld or delayed.

         10.4     Survival. The indemnification obligations of each Party under
this Article 10 shall continue in full force and effect regardless of whether
this Agreement has either expired or been terminated or canceled.

                                   ARTICLE 11
                                     DEFAULT

         11.1     Event of Default. Unless excused by Force Majeure, each of the
following events shall constitute an event of default (an "Event of Default")
under this Agreement:

                  (a)      the failure by a Party to pay any amount due within
thirty (30) days after receipt of written notice of nonpayment by the other
Party, unless the payment of such amount is disputed in good faith;

                  (b)      a Party's breach of any material term or condition of
this Agreement including any material breach of a representation, warranty or
covenant made in this Agreement which, after receiving written notice of the
breach from the non-breaching Party (such notice to set forth in reasonable
detail the nature of the default and, where known and if applicable, the steps
necessary to cure such default), (i) the breaching Party fails to cure within
thirty (30) days following receipt of the notice or (ii) if such default is of

<PAGE>   514

such a nature that it cannot be cured within thirty (30) days following receipt
of such notice, the breaching Party fails within such thirty (30) days to
commence the necessary cure and fails at any time thereafter diligently and
continuously to prosecute such cure to completion provided that the cure is
completed no later than 180 days after the receipt of the default notice ;

                  (c)      the appointment of a receiver or liquidator or
trustee for either Party and such receiver, liquidator or trustee is not
discharged within sixty (60) days;

                  (d)      the entry of a decree adjudicating a Party as
bankrupt or insolvent, and such decree is continued undischarged and unstayed
for a period of sixty (60) days; or

                  (e)      the filing of a voluntary or involuntary petition in
bankruptcy under any provision of any federal or state bankruptcy law by a Party
or against it, and, with respect to an involuntary petition in bankruptcy, such
petition continues undischarged and unstayed for a period of sixty (60) days.

         11.2     Remedies. Upon the occurrence of an Event of Default, the
non-defaulting Party may (a) terminate this Agreement by providing sixty (60)
days' prior written notice to the defaulting Party and this Agreement shall
thereupon terminate upon receipt of regulatory approval for such termination,
but not before the date specified in the notice, and/or (b) subject to Section
8.2 of this Agreement, exercise all such rights and remedies as may be available
to it under this Agreement or at law or equity with respect to such Event of
Default.

                                   ARTICLE 12
                       PROJECTIONS AND OPERATING COMMITTEE

         12.1     Projections. No later than three (3) business days prior to
each Monday during the term of this Agreement, Pepco shall provide Generator
with non-binding projections of the Services to be provided by Generator to
Pepco under this Agreement for the week beginning that Monday.

         12.2     Operating Committee. The Parties shall establish an operating
committee consisting of one representative for each Party

<PAGE>   515

("Operating Committee"). The Operating Committee shall act only by unanimous
agreement or consent. The Parties shall designate their respective
representatives to the Operating Committee, plus an alternate by written notice.
Each Party's representative on the Operating Committee is authorized to act on
behalf of such Party with respect to any matter arising under this Agreement
which is to be decided by the Operating Committee, however, the Operating
Committee shall not have any authority to modify or otherwise alter the rights
and obligations of the Parties hereunder. The Operating Committee shall develop
and implement suitable policies and procedures with to coordinate the
interaction of the Parties with respect to the performance of their duties and
obligations under this Agreement.

                                   ARTICLE 13
                  COST RESPONSIBILITIES AND BILLING PROCEDURES

         13.1     Billing Procedures.

                  (a)      Within ten (10) days after the first day of each
Month Pepco shall provide to Generator a written invoice setting forth (a) the
amount Pepco owes to Generator pursuant to Article 6 of this Agreement for
Services and any other payments which may be due hereunder, and (b) the amounts,
if any, that Generator owes to Pepco pursuant to this Agreement. Each invoice
shall (i) delineate the Month in which the Services or Alternative Services were
provided or reimbursable charges were incurred, (ii) fully describe the Services
or Alternative Services rendered or reimbursable charges incurred, (iii) be
itemized to reflect the Services or Alternative Services performed or provided
or reimbursable charges incurred, and (iv) provide reasonable detail as to the
calculation of the amounts involved.

                  (b)      All invoices shall be paid within fifteen (15) days
after the date of issuance, but not earlier than the 25th day of the month in
which the invoice is rendered. All payments shall be made by wire transfer to a
bank designated in writing by such Party. Payment of invoices shall not relieve
the paying Party from any responsibilities or obligations it has under this
Agreement, nor shall such payment constitute a waiver of any claims arising
hereunder.

                  (c)      To the extent that, for any billing period, Generator
is obligated to pay to Pepco amounts due and calculated pursuant to this Section
13.1, Pepco may use such amounts as a set-off against any amounts owed by Pepco
to Generator.

<PAGE>   516

         13.2     Billing Disputes. In the event of a billing dispute between
the Parties, (i) each Party shall continue to perform its obligations in
accordance with the terms of this Agreement subject to the other Party's rights
hereunder, and (ii) the Party required to make payments hereunder shall pay to
the other Party all invoiced amounts when due, net of any set-offs permitted
under Section 13.1(d), that are not in dispute. Payment of invoices by either
Party shall not relieve the paying Party from any responsibilities or
obligations it has under this Agreement; nor shall it constitute a waiver of any
claims arising hereunder.

         13.3     Interest on Unpaid Balances. Interest on any unpaid amounts
shall be calculated in accordance with the methodology specified for interest on
refunds in FERC regulations at 18 C.F.R. Section 35.19a(a)(2)(iii). Interest on
delinquent amounts shall be calculated from the due date of the bill to the date
of payment. When payments are made by mail, bills shall be considered as having
been paid on the date of receipt by the other Party.

                                   ARTICLE 14
                                 CONFIDENTIALITY

         14.1     Confidentiality Obligations of Pepco. Each Party shall hold in
confidence, unless compelled to disclose by judicial or administrative process
or other provisions of law, all documents and information furnished by one Party
to the other Party in connection with this Agreement marked "Confidential" or
"Proprietary." Except to the extent that such information or documents are (i)
generally available to the public other than as a result of a disclosure by a
receiving Party in breach of this Agreement, (ii) available to the receiving
Party on a non-confidential basis prior to disclosure by the other Party , or
(iii) available to the receiving Party on a non-confidential basis from a source
other than the other Party, provided that such source is not known, and by
reasonable effort could not be known, by the receiving Party to be bound by a
confidentiality agreement with the other Party or otherwise prohibited from
transmitting the information to the receiving Party by a contractual, legal or
fiduciary obligation, the receiving Party shall not release or disclose such
information to any other person, except to its employees, representatives or
agents on a need-to-know basis, in connection with this Agreement who has not
first been advised of the confidentiality provisions of this Section 14.1 and
has agreed in writing to comply with such provisions. In no event shall such
information be disclosed in violation of the requirements of FERC Orders 889 and
889-A, and any successor thereto. The Party receiving confidential information
from the

<PAGE>   517

other Party shall promptly notify the other Party if it receives notice or
otherwise concludes that the production of any information subject to this
Section 14.1 is being sought under any provision of law and the receiving Party
shall use reasonable efforts in cooperation with the other Party to seek
confidential treatment for such confidential information provided thereto.

         14.2     Confidentiality of Audits. The independent auditor performing
any audit, as referred to in Article 20, shall be subject to a confidentiality
agreement between the auditor and the Party being audited. Such audit
information shall be treated as confidential except to the extent that its
disclosure is required by regulatory or judicial order, for reliability purposes
pursuant to PJM requirements and pursuant to the FERC's rules and regulations.
Except as provided herein, neither Party will disclose the audit information to
any third party, without the other Party's prior written consent. Audit
information in the hands of the Party not being audited shall be subject to all
provisions of Article 20.

         14.3     Remedies. The Parties agree that monetary damages would be
inadequate to compensate a Party for the other Party's breach of its obligations
under Sections 14.1 and 14.2. Each Party accordingly agrees, subject to Section
8.2, that the other Party shall be entitled to equitable relief, by way of
injunction or otherwise, if the first Party breaches or threatens to breach its
obligations under Sections 14.1 or 14.2 of this Agreement, as applicable, which
equitable relief shall be granted without bond or proof of damages, and the
receiving Party shall not plead in defense that there would be an adequate
remedy at law.

                                   ARTICLE 15
                               DISPUTE RESOLUTION

         15.1     Disputes. A Party with a claim or dispute under this Agreement
shall submit to the Operating Committee a notification of such claim or dispute
within sixty (60) days after the circumstances that gave rise to the claim or
the question or issue in dispute. The notification shall be in writing and shall
include a concise statement of the claim or the issue or question in dispute, a
statement of the relevant facts and documentation to support the claim. In the
event the Operating Committee is unable, in good faith, to resolve their
disagreement in a manner satisfactory to both Parties within thirty (30) days
after receipt by the Operating Committee of a notification specifying the claim,
issue or question in dispute, the Parties

<PAGE>   518

shall refer the dispute to their respective senior management. If, after using
their good faith best efforts to resolve the dispute, senior management cannot
resolve the dispute within thirty (30) days, the Parties shall utilize the
arbitration procedures set forth below in Section 15.2 to resolve a dispute,
provided that nothing herein or therein shall prohibit a Party from at any time
requesting from a court of competent jurisdiction a temporary restraining order,
preliminary injunction, or other similar form of equitable relief to enforce
performance of the provisions of this Agreement.

         15.2     Arbitration.

                  (a)      Unless the Parties otherwise mutually agree in
writing to another form of dispute resolution such as dispute resolution under
the PJM Agreement or the MAAC agreement, any arbitration initiated under this
Agreement shall be conducted before a single neutral arbitrator appointed by the
Parties within thirty (30) days of receipt by respondent of the demand for
arbitration. If the Parties are unable to agree on an arbitrator, such
arbitrator shall be appointed by the American Arbitration Association. Unless
the Parties agree otherwise, the arbitrator shall be an attorney or retired
judge with at least fifteen (15) years of experience, and shall not have any
current or past substantial business or financial relationships with any Party
to the arbitration. If possible, the arbitrator shall have experience in the
electric utility industry. Unless otherwise agreed, the arbitration shall be
conducted in accordance with the American Arbitration Association's Commercial
Arbitration Rules, then in effect. Any arbitration proceedings, decision or
award rendered hereunder and the validity, effect and interpretation of this
arbitration agreement shall be governed by the Federal Arbitration Act of the
United States, 9 U.S.C. Sections 1 et seq. The location of any arbitration
hereunder shall be in the District of Columbia.

                  (b)      The arbitration shall, if possible, be concluded not
later than six (6) months after the date that it is initiated. The arbitrator
shall be authorized only to interpret and apply the provisions of this Agreement
or any related agreements entered into under this Agreement and shall have no
power to modify or change any of the above in any manner. The arbitrator shall
have no authority to award punitive or multiple damages or any damages
inconsistent with this Agreement. The arbitrator shall, within thirty (30) days
of the conclusion of the hearing, unless such time is extended by agreement of
the Parties, notify the Parties in writing of his or her decision, stating his
or her reasons for such decision and separately

<PAGE>   519

listing his or her findings of fact and conclusions of law. The decision of the
arbitrator rendered in such a proceeding shall be final and binding on the
Parties. Judgment on the award may be entered upon it in any court having
jurisdiction.

                  (c)      Nothing in this Agreement shall preclude, or be
construed to preclude, any Party from filing a petition or complaint with FERC
with respect to any arbitrable claim over which FERC has jurisdiction. In such
case, the other Party may request FERC to reject or to waive jurisdiction. If
FERC rejects or waives jurisdiction with respect to all or a portion of the
claim, the portion of the claim not so accepted by FERC shall be resolved
through arbitration, as provided in this Agreement. To the extent that FERC
asserts or accepts jurisdiction over the claim, the decision, finding of fact or
order of FERC shall be final and binding, subject to judicial review under the
Federal Power Act, and any arbitration proceedings that may have commenced with
respect to the claim prior to the assertion or acceptance of jurisdiction by
FERC shall be terminated.

                                   ARTICLE 16
                                 REPRESENTATIONS

         16.1     Representations of Pepco. Pepco hereby represents and warrants
to Generator as follows:

                  (a)      Incorporation. Pepco is a corporation duly organized,
validly existing and in good standing under the laws of the District of Columbia
and the Commonwealth of Virginia, and has all requisite corporate power and
authority to own, lease and operate its material assets and properties and to
carry on its business as now being conducted.

                  (b)      Authority. Pepco has all necessary corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Pepco of this
Agreement and the consummation by Pepco of the transactions contemplated
hereunder have been duly and validly authorized by the Board of Directors of
Pepco or by a committee thereof to whom such authority has been delegated and no
other corporate proceedings on the part of Pepco are necessary to authorize this
Agreement or the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Pepco and, assuming that this Agreement
constitutes a valid and binding agreement of Generator, constitutes

<PAGE>   520

a valid and binding agreement of Pepco, enforceable by Pepco in accordance with
its terms.

                  (c)      Consents and Approvals; No Violation.

                  (i)      Neither the execution and delivery of this Agreement
by Pepco nor performance by Pepco of its obligations hereunder will (A) conflict
with or result in any breach of any provision of the Certificate of
Incorporation or By-laws of Pepco, (B) result in a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Pepco or any of its
subsidiaries is a party or by which any of their respective assets may be bound
or (C) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Pepco, or any of its assets, except in the case of clauses (B) and
(C) for such failures to obtain a necessary consent, defaults and violations
which would not, individually or in the aggregate, have a material adverse
effect on the ability of Pepco to discharge its obligations under this Agreement
(a "Pepco Material Adverse Effect").

                  (ii)     No declaration, filing or registration with, or
notice to, or authorization, consent or approval of any governmental authority
is necessary for performance by Pepco of its obligations hereunder, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not obtained or made would not, individually or in the
aggregate, have a Pepco Material Adverse Effect.

         16.2     Representations of Generator. Generator hereby represents and
warrants to Pepco as follows:

                  (a)      Incorporation. Generator is a [corporation] duly
[incorporated], validly existing and in good standing under the laws of the
State of __________, and has all requisite [corporate] power and authority to
own, lease and operate its material assets and properties and to carry on its
business as now being conducted.

                  (b)      Authority. Generator has all necessary [corporate]
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by the Generator of
this Agreement and the consummation by Generator of the

<PAGE>   521

transactions contemplated hereby have been duly and validly authorized the
[Board of Directors] of Generator or by a committee thereof to whom such
authority has been delegated and no other [corporate] proceedings on the part of
Generator are necessary to authorize this Agreement or the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Generator and, assuming that this Agreement constitutes a valid and
binding agreement of Pepco, constitutes a valid and binding agreement of
Generator, enforceable against Generator in accordance with its terms.

                  (c)      Consents and Approvals.

                  (i)      Neither the execution and delivery of this Agreement
by Generator nor performance by Generator of its obligations hereunder will (A)
conflict with or result in any breach of any provision of the [Certificate of
Incorporation or By-laws] of Generator, (B) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which Generator or any of
its subsidiaries is a party or by which any of their respective assets may be
bound or (C) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Generator, or any of its assets, except in the case of
clauses (B) and (C) for such failures to obtain a necessary consent, defaults
and violations which would not, individually or in the aggregate, have a
material adverse effect on the ability of Generator to discharge its obligations
under this Agreement (a "Generator Material Adverse Effect").

                  (ii)     No declaration, filing or registration with, or
notice to, or authorization, consent or approval of any Governmental Authority
is necessary for performance by Generator of its obligations hereunder, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not obtained or made would not, individually or
in the aggregate, have a Generator Material Adverse Effect.

                                   ARTICLE 17
                     ASSIGNMENT/CHANGE IN CORPORATE IDENTITY

         17.1     Generally. Except as otherwise set forth in this Article 17,
neither this Agreement nor any of the rights, interests, or obligations

<PAGE>   522

hereunder shall be assigned by either Party hereto, without the prior written
consent of the other Party, which consent shall not be unreasonably withheld or
delayed.

         17.2     Pepco's Assignment Rights. Subject to Section 17.5 below, upon
ten (10) days prior written notice to Generator, Pepco may assign this
Agreement, and Pepco's rights, interests and obligations hereunder, to an
Affiliate of Pepco that assumes Pepco's obligations to provide Services to the
Service Load.

         17.3     Generator's Assignment Rights. Subject to Section 17.5 below,
Generator may assign, transfer, pledge or otherwise dispose of its rights and
interests hereunder to a trustee, lending institution, or other Person for the
purposes of financing or refinancing the Auctioned Assets, including upon or
pursuant to the exercise of remedies under such financing or refinancing, or by
way of assignments, transfers, conveyances of dispositions in lieu thereof;
provided, however, that no such assignment in accordance with this Section 17.3
shall relieve or in any way discharge Generator from the performance of its
duties and obligations under this Agreement. Pepco agrees to execute and
deliver, at Generator's expense, such documents as may be reasonably necessary
to accomplish any such assignment, transfer, conveyance, pledge or disposition
of rights hereunder for purposes of the financing or refinancing of the
Facility, so long as Pepco's rights under this Agreement are not thereby
altered, amended, diminished or otherwise impaired.

         17.4     Mergers or Consolidations. Subject to Section 17.5 below,
either Party may assign this Agreement to a successor to all or substantially
all of the assets of such Party by way of merger, consolidation, sale or
otherwise, provided such successor assumes in writing and becomes liable for all
of such Party's duties and obligations hereunder.

         17.5     Limitations

                  (a)      No assignment, transfer, conveyance, pledge or
disposition of rights, interests, duties or obligations under this Agreement by
a Party shall relieve that Party from liability and financial responsibility for
the performance thereof after any such transfer, assignment, conveyance, pledge
or disposition unless and until (i) the transferee or assignee shall agree in
writing to assume the obligations and duties of that Party under this Agreement
and to impose such obligations on subsequent permitted transferees and assignees
and (ii) the non-assigning

<PAGE>   523

Party has consented in writing to such assumption and to a release of the
assigning Party from such liability, such consent not to be unreasonably
withheld or delayed.

                  (b)      If Generator terminates its existence as a
[corporate] entity by merger, acquisition, sale, consolidation or otherwise, or
if all or substantially all of Generator's assets are transferred to another
person or business entity without complying with this Article 17, Pepco shall
have the right, enforceable in a court of competent jurisdiction, to enjoin
Generator's successor from using its assets in any manner that does not comply
with the requirements of this Agreement or that impedes Pepco's ability to carry
on its ongoing business operations.

         17.6     Successors. This Agreement and all of the provisions hereof
are binding upon, and inure to the benefit of, the Parties and their respective
successors and permitted assigns.

                                   ARTICLE 18
                                     NOTICES

         Except as otherwise expressly set forth in this Agreement, all notices
and other communications hereunder shall be in writing and shall be deemed given
(as of the time of delivery or, in the case of a telecopied communication, of
confirmation) if delivered personally, telecopied (which is confirmed) or sent
by overnight courier (providing proof of delivery) to the Parties at the
following addresses (or at such other address for a Party as shall be specified
by like notice):

            if to Pepco, to:

                  Potomac Electric Power Company
                  1900 Pennsylvania Avenue, N.W.
                  Washington, D.C. 20068
                  Telecopier: (202) 261-7889
                  Attention: William T. Torgerson
                             General Counsel

<PAGE>   524

            if to Generator, to:

                  c/o Southern Energy, Inc.
                  900 Ashwood Parkway
                  Suite 500
                  Atlanta, Georgia 30338-4780
                  Telecopier: (770) 821-6575
                  Attention:

                                   ARTICLE 19
                                   AMENDMENTS

         19.1     Amendments. Except as provided in Section 19.2, this Agreement
shall not be amended, modified, or supplemented unless mutually agreed to by the
Parties in writing. Except as provided in Section 19.2(b) below, the rates,
terms and conditions contained in this Agreement are not subject to change under
Sections 205 or 206 of the Federal Power Act absent the mutual written agreement
of the Parties. It is the intent of this Section 19.1 that, except as provided
in Section 19.2(b) below, the rates, terms and conditions of this Agreement
shall not be subject to change except by mutual written agreement by the
Parties.

         19.2     PJM Agreement Modifications

                  (a)      If the PJM Agreements are amended or modified so that
any schedule or section references herein to such agreements is changed, such
schedule or section references herein shall be deemed to automatically (and
without any further action by the Parties) refer to the new or successor
schedule or section in the PJM Agreements which replaces that originally
referred to in this Agreement.

                  (b)      If the applicable provisions of the PJM Agreements
referenced herein, or any other PJM rules relating to the implementation of this
Agreement, are changed materially from those in effect on May 31, 2000, the
Operating Committee shall cooperate to make conforming changes to this Agreement
to fulfill the purposes of this Agreement; provided that no such changes shall
alter the economic benefits of this Agreement between the Parties. If the
Operating Committee fails to agree on such changes within 15 days, Pepco may
unilaterally make conforming changes to this Agreement to fulfill the purposes
of this Agreement, and shall file such changes with the

<PAGE>   525

FERC on behalf of both Parties; provided that nothing herein shall prejudice the
Generator's rights to protest such change.

                                   ARTICLE 20
                                     AUDITS

         The Parties shall have the right, during normal business hours, to
audit each other's accounts and records pertaining to transactions under this
Agreement, upon twenty (20) days prior written notice, at the offices where such
accounts and records are maintained. Any such audit of a Party's accounts and
records will be at the expense of the auditing Party, shall not be made more
frequently than once in any twelve (12) month period, and no such audit may be
made with respect to accounts and records relating to periods more than
twenty-four (24) months prior to the date of the audit notice. The Party being
audited will be entitled to review the audit report and any supporting
materials. The Party conducting the audit shall maintain the confidentiality of
all information obtained during the audit in compliance with Section 14.2 of
this Agreement. To the extent that audited information includes confidential
information, the auditing Party shall designate an independent auditor at its
expense to perform such audit.

                                   ARTICLE 21
                            MISCELLANEOUS PROVISIONS

         21.1     Waiver. Except as otherwise provided in this Agreement, any
failure of a Party to comply with any obligation, covenant, agreement, or
condition herein may be waived by the Party entitled to the benefits thereof
only by a written instrument signed by the Party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement, or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.

         21.2     No Third Party Beneficiaries. Nothing in this Agreement is
intended to confer upon any other person except the Parties any rights or
remedies hereunder or shall create any third party beneficiary rights in any
person. No provision of this Agreement shall create any rights in any such
persons in respect of any benefits that may be provided, directly or indirectly,
under any employee benefit plan or arrangement except as expressly provided for
thereunder.

<PAGE>   526

         21.3     Governing Law This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).

         21.4     Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         21.5     Interpretation. When a reference is made in this Agreement to
an article, section, schedule or exhibit, such reference shall be to an article
or section of, or schedule or exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation" or equivalent words. The words "hereof", "herein"
and "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. The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such term. Unless otherwise expressly
stated otherwise herein, the word "day" shall mean any calendar day including
weekends and holidays. Any agreement, instrument, statute, regulation, rule or
order defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument, statute, regulation, rule
or order as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes, regulations, rules or orders) by succession of comparable successor
statutes, regulations, rules or orders and references to all attachments thereto
and instruments incorporated therein. References to a person are also to its
permitted successors and assigns. Each Party acknowledges that it has been
represented by counsel in connection with the review and execution of this
Agreement, and, accordingly, there shall be no presumption that this Agreement
or any provision hereof be construed against the Party that drafted this
Agreement.

         21.6     Jurisdiction and Enforcement. Each of the Parties irrevocably
submits to the exclusive jurisdiction of the federal and state courts of the
State of Maryland for the purposes of any suit, action or other proceeding
arising out of this Agreement or any transaction contemplated

<PAGE>   527

hereby. Each of the Parties agrees to commence any action, suit or proceeding
relating hereto either in the federal courts of the State of Maryland or, if
such suit, action or proceeding may not be brought in such court for
jurisdictional reasons, in the state courts of the State of Maryland. Each of
the Parties further agrees that service of process, summons, notice or document
by hand delivery or U.S. registered mail at the address specified for such Party
in Article 18 (or such other address specified by such Party from time to time
pursuant to Article 18) shall be effective service of process for any action,
suit or proceeding brought against such Party in any such court. Each of the
Parties irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in the federal and state courts of the State of
Maryland and hereby further irrevocably and unconditionally waives and agrees
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.

         21.7     Entire Agreement. This Agreement, the Asset Sale Agreement,
the Confidentiality Agreement and the Ancillary Agreements including the
exhibits, schedules, documents, certificates and instruments referred to herein
or therein and other contracts, agreements and instruments contemplated hereby
or thereby, embody the entire agreement and understanding of the Parties in
respect of the transactions contemplated by this Agreement. There are no
restrictions, promises, representations, warranties, covenants or undertakings
other than those expressly set forth or referred to herein or therein. This
Agreement, the Asset Sale Agreement and the Ancillary Agreements supersede all
prior agreements and understandings between the Parties with respect to the
transactions contemplated by this Agreement other than the Confidentiality
Agreement.

         21.8     Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the Parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the Parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.

<PAGE>   528

         21.9     Further Assurances. The Parties hereto agree to execute and
deliver promptly, at the expense of the Party requesting such action, any and
all other and further instruments, documents and information which may be
reasonably requested in order to effectuate the transactions contemplated
hereby. Each Party agrees to cooperate with, assist and accommodate all
reasonable requests made by the other Party in respect of any regulatory
approval necessary for, or any regulatory proceeding relating to, the execution,
delivery or performance of this Agreement. Each Party further agrees to comply
in all material respects with all laws of governmental authorities relating to
this Agreement and the consummation of the transactions contemplated hereby.

         21.10    Independent Contractor Status. Nothing in this Agreement shall
be construed as creating any relationship between Pepco and Generator other than
that of independent contractors.

         21.11    Conflicts. Except with respect to the amendments,
indemnification, liability, default and remedies provisions contained herein or
as otherwise expressly provided herein, in the event of any conflict or
inconsistency between the terms of this Agreement and the terms of the Asset
Sale Agreement, the terms of the Asset Sale Agreement shall prevail.

<PAGE>   529

         IN WITNESS WHEREOF, Pepco and Generator have caused this Transition
Power Agreement (Maryland) to be signed by their respective duly authorized
officers as of the date first above written.

                                    POTOMAC ELECTRIC POWER COMPANY

                                    By:
                                       -----------------------------
                                          Name:
                                          Title:

                                    [GENERATOR]

                                    By:
                                       -----------------------------
                                          Name:
                                          Title:

<PAGE>   530

                                   SCHEDULE 1
                                   DEFINITIONS

         Part A.  Capitalized terms not defined in the body of the Agreement
shall have the meaning set forth in Part A of this Schedule 1. (Part B of this
Schedule 1 sets forth capitalized terms defined within the Agreement.)

         1.       " Affiliate" has the meaning set forth in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act of 1934.

         2.       "Auctioned Assets" has the meaning set forth in the Asset Sale
Agreement.

         3.       "Capacity Credits" has the meaning set forth in the PJM
Reliability Agreement.

         4.       "Capacity Resources" has the meaning set forth in the PJM
Reliability Agreement.

         5.       "Contract Year 1" means the period between the Effective Date
through and including December 31, 2001.

         6.       "Contract Year 2" means the period between January 1, 2002
through and including December 31, 2002.

         7.       "Contract Year 3" means the period between January 1, 2003
through and including December 31, 2003.

         8.       "Contract Year 4" means the period between January 1, 2004
through and including June 30, 2004.

         9.       "Closing" has the meaning set forth in the Asset Sale
Agreement.

         10.      "Confidentiality Agreement" has the meaning set forth in the
Asset Sale Agreement.

         11.      "FERC" means the Federal Energy Regulatory Commission or its
successors.

         12.      "Fixed Transmission Rights" has the meaning set forth in the
PJM Operating Agreement.

<PAGE>   531

         13.      "Full Energy Requirements" means the full electric energy
requirements of the Service Load in any hour, measured in megawatt hours at the
Delivery Points.

         14.      "Generator" has the meaning set forth in the preamble of this
Agreement and shall include its permitted successors and assigns.

         15.      "MDPSC" means the Maryland Public Services Commission or its
successor.

         16.      "Metered Energy Requirements" means the full electric energy
requirements of the Service Load in any hour, measured in megawatt hours at the
retail (customer revenue meter) level. For customers without, interval metering,
Pepco will use customer or retail class profiles in accordance with the MDPSC
regulations to distribute periodic metered energy usage to obtain hourly
customer energy usage. When Pepco curtailable load programs are operated,
customer loads which are curtailed will be increased by Pepco to reflect the
hourly energy usage which would have occurred if curtailments had not taken
place.

         17.      "Month" means a calendar month.

         18.      "Network Customer" has the meaning set forth in the PJM
Tariff.

         19.      "Network Load" has the meaning set forth in the PJM Tariff.

         20.      "Optional Energy" means the Optional Energy Percent, as
elected by Pepco through the exercise of its Call Options, of Pepco's Full
Energy Requirements, including the Renewable Energy Percent.

         21.      "Pepco" has the meaning set forth in the preamble of this
Agreement and shall include its permitted successors or assigns.

         22.      "PJM" means the Pennsylvania New Jersey-Maryland
interconnected power pool operated under the PJM Operating Agreement and any
successor thereto including any regional transmission organization, independent
system operator, transco, or any other independent system administrator that
possesses operational control or planning control over Pepco's transmission
system.

         23.      "PJM Agreements" means the PJM Operating Agreement, PJM
Reliability Agreement, and PJM Tariff.

         24.      "PJM Control Area" has the meaning set forth in the PJM
Reliability Agreement.

<PAGE>   532

         25.      "PJM Operating Agreement" means the Amended and Restated
Operating Agreement of the PJM Interconnection LLC dated as of June 2, 1997.

         26.      "PJM Interconnection LLC" means the independent system
operator of the PJM Control Area pursuant to the PJM Operating Agreement and the
PJM Tariff.

         27.      "PJM Reliability Agreement" means the PJM Reliability
Assurance Agreement dated June 2, 1997, establishing obligations, standards and
procedures for maintaining the reliable operation of the PJM Control Area.

         28.      "PJM System Operator" means the PJM Interconnection LLC energy
control center staff responsible for central dispatch as provided in the PJM
Agreement.

         29.      "PJM Tariff" means the PJM Open Access Transmission Tariff
providing transmission service within the PJM Control Area.

         30.      "Planning Period" has the meaning set forth in the PJM
Reliability Agreement.

         31.      "Renewable Energy Resources" means renewable energy resource
as defined in MD CODE, PUBLIC UTILITY COMPANIES Section 1.01(z).

         32.      "Renewable Energy Percent" means electricity from Renewable
Energy Resources which is equal to 0.997 percent of the Required Energy or
Optional Energy, as applicable.

         33.      "Required Energy" means the Required Energy Percent of Pepco's
Full Energy Requirements, including the Renewable Energy Percent.

         34.      "Service Load" means (i) all of Pepco's default service retail
electric energy customers located in Pepco's service territory, as such
territory exists on the Effective Date, in the State of Maryland and (ii)
qualifying facilities to which Pepco is obligated to sell energy pursuant to the
rates and terms set forth in Pepco's qualifying facilities tariff on file with
the Maryland Public Service Commission which is currently designated as
MD-CG-SPP.

         35.      "Summer Month" means each Month during the period of May 1
through September 30.

<PAGE>   533

         36.      "Winter Month" means each Month during the period of October 1
through April 30.

         Part B.  The following terms have the meaning specified in the section
of this Agreement set forth opposite to such term:

<TABLE>
<CAPTION>
Term                                            Agreement Reference

<S>                                             <C>
Agreement                                       Preamble
Alternative Services                            Section 8.1
Ancillary Services                              Article 4

Ancillary Services Requirements                 Article 4
Asset Sale Agreement                            First Recital
Call Options                                    Section 5.2(a)
Capacity Resources Plan                         Section 3.2(a)
Capacity Resources Requirements                 Section 3.1(a)
Delivery Points                                 Section 5.3
Effective Date                                  Section 2.1
Event of Default                                Section 11.1
Force Majeure                                   Section 9.2
Generator Material Adverse Effect               Section 16.2(c)(i)
Operating Committee                             Article 12
Optional Energy Percent                         Section 5.2(a)
Pepco Material Adverse Effect                   Section 16.1(c)(i)
Party or Parties                                Preamble
PPAs                                            First Recital

Required Energy Percent                         Section 5.1
Services                                        Section 8.1
</TABLE>

<PAGE>   534

                                   EXHIBIT J

AFTER RECORDING, RETURN TO:                  PARCEL ID
---------------------------------            --------------------
---------------------------------            --------------------
---------------------------------
                                             STREET ADDRESS:

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

                              SPECIAL WARRANTY DEED

         THIS SPECIAL WARRANTY DEED, is made as of ______________, 2000 and is
by and between POTOMAC ELECTRIC POWER COMPANY, a District of Columbia and
Virginia corporation (the "Grantor") and __________________________________ (the
"Grantee").

                                   WITNESSETH:

         THAT, for and in consideration of the sum of Ten Dollars ($10.00), cash
in hand paid, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Grantor does hereby grant,
bargain, sell and convey, with Special Warranty of Title, unto the Grantee,
those certain parcels of land situate in the County of ______________, State of
Maryland (the "Real Estate"), and being more particularly described in Exhibit A
attached hereto and incorporated herein by reference (the "Property"), together
with all improvements located thereon and all appurtenances thereunto belonging.

         This conveyance is made subject to all recorded covenants,
restrictions, easements, reservations, agreements and rights-of-way applicable
to the Real Estate or any part thereof.

         TO HAVE AND TO HOLD the Real Estate, together with all rights,
privileges, and advantages thereunto belonging or appertaining to the Grantee,
its successors and assigns, forever.

<PAGE>   535

         IN WITNESS WHEREOF, the Grantor has caused this Special Warranty Deed
to be executed as of the date first above written.

WITNESS:                      GRANTOR:

                              POTOMAC ELECTRIC POWER COMPANY

                              By:
------------------------             ------------------------
                              Name:
                                     ------------------------
                              Title:
                                     ------------------------

State of                      )
         ---------------------
                              )
County of                     )
          ----------------

         On this ___ day of ______________, 2000, before me, the undersigned
Notary Public, personally appeared ___________________ who acknowledged
himself/herself to be the _____________ of Potomac Electric Power Company, and
that he/she, as ____________ of such corporation, being authorized so to do,
executed the foregoing Instrument for the purposes therein contained, by signing
his/her name, as _____________ of Potomac Electric Power Company.

         IN WITNESS WHEREOF, I hereunto set my hand and official seal.

                              ------------------------------
                                        Notary Public

My commission expires:
                       ------------------

<PAGE>   536

                             MARYLAND CERTIFICATION

         This is to certify that the foregoing instrument was prepared by or
under the supervision of the undersigned, an attorney duly admitted to practice
before the Court of Appeals of the State of Maryland.

                         _________________________________

                         _______________, Attorney at Law

<PAGE>   537

                                    EXHIBIT A

All that certain land situate in ____________ County, Maryland, and more
particularly described as follows:

<PAGE>   538

                                   EXHIBIT K

                          OPINION OF COUNSEL TO SELLER

         1.       Seller is a corporation validly existing and in good standing
                  under the laws of the District of Columbia and the
                  Commonwealth of Virginia. Seller has all necessary corporate
                  power and authority to execute and deliver the Agreement and
                  each of the Ancillary Agreements to which Seller is a party
                  and to consummate the transactions contemplated thereby; and
                  the execution and delivery of the Agreement and each of the
                  Ancillary Agreements to which Seller is a party and the
                  consummation by Seller of the transactions contemplated
                  thereby have been duly and validly authorized by all necessary
                  corporate action required on the part of Seller.

         2.       The Agreement and each of the Ancillary Agreements to which
                  Seller is a party have been duly and validly executed and
                  delivered by Seller, and assuming that the Agreement and each
                  such Ancillary Agreement constitutes a valid and binding
                  obligation of each other party thereto, subject to receipt of
                  all Required Regulatory Approvals, constitute valid and
                  binding obligations of Seller, enforceable against Seller in
                  accordance with their respective terms, except as may be
                  limited by applicable bankruptcy, insolvency, fraudulent
                  conveyance, reorganization, moratorium or other similar laws
                  affecting or relating to enforcement of creditor's rights
                  generally and general principles of equity, including without
                  limitation, concepts of materiality, reasonableness, good
                  faith and fair dealing (regardless of whether enforcement is
                  considered in a proceeding at law or in equity). With respect
                  to the foregoing opinion, (i) insofar as provisions contained
                  in the Agreement and the Ancillary Agreements provide for
                  indemnification, exoneration or limitations of liability, the
                  enforceability thereof may be limited by public policy
                  considerations and (ii) the availability of a decree for
                  specific performance or an injunction is subject to the
                  discretion of the court requested to issue any such decree or
                  injunction.

         3.       The execution, delivery and performance of the Agreement and
                  each Ancillary Agreement to which Seller is a party does not
                  (a) conflict with the Articles of Incorporation or Bylaws of
                  Seller, (b) to the knowledge of Seller's counsel, constitute a
                  violation of or default under those agreements or instruments
                  set forth on a Schedule attached to the opinion and which have
                  been identified to such counsel by Seller as all the
                  agreements and instruments which are material to the business
                  or financial condition of Seller, or (c) violate any order,
                  writ, injunction, decree, statute, rule or regulation, of
                  which Seller's counsel has knowledge, applicable to Seller or
                  the Auctioned Assets, except for such violations which

<PAGE>   539

                  would not, individually or in the aggregate, create a Material
                  Adverse Effect.

         4.       Except for the Seller Required Regulatory Approvals, no
                  declaration, filing or registration with, or notice to, or
                  authorization, consent or approval of any Governmental
                  Authority is necessary for the consummation by Seller of the
                  transactions contemplated by the Agreement and each of the
                  Ancillary Agreements to which Seller is a party, other than
                  such declarations, filings, registrations, notices,
                  authorizations, consents or approvals (i) which, if not
                  obtained or made, would not, individually or in the aggregate,
                  create a Material Adverse Effect or (ii) which relate to the
                  Transferable Permits.

         In rendering such opinion, such counsel may (A) rely in respect of
matters of fact upon certificates of officers and employees of Seller and upon
information obtained from public officials, (B) assume that all documents
submitted to counsel as originals are authentic, that all copies submitted to
counsel conform to the originals thereof, and that the signatures on all
documents examined by counsel are genuine, (C) state that the opinion is limited
to federal laws, the Virginia Stock Corporation Act and the laws of the District
of Columbia, (D) state that counsel expresses no opinion with respect to the
title of Seller to any of the Auctioned Assets, (E) state that counsel expresses
no opinion with respect to state or local taxes or tax statutes to which Seller
or the Auctioned Assets may be subject, (F) state that counsel expresses no
opinion with respect to any bulk sales, bulk transfer or similar laws to which
Seller or the Auctioned Assets may be subject, (G) state that counsel expresses
no opinion with respect to provisions of the Agreement and the Ancillary
Agreements relating to subject matter jurisdiction of the United States District
Court for the District of Columbia or relating to the waiver of an inconvenient
forum, and (H) with respect to the opinions expressed in paragraphs 3 and 4
above, state that counsel is relying as to such matters on the opinions of
in-house, local and other special counsel to Seller to the extent of the matters
set forth in such opinions. Certificates and opinions relied upon by Seller's
counsel shall be delivered to Buyer together with the opinion of Seller's
counsel.

<PAGE>   540

                                   EXHIBIT L

                           OPINION OF COUNSEL TO BUYER

         1.       Buyer is a corporation validly existing and in good standing
                  under the laws of its jurisdiction of incorporation. Buyer has
                  all necessary corporate power and authority to execute and
                  deliver the Agreement and each of the Ancillary Agreements to
                  which Buyer is a party and to consummate the transactions
                  contemplated thereby; and the execution and delivery of the
                  Agreement and each of the Ancillary Agreements to which Buyer
                  is a party and the consummation by Buyer of the transactions
                  contemplated thereby have been duly and validly authorized by
                  all necessary corporate action required on the part of Buyer.

         2.       The Agreement and each of the Ancillary Agreements to which
                  Buyer is a party have been duly and validly executed and
                  delivered by Buyer, and assuming that the Agreement and each
                  such Ancillary Agreement constitutes a valid and binding
                  obligation of the other parties thereto, subject to receipt of
                  all Required Regulatory Approvals, constitute valid and
                  binding obligations of Buyer, enforceable against Buyer in
                  accordance with their respective terms, except as may be
                  limited by applicable bankruptcy, insolvency, fraudulent
                  conveyance, reorganization, moratorium or other similar laws
                  affecting or relating to enforcement of creditors' rights
                  generally and general principles of equity, including without
                  limitation, concepts of materiality, reasonableness, good
                  faith and fair dealing (regardless of whether enforcement is
                  considered in a proceeding at law or in equity). With respect
                  to the foregoing opinion, (i) insofar as provisions contained
                  in the Agreement and the Ancillary Agreements provide for
                  indemnification, exoneration or limitations of liability, the
                  enforceability thereof may be limited by public policy
                  considerations and (ii) the availability of a decree for
                  specific performance or an injunction is subject to the
                  discretion of the court requested to issue any such decree or
                  injunction.

         3.       The execution, delivery and performance of the Agreement and
                  each Ancillary Agreement to which Buyer is a party does not
                  (a) conflict with the Articles of Incorporation or Bylaws of
                  Buyer, (b) to the knowledge of Buyer's counsel, constitute a
                  violation of or default under those agreements or instruments
                  set forth on a Schedule attached to the opinion and which have
                  been identified to such counsel by Buyer as all the agreements
                  and instruments which are material to the business or
                  financial condition of Buyer, or (c) violate any order, writ
                  injunction, decree, statute, rule or regulation, of which
                  Buyer's counsel has knowledge, applicable to Buyer or any of
                  its assets, except for such violations which would

<PAGE>   541

                  not, individually or in the aggregate, create a Buyer Material
                  Adverse Effect.

         4.       Except for the Buyer Required Regulatory Approvals, no
                  declaration, filing or registration with, or notice to, or
                  authorization, consent or approval of any Governmental
                  Authority is necessary for the consummation by Buyer of the
                  transactions contemplated by the Agreement and each of the
                  Ancillary Agreements to which Buyer is a party, other than
                  such declarations, filings, registrations, notices,
                  authorizations, consents or approvals which relate to the
                  Transferable Permits.

         In rendering such opinion, such counsel may (A) rely in respect of
matters of fact upon certificates of officers and employees of Buyer and upon
information obtained from public officials, (B) assume that all documents
submitted to counsel as originals are authentic, that all copies submitted to
counsel conform to the originals thereof, and that the signatures on all
documents examined by counsel are genuine, (C) state that the opinion is limited
to federal laws, the [corporate statute of Buyer's jurisdiction of
incorporation] and the laws of the District of Columbia, (D) state that counsel
expresses no opinion with respect to provisions of the Agreement and the
Ancillary Agreements relating to the subject matter jurisdiction of the United
States District Court for the District of Columbia and relating to the waiver of
an inconvenient forum, and (E) with respect to the opinions expressed in
paragraphs 3 and 4 above, state that counsel is relying as to such matters on
the opinions of in-house, local and other special counsel to Buyer to the extent
of the matters set forth in such opinions. Certificates and opinions relied upon
by Buyer's counsel shall be delivered to Seller together with the opinion of
Buyer's counsel.

<PAGE>   542

                                                                       EXHIBIT M

                         OPINION OF COUNSEL TO GUARANTOR

         1.       Guarantor is a corporation validly existing and in good
                  standing under the laws of its jurisdiction of incorporation.
                  Guarantor has all necessary corporate power and authority to
                  execute and deliver the Guarantee Agreement and to consummate
                  the transactions contemplated thereby; and the execution and
                  delivery of the Guarantee Agreement and the consummation by by
                  Guarantor of the transactions contemplated thereby have been
                  duly and validly authorized by all necessary corporate action
                  required on the part of Guarantor.

         2.       The Guarantee Agreement has been duly and validly executed and
                  delivered by Guarantor and, assuming that the Guarantee
                  Agreement constitutes a valid and binding obligation of
                  Seller, constitutes a valid and binding obligation of
                  Guarantor, enforceable against Guarantor in accordance with
                  its terms, except as may be limited by applicable bankruptcy,
                  insolvency, fraudulent conveyance, reorganization, moratorium
                  or other similar laws affecting or relating to enforcement of
                  creditors' rights generally and general principles of equity,
                  including without limitation, concepts of materiality,
                  reasonableness, good faith and fair dealing (regardless of
                  whether enforcement is considered in a proceeding at law or in
                  equity). With respect to the foregoing opinion, the
                  availability of a decree for specific performance or an
                  injunction is subject to the discretion of the court requested
                  to issue any such decree or injunction.

         3.       The execution, delivery and performance of the Guarantee
                  Agreement does not (a) conflict with the Articles of
                  Incorporation or Bylaws of Guarantor, (b) to the knowledge of
                  Guarantor's counsel, constitute a violation of or default
                  under those agreements or instruments set forth on a Schedule
                  attached to the opinion and which have been identified to such
                  counsel by Guarantor as all the agreements and instruments
                  which are material to the business or financial condition of
                  Guarantor, or (c) violate any order, writ, injunction, decree,
                  statute, rule or regulation, of which Guarantor's counsel has
                  knowledge, applicable to Guarantor or the Auctioned Assets,
                  except for such violations which would not, individually or in
                  the aggregate, have a material adverse effect on the ability
                  of Guarantor to consummate the transactions by, and discharge
                  its obligations under, the Guarantee Agreement.

         4.       No declaration, filing or registration with, or notice to, or
                  authorization, consent or approval of any Governmental
                  Authority

<PAGE>   543

                  is necessary for the consummation by Guarantor of the
                  transactions contemplated by the Guarantee Agreement.

         In rendering such opinion, such counsel may (A) rely in respect of
matters of fact upon certificates of officers and employees of Guarantor and
upon information obtained from public officials, (B) assume that all documents
submitted to counsel as originals are authentic, that all copies submitted to
counsel conform to the originals thereof, and that the signatures on all
documents examined by counsel are genuine, (C) state that the opinion is limited
to federal laws, the [corporate statute of the Guarantor's jurisdiction of
incorporation] and the laws of the District of Columbia, (D) state that counsel
expresses no opinion with respect to provisions of the Guarantee Agreement
relating to the subject matter jurisdiction of the United States District Court
for the District of Columbia and relating to the waiver of an inconvenient
forum, and (E) with respect to the opinions expressed in paragraphs 3 and 4
above, state that counsel is relying as to such matters on the opinions of
in-house, local and other special counsel to Guarantor to the extent of the
matters set forth in such opinions. Certificates and opinions relied upon by
Guarantor's counsel shall be delivered to Seller together with the opinion of
Guarantor's counsel.<PAGE>   1
                                                                    EXHIBIT 10.1

                     FIFTH AMENDMENT TO AMENDED AND RESTATED
                           CREDIT AGREEMENT AND WAIVER

         THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND
WAIVER made and entered into as of August 14, 2000, by and among HORIZON MEDICAL
PRODUCTS, INC., a Georgia corporation (the "COMPANY"), HORIZON ACQUISITION
CORP., STRATO/INFUSAID, INC. AND STEPIC CORPORATION (collectively "GUARANTORS"
or "SUBSIDIARIES") the Lenders signatory to the Credit Agreement referred to
below (the "LENDERS"), AND BANK OF AMERICA, N.A., SUCCESSOR TO BANC OF AMERICA
COMMERCIAL FINANCE CORPORATION, formerly known as NationsCredit Commercial
Corporation, as Agent for the Lenders (the "Agent").

                               STATEMENT OF FACTS

         A. The Company, the Lenders and the Agent are parties to the Amended
and Restated Credit Agreement, dated as of May 26, 1998, as amended by the First
Amendment to Amended and Restated Credit Agreement dated as of November 11,
1998, and the Second Amendment to Amended and Restated Credit Agreement and
Waiver dated as of March 31, 1999 and the Third Amendment to the Amended and
Restated Credit Agreement and Waiver dated March 29, 2000 and the Fourth
Amendment to the Amended and Restated Credit Agreement and Waiver dated June 6,
2000 (the "CREDIT AGREEMENT"; capitalized terms used in this Amendment and not
otherwise defined herein have the meanings given in the Credit Agreement, as
amended hereby), whereby the Lenders have agreed to make certain loans and other
financial accommodations to the Company, subject to the terms and conditions
contained in the Credit Agreement.

         B. The Company has requested that the Agent and the Lenders agree to
modify certain terms of the Credit Agreement and that the Agent and the Lenders
grant certain waivers relating to the Credit Agreement, and the Agent and the
Lenders are willing to agree to such modifications and to grant certain waivers,
subject to the terms and conditions of this Amendment.

                               STATEMENT OF TERMS

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

1.       WAIVER OF CERTAIN DEFAULTS OR EVENTS OF DEFAULT. Subject to the terms
and conditions of this Amendment, the Lenders hereby waive any Default or Event
of Default arising solely by reason of the Company's failure, for the test
periods ending on or before July 31, 2000, to be in compliance with the
covenants contained in the following Sections, as in effect prior to this
Amendment:

<PAGE>   2

         (i)      Section 6.13 (Minimum Net Worth)
         (ii)     Section 6.15 (Total Debt Coverage Ratio);
         (iii)    Section 6.16 (Leverage);
         (iv)     Section 6.17 (Minimum EBITDA);
         (v)      Section 6.18 (Interest Coverage); and
         (vi)     Section 6.19 (Debt to Capitalization).

2.       AMENDMENT TO CREDIT AGREEMENT. Subject to the terms and conditions of
this Amendment, the Credit Agreement is hereby amended as follows:

         (a)      Section 6.15 is amended by deleting the phrase "The Company
shall not permit the ratio on the last day of any fiscal quarter" in the first
sentence of said section and inserting in lieu thereof the phrase "The Company
shall not permit the ratio on the last day of any calendar month..." and by
deleting the phrase "except for the fiscal quarter ending December 31, 2000, for
which the Company shall not permit such ratio to be less than 1. 15 to 1.0" at
the end of said section and inserting in lieu thereof the phrase "except for the
calendar months ending October 31, November 30 and December 31, 2000, for which
the Company shall not permit such ratio to be less than 1. 15 to 1.0.

         (b)      Section 6.16 of the Credit Agreement is amended to read as
follows:

                           SECTION 6.16. Leverage. At no time shall the ratio of
                  (i) Consolidated Total Debt at such time to (ii) Adjusted
                  EBITDA for the twelve consecutive calendar months then most
                  recently ended (considered as a single accounting period;
                  provided that for the purposes of compliance on any date prior
                  to the date that twelve consecutive calendar months have
                  elapsed since the Initial Closing Date, Adjusted EBITDA for
                  the relevant period shall equal the sum of Adjusted EBITDA for
                  twelve consecutive calendar months completed since the Initial
                  Closing Date, annualized), exceed 3.50 to 1.0; provided
                  further that during the Fiscal Years ending December 31, 1999
                  and December 31, 2000, the ratio of (i) Consolidated Total
                  Debt at such time to (ii) EBITDA for the twelve consecutive
                  calendar months then most recently ended shall not exceed the
                  ratio set forth below for the periods occurring during such
                  Fiscal Year:

<TABLE>
<CAPTION>
                  Period                                              Ratio
                  ------                                              -----
                  <S>                                                 <C>
                  January 1, 1999 through June 30, 1999              4.00 : 1.00
                  July 1, 1999 through December 31, 1999             3.75 : 1.00
                  January 1, 2000 through March 31, 2000             4.40 : 1.00
                  April 1, 2000 through June 30, 2000                4.10 : 1.00
                  Each calendar month for the period from
                      July 1, 2000 through September 30, 2000        3.75 : 1.00
                  Each calendar month for the period from
                      October 1, 2000 through December 31, 2000      3.50 : 1.00
</TABLE>

                                       2
<PAGE>   3

         (c)      Section 6.17 of the Credit Agreement is amended to read as
follows:

                           SECTION 6.17. MINIMUM EBITDA. At no time during any
                  period specified below arising after the Closing Date, shall
                  EBITDA for the twelve consecutive calendar months (or, in the
                  case of any fiscal quarter ending prior to the first
                  anniversary of the Initial Closing Date, for the period
                  commencing on the Initial Closing Date and ending on the last
                  day of such fiscal quarter), considered as a single accounting
                  period, be less than the corresponding amount set forth below:

<TABLE>
<CAPTION>
                           Twelve Months Ending         Amount
                           ---------------------      -----------
                           <S>                        <C>
                           3/31/98                    $ 5,500,000
                           6/30/98                      7,000,000
                           9/30/98                      8,000,000
                           12/31/98                     9,000,000
                           3/31/99                     13,000,000
                           6/30/99                     13,000,000
                           9/30/99                     13,000,000
                           12/31/99                    15,500,000
                           3/31/00                     11,000,000
                           6/30/00                     11,000,000
                           7/31/00                     11,000,000
                           8/31/00                     11,000,000
                           9/30/00                     12,000,000
                           10/30/00                    12,000,000
                           11/30/00                    12,000,000
                           12/31/00                    13,000,000
                           All months thereafter       15,500,000
</TABLE>

         (d)      Section 6.18 is amended to read as follows:

                  The Company shall not permit the ratio, calculated on the last
                  day of any calendar month for the number of consecutive
                  calendar months then most recently ended since the Initial
                  Closing Date (considered as a single accounting period, but
                  not to exceed twelve months), of (i) Consolidated Free Cash
                  Flow to (ii) the aggregate interest charges incurred by the
                  Company and its Consolidated Subsidiaries for such period,
                  whether expensed or capitalized, including the portion of any
                  obligation under Capital Leases allocable to interest expenses
                  in accordance with GAAP and the portion of any debt discount
                  or premium (but not expenses of issuance) that shall be
                  amortized in such period, to be less than the ratio set forth
                  below for the period in which the last day of such calendar
                  month shall occur, except for any calendar month in the Fiscal
                  Year ended December 31, 2000, for which the Company shall not
                  permit such ratio to be less than 2.0 to 1.0.

                                       3
<PAGE>   4

<TABLE>
<CAPTION>
                                       Period                        Ratio
                           -----------------------------          -----------
                           <S>                                    <C>
                           Closing Date through maturity          3.00 : 1.00
</TABLE>

         (e)      Section 6.21 is amended to read as follows:

                  SECTION 6.21. CUMULATIVE CONSOLIDATED CASH FLOW. As of the
                  last date of any calendar month commencing with the month
                  ended July 31, 2000, cash provided by (used in) operations of
                  the Company and its Consolidated Subsidiaries for the twelve
                  calendar months then most recently ended (or in the case of
                  any calendar month ending on or prior to December 31, 2000,
                  since January 1, 2000), as determined from the statements of
                  cash flow delivered in accordance with Section 5.01(b) and
                  (c), adding back any amounts (not to exceed $3,300,000 in the
                  aggregate) deducted in determining cash provided by (used in)
                  operations with respect to the purchase from Cryolife, Inc. of
                  the assets and inventory associated with the plant of
                  Cryolife, Inc. located in Clearwater, Florida, shall be
                  greater than 0.

3.       AUDITS AND REPORTING. Company agrees to fully cooperate with, and
comply in all respects with any demands related to a collateral audit to be
conducted by Agent or its agents and an operational audit to be conducted by The
Recovery Group and shall furnish to Agent or its agents any information,
reports, statements or other documentation respecting the business operations
and financial condition of Company and its Subsidiaries respectively, from time
to time, as may be requested and shall provide any and all information necessary
to comply with monitoring of its accounts receivable and inventory. Any and all
costs, fees and expenses related to the foregoing audit and monitoring shall be
borne solely at Company's expense and shall be promptly reimbursed to Agent, at
its request. Company agrees that all reports, certificates or other documents
required to be provided under Section 5.01 of the Credit Agreement which were
originally due on or before September 30, 2000 (including but not limited to
August 31, 2000 financial statements) shall now be due on or before September
15, 2000.

4.       AGREEMENT TO EXPLORE ALTERNATIVES. It is Company's intent to enter into
a binding letter of intent setting forth the terms for an equity investment by
* * * which is satisfactory in all respects to Agent. As such, Company agrees
that if said letter of intent is not executed and presented to Bank on or before
August 22, 2000, that it will, at its sole cost and expense, engage an
investment banker or other third party advisor acceptable to Agent to explore
strategic alternatives with respect to the sale of a portion or all of Company's
assets or stock.

5.       LOCKBOX AGREEMENTS. Notwithstanding the waivers set forth above,
Agent's actions in forwarding certain "Default Notices" under those certain
Disbursement and Waiver Agreements entered into by and among Company, its
Subsidiaries, Agent and certain banks having banking relationships with Company,
shall remain valid and in full force and effect and Company's or Subsidiaries'
rights to withdraw, transfer or pay funds from the accounts referenced below is
terminated.

* * * CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION

                                       4
<PAGE>   5

<TABLE>
<CAPTION>
Account Name                                                     Account Number
------------------------------------------------------------     --------------
<S>                                                              <C>
Horizon Medical Products, Inc.                                     8251106426
Horizon Acquisition Corp. d/b/a Neostar Medical Technologies         2233029
Horizon Acquisition Corp. d/b/a Neostar Medical Technologies       3250348051
Strato/Infusaid, Inc.                                                2275341
Strato/Infusaid, Inc.                                             375-020-5068
 Stepic Corporation                                                 053022805
</TABLE>

6.       NO OTHER WAIVERS OR AMENDMENTS. Except for the waivers and amendments
expressly set forth in Section 1 and Section 2 above, respectively, the Credit
Agreement shall remain unchanged and in full force and effect. The waivers
contained, in Section 1 relate solely to the Defaults or Events of Default
described therein and nothing in this Amendment is intended or shall be
construed to be a waiver by the Lenders of any other Default or Event of
Default, including without limitation any future failure by the Company to
comply with the aforesaid financial covenants, as amended by this Amendment.
Nothing in this Amendment is intended or shall be construed to constitute a
novation or an accord and satisfaction of any of the Company's Obligations under
or in connection with the Credit Agreement or to modify, affect or impair the
perfection or continuity of Agent's security interests in, security titles to or
other liens on any Collateral for the Obligations.

7.       REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Agent and the Lenders that (a) this Amendment has been duly
authorized, executed and delivered by the Company, (b) no Default or Event of
Default has occurred and is continuing as of this date, other than the Defaults
or Events of Default waived in this Amendment, and (c) except to the extent
disclosed to the Agent in writing on or prior to the date hereof, all of the
representations and warranties made by the Company in the Credit Agreement and
the other Financing Documents are true and correct in all material respects on
and as of the date of this Amendment (except to the extent that any such
representations or warranties expressly referred to a specific prior date). Any
breach by the Company of its representations and warranties contained in this
Section 6 shall be an Event of Default for all purposes of the Credit Agreement
(as amended hereby).

8.       RATIFICATION. The Company hereby ratifies and reaffirms each and every
term, covenant and condition set forth in the Credit Agreement and all other
documents delivered by the Company (as amended hereby) in connection therewith
(including without limitation the other Financing Documents to which the Company
is a party), effective as of the date hereof.

9.       ESTOPPEL. To induce the Agent and the Lenders to enter into this
Amendment, the Company hereby acknowledges and agrees that, as of the date
hereof, there exists no right of offset, defense or counterclaim in favor of the
Company as against the Agent or any Lender with respect to the obligations of
the Company to any of such parties under the Credit Agreement or the other
Financing Documents, either with or without giving effect to this Amendment.

                                        5
<PAGE>   6

10.      STRICT COMPLIANCE NOTICE. The Agent hereby notifies the Company that
the Agent and the Lenders intend to rely upon the strict terms and conditions of
the Credit Agreement and the other Financing Documents, and the Agent and the
Lenders expect that the Company will strictly comply with the terms and
conditions thereof from and after this date. Nothing contained in this Amendment
shall constitute a waiver by the Agent or the Lender of any Default or Event of
Default now existing or hereafter arising under the Credit Agreement or any
other Financing Document.

11.      CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective upon
the date hereof, subject to the satisfaction of the following conditions:

                  (a) the receipt by the Agent of this Amendment, duly executed,
         completed and delivered by the Agent, the Lenders and the Company; and

                  (b) the receipt by the Agent of the fees and expenses due to
         its counsel from the Company, which amount equals $6,260.00;

                  (c) the receipt by the Agent of such other documents,
         certificates, lien searches, instruments and opinions of counsel as the
         Agent may reasonably request.

12.      SETOFF. Upon the occurrence and during the continuance of any Event of
Default, Agent (and each of it affiliates) is hereby authorized at any time and
from time to time, to the fullest extent permitted by law, to set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebtedness at any time owing by such Bank (or any
of its affiliates) to or for the credit or the account of Company against any
and all of the obligations of Company now or hereafter existing under this
Agreement and any Note held by Agent, irrespective of whether Agent shall have
made any demand under this Agreement or such Note and although such obligations
may be unmatured. Agent agrees promptly to notify Company after any such set-off
and application made by Agent; provided, however, that the failure to give such
notice shall not affect the validity of such set-off and application. The rights
of Agent under this Section are in addition to other rights and remedies
(including, without limitation, other rights of set-off) that Agent may have.

13.      EXPENSES. The Company will pay all present and future reasonable
expenses of Agent in connection with the negotiation, preparation, execution,
delivery and administration of this Agreement, the Note and each of the other
Loan Documents, whenever the same shall be executed and delivered, including
appraisers' fees, auditing fees, search fees, recording fees and the fees and
disbursements of Morris, Manning & Martin, L.L.P., or any replacement law firm
that serves as counsel retained by the Agent and Agent may debit Company's loan
account for any such expenses presented to Company which are unpaid past their
due date. This includes any monthly fees incurred in monitoring the Company's
borrowing base hereunder and for field exams, which Company hereby agrees to pay
and, includes all future reasonable costs and expenses of the Agent in
connection with:

                                       6
<PAGE>   7

         (a) the negotiation, preparation, execution and delivery of any waiver,
amendment or consent by the Agent which is requested by the Company relating to
this Agreement, the Note or any of the other Loan Documents;

         (b) any restructuring, refinancing or "workout" of the transactions
contemplated by this Agreement, the Note and the other Loan Documents, or any
material amendment to the terms of this Agreement or any other Loan Document,
including the fees and disbursements of counsel to the Agent;

         (c) consulting with one or more Persons engaged by the Agent, including
appraisers, accountants, lawyers, and The Recovery Group concerning or related
to the servicing of this Agreement or the nature, scope or value of any right or
remedy of the Agent hereunder, under the Note or under any of the other Loan
Documents, including any review of factual matters in connection therewith, with
expenses shall include the fees and disbursements of such Persons;

         (d) the collection or enforcement of the obligations of the Company
under this Agreement, the Note or other Loan Document including the reasonable
fees and disbursements of counsel to the Agent if such collection or enforcement
is done by, through or with the assistance of an attorney;

         (e) prosecuting or defending any claim in any way arising out of,
related to, or connected with this Agreement, the Note or any of the other Loan
Documents, which expenses shall include fees and disbursements of counsel to the
Agent and of experts and other consultants retained by the Agent;

         (f) the exercise by the Agent of any right or remedy granted to it
under this Agreement, the Note or any of the other Loan Documents including the
reasonable fees and disbursements of counsel to the Agent if such exercise is
done by, through, or with the assistance of any attorney;

         (g) gaining possession of, maintaining, handling, preserving, storing,
shipping, appraising, selling preparing for sale and advertising to sell any
collateral pledged as security for the Note, whether or not a sale is
consummated; and

         (h) to the extent not already covered by any of the preceding
subsections, any bankruptcy proceeding, and the fees and disbursements of
counsel to the Agent incurred in connection with the representation of the Agent
in any matter relating to or arising out of any such proceeding including,
without limitation (i) any motion for relief from any stay or similar order,
(ii) the negotiation, preparation, execution and delivery of any document
relating to the Loan and (iii) the negotiation and preparation of any
debtor-in-possession financing or any plan of reorganization of Company, whether
proposed by the Company, the Agent or any other person, and whether such fees
and expenses are incurred prior to, during or after the commencement of such
proceeding or the confirmation or conclusion of any such proceeding.

14.      WAIVER OF CLAIMS AND RELEASE. Company and its Subsidiaries warrant and
represent to Agent that the obligations memoralized by the Credit Agreement and
related documents are not subject to any credits, charges, claims, or rights of
offset or deduction of any kind or character

                                       7
<PAGE>   8

whatsoever; and Company and its Subsidiaries hereby release and discharge Agent,
Lenders, and their predecessors, successors, assigns, officers, managers,
directors, shareholders, employees, agents, attorneys, representatives, parent
corporations, subsidiaries, and affiliates (collectively referred to as
"Affiliates"), jointly and severally from any and all claims and causes of
action, whether known or unknown and whether now existing or hereafter arising,
that have at any time been owned, or that are hereafter owned, in tort or in
contract, by Company or Subsidiaries and that arise out of any one or more
circumstances or events that occurred prior to the date of this Agreement which
they had, may have or claim to have against Agent, Lenders or Affiliates.
Moreover, Company and its subsidiaries and subsidiaries, jointly and severally,
waive any and all claims now or hereafter arising from or related to any delay
by Agent, Lenders or Affiliates in exercising any rights or remedies under the
Loan Documents, including, without limitation, any delay in foreclosing any
collateral securing any of the Obligations.

15.      GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA FOR CONTRACTS TO BE PERFORMED
ENTIRELY WITHIN SAID STATE.

16.      SEVERABILITY OF PROVISIONS. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability of such
provision in any other jurisdiction. To the extent permitted by applicable law,
the Company hereby waives any provision of law that renders any provision hereof
prohibited or unenforceable in any respect.

17.      COUNTERPARTS . This Amendment may be executed in any number of
counterparts, all of which shall be deemed to constitute but one original and
shall be binding upon all parties, their successors and permitted assigns and
facsimile signatures shall be deemed binding and of the same force and effect as
originals.

18.      ENTIRE AGREEMENT. The Credit Agreement as amended by this Amendment
embodies the entire agreement between the parties hereto relating to the subject
matter hereof and supersedes all prior agreements, representations and
understandings, if any, relating to the subject matter hereof.

                                       8
<PAGE>   9

         IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed by their respective officers thereunto duly authorized, as of the date
first above written.

                                             HORIZON MEDICAL PRODUCTS,
                                             INC.

                                             By:    /s/ William E. Peterson, Jr.
                                                --------------------------------
                                             Name:  William E. Peterson, Jr.
                                             Title: President

                                             LENDER AND AGENT:

                                             BANK OF AMERICA, N.A., SUCCESSOR TO
                                             BANC OF AMERICA COMMERCIAL
                                             FINANCE CORPORATION

                                             By:    /s/ Ronald S. Cohn
                                                --------------------------------
                                             Name:  Ronald S. Cohn
                                                    Duly Authorized Signatory

                                       9
<PAGE>   10

                                 ACKNOWLEDGMENT

         The undersigned Credit Parties hereby acknowledge and consent to, and
agree to the terms of, the foregoing Fifth Amendment to Amended and Restated
Credit Agreement and Waiver, and ratify and confirm their respective obligations
under the Financing Documents, as of the date of such Amendment.

                                             HORIZON ACQUISITION CORP.

                                             By: /s/ Marshall B. Hunt
                                                 -------------------------------
                                             Name:  Marshall B. Hunt
                                             Title: Chief Executive Officer

                                             STRATO/INFUSAID, INC.

                                             By: /s/ Marshall B. Hunt
                                                 -------------------------------
                                             Name:  Marshall B. Hunt
                                             Title: President and
                                                    Chief Executive Officer

                                             STEPIC CORPORATION

                                             By: /s/ Marshall B. Hunt
                                                 -------------------------------
                                             Name:  Marshall B. Hunt
                                             Title: Chief Executive Officer

                                       10

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