Document:

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                                                                    EXHIBIT 10.1

                  AMENDED AND RESTATED POWER PURCHASE AGREEMENT

                                     BETWEEN

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                                       AND

                             CEDAR BRAKES I, L.L.C.

March 21, 2000

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                                TABLE OF CONTENTS

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                                                                                   PAGE
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<S>                                                                                <C>
ARTICLE I DEFINITIONS ..........................................................      2

ARTICLE II GENERAL CONDITIONS OF DELIVERY AND ACCEPTANCE OF ELECTRIC
ENERGY AND CAPACITY ............................................................      6

     Section A Status of Facility ..............................................      7
     Section B Sale of Energy ..................................................      7
     Section C Sale of Capacity ................................................      7
     Section D Exceptions to Obligation to Accept Energy and Capacity ..........      8
     Section E Distribution Surcharges .........................................     10
     Section F Reactive Power ..................................................     10

ARTICLE III TERM; EFFECTIVENESS ................................................     11

     Section A Term ............................................................     11
     Section B Conditions Precedent ............................................     11

ARTICLE IV PURCHASE PRICE AND PAYMENT CONDITIONS ...............................     13

     Section A Energy and Capacity Rates .......................................     13
     Section B Transmission of Energy ..........................................     13
     Section C Binding Rate ....................................................     13

ARTICLE V DELIVERY OF ENERGY AND CAPACITY ......................................     14

     Section A Scheduling ......................................................     14
     Section B Rate of Delivery ................................................     15
     Section C Minimum On-Peak Energy Deliveries ...............................     16
     Section D Make-up Energy Deliveries .......................................     16
     Section E Seller's Failure to Deliver Energy and Capacity .................     17
     Section F PSE&G's Failure to Accept Delivery of Energy ....................     19
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<TABLE>
<S>                                                                                <C>
ARTICLE VI BILLING AND PAYMENT .................................................     20

ARTICLE VII METERING/RECORDS ...................................................     21

ARTICLE VIII USE OF THE PUBLIC SERVICE SYSTEM ..................................     21

ARTICLE IX DEDICATION OF FACILITIES ............................................     22

ARTICLE X LIABILITY ............................................................     22

ARTICLE XI FORCE MAJEURE .......................................................     23

ARTICLE XII INDEMNIFICATION ....................................................     25

ARTICLE XIII WARRANTIES ........................................................     26

ARTICLE XIV EVENTS OF DEFAULT AND BREACH OF CONTRACT ...........................     27

    Section A Default by Seller ................................................     27

    Section B Default by PSE&G .................................................     29

    Section C Remedies .........................................................     31

ARTICLE XV ARBITRATION .........................................................     32

ARTICLE XVI ENTIRE AGREEMENT ...................................................     35

ARTICLE XVII ASSIGNMENT/TRANSFER ...............................................     35

ARTICLE XVIII CURE BY FINANCIER ................................................     37

ARTICLE XIX FINANCIER SECURITY AGREEMENTS ......................................     37

ARTICLE XX CHOICE OF LAW .......................................................     39

ARTICLE XXI CAPTIONS ...........................................................     39

ARTICLE XXII COUNTERPARTS ......................................................     40

ARTICLE XXIII MISCELLANEOUS ....................................................     40

ARTICLE XXIV RESERVATIONS ......................................................     41

ARTICLE XXV SURVIVAL OF OBLIGATIONS ............................................     41

ARTICLE XXVI NOTICES ...........................................................     41

ARTICLE XXVII RELEASE ..........................................................     44
</TABLE>

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                  AMENDED AND RESTATED POWER PURCHASE AGREEMENT

          This Amended and Restated Power Purchase Agreement ("Amended
Agreement") is made and entered into this 21st day of March, 2000 by and between
Public Service Electric and Gas Company, a New Jersey corporation ("PSE&G") and
Cedar Brakes I, L.L.C., a Delaware limited liability company (the "Seller")
(each individually referred to as a "Party" and collectively as "Parties").

                                    RECITALS

          WHEREAS, PSE&G is a public utility as defined in N.J.S.A. 48:2-13 and,
as such, is required by applicable statutes and regulations to furnish safe,
adequate and proper service to its customers and further, to have and maintain
its property, plant and equipment in such condition as to enable it to do so;

          WHEREAS, PSE&G is a member of the PJM Interconnection, L.L.C. ("PJM");

          WHEREAS, PJM operates a fully coordinated power pool pursuant to an
agreement (the "PJM Operating Agreement") executed by and among its members;

          WHEREAS, PSE&G and Newark Bay Cogeneration Partnership, L.P. ("NBCP")
are parties to a Power Purchase Agreement dated June 15, 1988, as amended by the
First Amendment dated January 28, 1991 (together referred to as the "Original
Agreement"), providing for the interconnection of the Facility with PSE&G and
the sale by NBCP and the purchase by PSE&G of the output of the Facility;

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          WHEREAS, the Original Agreement was entered into by PSE&G pursuant to
its obligations under the Public Utility Regulatory Policies Act of 1978
("PURPA") and was approved by the New Jersey Board of Public Utilities ("NJBPU")
by orders dated May 10, 1989, and March 12, 1991;

          WHEREAS, New Jersey's Electric Discount and Energy Competition Act,
N.J. 208th Legislature, Assembly, No. 16 ("the New Jersey Competition Act") and
certain orders of the NJBPU encourage the mitigation of above-market costs of
long-term power purchase agreements with non-utility generators to effect rate
payer savings;

          WHEREAS, PSE&G and NBCP desire to amend the Original Agreement to,
among other things, reduce the rates for energy and capacity paid by PSE&G for
the amounts of energy and capacity sold under the Original Agreement, and to
provide for NBCP or its assignees or transferees to supply such energy and
capacity from sources other than the Facility; and

          WHEREAS, NBCP intends to transfer and/or assign its rights and
obligations under the Original Agreement to Seller.

          NOW, THEREFORE, in consideration of the recitals and mutual covenants
contained herein, the Parties hereto agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

          The following terms when used herein with capitalization shall have
the following meanings, unless a different meaning shall be expressly stated:

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         "AAA" shall mean American Arbitration Association as defined and
described in Article XV.

         "Amended Agreement" means this Amended and Restated Power Purchase
Agreement between Seller and PSE&G.

         "Capacity" has the meaning in Section II(C).

         "Curtailed Energy Deliveries" has the meaning in Section V(D).

         "Date Of Commercial Operation" means September 1, 1993.

         "Delivery Point" means any of: (i) the Facility Interconnection Point;
(ii) the Fairlawn 138-kV interconnection; (iii) the New Milford 230-kV
interconnection; or (iv) any alternate point of delivery in the PJM System of
which Seller notifies PSE&G (any of which is referred to herein as the "Delivery
Point").

         "Eastern Prevailing Time" means Eastern Standard Time or Eastern
Daylight Savings Time, as applicable, in New York, New York.

         "Effective Date" has the meaning in Section III(A).

         "Energy" means electric energy measured in kilowatt-hours (or
megawatt-hours), sixty hertz, balanced three phase alternating current at the
nominal voltage of the Delivery Point.

         "Facility" means the gas-fired combined cycle power plant together with
the Substation Facility and all appurtenant structures and equipment that NBCP
owns/leases, operates and maintains, for the purpose of generating electricity,
steam and/or other forms of useful thermal energy output.

         "Facility Interconnection Point" means the existing point of physical
connection of the Facility to the Public Service System as further defined in
the Interconnection Agreement.

          "FERC" means the Federal Energy Regulatory Commission.

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          "Financier or Lender" means any individual(s) or entity(ies) and any
representative(s) or trustee(s) for any such individual(s) or entity(ies)): (i)
providing financing to El Paso Merchant Energy Holding Company or Seller or any
entity controlling, controlled by or under common control with such entity, in
respect of the transactions in this Amended Agreement and the Interconnection
Agreement and the PJM Interconnection Service Agreement, including without
limitation in the form of (a) term or interim debt or subordinated debt
financing; (b) the establishment and/or maintenance of working capital
requirements; and/or (c) any refinancing or take-out of any such loan(s); and/or
(ii) participating as an equity investor in such transactions; and/or (iii) any
lessor under a lease finance arrangement.

          "Interconnection" means the physical facilities interconnecting the
Facility with the Public Service System as further described in the
Interconnection Agreement.

          "Interconnection Agreement" means the Interconnection Agreement
between PSE&G and NBCP providing for the Interconnection of the Facility with
the Public Service System.

          "Loan Agreement" means any agreement with one or more Lenders pursuant
to which debt and/or equity financing is obtained.

          "Make-up Energy Deliveries" has the meaning in Section V(D).

          "Month" means the calendar Month commencing at 12:00.01 a.m. Eastern
Prevailing Time on the first day of the calendar Month and concluding at
midnight Eastern Prevailing Time on the final day of the same calendar Month.

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

          "Net Electrical Power Output" means Energy generated by the Facility
less energy consumed by the Facility's auxiliary load. "NJBPU Order" has the
meaning in Section III(B).

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         "OATT means the Open Access Transmission Tariff filed by PJM with the
FERC on July 14, 1997, in Docket No. OA97-261-000 as amended effective April 1,
1998, as further amended modified or superseded from time to time, under which
transmission service is provided within the PJM Control Area.

         "Off-Peak Period" means all other hours of a week exclusive of the
On-Peak Period.

         "On-Peak Period" means the period commencing with hour beginning 0700
through hour ending 2300 (Eastern Prevailing Time) Monday through Friday,
excluding NERC holidays.

         "PJM Interconnection Service Agreement" means the PJM Interconnection
Service Agreement between PJM and NZBCP regarding interconnection under Part IV
of the OATT.

         "PJM Operating Agreement" means the agreement governing the PJM
Interconnection, L.L.C. dated June 2, 1997, as amended December 31, 1997, as in
effect from time to time, together with all amendments and supplements thereto.

         "PJM System" means Transmission Facilities within the PJM Control Area,
as each such term is defined in the PJM Operating Agreement.

         "PJM Tariff" means the PJM Open Access Transmission Tariff.

         "Public Service System" means the electric power generation,
transmission, subtransmission and distribution facilities owned, operated and
maintained by PSE&G, including the Interconnection.

         "PURPA" shall have the meaning set forth in the fifth whereas clause
hereof.

         "RAA" means the PJM Reliability Assurance Agreement dated June 2, 1997,
as in effect from time to time, together with all amendments and supplements
thereto.

         "Substation Facility" has the meaning set forth in the Interconnection
Agreement.

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         "System Emergency" means the existence of a physical or operational
condition and/or the occurrence of an event on the Public Service System (or PJM
System) which in PSE&G's judgment is: (i) imminently likely to endanger life or
property; or (ii) impairs and/or imminently will impair: (a) PSE&G's ability to
discharge its statutory obligation(s) to provide safe, adequate and proper
service to its customers; and/or (b) the safety and/or reliability of the Public
Service System (or PJM System). System Emergency shall include a minimum
generation emergency declaration by PJM that meets the requirements specified in
the previous sentence if PSE&G treats Seller equally with all other generation
under contract with PSE&G (except for Small Power Producers as defined in PURPA)
on the Public Service System.

                                   ARTICLE II

                       GENERAL CONDITIONS OF DELIVERY AND
                   ACCEPTANCE OF ELECTRIC ENERGY AND CAPACITY

         Seller agrees to deliver and PSE&G agrees to accept, during the term of
this Amended Agreement, Energy and Capacity delivered by Seller, subject to and
in accordance with the terms of this Amended Agreement. Seller may provide
Energy and Capacity to PSE&G, at Seller's sole option, from any source of supply
including the Facility or other sources. Seller shall have the right to sell all
or a portion of the Net Electrical Power Output of the Facility to any third
party purchaser without prior notice thereof to PSE&G, subject to Section II(E)
below.

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                                   SECTION A
                               STATUS OF FACILITY

         Seller's and PSE&G's obligations under this Amended Agreement are
expressly not conditioned on Seller's maintenance of the "qualifying facility"
(QF) status of the Facility under PURPA and this Amended Agreement shall remain
binding upon the Parties without regard to whether the Facility is or remains a
QF. Seller shall have no obligation to maintain such QF status. Seller, on
behalf of itself and any successor owner of the Facility, hereby waives and
agrees not to exercise any rights it may have under PURPA to require the
purchase by PSE&G of the Net Electrical Power Output of the Facility.

                                    SECTION B
                                 SALE OF ENERGY

         Seller will sell and deliver Energy to PSE&G that is scheduled and
delivered by Seller in accordance with Article V, and PSE&G will purchase and
accept delivery of such Energy, at the Delivery Point(s). The annual quantities
of Energy that Seller may schedule and deliver in each calendar year of the
Amended Agreement commencing with the Year 2000 are set forth in Exhibit I. The
annual quantity applicable to the initial calendar year of the Term of this
Amended Agreement (if a partial calendar year) shall be adjusted by multiplying
the applicable annual quantity for such year times the number of days in such
partial calendar year divided by 365 days.

                                    SECTION C
                                SALE OF CAPACITY

         Seller shall arrange for capacity credits to be made available to PSE&G
from Capacity Resources (as defined in the RAA) ("Capacity"), which may include
at Seller's option capacity provided by the Facility or from other sources of
such capacity, such that PSE&G shall be credited by PJM with at least one
hundred twenty-three (123) MW per day of such Capacity

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credits. Seller shall take all necessary steps utilizing PJM's "eCapacity"
mechanism, or as otherwise may be required by PJM, such that PSE&G's account
with PJM shall reflect such one hundred twenty-three (123) MW per day of
Capacity credits as of the effective date of this Agreement and at all times
throughout the term hereof. PSE&G agrees to cooperate with Seller in making any
submittals required by PJM.

         The amount of Capacity credits to be provided to PSE&G above is based
on the methodology currently specified in the RAA. If such methodology is no
longer used by PJM, the minimum quantity of Capacity credits Seller is required
to provide hereunder (restated in terms of the new unit of measurement) shall be
calculated based upon the operation of the Facility during the twelve (12) Month
period from September 1, 1998 through August 31, 1999 or such shorter period
ending as of August 31, 1999 as may be specified in the new measurement
methodology. If the RAA and the PJM Operating Agreement no longer require PSE&G
to obtain such Capacity credits, Seller shall provide Capacity to PSE&G in an
amount equal to the amount specified in the measurement methodology in effect
immediately prior to the cancellation of such requirement.

                                    SECTION D
                       EXCEPTIONS TO OBLIGATION TO ACCEPT
                               ENERGY AND CAPACITY

         Notwithstanding the above, and without derogating from the provisions
of Article XI of this Amended Agreement, PSE&G shall be excused from accepting
all or a portion of Seller's

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Energy and Capacity in the event of a System Emergency, if such purchases would
contribute to such System Emergency.

         Where practicable, PSE&G shall give Seller advance notice of any
interruption, curtailment or reduction effected pursuant to this Article, the
circumstances requiring or necessitating the interruption, curtailment or
reduction of PSE&G's acceptance of Energy and Capacity and, if able, the reasons
therefor, and the extent and duration thereof. In the event PSE&G is unable, for
any reason, to give Seller advance notice of such an interruption, curtailment
or reduction of such acceptance of the Energy and Capacity, PSE&G shall, as soon
thereafter as practicable, contact Seller to confirm such interruption,
curtailment or reduction, explaining the circumstances requiring or
necessitating the interruption, curtailment or reduction, and, if able, furnish
the reasons therefor and the extent and duration thereof. At Seller's request,
PSE&G shall provide written notice to Seller explaining the circumstances
requiring or necessitating any interruption, curtailment or reduction of service
effective pursuant to this Article. PSE&G will promptly notify Seller when the
reason for the interruption, curtailment or reduction no longer exists and shall
promptly resume the acceptance of the Energy and Capacity.

         In the event acceptance of the Energy and Capacity is interrupted,
curtailed or reduced by PSE&G for any reason specified in this Section II(D),
PSE&G agrees to use its best efforts (consistent with PSE&G's existing
obligations to restore service to its retail and wholesale customers) to correct
any condition and to restore acceptance of such power upon the cessation of any
System Emergency. Seller expressly agrees that PSE&G is not liable for damages
of any kind to Seller or any third party due to PSE&G's failure to accept the
Energy and Capacity for any of the reasons expressed above.

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                                    SECTION E
                             DISTRIBUTION SURCHARGES

         Seller shall reimburse PSE&G for the amount of any Distribution
Surcharges, as defined below, not paid to PSE&G in respect of the Net Electrical
Power Output of the Facility because of an exemption from such Distribution
Surcharges pursuant to Section 28 of the New Jersey Competition Act. For
purposes of the foregoing provision, the term, "Distribution Surcharges" shall
mean the following charges individually or in any combination: (i) the societal
benefits charge or its equivalent, imposed pursuant to Section 12 of the New
Jersey Competition Act; (ii) the market transition charge or its equivalent,
imposed pursuant to Section 13 of the New Jersey Competition Act; and (iii) the
transition bond charge or its equivalent, imposed pursuant to Section 18 of the
New Jersey Competition Act. Upon request by PSE&G, Seller shall provide PSE&G
with data demonstrating the Net Electrical Power Output of the Facility for a
given calendar year and the amount of such Net Electrical Power Output sold to a
customer of Seller for which the exemption from Distribution Surcharges under
Section 28 of the New Jersey Competition Act, has been claimed.

                                    SECTION F
                                 REACTIVE POWER

          PSE&G may request, and, when requested, Seller shall use best efforts
to provide reactive power, leading or lagging, from the Facility up to the
operating limits of the Facility to the extent that it does not require a
reduction in the Net Electrical Power Output of the Facility and there is no
cost to the Seller or the Facility in connection with the provision of such
reactive power. Further, in the event of a System Emergency, PSE&G may request
Seller to provide reactive power, leading or lagging, from the Facility and, if
PSE&G makes such a request, Seller shall

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use best efforts to provide same up to the operating limits of the Facility,
whether or not same requires a reduction in the Net Electrical Power Output of
the Facility. Notwithstanding the foregoing, Seller shall have no obligation to
provide reactive power as provided herein unless Seller is selling Energy
hereunder from the Facility or the Facility is otherwise running.

         Seller shall have no obligation to provide ancillary services to PSE&G
except for reactive power as set forth herein.

                                   ARTICLE III

                               TERM; EFFECTIVENESS

                                    SECTION A
                                      TERM

         This Amended Agreement shall become effective (the "Effective Date")
upon the later to occur of (i) the last date upon which all of the conditions
precedent set forth in Section B below are satisfied or waived and (ii)
September 4, 2000. This Amended Agreement shall remain in effect through and
including August 31, 2013, except as otherwise provided herein.

                                    SECTION B
                              CONDITIONS PRECEDENT

          The following shall be conditions precedent to the effectiveness of
this Amended Agreement: (i)(a) issuance by the NJBPU of an order ("NJBPU Order")
finding that this Amended Agreement is reasonable and prudent, and that PSE&G
will be able to fully and timely recover from its rate payers all costs and
charges to be paid by PSE&G hereunder for Capacity and Energy purchased pursuant
to this Amended Agreement, and such NJBPU Order is issued without conditions or
is otherwise deemed acceptable to the Parties in their reasonable discretion and
(b) the expiration of all relevant notice and appeal periods and the filing of
all other notices

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and obtaining of all other approvals required under New Jersey law; (ii)
amendment, modification or replacement of the existing Gas Service Agreement
between PSE&G and NBCP dated January 24, 1991 on mutually acceptable terms and
the receipt of any required regulatory approvals; (iii) (a) issuance of a FERC
order ("FERC Order"), if required, accepting for filing pursuant to Section 205
of the Federal Power Act a rate schedule providing for Seller to make sales of
energy for resale in interstate commerce as contemplated herein and granting
waivers of regulation under the Federal Power Act routinely granted by FERC to
sellers of electricity which market power, and such FERC Order is to be issued
without conditions, or subject to such conditions as are reasonably acceptable
to Seller; and (b) if required, the expiration or all relevant notice and appeal
periods and the filing of all other notices and obtaining of all other approvals
required under federal law; (iv) PJM approval for Seller to become a member of
PJM; (v) approval of the transactions contemplated by this Amended Agreement by
the Lenders, (vi) approval of the Board of Directors of El Paso Energy
Corporation and PSE&G, if required, (vii) receipt by PSE&G from NBCP, and by
NBCP from PSE&G of a mutual waiver and release of any claims arising under the
Original Agreement prior to the effective date of this Amended Agreement,
including but not limited to claims or liability for breach of contract or
contract defaults, (viii) the transfer and/or assignment of NBCP's rights and
obligations under the Original Agreement to Seller; and (ix) closing of the
transactions contemplated by the Loan Agreements and availability of proceeds to
be obtained thereunder.

         Upon satisfaction or waiver of the last such condition precedent to be
satisfied, the Parties shall promptly affirm in writing that all conditions
precedent have been satisfied. In the event the conditions precedent are not
satisfied, or waived (in the case of (iv) or (vi) above) by the Party
responsible for obtaining them, within 360 days of execution of this Amended
Agreement,

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either Party at its option may notify the other Party of its election to
terminate this Amended Agreement and upon receipt of such notice, this Amended
Agreement shall be terminated.

                                   ARTICLE IV

                     PURCHASE PRICE AND PAYMENT CONDITIONS

                                    SECTION A
                            ENERGY AND CAPACITY RATES

         The rates payable by PSE&G for Energy and Capacity during the term of
this Amended Agreement are set forth in Exhibit II. The payment for Energy and
Capacity shall be calculated based on delivery of Energy by Seller as scheduled
by Seller in accordance with Article V, and shall be billed in accordance with
Article VI.

                                    SECTION B
                             TRANSMISSION OF ENERGY

         Seller shall be responsible for arranging transmission of all Energy
and Capacity that is delivered to PSE&G and paying for all related transmission
charges and congestion costs to the Delivery Point. In the event that Seller
elects to deliver Energy and Capacity to a Delivery Point specified in subpart
(iv) of the definition of Delivery Point, the delivery price for such Energy
shall be reduced by an amount equal to the difference (if positive) between the
locational marginal price at the Facility Interconnection Point and the
locational marginal price at the alternate point of delivery.

                                    SECTION C
                                  BINDING RATE

         Each party, having entered into this Amended Agreement in good faith,
hereby waives all rights on its part now or hereafter to undertake any
proceeding for the purpose of having the

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purchase rate, as calculated in this Article IV of this Amended Agreement, set
aside or adjusted as being unjust and unreasonable or as impairing or
disallowing the full and timely recovery of any payment made by PSE&G under this
Amended Agreement.

         PSE&G agrees to give notice to Seller of any challenge to the validity
of this Amended Agreement in any regulatory or judicial proceeding, so as to
permit Seller a reasonable opportunity to intervene in such proceeding, provided
that the failure of PSE&G to give notice shall not be deemed a breach of this
Amended Agreement so long as such failure was due to good faith error or
omission. PSE&G further agrees to refrain from objecting or in any way opposing
any application by Seller to intervene before any regulatory body or judicial
forum, or otherwise fully participate before such body or forum, in which the
validity or consequences of this Amended Agreement is subject to challenge.
Seller and PSE&G further agree to use their best efforts to defend this Amended
Agreement before such regulatory body or judicial forum.

                                    ARTICLE V

                         DELIVERY OF ENERGY AND CAPACITY

                                    SECTION A
                                   SCHEDULING

         Not later than three (3) business days prior to the commencement of
each calendar month, Seller shall provide PSE&G with a non-binding schedule of
proposed deliveries of Energy for each hour of the upcoming month (the "Monthly
Schedule").

         Notwithstanding the quantities set forth in a Monthly Schedule, on the
business day preceding the day of delivery of such Energy, Seller shall provide
PSE&G with a final daily schedule for deliveries of Energy no later than the
time that is one hour prior to the time that PJM

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requires submission of final schedules. The volumes set forth in the final daily
schedules may vary from each other and from the volumes set forth in Monthly
Schedules, provided that Seller shall not schedule for delivery in any calendar
year, any amount which exceeds the annual quantities specified in Article II(B).

         In the event Seller fails to furnish a final daily schedule or a
Monthly Schedule on or before the time specified in the second paragraph of this
Article V(A), the scheduled delivery of Energy shall be deemed to be that
specified in the Monthly schedule last delivered by Seller.

         Any Monthly Schedule or final daily schedule shall be consistent with
the requirements of this Article V.

                                    SECTION B
                                RATE OF DELIVERY

         Seller may deliver Energy at a rate up to 150 MWh per hour, provided
that the rate of delivery may be up to 200 MW-hours per hour in any hour in
which Make-up Energy deliveries are scheduled in accordance with Section V(D).

         Seller shall schedule and deliver Energy at the same delivery rate
during all On-Peak Hours in any day and at the same delivery rate during all
Off-Peak Hours in any day, provided that (i) the delivery rate for On-Peak Hours
may vary from that for Off-Peak Hours in any day and (ii) the delivery rate for
On-Peak Hours in any day may vary from that for On-Peak Hours in any other day.

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                                    SECTION C
                        MINIMUM ON-PEAK ENERGY DELIVERIES

         During the months of June, July, August and September of each year (the
"Summer Period"), Seller shall schedule and deliver to PSE&G 40,000 MWh per
month during the On-Peak Hours in the Summer Period.

         During the period of the year which is not included in the Summer
Period, Seller shall schedule and deliver to PSE&G an aggregate of 234,000 MWh
during the On-Peak Hours.

                                    SECTION D
                            MAKE-UP ENERGY DELIVERIES

          If Seller is unable to deliver Energy or PSE&G is unable to accept
delivery of Energy which has been scheduled by Seller in accordance with Section
V(A) above, in either case due to an event of Force Majeure or due to the
occurrence of an event set forth in Section II(D) ("Curtailed Energy
Deliveries"), Seller shall have the right, but not the obligation, to reschedule
deliveries of make-up quantities of Energy equivalent to such Curtailed Energy
Deliveries during comparable periods during the remainder of the Month in which
the event occurred ("Make-up Energy Deliveries"). If Seller is unable to deliver
Energy or PSE&G is unable to accept delivery of Energy which has been
rescheduled by Seller in accordance with the immediately preceding sentence,
Seller shall have the right, but not the obligation, to reschedule deliveries of
make-up quantities of Energy equivalent to such undelivered Energy during
comparable periods during the remainder of the Month in which the event
occurred. If Seller is unable to reschedule such Energy due to an event of Force
Majeure or due to the occurrence of an event set forth in Section II(D), Seller
shall have the right (but not the obligation) to reschedule the delivery of such
make-up Energy quantities in respect of the Curtailed Energy Deliveries during
comparable periods during the immediately following Month. To the extent that
Seller fails to (i) deliver scheduled

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quantities of Energy or (ii) in the case of Curtailed Energy Deliveries under
Section V(D), reschedule and deliver any such make-up quantities with respect to
Curtailed Energy Deliveries in the immediately following Month, PSE&G may, but
shall not be obligated to permit Seller to reschedule any such quantities which
Seller seeks to deliver in any subsequent Month.

         For the purposes of this Section V(D), rescheduled Energy deliveries
shall be deemed to be made during a comparable period if the rescheduled
deliveries are effected during the hours in which the curtailments occurred
(e.g., similar On-Peak Hours if the curtailment occurred during On-Peak Hours
and similar Off-Peak Hours if the curtailment occurred during Off-Peak Hours).

                                    SECTION E
                 SELLER'S FAILURE TO DELIVER ENERGY AND CAPACITY

         If Seller fails for reasons other than a Force Majeure event or in the
event of an occurrence described in Section II(D), to deliver all or part of the
scheduled Energy at the Delivery Point, PSE&G may but shall not be required to
permit Seller to reschedule delivery of such Energy. In the event that Seller
fails to deliver all or part of the Energy scheduled for delivery hereunder or
fails to schedule sufficient Energy to comply with Article V(C) hereunder, the
payment to Seller with respect to the corresponding billing period shall be
reduced by a credit against the amount payable by PSE&G for the next succeeding
Month; provided that if the amount of the credit is greater than the amount
payable by PSE&G for a single Month, the excess portion of the credit shall be
applied to reduce the amount otherwise payable by PSE&G for subsequent Month(s).
Such credit shall be calculated as follows:

                                      -17-
<PAGE>   21

         (i)      if Seller fails to deliver any quantities of Energy scheduled
                  for delivery under Section V(A) hereof, the credit shall be
                  determined by multiplying the shortfall in scheduled Energy
                  deliveries by the difference, if positive, between (a) the
                  amounts paid by PSE&G to third parties to procure energy to
                  replace the scheduled Energy which Seller failed to deliver,
                  using commercially reasonable efforts under the circumstances,
                  less (b) the rates set forth in Exhibit 2 with respect to such
                  Energy;

         (ii)     if Seller fails during any Month of the Summer Period to
                  schedule at least an aggregate of 40,000 MWh during the
                  On-Peak Hours under Section V(C) hereof ("Deficient Summer
                  Month"), the credit shall be determined by multiplying the
                  shortfall in scheduled Energy quantities below 40,000 MWh by
                  the difference, if positive, between (a) the average On-Peak
                  locational marginal prices at the Facility Interconnection
                  Point (expressed in $/MWh) for those On-Peak Hours during the
                  Deficient Summer Month in which Seller failed to schedule at
                  least 120 MWh per hour for delivery, less (b) the rates set
                  forth in Exhibit 2 with respect to such Energy; or

         (iii)    if Seller fails during the period of the year which is not
                  included in the Summer Period, to schedule an aggregate of at
                  least 234,000 MWh during the On-Peak Hours under Section V(C)
                  hereof ("Deficient Non-Summer Period"), the credit shall be
                  determined by multiplying the shortfall in scheduled Energy
                  quantities below 234,000 MWh by the difference, if positive,
                  between (a) the average On-Peak locational marginal prices at
                  the Facility Interconnection Point (expressed in $/MWh) for
                  those

                                      -18-
<PAGE>   22

                  On-Peak Hours during the Deficient Non-Summer Period in which
                  Seller failed to schedule at least 90 MWh per hour for
                  delivery, less (b) the rates set forth in Exhibit 2 with
                  respect to such Energy.

         If Seller fails for reasons other than a Force Majeure or in the event
of an occurrence described in Section 11(D), during any calendar Month to
provide all or part of the Capacity to PSE&G pursuant to Section 11(C) hereof,
PSE&G shall use reasonable commercial efforts to purchase replacement capacity
in the amount of such shortfall, and Seller will be obligated to reimburse PSE&G
for all such replacement costs. In the event that PSE&G, in spite of using
reasonable commercial efforts, is unable to replace such capacity shortfall,
then the payments due to Seller in respect of that Month shall be reduced by a
credit against the amount payable by PSE&G for the next succeeding Month in an
amount equal to the deficiency charge, if any, or other charges, as applicable,
payable by PSE&G as a direct result of Seller's failure to provide such
Capacity.

         The foregoing liquidated damages shall be the sole damages to which
PSE&G shall be entitled as the result of any failure by Seller to deliver Energy
or to provide Capacity under this Agreement, subject to Article XIV.

                                    SECTION F
                  PSE&G'S FAILURE TO ACCEPT DELIVERY OF ENERGY

         If PSE&G fails to accept deliveries of Energy scheduled by Seller in
accordance with this Amended Agreement, for reasons other than a Force Majeure
Event or due to the occurrence of an event excusing the acceptance of deliveries
under Section 11(D) hereof, PSE&G shall pay to

                                      -19-
<PAGE>   23

Seller an amount equal to the difference, if positive, between (i) the amount
payable by PSE&G to Seller under this Amended Agreement for such scheduled
Energy which PSE&G failed to accept and (ii) the amount, if any, that Seller,
using commercially reasonable efforts under the circumstances realizes through
re-marketing of such Energy to persons other than PSE&G.

          The foregoing liquidated damages shall be the sole damages to which
Seller shall be entitled as the result of any failure by PSE&G to accept Energy
under this Agreement, subject to Article XIV.

                                   ARTICLE VI

                               BILLING AND PAYMENT

PSE&G shall prepare and present to Seller, on or before the last day of the
subsequent Month, a statement and payment for Energy and Capacity delivered to
PSE&G during the Month in accordance with Article IV. Such statement shall
indicate the total MWhs delivered during the Month for both the On Peak Period
and the Off Peak Period and the applicable Energy and Capacity rates.

         If the payment is not received by the due date specified above, PSE&G
shall pay to Seller an interest charge on unpaid amounts which shall accrue
daily from the due date until the date upon which payment is made at the then
current late payment charge for commercial customers prescribed in PSE&G's
Standard Terms and Conditions as may be amended from time to time.

         In the event Seller disputes any statement, Seller shall present the
dispute in writing and submit supporting documentation to PSE&G within a thirty
(30) day period from receipt of such

                                      -20-
<PAGE>   24

statement. Upon receipt of notice of the dispute and supporting documentation,
PSE&G shall have thirty (30) days from receipt of such notice to resolve any
dispute with Seller. In the event the dispute is not resolved within the thirty
(30) day period, either party may submit the matter to arbitration for
resolution in accordance with Article XV. The disputed amount of any statement
disputed by Seller, in accordance with the provisions of this Article, which is
ultimately determined to be due and owing by PSE&G to Seller, from the date
originally due shall, until payment, accrue interest at the then current late
payment charge for commercial customers, prescribed in PSE&G's Standard Terms
and Conditions as may be amended from time to time.

                                   ARTICLE VII

                                METERING/RECORDS

         Metering of Energy and Capacity when delivered from the Facility shall
be conducted in accordance with the Interconnection Agreement and when delivered
from other sources shall be conducted in accordance with the requirements of the
PJM Operating Agreement, including with respect to verification of deliveries by
or on behalf of Seller at the Delivery Points.

                                  ARTICLE VIII

                        USE OF THE PUBLIC SERVICE SYSTEM

         Except as otherwise provided in and pursuant to the terms and
conditions of any applicable PSE&G tariff on file with the NJBPU or the FERC or
the PJM Tariff, Seller shall not be permitted to use the Public Service System
nor shall PSE&G be obligated to provide any service to Seller, other than as
provided for in this Amended Agreement and the Interconnection Agreement. Any
rights to or interest in the Public Service System that Seller has or may claim
as

                                      -21-
<PAGE>   25

a result of this Amended Agreement shall cease or expire upon termination of
this Amended Agreement.

                                   ARTICLE IX

                            DEDICATION OF FACILITIES

         No undertaking by PSE&G under any provision of this Amended Agreement
or the Interconnection Agreement shall constitute the dedication to Seller or to
the public of the Public Service System.

                                    ARTICLE X

                                    LIABILITY

         Neither Party nor its officers, directors, partners, agents, servants,
employees, affiliates, parent, subsidiaries or respective successors or assigns
shall be liable to the other Party (except as provided for in Article V of this
Amended Agreement or as otherwise provided for in this Amended Agreement) for
claims for incidental, special, direct, indirect or consequential damages
whether such damages claim is based on a cause of action based in warranty,
negligence, strict liability, contract, operation of law or otherwise except
where such claim for damages arises out of, relates to or results from the
gross negligence of such Party or the willful disregard by a Party of its
obligations under this Amended Agreement; provided, however, each Party shall
have the right to seek to recover from the other Party direct damages upon the
occurrence of an Event of Default under this Amended Agreement as defined in and
which has been established pursuant to and in accordance with Article XIV of
this Amended Agreement.

                                      -22-
<PAGE>   26

                                   ARTICLE XI

                                  FORCE MAJEURE

         An event of "Force Majeure" as used herein means an event beyond the
reasonable control of the Party claiming Force Majeure which events may include
but are not limited to: acts of God; strikes, lockouts or other similar such
industrial disturbances; acts of the public enemy, wars, civil disturbances,
blockades, military actions, insurrections or riots; landslides, floods,
washouts, lightning, earthquakes, tornadoes, hurricanes, blizzards or other
storms or storm warnings; explosions, fires, sabotage or vandalism; mandates,
directives, orders or restraints of any governmental, regulatory or judicial
body or agency (other than mandates, directives, orders or restraints either
sought, approved or not contested by the party asserting Force Majeure or issued
in any bankruptcy or insolvency proceeding for the relief the party asserting
Force Majeure); any catastrophic physical failures or disruptions of the PJM
transmission system; breakage, defects, malfunctioning, or accident to
machinery, equipment, materials or lines of pipe or wires; freezing of
machinery, equipment, materials or lines of pipe or wires; inability or delay in
the obtaining of materials or equipment; inability to obtain or utilize any
permit, approval, easement, license or right-of-way. The settlement of strikes,
lockouts or other similar such industrial disturbances shall be entirely within
the discretion of the Party directly affected. The requirement herein that any
event of Force Majeure shall be remedied with all reasonable dispatch shall not
require the settlement of strikes, lockouts or other similar such industrial
disturbances when such course is, in the opinion of the Party directly affected,
inadvisable.

         An event of Force Majeure shall not include (i) failures of the
equipment of the Party claiming Force Majeure which are due to (a) wear and tear
and (b) defects in manufacture, design

                                      -23-
<PAGE>   27

or construction; (ii) any increase in the cost of electricity supplies or costs
associated with transmission system operation, maintenance or congestion; (iii)
unavailability of Capacity and/or Energy from any source, regardless of price,
for delivery to the Delivery Point (except in the event of a System Emergency);
(iv) interruption in service by a transmission provider unless; (a) the Party
contracting with such transmission provider shall have made arrangements with
such transmission provider for the firm transmission, as defined under the
transmission provider's tariff, of the Energy to be delivered hereunder, and (b)
such interruption is due to an emergency or to an event of force majeure as
defined under the transmission provider's tariff; or (v) any change in economic
conditions not caused by a Force Majeure event.

         In the event PSE&G or Seller is rendered unable, wholly or in part, by
an event of Force Majeure, to perform any obligation it has under this Amended
Agreement, it is agreed that, on PSE&G or Seller giving notice and full
particulars of such event of Force Majeure to the other Party, as soon
thereafter as practicable, the obligations of PSE&G or Seller, so far as they
are affected by such event of Force Majeure, shall be suspended during the
continuance of any inability or incapacity so caused, but for no longer period;
provided however, neither Party shall be relieved from any obligation to make
any payment to the other required under this Amended Agreement. PSE&G or Seller
shall use best efforts to remedy the cause of the Force Majeure with all
reasonable dispatch.

         Neither Party shall be liable to the other for any claim(s), loss(es),
damage(s), liability(ies) or expense(s) sustained or incurred by PSE&G or
Seller, arising out of, relating to, or resulting from PSE&G's or Seller's
inability or incapacity to perform its obligations under this Amended Agreement
due to any event of Force Majeure, as herein defined.

                                      -24-
<PAGE>   28

                                   ARTICLE XII

                                 INDEMNIFICATION

         Each Party shall indemnify and hold harmless the other Party and each
and every of its officers, agents, servants and employees, its successors and
assigns of, from and against any and all claims, demands and suits, actions, and
liabilities, losses, damages, and/or judgments, which may arise therefrom, as
well as against any fees, costs, charges or expenses which PSE&G or Seller, its
officers, agents, servants and employees, its successors and assigns, incur in
the defense of any such claims, suits, actions or similar such demands made or
filed by any third-party, which in any manner arise out of, relate to, or result
from negligence, strict liability or breach of this Amended Agreement by the
indemnifying Party including but not limited to the design, construction,
engineering, installation, operation, maintenance, repair, replacement,
supervision, inspection, testing, protection, reinforcement, reconstruction,
decommissioning, removal, use, control or ownership of its facilities.

         In case a claim is asserted or action brought against either Party as
to which it believes it is entitled to indemnification under this Article XII,
the party seeking indemnification shall promptly notify the other in writing of
such claim or action. Prompt notice as contemplated in the preceding sentence
shall mean such notice as would be required to enable the indemnitor to assert
and prosecute appropriate defenses relative to such claim or such action in a
timely fashion. If the Party seeking indemnification fails to give the other
Party prompt notice of any claim or action as provided in this Paragraph, that
Party shall have no obligation to indemnifY pursuant to this Article XII. Upon
receipt of such notice request for indemnification, that Party shall promptly
make a determination of whether it believes it is required to indemnify and
shall

                                      -25-
<PAGE>   29

promptly notify the Party seeking indemnification in writing of that
determination. If the Party to whom such notice and request is directed
determines that it is required to indemnify the other Party pursuant to this
Article XII, it shall assume the defense of such claim or action, including the
employment of counsel and shall assume thereafter the payment of all costs and
expenses relative to the defenses of such claim or action. The non-indemnifying
Party shall cooperate in all reasonable respects with the indemnifying Party in
the defense of such claim or action. The non-indemnifying Party shall have the
right, at its own expense, to employ separate counsel in any such action and to
participate in the defense thereof. The indemnifying Party shall not be liable
for any settlement of any such claim or action effected without its consent.
Before settling any claim or action, the indemnifying Party shall demonstrate to
the other that it has sufficient financial means or has made adequate
arrangements to make all payments under any such settlement as and when due.

                                  ARTICLE XIII

                                   WARRANTIES

         Seller warrants and shall be obligated to supply to the Delivery Points
Energy and Capacity free and clear of any liens and/or adverse claims which
might attach to said Energy and Capacity prior to supply and receipt by PSE&G
except with respect to any lien possessed by a Financier. Seller agrees to
indemnify and hold harmless PSE&G against any and all claims, demands, suits,
actions, costs, and liabilities, damages, losses and/or judgments arising out
of, relating to or resulting from any such adverse claim or lien, as well as
against any fees, costs, charges or expenses which PSE&G might incur in the
defense of any such claim, suit, action or similar such demand made or filed by
such person, its successors or assigns, asserting such

                                      -26-
<PAGE>   30

adverse claim. In effecting the right of or obligation to indemnify pursuant to
and in accordance with the provisions of this Article XIII, the procedural
provisions set forth in Article XII of this Amended Agreement shall govern.

         Seller further warrants and represents that implementation of this
Amended Agreement by Seller shall not increase the breakage costs associated
with a negotiation of a future buy-down or buy-out of the PPA by PSE&G, if any.

                                   ARTICLE XIV

                    EVENTS OF DEFAULT AND BREACH OF CONTRACT

                                    SECTION A

                                DEFAULT BY SELLER

         Seller shall be in default under this Amended Agreement upon the
happening or occurrence of any of the following events or conditions, each of
which shall be deemed to be an "Event of Default," and each of which shall be
considered a breach of contract for purposes of this Amended Agreement unless it
is cured in accordance with the provisions specified below:

                  1. Seller breaches or fails to observe or perform, any of the
                  material obligations, covenants, conditions, services or
                  responsibilities under this Amended Agreement, unless, within
                  thirty (30) days after written notice from PSE&G specifying
                  the nature of such breach or failure, Seller either cures such
                  breach or failure or, if such cure cannot be completed within
                  thirty (30) days, provides PSE&G with a plan reasonably
                  acceptable to PSE&G to cure such breach or failure and
                  commences and diligently pursues such plan.

                                      -27-
<PAGE>   31

                  2. There is an assignment for the benefit of Seller's
                  creditors, or Seller is adjudged bankrupt, or a petition is
                  filed by or against Seller under the provisions of any state
                  insolvency law or under the provisions of the federal
                  bankruptcy laws, or the business or principal assets of Seller
                  are placed in the hands of a receiver, assignee or trustee, or
                  Seller is dissolved, or Seller's existence is terminated, or
                  its business is discontinued; provided, however, that the
                  events described in this Paragraph 2 shall not constitute an
                  Event of Default or otherwise affect the validity of this
                  Amended Agreement, so long as the terms, covenants and
                  conditions of this Amended Agreement on the part of Seller are
                  performed, and in such event, this Amended Agreement shall
                  continue to remain in full force in accordance with the terms
                  herein contained.

                  3. Seller takes any actions which prevent PSE&G from
                  performing any of the material obligations, covenants,
                  conditions, responsibilities or services under this Amended
                  Agreement, unless, within thirty (30) days after written
                  notice from PSE&G specifying the nature of such action or
                  failure to act, Seller either cures such action or failure to
                  act, or, such cure cannot be completed within thirty (30)
                  days, provides PSE&G with a plan reasonably acceptable to
                  PSE&G to cure such breach or failure and commences and
                  diligently pursues such cure.

                  4. Seller fails to deliver Energy and Capacity to PSE&G for
                  two hundred and forty (240) out of three hundred and sixty
                  five (365) days for any reason other than Force Majeure or a
                  curtailment in accordance with Article II(D) of this

                                      -28 -
<PAGE>   32

                  Amended Agreement and fails to pay the liquidated damages
                  associated with such failure as set forth in Article V(E).

                                    SECTION B

                                DEFAULT BY PSE&G

         PSE&G shall be in default under this Amended Agreement upon the
happening or occurrence of any of the following events or conditions, each of
which shall be deemed to be an "Event of Default" and each of which shall be
considered a breach of contract for purposes of this Amended Agreement unless it
is cured in accordance with the provisions specified below.

                  1. PSE&G breaches or fails to observe or perform any of the
                  material obligations, covenants, conditions, services or
                  responsibilities under this Amended Agreement, unless, within
                  thirty (30) days after written notice from Seller specifying
                  the nature of such breach or failure, PSE&G either cures such
                  breach or failure, or, if such cure cannot be completed within
                  thirty (30) days, provides Seller with a plan reasonably
                  acceptable to Seller to cure such breach or failure and
                  commences and diligently pursues such cure.

                  2. PSE&G fails to accept deliveries of Energy and Capacity for
                  any reason other than a Force Majeure Event or reason
                  permitted under Article II(D), and such failure continues for
                  a period of thirty (30) days following receipt of notice of
                  such failure and fails to pay the liquidated damages
                  associated with such failure as set forth in Article V(F).

                                      -29 -
<PAGE>   33

                  3. There is an assignment for the benefit of PSE&G's
                  creditors, or PSE&G is adjudged bankrupt, or a petition is
                  filed by or against PSE&G under the provisions of any state
                  insolvency law or under the provisions of the federal
                  bankruptcy law, or the business or principal assets of PSE&G
                  are placed in the hands of a receiver, assignee or trustee, or
                  PSE&G is dissolved, or PSE&G's existence is terminated, or its
                  business is discontinued; provided, however, that the events
                  described in this Paragraph 3 shall not constitute an Event of
                  Default or otherwise affect the validity of this Amended
                  Agreement, so long as the payment for Energy and Capacity
                  delivered by the Seller to PSE&G as provided under Article IV
                  hereof continues to be paid and the other terms, covenants and
                  conditions of this Amended Agreement on the part of PSE&G are
                  performed, and in such event, this Amended Agreement shall
                  continue to remain in full force in accordance with the terms
                  herein contained.

                  4. PSE&G takes any actions which prevent Seller from
                  performing any of the material obligations, covenants,
                  conditions, responsibilities or services under this Amended
                  Agreement, unless within thirty (30) days after written notice
                  from Seller specifying the nature of such action or failure to
                  act, PSE&G either cures such action or failure to act, or, if
                  such cure cannot be completed within thirty (30) days,
                  provides Seller with a plan reasonably acceptable to Seller to
                  cure such breach or failure and commences and diligently
                  pursues such cure.

                  5. PSE&G fails to pay, when due, the payment provided under
                  Article IV, and such failure continues for a period of thirty
                  (30) days following the receipt by

                                      -30-
<PAGE>   34

          PSE&G of notice of such failure; provided, however, PSE&G shall not be
          considered in default if (i) it has paid the undisputed portion of any
          payment due under this Amended Agreement and (ii) the Parties are in
          the process of resolving expeditiously any disputed portion in
          accordance with the terms set forth in Article VI of this Amended
          Agreement.

                                    SECTION C
                                    REMEDIES

     In the event a party claims that an Event of Default has occurred, such
party shall provide the other party with written notice thereof (hereinafter
referred to as Notice of Breach). The Notice of Breach shall state the basis for
such claim and any remedy sought. The Parties shall have thirty (30) days within
which to resolve the dispute via negotiation. If within such thirty (30) day
period after service of the Notice of Breach, the Parties are unable to resolve
their differences by negotiation, either Party shall have the right to submit
the dispute for resolution to either arbitration or to any regulatory body
having jurisdiction.

     The nature and extent of any damage incurred or sustained by the
non-breaching Party, as a result of any Event of Default shall be determined and
calculated as of the date the Event of Default commenced, taking into account
the non-breaching Party's obligation to act in a commercially reasonable manner
to mitigate damages.

     Except as otherwise provided in this Article XIV, neither Party shall
refuse to make, suspend or delay any payment(s) otherwise required to be made
under this Amended Agreement or refuse to carry out any of its obligations under
this Amended Agreement for or on account of or as a result of an alleged breach
of this Amended Agreement or Event of Default.

                                      -31-
<PAGE>   35

     Any waiver by a Party of any breach or Event of Default shall be deemed to
extend only to the particular breach or Event of Default waived and shall not
limit or otherwise affect any right(s) that such party may have with respect to
any other of future breach or Event of Default, whether of a similar or
difference nature.

                                   ARTICLE XV

                                  ARBITRATION

     Any controversy, dispute or claim between the Parties to this Amended
Agreement, which the Parties are unable to resolve by negotiation or over which
any regulatory body lacks jurisdiction or declines to initiate proceedings,
shall be settled by arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association ("AAA"), then in effect, and the
provisions of this Article. If either Party chooses arbitration, no suit at law
that seeks to resolve any controversy, dispute or claim between the Parties
shall be instituted by either Party hereto, except where such suit is instituted
to confirm an arbitration award received pursuant to this Article. However,
nothing contained herein shall deprive either Party of any right to: (i) obtain
injunctive or other equitable relief in any court in the State of New Jersey, on
an interim basis pending disposition of the arbitration of any controversy,
dispute or claim if such relief is available under applicable principles of law
and equity; and/or (ii) assert any crossclaim, or third-party claim in any suit
at law instituted by a third-party; and/or (iii) file and prosecute any
complaint at and with the regulatory agency having jurisdiction or make and
prosecute any claim or position in any filing made with such regulatory agency
by either party or some third-party.

                                      -32-
<PAGE>   36

     Any controversy, dispute or claim submitted to arbitration shall be settled
by arbitration in Newark, New Jersey in accordance with the laws of the State of
New Jersey. Any award entered pursuant to such arbitration shall be binding on
both Parties and judgment upon the award rendered or received may be entered in
the Superior Court of the State of New Jersey pursuant to N.J.S.A.2A:24-l
et seq.

     Exclusive jurisdiction relative to the entry of judgment on any arbitration
award relative to any controversy or claim between the parties shall be in any
court of appropriate subject matter jurisdiction located in New Jersey, and the
Parties to this Amended Agreement expressly subject themselves hereby to the
personal jurisdiction of said court for entry of any such judgment and for the
resolution of any dispute, action, or suit arising in connection with the entry
of such judgment.

     The controversy or claim to be arbitrated shall be referred to three (3)
arbitrators, one to be selected by each party and the third to be selected by
the AAA. The selections to be made by the parties shall be made from the list of
the National Panel of Arbitrators maintained by the AAA. The arbitrator to be
selected by the AAA shall be qualified to pass on any technical or engineering
matters and shall be independent of and acceptable to both PSE&G and Seller. All
decisions and awards shall be made by a majority of the arbitrators, except for
decisions relating to discovery as set forth herein.

     In the event any arbitrator dies, or refuses to act, or becomes incapable,
incompetent or unfit to act before hearings have been completed and/or before an
award has been rendered, a successor arbitrator may be selected by the party who
originally made the selection. The selection of the successor arbitrator shall
be made consistent with the selection procedure set forth in the preceding
paragraph.

                                      -33-
<PAGE>   37

     The arbitrators selected pursuant to this Amended Agreement shall be
governed by and apply the laws of the State of New Jersey and federal law, as
applicable, in conducting any arbitration proceeding and/or in making any award.

     Notice of a demand for arbitration (hereinafter referred to as Demand for
Arbitration) of any controversy or dispute between the Parties shall be filed in
writing with the AAA by the Party seeking arbitration and a copy of same shall
be served contemporaneously with such filing on the other Party. The notice
shall state, with specificity, the nature of the dispute and the remedy sought.
After such notice has been filed, the Parties may make discovery of any matter
relevant to such dispute before the hearing, to the extent and in the manner
provided by the Rules Governing Civil Practice in the Superior Court contained
in the Rules Governing the Courts of the State of New Jersey. Any question that
may arise with respect to the obligations of the Parties relative to discovery
and/or relative to the protection of the discovery materials shall be referred
solely to the arbitrator selected by the AAA. His determination shall be final
and conclusive. Discovery shall be completed not later than ninety (90) days
after filing of the notice of arbitration unless such period for discovery is
extended by the arbitrator selected by the AAA, upon a showing of good cause by
either Party to the arbitration.

     The arbitrators may consider any material that is relevant to the subject
matter of any such controversy even if such material might also be relevant to
an issue or issues not subject to arbitration hereunder. A stenographic record
shall be made of any arbitration hearing.

     Any costs associated with any arbitration under this Article, including but
not limited to attorney fees and witness expenses, shall be paid by the Party
against whom an award is entered unless the arbitrators by their award otherwise
provide.

                                      -34-
<PAGE>   38

     Arbitration may not be utilized and the arbitrators selected in accordance
with this Article shall not possess the authority or power to alter, amend or
modify any of the terms or conditions or charges set forth in this Amended
Agreement, and further, the arbitrators may not enter any award which alters,
amends or modifies such terms, conditions or charges in any form or manner.

                                  ARTICLE XVI

                                ENTIRE AGREEMENT

     The Amended Agreement constitutes the entire Agreement between the Parties
with respect to the matters contained herein and all prior agreements with
respect thereto including the Original Agreement are superseded hereby. Each
Party confirms that it is not relying on any oral representations or warranties
of the other Party except as specifically set forth herein. No additions,
amendments or modifications hereof or of any terms included herein shall be
binding unless duly executed by both Parties.

                                  ARTICLE XVII

                             ASSIGNMENT/TRANSFER

     Seller may at any time and from time to time during the term of this
Amended Agreement, assign its rights in this Amended Agreement to any
Financier(s). PSE&G shall, at Seller's request, execute a consent to assignment
provided that the terms and conditions of same are reasonably acceptable to
PSE&G and Seller. Upon written notice to PSE&G, Seller may transfer its rights
and obligations under this Amended Agreement to El Paso Merchant Energy Holding
Company or Seller or any entity (i) controlling, controlled by or under common
control with El Paso Merchant Energy Holding Company or Seller, or (ii) which
has a credit rating by

                                      -35-
<PAGE>   39

Moody's, Standard & Poors' or a similar independent credit rating agency at
least equal to Baa3, in the case of Moody's or BBB- in the case of Standard and
Poors or a similar rating from any other similar independent rating agency.
Except as otherwise provided herein, Seller may not assign its rights and/or
transfer its rights and obligations under this Amended Agreement without the
prior written consent of PSE&G, which consent shall not be unreasonably withheld
or delayed. Nothing contained herein shall prevent Seller from pledging or
mortgaging all or any part of its assets or interests in connection with any
financing for or related to the transactions contemplated herein.

     PSE&G may, on notice to and with the approval of Seller, assign its rights
in this Amended Agreement. Additionally, PSE&G may, on notice to Seller, assign
and transfer its rights and obligations under this Amended Agreement to any
entity controlling, controlled by or under common control with PSE&G (a "PSE&G
Affiliate") or to any other entity only if such PSE&G Affiliate or other entity
has a credit rating by Moody's, Standard & Poor's or similar independent credit
rating agency at least equivalent to that of PSE&G. Except as otherwise provided
herein, PSE&G may not assign its rights and/or transfer its obligations under
this Amended Agreement without the prior written consent of Seller. Seller shall
not unreasonably delay or withhold any approval of an assignment or
assignment/transfer by PSE&G provided that the assignee or assignee/transferee
agrees to be bound by, subject to and to comply with the terms and conditions of
this Amended Agreement.

                                      -36-
<PAGE>   40

                                 ARTICLE XVIII

                               CURE BY FINANCIER

     During any term of this Amended Agreement, Seller shall provide PSE&G with
such information as to enable it to know the name(s) and address(es) of any
Financier on a current basis. For so long as Seller shall have outstanding and
unpaid any financing liabilities, PSE&G agrees to promptly furnish to all
Financiers, then known to PSE&G, a copy of any Notice of Breach pursuant to
Article XIV or Demand for Arbitration pursuant to Article XV given to Seller.
Additionally, no termination of this Amended Agreement shall be effective unless
any written notice of such termination or breach, as the case may be, and the
reasons therefor have been give to and received by each Financier then known to
PSE&G thirty (30) days prior to the effective date of the termination. PSE&G
shall not terminate this Amended Agreement if, after notice thereof, and prior
to any effective date of termination Financier has:

     1. cured the condition precipitating the Notice of Breach under Article
     XIV; or

     2. if the condition precipitating such Notice of Breach is not capable of
     being cured prior to the date of termination, commenced in a diligent
     manner to cure the condition precipitating the Notice of Breach and for so
     long as the Financier diligently continues such efforts.

                                  ARTICLE XIX

                         FINANCIER SECURITY AGREEMENTS

     In the event Financier alleges that a breach or an event of default has
occurred under any operative agreement between Financier and Seller and
Financier thereafter elects to exercise any

                                      -37-
<PAGE>   41

right(s) under any applicable security, mortgage, assignment or other agreement
then in effect between Financier and Seller, it is agreed that, upon receipt of
such notice from Financier, PSE&G shall provide notice to Seller and thereafter
PSE&G shall accept the instructions of Financier in accordance with the terms of
any applicable security, mortgage or assignment agreement. In such event, Seller
shall have no claim against PSE&G for, and hereby agrees to release PSE&G from,
any liability for any cost, expense, loss, damage or liability Seller may incur
or sustains arising out of, relating to or resulting from any action(s) which
PSE&G determines it is obligated to take pursuant to any operative agreement
between Seller and Financier.

     Notwithstanding the foregoing, in the event PSE&G provides a notice to
Seller under this Section, and Seller notifies PSE&G that it disagrees with and
is actively contesting the Financier's allegation that an event of default has
occurred under any operative agreement between Financier and Seller, PSE&G may
in its reasonable discretion elect not to accept the instructions of such
Financier, provided that Seller shall (i) indemnify PSE&G in accordance with the
terms of Article XII for any costs or damages PSE&G may incur or sustain as a
result of PSE&G's failure to follow the instructions of such Financier, and (ii)
provide PSE&G with a non-cancelable surety bond, irrevocable bank letter of
credit or other security in form, substance and amount acceptable to PSE&G upon
which PSE&G can draw in the event it incurs or sustains any expense, loss,
damage or liabilities as a result of its failure to follow the instructions of
such Financier.

                                      -38-
<PAGE>   42

                                   ARTICLE XX

                                 CHOICE OF LAW

     This Amended Agreement shall be interpreted, construed, governed by,
performed and enforced in accordance with the laws of the State of New Jersey
and federal law, where applicable. All questions concerning the validity,
construction and enforceability of this Amended Agreement as well as questions
concerning the sufficiency or other aspects of performance under this Amended
Agreement shall be determined under the laws of the State of New Jersey without
recourse to the law governing conflict of laws.

                                  ARTICLE XXI

                                    CAPTIONS

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

                                      -39-
<PAGE>   43

                                  ARTICLE XXII

                                  COUNTERPARTS

     This Amended Agreement may be executed in counterparts. Each shall be
deemed an original but together shall constitute one and the same instrument.

                                 ARTICLE XXIII

                                 MISCELLANEOUS

     This Amended Agreement and the obligations of the Parties hereunder are
subject to all present and future valid laws and to all valid present and future
orders, rules and regulations of any court or regulatory authority having
jurisdiction.

     In case of conflict between any provisions hereof and any applicable law,
regulation or regulatory order, such applicable law, regulation or regulatory
order shall govern.

     All terms defined in this Amended Agreement shall have the same defined
meanings when used in any notice, correspondence, report or other document made
or delivered pursuant to or in connection with this Amended Agreement, unless
the context shall otherwise require.

     Each reference herein to Seller and PSE&G shall be deemed to include their
respective successors and assigns.

     All of the covenants, warranties, undertakings and agreements of Seller and
PSE&G shall bind the respective Parties, their successors and assigns.

                                      -40-
<PAGE>   44

                                  ARTICLE XXIV

                                  RESERVATIONS

     No Party shall be prejudiced or bound, except as otherwise specifically
provided herein, nor shall any Party be deemed to have approved, accepted,
agreed or consented to any concept, theory or principle underlying or supposed
to underlie any of the matters contained herein, including but not limited to
any concept, theory, principle or method used to calculate the rates provided
for herein.

     All Parties further understand and agree that the provisions of this
Amended Agreement relate only to the specific matter referred to herein and no
Party or person waives any claim or right which it may otherwise have with
respect to any matter not expressly provided for herein.

                                   ARTICLE XXV

                             SURVIVAL OF OBLIGATIONS

     Termination of this Amended Agreement for any reason shall not relieve
PSE&G or Seller of any obligation accruing or arising with respect to the period
prior to such termination and required by terms of this Amended Agreement to be
performed at date subsequent to the date of termination.

                                  ARTICLE XXVI

                                     NOTICES

     Any notice, request, demand, or statement which either PSE&G or Seller may
desire to give to the other shall be in writing and except as otherwise provided
for in this Amended

                                      -41-
<PAGE>   45

Agreement shall be considered as duly delivered when mailed by certified mail or
delivered against receipt by messenger or overnight courier addressed to said
Party as follows:

(a)  If to PUBLIC SERVICE ELECTRIC AND GAS COMPANY:

     Manager - Non Utility Generation
     Public Service Electric and Gas Company
     80 Park Plaza, 21B
     Newark, NJ 07701

     With electronic mail copies to:

(b)  If to Seller or to such other person or address as the addressee may have
     specified in a notice duly given as provided herein:

     Managing Director, El Paso Merchant Energy Holding Company
     1001 Louisiana Street
     Houston, TX 77002

     Vice President, El Paso Merchant Energy Holding Company
     70 Walnut Street
     Wellesley, MA 02481

     General Counsel, El Paso Merchant Energy Holding Company
     1001 Louisiana Street
     Houston, TX 77002

                                      -42-

<PAGE>   46
     Except as otherwise provided in this Amended Agreement, routine
communications and Billing Statements shall be considered as duly delivered when
mailed by either certified or ordinary mail.

(a)  If to PUBLIC SERVICE ELECTRIC AND GAS COMPANY:

     Manager - Non Utility Generation
     Public Service Electric and Gas Company
     80 Park Plaza, 21B
     Newark, NJ 07701

     With electronic mail copies to:
     seymour.wodakow@pseg.com
     reuben.steinberg@pseg.com
     kenneth.carretta@pseg.com

(b)  If to Seller or to such other person or address as the addressee may have
     specified in a notice duly given as provided herein:

     Contract Administrator - Cedar Breaks I, L.L.C.
     1001 Louisiana Street
     Houston, TX 77002

     Steve Chwiecko
     El Paso Merchant Energy Holding Company
     70 Walnut Street
     Wellesley, MA 02481

          With electronic mail copies to:
          ChwieckoS@epenergy.com
          KiddA@epenergy.com
          SullivanT2@epenergy.com

                                      -43-
<PAGE>   47

Monthly and Daily Schedules

Scheduling information, as set forth in Article V, Delivery of Energy and
Capacity, Section A, Scheduling, shall be provided by Seller to PSE&G's
Scheduling Department via:

FAX: 973-648-0749 and can be confirmed by telephone at 973-430-6246.

                                  ARTICLE XXVII

                                     RELEASE

     Effective on the effective date under Article III, PSE&G and Seller hereby
waives and releases the other from any claims arising under the Original
Agreement prior to the effective date of this Amended Agreement, including but
not limited to claims or liability for breach of contract or contract defaults.
This release shall not impair nor diminish the parties' duties and obligations
under this Amended Agreement.

                                      -44-
<PAGE>   48

     IN WITNESS WHEREOF, this Amended Agreement has been executed and delivered
as of the date and year first above written.

                                        CEDAR BRAKES I, L.L.C.

                                        /s/ GREG G. JENKINS
                                        ---------------------------
                                        By:  Greg G. Jenkins
                                        Its: President

                                        PUBLIC SERVICE ELECTRIC
                                        AND GAS COMPANY

                                        /s/ PATRICK J. DOWNES
                                        ---------------------------
                                        By:  Patrick J. Downes
                                        Its: Vice President - PSE&G

<PAGE>   49

                                                                       EXHIBIT 1

                            ANNUAL ENERGY DELIVERIES

<TABLE>
<CAPTION>
          Year                          Annual Energy Deliveries (MWh)
          ----                          ------------------------------
<S>                                     <C>
          2000                                    788,954
          2001                                    788,954
          2002                                    788,954
          2003                                    811,229
          2004                                    855,779
          2005                                    855,779
          2006                                    855,779
          2007                                    855,779
          2008                                    855,779
          2009                                    855,779
          2010                                    855,779
          2011                                    855,779
          2012                                    855,779
          2013                                    570,519
</TABLE>
<PAGE>   50

                                                                       EXHIBIT 2

                    CAPACITY AND ENERGY PURCHASE RATES ($/MWh)

<TABLE>
<CAPTION>
Year                    Existing Rates     Rate Reduction         New Rate
----                    --------------     --------------         --------
<S>                     <C>                <C>                    <C>
2000                         76.48                 5.74              70.74
2001                         78.03                 5.85              72.17
2002                         79.50                 5.96              73.53
2003                         80.69                 6.05              74.64
2004                         81.56                 6.12              75.44
2005                         83.20                 6.24              76.96
2006                         85.13                 6.38              78.74
2007                         86.86                 6.51              80.34
2008                         88.79                 6.66              82.13
2009                         90.69                 6.80              83.88
2010                         92.71                 6.95              85.76
2011                         94.78                 7.11              87.67
2012                         96.90                 7.27              89.63
2013                         99.93                 7.49              92.43
</TABLE><PAGE>   1
                                                                    EXHIBIT 10.2

                            POWER SERVICES AGREEMENT

                                     BETWEEN

                             CEDAR BRAKES I, L.L.C.

                                       AND

                          EL PASO MERCHANT ENERGY L.P.

September 20, 2000

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----

<S>                                                                        <C>
ARTICLE I  DEFINITIONS.........................................................2

ARTICLE II  GENERAL CONDITIONS OF DELIVERY AND ACCEPTANCE OF ELECTRIC
     ENERGY AND CAPACITY.......................................................3

     Section A Sale of Energy..................................................3

     Section B Sale of Capacity................................................4

     Section C Exceptions to Obligation to Accept Energy and Capacity..........5

     Section D Distribution Surcharges.........................................6

     Section E Reactive Power..................................................7

ARTICLE III  TERM; EFFECTIVENESS...............................................8

ARTICLE IV  PURCHASE PRICE AND PAYMENT CONDITIONS..............................9

     Section A Energy and Capacity Rates.......................................9

     Section B Transmission of Energy..........................................9

     Section C Binding Rate...................................................10

ARTICLE V  DELIVERY OF ENERGY AND CAPACITY....................................11

     Section A Scheduling.....................................................11

     Section B Rate of Delivery...............................................12

     Section C Minimum On-Peak Energy Deliveries..............................13

     Section D Make-up Energy Deliveries......................................13

     Section E Seller's Failure to Deliver Energy and Capacity................15

     Section F Seller's Failure to Deliver Annual Energy Deliveries...........17

ARTICLE VI  BILLING AND PAYMENT...............................................18
</TABLE>

<PAGE>   3

<TABLE>
<S>                                                                          <C>
ARTICLE VII  METERING/RECORDS.................................................19

ARTICLE VIII  LIABILITY.......................................................20

ARTICLE IX  FORCE MAJEURE.....................................................21

ARTICLE X  INDEMNIFICATION....................................................24

ARTICLE XI  WARRANTIES........................................................26

ARTICLE XII  EVENTS OF DEFAULT AND BREACH OF CONTRACT.........................27

     Section A Events of Default..............................................27

     Section B Remedies.......................................................30

ARTICLE XIII  ARBITRATION.....................................................31

ARTICLE XIV  ENTIRE AGREEMENT.................................................35

ARTICLE XV ASSIGNMENT/TRANSFER................................................36

ARTICLE XVI  CHOICE OF LAW....................................................37

ARTICLE XVII  CAPTIONS........................................................37

ARTICLE XVIII  COUNTERPARTS...................................................38

ARTICLE XIX  MISCELLANEOUS....................................................38

ARTICLE XX  RESERVATIONS......................................................39

ARTICLE XXI  SURVIVAL OF OBLIGATIONS..........................................40

ARTICLE XXII  NOTICES.........................................................40

EXHIBIT 1  ANNUAL ENERGY DELIVERIES...........................................43

EXHIBIT 2  CAPACITY AND ENERGY PURCHASE RATES ($/MWH).........................44
</TABLE>

<PAGE>   4

                            POWER SERVICES AGREEMENT

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

                                    RECITALS

                  WHEREAS, Public Service Electric and Gas Company (whether or
not the Amended and Restated PPA is still in full force and effect, "PSE&G") and
Newark Bay Cogeneration Partnership, L.P. ("NBCP") are parties to a Power
Purchase Agreement dated June 15, 1988, as amended by the First Amendment dated
January 28, 1991 (together referred to as the "Original Agreement"), providing
for the interconnection of the Facility with PSE&G and the sale by NBCP and the
purchase by PSE&G of the output of the Facility;

                  WHEREAS, pursuant to the Purchase and Sale Agreement among
Cedar Brakes and NBCP, dated as of September 20, 2000, NBCP transferred all its
right, title, interest and obligations under the Original Agreement to Cedar
Brakes;

<PAGE>   5

                  WHEREAS, PSE&G and the Seller have entered into an amendment
to the Original Agreement on March 21, 2000 (the "Amended and Restated PPA"),
the effectiveness of which is conditioned upon the transfer of NBCP's rights and
obligations under the Original Agreement to Cedar Brakes;

                  WHEREAS, Cedar Brakes is entering into this Power Services
Agreement in order to be able, inter alia, to assure itself of a supply of
Capacity and Energy sufficient to meet its obligations under the Amended and
Restated PPA; and

                  WHEREAS, Seller is willing to perform the various obligations
set forth herein in accordance with the terms and conditions hereof.

                  NOW, THEREFORE, in consideration of the recitals and mutual
covenants contained herein and other good and valuable consideration the receipt
and sufficiency of which is hereby acknowledged, the Parties hereto agree as
follows:

                                    ARTICLE I

                                   DEFINITIONS

                  Unless otherwise specified, capitalized terms used herein but
not defined herein have the respective meanings assigned to such terms in the
Amended and Restated PPA; provided, however, that (i) references to "Seller" in
definitions incorporated from

                                       2
<PAGE>   6

the Amended and Restated PPA shall be deemed to mean "Cedar Brakes" under this
Power Services Agreement and (ii) in the event of the termination of the Amended
and Restated PPA prior to the termination of this Power Services Agreement, the
definition of "Delivery Point" under this Power Services Agreement shall be
deemed to mean clauses (i) through (iii) only of the definition of Delivery
Point assigned to such term in the Amended and Restated PPA.

                                   ARTICLE II

                       GENERAL CONDITIONS OF DELIVERY AND
                   ACCEPTANCE OF ELECTRIC ENERGY AND CAPACITY

                  Seller agrees to deliver and Cedar Brakes agrees to accept,
during the term of this Power Services Agreement, Energy and Capacity delivered
by Seller, subject to and in accordance with the terms of this Power Services
Agreement. Seller may provide Energy and Capacity to Cedar Brakes, at Seller's
sole option, from any source of supply including the Facility or other sources.
Seller shall have the right to sell all or a portion of the Net Electrical Power
Output of the Facility to any third party purchaser without prior notice thereof
to Cedar Brakes, subject to Article II(D) below.

                                    SECTION A
                                 SALE OF ENERGY

                  Seller will sell and deliver Energy to Cedar Brakes that is
scheduled and delivered by Seller in accordance with Article V, and Cedar Brakes
will purchase and

                                       3
<PAGE>   7

accept delivery of such Energy, at the Delivery Point(s). The annual quantities
of Energy which Seller shall schedule and deliver and which Cedar Brakes shall
purchase and accept, in each calendar year of this Power Services Agreement
commencing with the Year 2000 are set forth in Exhibit I (such quantity for each
such year, "Annual Energy Deliveries"). The Annual Energy Deliveries applicable
to the initial calendar year of the Term of this Power Services Agreement (if a
partial calendar year) shall be adjusted by multiplying the Annual Energy
Deliveries for such year times the number of days in such partial calendar year
divided by 365 days.

                                    SECTION B
                                SALE OF CAPACITY

                  Seller shall arrange for Capacity to be made available to
Cedar Brakes, which may include, at Seller's option, Capacity provided by the
Facility or from other sources of such Capacity, such that Cedar Brakes shall be
credited by PJM with at least one hundred twenty-three (123) MW per day of such
Capacity. Seller shall take all necessary steps utilizing PJM's "eCapacity"
mechanism, or as otherwise may be required by PJM, such that Cedar Brakes'
account with PJM shall reflect such one hundred twenty-three (123) MW per day of
Capacity as of the effective date of this Power Services Agreement and at all
times throughout the term hereof. Cedar Brakes agrees to cooperate with Seller
in making any submittals required by PJM.

                                       4
<PAGE>   8

                  The amount of Capacity credits to be provided to Cedar Brakes
above is based on the methodology currently specified in the RAA. If such
methodology is no longer used by PJM, the minimum quantity of Capacity credits
Seller is required to provide hereunder (restated in terms of the new unit of
measurement) shall be calculated based upon the operation of the Facility during
the twelve (12) Month period from September 1, 1998 through August 31, 1999 or
such shorter period ending as of August 31, 1999 as may be specified in the new
measurement methodology. If the Amended and Restated PPA no longer requires
Cedar Brakes to obtain such Capacity credits, Seller shall provide Capacity to
Cedar Brakes in an amount equal to the amount specified in the measurement
methodology in effect immediately prior to the cancellation of such requirement.

                                    SECTION C
                       EXCEPTIONS TO OBLIGATION TO ACCEPT
                               ENERGY AND CAPACITY

                  Notwithstanding the above, and without derogating from the
provisions of Article IX of this Power Services Agreement, Cedar Brakes shall be
excused from accepting all or a portion of Seller's Energy and Capacity in the
event of a System Emergency, if such purchases would contribute to such System
Emergency.

                  Where practicable, Cedar Brakes shall give Seller advance
notice of any interruption, curtailment or reduction effected pursuant to this
Article, the circumstances

                                       5
<PAGE>   9

requiring or necessitating the interruption, curtailment or reduction of Cedar
Brakes' acceptance of Energy and Capacity and, if able, the reasons therefor,
and the extent and duration thereof. In the event Cedar Brakes is unable, for
any reason, to give Seller advance notice of such an interruption, curtailment
or reduction of such acceptance of the Energy and Capacity, Cedar Brakes shall,
as soon thereafter as practicable, contact Seller to confirm such interruption,
curtailment or reduction, explaining the circumstances requiring or
necessitating the interruption, curtailment or reduction, and, if able, furnish
the reasons therefor and the extent and duration thereof. At Seller's request,
Cedar Brakes shall provide written notice to Seller explaining the circumstances
requiring or necessitating any interruption, curtailment or reduction of service
effective pursuant to this Article. Cedar Brakes will promptly notify Seller
when the reason for the interruption, curtailment or reduction no longer exists
and shall promptly resume the acceptance of the Energy and Capacity. Seller
expressly agrees that Cedar Brakes is not liable for damages of any kind to
Seller or any third party due to Cedar Brakes' failure to accept the Energy and
Capacity for any of the reasons expressed above.

                                    SECTION D
                             DISTRIBUTION SURCHARGES

                  Seller shall pay Cedar Brakes for the amount of any
Distribution Surcharges claimed by PSE&G pursuant to Article II(E) of the
Amended and Restated PPA within two (2) business days of receipt of a written
notice from Cedar Brakes stating

                                       6
<PAGE>   10

the amount of such Distribution Surcharges. Seller shall pay such amounts due
pursuant to this Article II(D) into an account of Cedar Brakes in accordance
with written instructions provided by Cedar Brakes to Seller. Upon request by
Cedar Brakes, Seller shall provide Cedar Brakes with data demonstrating the Net
Electrical Power Output of the Facility for a given calendar year and the amount
of such Net Electrical Power Output sold to a customer of Seller for which the
exemption from Distribution Surcharges under Section 28 of the New Jersey
Competition Act, has been claimed.

                                    SECTION E
                                 REACTIVE POWER

                  Cedar Brakes may request, and, when requested, Seller shall
use best efforts to provide reactive power, leading or lagging, from the
Facility up to the operating limits of the Facility to the extent that it does
not require a reduction in the Net Electrical Power Output of the Facility and
there is no cost to the Seller or the Facility in connection with the provision
of such reactive power. Further, in the event of a System Emergency, Cedar
Brakes may request Seller to provide reactive power, leading or lagging, from
the Facility and, if Cedar Brakes makes such a request, Seller shall use best
efforts to provide same up to the operating limits of the Facility, whether or
not same requires a reduction in the Net Electrical Power Output of the
Facility. Notwithstanding the foregoing, Seller shall have no obligation to
provide reactive power as provided herein unless Seller is selling Energy
hereunder from the Facility or the Facility is otherwise running.

                                       7
<PAGE>   11

         Seller shall have no obligation to provide ancillary services to Cedar
Brakes except for reactive power as set forth herein.

                                   ARTICLE III

                               TERM; EFFECTIVENESS

                  This Power Services Agreement shall become effective upon the
Effective Date under the Amended and Restated PPA. The term of this Power
Services Agreement shall run from the Effective Date until August 31, 2013. This
Power Services Agreement may be terminated by either of Cedar Brakes or Seller,
on ten (10) days prior written notice if Cedar Brakes terminates the Amended and
Restated PPA as the result of a default by PSE&G thereunder. This Power Services
Agreement may be terminated by Cedar Brakes or Seller on ten (10) days prior
written notice if Cedar Brakes fails to make the payment required in Article VI
hereof, and such failure continues for a period of thirty (30) days after notice
thereof has been given; provided, that, Seller shall have no right to terminate
this Power Services Agreement pursuant to this sentence if the reason for such
non-payment results directly or indirectly from Seller's failure to perform
under this Agreement.

                                       8
<PAGE>   12

                                   ARTICLE IV

                      PURCHASE PRICE AND PAYMENT CONDITIONS

                                    SECTION A
                            ENERGY AND CAPACITY RATES

                  The rates payable by Cedar Brakes for Energy and Capacity
during the term of this Power Services Agreement are set forth in Exhibit II,
Part (A), contract rate. The delivery price for Energy and Capacity shall be
equal to the amount of Energy delivered by Seller as scheduled by Seller in
accordance with Article V times the relevant contract rate, and shall be billed
in accordance with Article VI.

                                    SECTION B
                             TRANSMISSION OF ENERGY

                  Seller shall be responsible for arranging transmission of all
Energy and Capacity which is delivered to Cedar Brakes and paying for all
related transmission charges and congestion costs to the Delivery Point. In the
event that Seller elects to deliver Energy and Capacity to a Delivery Point
specified in subpart (iv) of the definition of "Delivery Point", the delivery
price for such Energy shall be reduced by an amount equal to the difference (if
positive) between the locational marginal price at the Facility Interconnection
Point and the locational marginal price at the actual Delivery Point. If the
excess of the locational marginal price at the actual delivery point over the
locational marginal price at the Facility Interconnection Point exceeds the
delivery price for such

                                       9
<PAGE>   13

Energy (such excess amount, the "Delivery Point Excess"), the payment to Seller
with respect to the corresponding billing period shall be reduced by a credit in
the amount of the Delivery Point Excess against the amount payable by Cedar
Brakes for the next succeeding Month; provided, that, if the amount of the
credit is greater than the amount payable by Cedar Brakes for a single Month,
Seller shall pay to Cedar Brakes an amount equal to such excess portion of the
credit (each, an "Article IV(B) Payment"). Such credit shall be calculated in
the same manner as the credit due to PSE&G under Article IV(B) of the Amended
and Restated PPA and shall be applied hereunder in the same Month(s) in which
the credit is applied to PSE&G under Article IV(B) of the Amended and Restated
PPA.

                                    SECTION C
                                  BINDING RATE

                  Each party, having entered into this Power Services Agreement
in good faith, hereby waives all rights on its part now or hereafter to
undertake any proceeding for the purpose of having the purchase rate, as
calculated in this Article IV of this Power Services Agreement, set aside or
adjusted as being unjust and unreasonable.

                                       10
<PAGE>   14

                                    ARTICLE V

                         DELIVERY OF ENERGY AND CAPACITY

                                    SECTION A
                                   SCHEDULING

                  Not later than seven (7) business days prior to the
commencement of each calendar month, Seller shall provide Cedar Brakes with a
non-binding schedule of proposed deliveries of Energy for each hour of the
upcoming month (the "Monthly Schedule").

                  Notwithstanding the quantities set forth in a Monthly
Schedule, on the business day preceding the day of delivery of such Energy,
Seller shall provide Cedar Brakes with a final daily schedule for deliveries of
Energy no later than the time that is two hours prior to the time that PJM
requires submission of final schedules. The volumes set forth in the final daily
schedules may vary from each other and from the volumes set forth in Monthly
Schedules, provided that Seller shall schedule for delivery in any calendar year
an amount which is equal to the Annual Energy Deliveries for such year.

                  In the event Seller fails to furnish a final daily schedule or
a Monthly Schedule on or before the time specified in the second paragraph of
this Article V(A), the scheduled delivery of Energy shall be deemed to be that
specified in the Monthly schedule last delivered by Seller.

                                       11
<PAGE>   15

                  Any Monthly Schedule or final daily schedule shall be
consistent with the requirements of this Article V.

                  Cedar Brakes hereby appoints Seller to be and act as its agent
to do and perform the scheduling obligations under this Power Services Agreement
and such other things as may be necessary or convenient thereto. As agent for
Cedar Brakes for such scheduling obligations, Seller is authorized to act for
Cedar Brakes in its own name or in the name of Cedar Brakes, as deemed necessary
or advisable by Seller.

                                    SECTION B
                                RATE OF DELIVERY

                  Seller may deliver Energy at a rate up to 150 MWh per hour,
provided that the rate of delivery may be up to 200 MW-hours per hour in any
hour in which Make-up Energy deliveries are scheduled in accordance with Article
V(D).

                  Seller shall schedule and deliver Energy at the same delivery
rate during all On-Peak Hours in any day and at the same delivery rate during
all Off-Peak Hours in any day, provided that (i) the delivery rate for On-Peak
Hours may vary from that for Off-Peak Hours in any day and (ii) the delivery
rate for On-Peak Hours or Off-Peak Hours in

                                       12
<PAGE>   16

any day may vary from that for On-Peak Hours or Off-Peak Hours, as the case may
be, in any other day.

                                    SECTION C
                        MINIMUM ON-PEAK ENERGY DELIVERIES

                  During the Months of June, July, August and September of each
year (the "Summer Period"), Seller shall schedule and deliver to Cedar Brakes, a
minimum of 40,000 MWh per month during the On-Peak Hours in the Summer Period.

                  During the period of the year which is not included in the
Summer Period, Seller shall schedule and deliver to Cedar Brakes, a minimum of
an aggregate of 234,000 MWh during the On-Peak Hours.

                                    SECTION D
                            MAKE-UP ENERGY DELIVERIES

                  If Seller is unable to deliver Energy or Cedar Brakes is
unable to accept delivery of Energy which has been scheduled by Seller in
accordance with Article V(A) above, in either case due to an event of Force
Majeure or due to the occurrence of an event set forth in Article II(C)
("Curtailed Energy Deliveries"), Seller shall have the obligation to reschedule
deliveries of make-up quantities of Energy equivalent to such Curtailed Energy
Deliveries during comparable periods during the remainder of the Month in which
the event occurred ("Make-up Energy Deliveries"). If Seller is unable to deliver

                                       13
<PAGE>   17

Energy or Cedar Brakes is unable to accept delivery of Energy which has been
rescheduled by Seller in accordance with the immediately preceding sentence,
Seller shall have the obligation to reschedule Make-up Energy Deliveries equal
to the Curtailed Energy Deliveries during comparable periods during the
remainder of the Month in which the event occurred. If Seller is unable to
reschedule Make-up Energy Deliveries due to an event of Force Majeure or due to
the occurrence of an event set forth in Article II(C), Seller shall have the
obligation to reschedule such Make-up Energy Deliveries during comparable
periods during the immediately following Month. To the extent that Seller fails
to (i) deliver scheduled quantities of Energy or (ii) in the case of Curtailed
Energy Deliveries under Article V(D), reschedule and deliver any such Make-up
Energy Deliveries in the immediately following Month, to the extent that Cedar
Brakes is permitted to reschedule and deliver such Make-up Energy Deliveries in
any subsequent Month under the Amended and Restated PPA, Seller shall be
obligated to reschedule the delivery of such Make-up Energy Deliveries during
comparable periods during such subsequent Month.

                  For the purposes of this Article V(D), a "comparable period"
for the scheduling and delivery of Make-up Energy Deliveries shall mean similar
On-Peak Hours, if the Curtailed Energy Deliveries were originally scheduled
during On-Peak Hours and similar Off-Peak Hours if the Curtailed Energy
Deliveries were originally scheduled during Off-Peak Hours.

                                       14
<PAGE>   18

                                    SECTION E
                 SELLER'S FAILURE TO DELIVER ENERGY AND CAPACITY

                  If Seller fails for reasons other than a Force Majeure event
or in the event of an occurrence described in Article II(C), to deliver all or
part of the scheduled Energy at the Delivery Point, and PSE&G under the Amended
and Restated PPA permits Cedar Brakes to reschedule and deliver such Energy,
Seller shall have the obligation to reschedule delivery of such Energy. In the
event that Seller fails to deliver all or part of the Energy scheduled for
delivery hereunder or fails to schedule sufficient Energy to comply with Article
V(C) hereunder, the payment to Seller with respect to the corresponding billing
period shall be reduced by a credit against the amount payable by Cedar Brakes
for the next succeeding Month; provided, however, that if the amount of the
credit is greater than the amount payable by Cedar Brakes for a single Month,
Seller shall pay to Cedar Brakes the amount of such excess portion of the credit
(each, an "Article V(E) Energy Payment") on or before the last business day of
the following month. Such credit shall be calculated in the same manner as the
credit due to PSE&G under Article (V)(E) of the Amended and Restated PPA and
shall be applied hereunder in the same Month(s) in which the credit is applied
to PSE&G under Article V(E) of the Amended and Restated PPA.

                  If Seller fails for reasons other than a Force Majeure or in
the event of an occurrence described in Article II(D), during any calendar Month
to provide all or a part

                                       15
<PAGE>   19

of the Capacity to Cedar Brakes pursuant to Section II(B) hereof, Cedar Brakes
shall use reasonable commercial efforts to purchase replacement Capacity in the
amount of such shortfall, and Seller will be obligated to reimburse Cedar Brakes
for all such replacement costs. In the event that Cedar Brakes, in spite of
using reasonable commercial efforts, is unable to purchase such Capacity
shortfall, then the payments due to Seller in respect of that Month shall be
reduced by a credit against the amount payable by Cedar Brakes for the next
succeeding Month in an amount equal to the deficiency charge, if any, or other
charges, as applicable, payable by Cedar Brakes under Section V(E) of the
Amended and Restated PPA; provided, however, that if the amount of the credit is
greater than the amount payable by Cedar Brakes for a single Month, Seller shall
pay to Cedar Brakes the amount of such excess portion of the credit (each, an
"Article V(E) Capacity Payment") on or before the last business day of the
following month. Such credit shall be calculated in the same manner as the
credit due to PSE&G under Article (V)(E) of the Amended and Restated PPA and
shall be applied hereunder in the same Month(s) in which the credit is applied
to PSE&G under Article V(E) of the Amended and Restated PPA.

                  The foregoing liquidated damages and the damages pursuant to
Article (V)(F) hereof shall be the sole damages to which Cedar Brakes shall be
entitled as the result of any failure by Seller to deliver Energy under this
Agreement, subject to Article XII.

                                       16
<PAGE>   20

                                    SECTION F
                        SELLER'S FAILURE TO DELIVER ANNUAL ENERGY DELIVERIES

                  If Seller does not deliver the Annual Energy Deliveries (as
may be adjusted for any partial calendar year) required to be delivered pursuant
to Article II(A) hereof in any calendar year, then in addition to any amounts to
be credited to Cedar Brakes by Seller under Article V(E) hereof, Seller shall
pay to Cedar Brakes for such calendar year, as damages and not a penalty and as
part of the consideration for this Power Services Agreement, an amount (the
"Energy Shortfall Liquidated Damages") equal to the product of (i) the
difference between (1) the Annual Energy Deliveries for such calendar year and
(2) the Energy delivered by Seller for such calendar year multiplied by (ii) the
difference between (1) the liquidated damages rate for such calendar year set
forth on Exhibit II, Part B hereof and (2) the contract rate for such calendar
year set forth on Exhibit II, Part A hereof. Cedar Brakes shall prepare and
present to Seller on or before the fifth (5th) day of February of the succeeding
calendar year a statement of the Energy Shortfall Liquidated Damages due and
payable, if any, by Seller for the preceding calendar year in accordance with
the terms hereof. Seller shall pay such Energy Shortfall Liquidated Damages on
or before the fifth (5th) day after receipt of the invoice from Cedar Brakes
into an account of Cedar Brakes in accordance with written instructions provided
by Cedar Brakes to Seller. If the payment is not received by the due date
specified above, Seller shall pay to Cedar Brakes an interest charge on unpaid
amounts which shall accrue daily from the due date until the date upon which
payment is made at the then current late payment charge for

                                       17
<PAGE>   21

commercial customers prescribed in PSE&G's Standard Terms and Conditions as may
be amended from time to time.

                                   ARTICLE VI

                               BILLING AND PAYMENT

                  Cedar Brakes shall prepare and present to Seller, on or before
the fifth day of the second subsequent Month, a statement and payment for Energy
and Capacity delivered to Cedar Brakes during the Month in accordance with
Article IV. Such statement shall indicate the total MWhs delivered during the
Month for both the On Peak Period and the Off Peak Period and the applicable
Energy and Capacity rates.

                  If the payment is not received by the due date specified
above, Cedar Brakes shall pay to Seller an interest charge on unpaid amounts
which shall accrue daily from the due date until the date upon which payment is
made at the then current late payment charge for commercial customers prescribed
in PSE&G's Standard Terms and Conditions as may be amended from time to time.

                  In the event Seller disputes any statement, Seller shall
present the dispute in writing and submit supporting documentation to Cedar
Brakes within a twenty (20) day period from receipt of such statement. Upon
receipt of notice of a dispute and supporting documentation, Cedar Brakes shall
have thirty-five (35) days from receipt of such notice

                                       18
<PAGE>   22

to resolve any dispute with Seller. In the event that the dispute is not
resolved within the thirty-five (35) day period, either party may submit the
matter to arbitration in accordance with Article XIII. The disputed amount of
any statement disputed by Seller in accordance with the provisions of this
Article, which is ultimately determined to be due and owing by Cedar Brakes to
Seller, from the date originally due shall, until payment, accrue interest at
the then current late payment charge for commercial customers prescribed in
PSE&G's Standard Terms and Conditions as may be amended from time to time.

                  Cedar Brakes shall have the right to set off against any and
all amounts owed by Cedar Brakes to Seller pursuant to this Power Services
Agreement any and all amounts owed by Seller to Cedar Brakes or the El Paso
Energy Corporation ("El Paso") to Cedar Brakes under the Funding Agreement dated
as of September 26, 2000 between El Paso and Cedar Brakes or the Guaranty dated
as of September 20, 2000 entered into by El Paso in favor Cedar Brakes.

                                   ARTICLE VII

                                METERING/RECORDS

                  Metering of Energy and Capacity when delivered from the
Facility shall be conducted in accordance with the Interconnection Agreement and
when delivered from other sources shall be conducted in accordance with the
requirements of the PJM

                                       19
<PAGE>   23

Operating Agreement, including with respect to verification of deliveries by or
on behalf of Seller at the Delivery Points.

                                  ARTICLE VIII

                                    LIABILITY

                  (a) Neither Party nor its officers, directors, partners,
agents, servants, employees, affiliates, parent, subsidiaries or respective
successors or assigns shall be liable to the other Party (except as provided for
in Article V of this Power Services Agreement or as otherwise provided for in
this Power Services Agreement) for claims for incidental, special, direct,
indirect or consequential damages whether such damages claim is based on a cause
of action based in warranty, negligence, strict liability, contract, operation
of law or otherwise except where such claim for damages arises out of, relates
to or results from the gross negligence of such Party or the willful disregard
by a Party of its obligations under this Power Services Agreement; provided,
however, that Cedar Brakes shall have the right to seek to recover from the
Seller (i) direct damages upon the occurrence of an Event of Default under this
Power Services Agreement as defined in and which has been established pursuant
to and in accordance with Article XII of this Power Services Agreement, (ii)
damages required to be set-off against the amount payable by PSE&G under Article
(V)(E) of the Amended and Restated PPA and (iii) indemnification payments
required to be made by Cedar Brakes to PSE&G under Article XII or Article XIII
of the Amended and Restated PPA.

                                       20
<PAGE>   24

                  (b) Notwithstanding anything in this Agreement to the
contrary, in the event of the termination of the Amended and Restated PPA prior
to the termination of this Power Services Agreement, the Parties hereby agree
that the Seller shall in no such event be liable to the Buyer under this Power
Services Agreement (including without limitation, liability imposed pursuant to
Article V(E) & (F) and Article X, XI and XII hereof) unless the Seller would
have been liable to the Buyer hereunder if the Amended and Restated PPA were in
full force and effect.

                                   ARTICLE IX

                                  FORCE MAJEURE

                  An event of "Force Majeure" as used herein means an event
beyond the reasonable control of the Party claiming Force Majeure which events
may include but are not limited to: acts of God; strikes, lockouts or other
similar such industrial disturbances; acts of the public enemy, wars, civil
disturbances, blockades, military actions, insurrections or riots; landslides,
floods, washouts, lightning, earthquakes, tornadoes, hurricanes, blizzards or
other storms or storm warnings; explosions, fires, sabotage or vandalism;
mandates, directives, orders or restraints of any governmental, regulatory or
judicial body or agency (other than mandates, directives, orders or restraints
either sought, approved or not contested by the party asserting Force Majeure or
issued in any bankruptcy or insolvency proceeding for the relief the party
asserting Force Majeure); any catastrophic physical failures or disruptions of
the PJM transmission system; breakage, defects,

                                       21
<PAGE>   25

malfunctioning, or accident to machinery, equipment, materials or lines of pipe
or wires; freezing of machinery, equipment, materials or lines of pipe or wires;
inability or delay in the obtaining of materials or equipment; inability to
obtain or utilize any permit, approval, easement, license or right-of-way;
events of Force Majeure as defined under and declared by either party to the
Amended and Restated PPA; provided, that, an event shall be deemed to be an
event of Force Majeure hereunder only to the extent that is deemed to be so
pursuant to the Amended and Restated PPA (whether or not the Amended and
Restated PPA is in full force and effect). The settlement of strikes, lockouts
or other similar such industrial disturbances shall be entirely within the
discretion of the Party directly affected. The requirement herein that any event
of Force Majeure shall be remedied with all reasonable dispatch shall not
require the settlement of strikes, lockouts or other similar such industrial
disturbances when such course is, in the opinion of the Party directly affected,
inadvisable.

                  An event of Force Majeure shall not include (i) failures of
the equipment of the Party claiming Force Majeure which are due to (a) wear and
tear and (b) defects in manufacture, design or construction; (ii) any increase
in the cost of electricity supplies or costs associated with transmission system
operation, maintenance or congestion; (iii) unavailability of Capacity and/or
Energy from any source, regardless of price, for delivery to the Delivery Point
(except in the event of a System Emergency); (iv) interruption in service by a
transmission provider unless; (a) the Party contracting with

                                       22
<PAGE>   26

such transmission provider shall have made arrangements with such transmission
provider for the firm transmission, as defined under the transmission provider's
tariff, of the Energy to be delivered hereunder, and (b) such interruption is
due to an emergency or to an event of force majeure as defined under the
transmission provider's tariff; or (v) any change in economic conditions not
caused by a Force Majeure event.

                  In the event Cedar Brakes or Seller is rendered unable, wholly
or in part, by an event of Force Majeure, to perform any obligation it has under
this Power Services Agreement, it is agreed that, on Cedar Brakes or Seller
giving notice and full particulars of such event of Force Majeure to the other
Party, as soon thereafter as practicable, the obligations of Cedar Brakes or
Seller, so far as they are affected by such event of Force Majeure, shall be
suspended during the continuance of any inability or incapacity so caused, but
for no longer period and it is further agreed that such obligations shall be
suspended for no longer period than such event of Force Majeure (a) has
suspended the parties obligations under the Amended and Restated PPA or (b) in
the event that the Amended and Restated PPA is no longer in full force and
effect, would have suspended the parties obligations under the Amended and
Restated PPA as if it had remained in effect; provided however, neither Party
shall be relieved from any obligation to make any payment to the other required
under this Power Services Agreement. Cedar Brakes or Seller shall use best
efforts to remedy the cause of the Force Majeure with all reasonable dispatch.

                                       23
<PAGE>   27

                  Notwithstanding anything herein to the contrary, the
obligations of Seller under this Power Services Agreement to schedule and
deliver the Annual Energy Deliveries (other than the minimum on-peak energy
deliveries set forth in Article V(C)) shall not be excused or suspended by an
event of Force Majeure.

                  Neither Party shall be liable to the other for any claim(s),
loss(es), damage(s), liability(ies) or expense(s) sustained or incurred by Cedar
Brakes or Seller, arising out of, relating to, or resulting from Cedar Brakes'
or Seller's inability or incapacity to perform its obligations under this Power
Services Agreement due to any event of Force Majeure, as herein defined.

                                    ARTICLE X

                                 INDEMNIFICATION

                  Seller shall indemnify and hold harmless Cedar Brakes and each
and every one of its officers, agents, servants and employees, its successors
and assigns of, from and against any and all claims, demands and suits, actions,
and liabilities, losses, damages, and/or judgments, which may arise therefrom,
as well as against any fees, costs, charges or expenses which Cedar Brakes, its
officers, agents, servants and employees, its successors and assigns, incur in
the defense of any such claims, suits, actions or similar such demands made or
filed by any third-party, which in any manner arise out of, relate to, or result
from negligence, strict liability or breach of this Power Services Agreement by
Seller including

                                       24
<PAGE>   28

but not limited to the design, construction, engineering, installation,
operation, maintenance, repair, replacement, supervision, inspection, testing,
protection, reinforcement, reconstruction, decommissioning, removal, use,
control or ownership of its facilities and claims, suits, actions or similar
demands made or filed by PSE&G against Cedar Brakes pursuant to the Amended and
Restated PPA (including, without limitation, any claims, suits, actions or
demands made or filed by PSE&G pursuant to Articles XII, XIII and XIV of the
Amended and Restated PPA).

                  In case a claim is asserted or action brought against Cedar
Brakes as to which it believes it is entitled to indemnification under this
Article X, Cedar Brakes shall promptly notify Seller in writing of such claim or
action. Prompt notice as contemplated in the preceding sentence shall mean such
notice as would be required to enable Seller to assert and prosecute appropriate
defenses relative to such claim or such action in a timely fashion. Upon receipt
of such notice request for indemnification, Seller shall promptly make a
determination of whether it believes it is required to indemnify and shall
promptly notify Cedar Brakes in writing of that determination. If Seller
determines that it is required to indemnify Cedar Brakes pursuant to this
Article X, then Seller shall assume the defense of such claim or action,
including the employment of counsel and shall assume thereafter the payment of
all costs and expenses relative to the defenses of such claim or action. Cedar
Brakes shall cooperate in all reasonable respects with Seller in the defense of
such claim or action. Cedar Brakes shall have the right, at its own expense, to
employ

                                       25
<PAGE>   29

separate counsel in any such action and to participate in the defense thereof.
Seller shall not be liable for any settlement of any such claim or action
effected without its consent. Before settling any claim or action, Seller shall
demonstrate to Cedar Brakes that it has sufficient financial means or has made
adequate arrangements to make all payments under any such settlement as and when
due. Notwithstanding anything herein to the contrary, in the event that a claim
for indemnification hereunder relates to a claim for indemnification made by
PSE&G under Article XII or Article XIII of the Amended and Restated PPA or a
claim for damages made by PSE&G under Article XIV thereof, then within five (5)
days of receipt of a written notice from Cedar Brakes to Seller that states that
Cedar Brakes is required to pay indemnity payments or damages pursuant to the
Amended and Restated PPA and sets forth the amount of such indemnity payments or
damages, Seller shall pay such amounts into an account of Cedar Brakes in
accordance with written instructions provided by Cedar Brakes to Seller.

                                   ARTICLE XI

                                   WARRANTIES

                  Seller warrants and shall be obligated to supply to the
Delivery Points Energy and Capacity free and clear of any liens and/or adverse
claims which might attach to said Energy and Capacity prior to supply and
receipt by Cedar Brakes except with respect to any lien possessed by a
Financier. Seller agrees to indemnify and hold harmless Cedar Brakes against any
and all claims, demands, suits, actions, costs, and liabilities,

                                       26
<PAGE>   30

damages, losses and/or judgments arising out of, relating to or resulting from
any such adverse claim or lien, as well as against any fees, costs, charges or
expenses which Cedar Brakes might incur in the defense of any such claim, suit,
action or similar such demand made or filed by such person, its successors or
assigns, asserting such adverse claim. In effecting the right of or obligation
to indemnify pursuant to and in accordance with the provisions of this Article
XI, the procedural provisions set forth in Article X of this Power Services
Agreement shall govern. Notwithstanding anything herein to the contrary, in the
event that a claim for indemnification hereunder relates to a claim for
indemnification made by PSE&G under Article XIII of the Amended and Restated
PPA, then within five (5) days of receipt of a written notice from Cedar Brakes
to Seller that states that Cedar Brakes is required to pay indemnity payments
pursuant to Article XII of the Amended and Restated PPA and sets forth the
amount of such indemnity payments, Seller shall pay such amounts into an account
of Cedar Brakes in accordance with written instructions provided by Cedar Brakes
to Seller.

                                   ARTICLE XII

                    EVENTS OF DEFAULT AND BREACH OF CONTRACT

                                    SECTION A
                                EVENTS OF DEFAULT

                  Seller shall be in default under this Power Services Agreement
upon the happening or occurrence of any of the following events or conditions,
each of which shall

                                       27
<PAGE>   31

be deemed to be an "Event of Default," and each of which shall be considered a
breach of contract for purposes of this Power Services Agreement unless it is
cured in accordance with the provisions specified below:

         1.       Seller breaches or fails to observe or perform, any of the
                  material obligations, covenants, conditions, services or
                  responsibilities under this Power Services Agreement, unless,
                  within twenty-five (25) days after written notice from Cedar
                  Brakes specifying the nature of such breach or failure, Seller
                  either cures such breach or failure or, if such cure cannot be
                  completed within twenty-five (25) days, provides Cedar Brakes
                  with a plan reasonably acceptable to Cedar Brakes to cure such
                  breach or failure and commences and diligently pursues such
                  plan.

         2.       There is an assignment for the benefit of Seller's creditors,
                  or Seller is adjudged a bankrupt, or a petition is filed by or
                  against Seller under the provisions of any state insolvency
                  law or under the provisions of the federal bankruptcy laws, or
                  the business or principal assets of Seller are placed in the
                  hands of a receiver, assignee or trustee, or Seller is
                  dissolved, or Seller's existence is terminated, or its
                  business is discontinued; provided, however, that the events
                  described in this Paragraph 2 shall not constitute an Event of
                  Default or otherwise affect the validity of this Power
                  Services Agreement, so long as the terms, covenants and
                  conditions of this Power

                                       28
<PAGE>   32

                  Services Agreement on the part of Seller are performed, and in
                  such event, this Power Services Agreement shall continue to
                  remain in full force in accordance with the terms herein
                  contained.

         3.       Seller takes any actions which prevent Cedar Brakes from
                  performing any of the material obligations, covenants,
                  conditions, responsibilities or services under this Power
                  Services Agreement, unless, within twenty-five (25) days after
                  written notice from Cedar Brakes specifying the nature of such
                  action or failure to act, Seller either cures such action or
                  failure to act, or, such cure cannot be completed within
                  twenty-five (25) days, provides Cedar Brakes with a plan
                  reasonably acceptable to Cedar Brakes to cure such breach or
                  failure and commences and diligently pursues such cure.

         4.       Seller fails to (i) deliver Energy and Capacity to Cedar
                  Brakes for two hundred and forty (240) out of three hundred
                  and sixty five (365) days for any reason other than Force
                  Majeure or a curtailment in accordance with Article II(C) of
                  this Power Services Agreement and fails to pay the liquidated
                  damages associated with such failure as set forth in Article
                  V(E) or (ii) pay when due Energy Shortfall Liquidated Damages
                  or other payments required to be paid hereunder.

                                       29
<PAGE>   33

                                    SECTION B
                                    REMEDIES

                  In the event that Cedar Brakes claims that an Event of Default
has occurred, Cedar Brakes shall provide Seller with written notice thereof
(hereinafter referred to as Notice of Breach). The Notice of Breach shall state
the basis for such claim and any remedy sought. The Parties shall have
twenty-five (25) days within which to resolve the dispute via negotiation. If
within such twenty-five (25 day period after service of the Notice of Breach,
the Parties are unable to resolve their differences by negotiation, either Party
shall have the right to submit the dispute for resolution to either arbitration
or to any regulatory body having jurisdiction, such arbitration proceeding to be
joined with any arbitration proceeding under the Amended and Restated PPA to the
extent required by Article XIII.

                  The nature and extent of any damage incurred or sustained by
Cedar Brakes, as a result of any Event of Default shall be determined and
calculated as of the date the Event of Default commenced, taking into account
Cedar Brakes' obligation to act in a commercially reasonable manner to mitigate
damages.

                  Except as otherwise provided in this Article XII, neither
Party shall refuse to make, suspend or delay any payment(s) otherwise required
to be made under this Power Services Agreement or refuse to carry out any of its
obligations under this Power

                                       30
<PAGE>   34

Services Agreement for or on account of or as a result of an alleged breach of
this Power Services Agreement or Event of Default.

                  Any waiver by Cedar Brakes of any breach or Event of Default
shall be deemed to extend only to the particular breach or Event of Default
waived and shall not limit or otherwise affect any right(s) that Cedar Brakes
may have with respect to any other of future breach or Event of Default, whether
of a similar or different nature.

                                  ARTICLE XIII

                                   ARBITRATION

                  Any controversy, dispute or claim between the Parties to this
Power Services Agreement, which the Parties are unable to resolve by negotiation
or over which any regulatory body lacks jurisdiction or declines to initiate
proceedings, shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA"), then in
effect, and the provisions of this Article. If arbitration is chosen by either
Party, no suit at law which seeks to resolve any controversy, dispute or claim
between the Parties shall be instituted by either Party hereto, except where
such suit is instituted to confirm an arbitration award received pursuant to
this Article. However, nothing contained herein shall deprive either Party of
any right to: (i) obtain injunctive or other equitable relief in any court in
the State of New Jersey, on an interim basis pending disposition of the
arbitration of any controversy, dispute or claim if

                                       31
<PAGE>   35

such relief is available under applicable principles of law and equity; and/or
(ii) assert any crossclaim, or third-party claim in any suit at law instituted
by a third-party; and/or (iii) file and prosecute any complaint at and with the
regulatory agency having jurisdiction or make and prosecute any claim or
position in any filing made with such regulatory agency by either party or some
third-party.

                  Any controversy, dispute or claim submitted to arbitration
shall be settled by arbitration in Newark, New Jersey in accordance with the
laws of the State of New Jersey. Any award entered pursuant to such arbitration
shall be binding on both Parties and judgment upon the award rendered or
received may be entered in the Superior Court of the State of New Jersey
pursuant to N.J.S.A. 2A:24-1 et seq.

                  Exclusive jurisdiction relative to the entry of judgment on
any arbitration award relative to any controversy or claim between the parties
shall be in any court of appropriate subject matter jurisdiction located in New
Jersey, and the Parties to this Power Services Agreement expressly subject
themselves hereby to the personal jurisdiction of said court for entry of any
such judgment and for the resolution of any dispute, action, or suit arising in
connection with the entry of such judgment.

                  The controversy or claim to be arbitrated shall be referred to
three (3) arbitrators, one to be selected by each party and the third to be
selected by the AAA. The selections to be made by the parties shall be made from
the list of the National Panel of

                                       32
<PAGE>   36

Arbitrators maintained by the AAA. The arbitrator to be selected by the AAA
shall be qualified to pass on any technical or engineering matters and shall be
independent of and acceptable to both Cedar Brakes and Seller. All decisions and
awards shall be made by a majority of the arbitrators, except for decisions
relating to discovery as set forth herein.

                  In the event any arbitrator dies, or refuses to act, or
becomes incapable, incompetent or unfit to act before hearings have been
completed and/or before an award has been rendered, a successor arbitrator may
be selected by the party who originally made the selection. The selection of the
successor arbitrator shall be made consistent with the selection procedure set
forth in the preceding paragraph.

                  The arbitrators selected pursuant to this Power Services
Agreement shall be governed by and apply the laws of the State of New Jersey and
federal law, as applicable, in conducting any arbitration proceeding and/or in
making any award.

                  Notice of a demand for arbitration (hereinafter referred to as
Demand for Arbitration) of any controversy or dispute between the Parties shall
be filed in writing with the AAA by the Party seeking arbitration and a copy of
same shall be served contemporaneously with such filing on the other Party. The
notice shall state, with specificity, the nature of the dispute and the remedy
sought. After such notice has been filed, the Parties may make discovery of any
matter relevant to such dispute before the hearing, to the extent and in the
manner provided by the Rules Governing Civil Practice in

                                       33
<PAGE>   37

the Superior Court contained in the Rules Governing the Courts of the State of
New Jersey. Any question that may arise with respect to the obligations of the
Parties relative to discovery and/or relative to the protection of the discovery
materials shall be referred solely to the arbitrator selected by the AAA. His
determination shall be final and conclusive. Discovery shall be completed not
later than ninety (90) days after filing of the notice of arbitration unless
such period for discovery is extended by the arbitrator selected by the AAA,
upon a showing of good cause by either Party to the arbitration.

                  The arbitrators may consider any material which is relevant to
the subject matter of any such controversy even if such material might also be
relevant to an issue or issues not subject to arbitration hereunder. A
stenographic record shall be made of any arbitration hearing.

                  Any costs associated with any arbitration under this Article,
including but not limited to attorney fees and witness expenses, shall be paid
by the Party against whom an award is entered unless the arbitrators by their
award otherwise provide.

                  Arbitration may not be utilized and the arbitrators selected
in accordance with this Article shall not possess the authority or power to
alter, amend or modify any of the terms or conditions or charges set forth in
this Power Services Agreement, and further, the arbitrators may not enter any
award which alters, amends or modifies such terms, conditions or charges in any
form or manner.

                                       34
<PAGE>   38

                  Notwithstanding anything herein to the contrary, each of the
Parties hereby agrees that the provisions of this Article XIII are intended to
operate, and shall operate, such that, in the event a dispute arises hereunder
which is submitted to arbitration and arbitration proceedings are initiated
under Article XV of the Amended and Restated PPA with respect to substantially
the same dispute or with respect to another dispute involving substantially the
same facts, such disputes shall be resolved jointly in a single proceeding by
the arbitration proceedings initiated under Article XV of the Amended and
Restated PPA. Such proceedings shall be conducted in accordance with the
provisions of Article XV of the Amended and Restated PPA. Seller hereby agrees
to be bound under this Power Services Agreement by the decision and award of the
arbitration panel in such proceedings.

                                   ARTICLE XIV

                                ENTIRE AGREEMENT

                  The Power Services Agreement constitutes the entire Agreement
between the Parties with respect to the matters contained herein and all prior
agreements with respect thereto are superseded hereby. Each Party confirms that
it is not relying on any oral representations or warranties of the other Party
except as specifically set forth herein. No additions, amendments or
modifications hereof or of any terms included herein shall be binding unless
duly executed by both Parties.

                                       35
<PAGE>   39

                                   ARTICLE XV
                               ASSIGNMENT/TRANSFER

                  Cedar Brakes may at any time and from time to time during the
term of this Power Services Agreement, without the consent of Seller assign its
rights in this Power Services Agreement to (i) any Financier(s) in connection
with the transfer, pledge, encumbrance or assignment of this Power Services
Agreement or the accounts, revenues, or proceeds hereof in connection with any
financing or other financial arrangements or (ii) to any person or entity
succeeding to all or substantially all of the assets of Cedar Brakes. Seller
shall, at Cedar Brakes' request, execute a consent to assignment provided that
the terms and conditions of same are reasonably acceptable to Seller. Seller may
not assign its rights and/or transfer its rights and obligations under this
Power Services Agreement without the prior written consent of Cedar Brakes,
which consent shall not be unreasonably withheld or delayed. Nothing contained
herein shall prevent Cedar Brakes from pledging or mortgaging all or any part of
its assets or interests in connection with any financing for or related to the
transactions contemplated herein.

                  Except as otherwise provided herein, Cedar Brakes may not
assign its rights and/or transfer its obligations under this Power Services
Agreement without the prior written consent of Seller. Seller shall not
unreasonably delay or withhold any approval of an assignment or
assignment/transfer by Cedar Brakes provided that the

                                       36
<PAGE>   40

assignee or assignee/transferee agrees to be bound by, subject to and to comply
with the terms and conditions of this Power Services Agreement.

                                   ARTICLE XVI

                                  CHOICE OF LAW

                  This Power Services Agreement shall be interpreted, construed,
governed by, performed and enforced in accordance with the laws of the State of
New Jersey and federal law, where applicable. All questions concerning the
validity, construction and enforceability of this Power Services Agreement as
well as questions concerning the sufficiency or other aspects of performance
under this Power Services Agreement shall be determined under the laws of the
State of New Jersey without recourse to the law governing conflict of laws.

                                  ARTICLE XVII

                                    CAPTIONS

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

                                       37
<PAGE>   41

                                  ARTICLE XVIII

                                  COUNTERPARTS

                  This Power Services Agreement may be executed in counterparts.
Each shall be deemed an original but together shall constitute one and the same
instrument.

                                   ARTICLE XIX

                                  MISCELLANEOUS

                  This Power Services Agreement and the obligations of the
Parties hereunder are subject to all present and future valid laws and to all
valid present and future orders, rules and regulations of any court or
regulatory authority having jurisdiction.

                  In case of conflict between any provisions hereof and any
applicable law, regulation or regulatory order, such applicable law, regulation
or regulatory order shall govern.

                  All terms defined in this Power Services Agreement shall have
the same defined meanings when used in any notice, correspondence, report or
other document made or delivered pursuant to or in connection with this Power
Services Agreement, unless the context shall otherwise require.

                                       38
<PAGE>   42

                  Each reference herein to Seller and Cedar Brakes shall be
deemed to include their respective successors and assigns.

                  All of the covenants, warranties, undertakings and agreements
of Seller and Cedar Brakes shall bind the respective Parties, their successors
and assigns.

                                   ARTICLE XX

                                  RESERVATIONS

                  No Party shall be prejudiced or bound, except as otherwise
specifically provided herein, nor shall any Party be deemed to have approved,
accepted, agreed or consented to any concept, theory or principle underlying or
supposed to underlie any of the matters contained herein, including but not
limited to any concept, theory, principle or method used to calculate the rates
provided for herein.

                  All Parties further understand and agree that the provisions
of this Power Services Agreement relate only to the specific matter referred to
herein and no Party or person waives any claim or right which it may otherwise
have with respect to any matter not expressly provided for herein.

                                       39
<PAGE>   43

                                   ARTICLE XXI

                             SURVIVAL OF OBLIGATIONS

                  Termination of this Power Services Agreement for any reason
shall not relieve Cedar Brakes or Seller of any obligation accruing or arising
with respect to the period prior to such termination and required by terms of
this Power Services Agreement to be performed at date subsequent to the date of
termination.

                                  ARTICLE XXII

                                     NOTICES

                  Any notice, request, demand, or statement which either Cedar
Brakes or Seller may desire to give to the other shall be in writing and except
as otherwise provided for in this Power Services Agreement shall be considered
as duly delivered when mailed by certified mail or delivered against receipt by
messenger or overnight courier addressed to said Party as follows:

(a)      If to CEDAR BRAKES I, L.L.C.
         1001 Louisiana Street
         Houston, TX 77002
         Attention: President

         With electronic mail copies to:
         sullivant@epenergy.com

                                       40
<PAGE>   44

(b)      If to Seller or to such other person or address as the addressee may
         have specified in a notice duly given as provided herein:

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

         With electronic mail copies to:
         sullivant@epenergy.com

         Except as otherwise provided in this Power Services Agreement, routine
communications and Billing Statements shall be considered as duly delivered when
mailed by either certified or ordinary mail.

(a)      If to CEDAR BRAKES I, L.L.C.
         1001 Louisiana Street
         Houston, TX 77002
         Attention:

         With electronic mail copies to:
         sullivant@epenergy.com

(b)      If to Seller or to such other person or address as the addressee may
         have specified in a notice duly given as provided herein:

         El Paso Merchant Energy L.P.
         1001 Lousiana Street
         Houston, TX  77002

         With electronic mail copies to:
         sullivant@epenergy.com

                                       41
<PAGE>   45

                  IN WITNESS WHEREOF, this Power Services Agreement has been
executed and delivered as of the date and year first above written.

                                          CEDAR BRAKES I, L.L.C.

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

                                          EL PASO MERCHANT ENERGY L.P.

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

                                       42
<PAGE>   46

                                    EXHIBIT 1

                            ANNUAL ENERGY DELIVERIES

<TABLE>
<S>                                     <C>
--------------------------------------- ----------------------------------------
Year                                    Annual Energy Deliveries (MWh)
--------------------------------------- ----------------------------------------
2000                                                     788,954
--------------------------------------- ----------------------------------------
2001                                                     788,954
--------------------------------------- ----------------------------------------
2002                                                     788,954
--------------------------------------- ----------------------------------------
2003                                                     811,229
--------------------------------------- ----------------------------------------
2004                                                     855,779
--------------------------------------- ----------------------------------------
2005                                                     855,779
--------------------------------------- ----------------------------------------
2006                                                     855,779
--------------------------------------- ----------------------------------------
2007                                                     855,779
--------------------------------------- ----------------------------------------
2008                                                     855,779
--------------------------------------- ----------------------------------------
2009                                                     855,779
--------------------------------------- ----------------------------------------
2010                                                     855,779
--------------------------------------- ----------------------------------------
2011                                                     855,779
--------------------------------------- ----------------------------------------
2012                                                     855,779
--------------------------------------- ----------------------------------------
2013                                                     570,519
--------------------------------------- ----------------------------------------
</TABLE>

                                       43
<PAGE>   47

                                    EXHIBIT 2

                   CAPACITY AND ENERGY PURCHASE RATES ($/MWH)

<TABLE>
<CAPTION>
--------------------- ----------------------- ----------------------
Year                  Contract Rate           Liquidated
                                              Damages Rate
--------------------- ----------------------- ----------------------
<S>                   <C>                     <C>
2001                          23.03                   70.74
--------------------- ----------------------- ----------------------
2001                          29.71                   72.17
--------------------- ----------------------- ----------------------
2002                          29.30                   73.53
--------------------- ----------------------- ----------------------
2003                          28.56                   74.64
--------------------- ----------------------- ----------------------
2004                          27.94                   75.44
--------------------- ----------------------- ----------------------
2005                          28.07                   76.96
--------------------- ----------------------- ----------------------
2006                          28.26                   78.74
--------------------- ----------------------- ----------------------
2007                          28.26                   80.34
--------------------- ----------------------- ----------------------
2008                          28.80                   82.13
--------------------- ----------------------- ----------------------
2009                          29.08                   83.88
--------------------- ----------------------- ----------------------
2010                          29.36                   85.76
--------------------- ----------------------- ----------------------
2011                          29.64                   87.67
--------------------- ----------------------- ----------------------
2012                          29.64                   89.63
--------------------- ----------------------- ----------------------
2013                          33.75                   92.43
--------------------- ----------------------- ----------------------
</TABLE>

                                       44

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