Document:

Exhibit 4-102

                              SUPPLEMENTAL MORTGAGE
              -----------------------------------------------------

                             Supplemental Indenture

                                      DATED
                             ----------------------

                                 SUPPLEMENTAL TO
                          FIRST AND REFUNDING MORTGAGE
                              DATED AUGUST 1, 1924

                            ------------------------

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                       To
                       WACHOVIA BANK, NATIONAL ASSOCIATION
                                     TRUSTEE
                                 21 SOUTH STREET
                          MORRISTOWN, NEW JERSEY 07960

                             -----------------------

                           PROVIDING FOR THE ISSUE OF
              $                FIRST AND REFUNDING MORTGAGE BONDS,
                                  % SERIES         DUE

--------------------------------------------------------------------------------
                     RECORD IN MORTGAGE BOOK AND RETURN TO:
                              JAMES T. FORAN, ESQ.
                               80 PARK PLAZA, T5B
                        P. O. BOX 570 NEWARK, N. J. 07101

Prepared by
                     , Esq.

<PAGE>

                                TABLE OF CONTENTS
                               ------------------

                                                                           PAGE

RECITALS..............................................................
FORM OF BOND [FACE]...................................................
FORMS OF CERTIFICATES OF AUTHENTICATION...............................
FORM OF BOND [REVERSE]................................................
GRANTING CLAUSES......................................................

                                    ARTICLE I.
                             BONDS OF THE SERIES __.

DESCRIPTION OF SERIES __ .............................................

                                   ARTICLE II.
                REDEMPTION OF BONDS--SINKING OR IMPROVEMENT FUND--
                                  OF SERIES __.

SECTION 2.01. Redemption--Redemption Prices...........................
SECTION 2.02. Sinking or Improvement Fund--
              Sinking or Improvement Fund Redemptions--
              Redemptions Pursuant to Section 4C of
              Article Eight of the Indenture..........................
SECTION 2.03. Redemption at Election of Company.......................
SECTION 2.04. Called Bonds to be Surrendered--Interest to Cease.......
SECTION 2.05. Bonds Called in Part....................................
SECTION 2.06. Provisions of Indenture Not Applicable..................

                                   ARTICLE III.
                                  MISCELLANEOUS.

SECTION 3.01. Authentication of Bonds of Series __ ...................
SECTION 3.02. Authenticating Agent....................................
SECTION 3.03. Additional Restrictions on Authentication of
              Additional Bonds Under Indenture........................
SECTION 3.04. Restriction on Dividends................................
SECTION 3.05. Use of Facsimile Seal and Signatures....................
SECTION 3.06. Time for Making of Payment..............................
SECTION 3.07. Effective Period of Supplemental Indenture..............
SECTION 3.08. Effect of Approval of Board of Public Utilities
              of the State of New Jersey..............................
SECTION 3.09. Execution in Counterparts...............................
Acknowledgements......................................................
Certificate of
Residence.............................................................

<PAGE>

      SUPPLEMENTAL INDENTURE, dated the ---------- day of --------- for
convenience of reference and effective from the time of execution and delivery
hereof, between PUBLIC SERVICE ELECTRIC AND GAS COMPANY, a corporation organized
under the laws of the State of New Jersey, hereinafter called the "Company",
party of the first part, and WACHOVIA BANK, NATIONAL ASSOCIATION, a national
banking association organized under the laws of the United States of America, as
Trustee under the indenture dated August 1, 1924, below mentioned, hereinafter
called the "Trustee", party of the second part.

      WHEREAS, on July 25, 1924, the Company executed and delivered to FIDELITY
UNION TRUST COMPANY (now known as WACHOVIA BANK, NATIONAL ASSOCIATION), a
certain indenture dated August 1, 1924 (hereinafter called the "Indenture"), to
secure and to provide for the issue of First and Refunding Mortgage Gold Bonds
of the Company; and

      WHEREAS, the Indenture has been recorded in the following counties of the
State of New Jersey, in the offices, and therein in the books and at the pages,
as follows:

<TABLE>
<CAPTION>
                                                                             PAGE
COUNTY                OFFICE                BOOK NUMBER                      NUMBER
------------------------------------------------------------------------------------
<S>                   <C>                   <C>                                 <C>
Atlantic              Clerk's               1955 of Mortgages                   160
Bergen                Clerk's               94 of Chattel Mortgages             123 etc.
                                            693 of Mortgages                    88 etc.
Burlington            Clerk's               52 of Chattel Mortgages             Folio 8, etc.
                                            177 of Mortgages                    Folio 354, etc.
Camden                Register's            45 of Chattel Mortgages             184 etc.
                                            239 of Mortgages                    1 etc.
Cumberland            Clerk's               786 of Mortgages                    638 & c.
Essex                 Register's            437 of Chattel Mortgages            1-48
                                            T-51 of Mortgages                   341-392
Gloucester            Clerk's               34 of Chattel Mortgages             123 etc.
                                            142 of Mortgages                    7, etc.
Hudson                Register's            453 of Chattel Mortgages            9, etc.
                                            1245 of Mortgages                   484, etc.
Hunterdon             Clerk's               151 of Mortgages                    344
Mercer                Clerk's               67 of Chattel Mortgages             1 etc.
                                            384 of Mortgages                    1 etc.
Middlesex             Clerk's               113 of Chattel Mortgages            3 etc.
                                            437 of Mortgages                    294, etc.
Monmouth              Clerk's               951 of Mortgages                    291 & c.
Morris                Clerk's               N-3 of Chattel Mortgages            446 etc.
                                            F-10 of Mortgages                   269 etc.
Ocean                 Clerk's               1809 of Mortgages                   40
Passaic               Register's M-         6 of Chattel Mortgages              178, etc.
                                            R-13 of Mortgages                   268 etc.
Salem                 Clerk's               267 of Mortgages                    249 & c.
</TABLE>

<PAGE>
                                       2

<TABLE>
<CAPTION>
                                                                             PAGE
COUNTY                OFFICE                BOOK NUMBER                      NUMBER
------------------------------------------------------------------------------------
<S>                   <C>                   <C>                                 <C>
Somerset              Clerk's               46 of Chattel Mortgages             207 etc.
                                            N-10 of Mortgages                   1 etc.
Sussex                Clerk's               123 of Mortgages                    10 & c.
Union                 Register's            664 of Mortgages                    259 etc.
Warren                Clerk's               124 of Mortgages                    141 etc.
</TABLE>

and

        WHEREAS, the Indenture has also been recorded in the following counties
of the Commonwealth of Pennsylvania, in the offices, and therein in the books
and at the pages, as follows:

                                                                      PAGE
COUNTY                OFFICE                BOOK NUMBER               NUMBER
-----------------------------------------------------------------------------
Adams                 Recorder's            22 of Mortgages              105
Armstrong             Recorder's            208 of Mortgages             381
Bedford               Recorder's            90 of Mortgages              917
Blair                 Recorder's            671 of Mortgages             430
Cambria               Recorder's            407 of Mortgages             352
Cumberland            Recorder's            500 of Mortgages             136
Franklin              Recorder's            285 of Mortgages             373
Huntingdon            Recorder's            128 of Mortgages             47
Indiana               Recorder's            197 of Mortgages             281
Lancaster             Recorder's            984 of Mortgages             1
Montgomery            Recorder's            5053 of Mortgages            1,221
Westmoreland          Recorder's            1281 of Mortgages            198
York                  Recorder's            31-V of Mortgages            446

and

      WHEREAS, the Indenture granted, bargained, sold, aliened, remised,
released, conveyed, confirmed, assigned, transferred and set over unto the
Trustee certain property of the Company, more fully set forth and described in
the Indenture, then owned or which might thereafter be acquired by the Company;
and

      WHEREAS, the Company, by various supplemental indentures, supplemental to
the Indenture, the last of which was dated ------------, has granted, bargained,
sold, aliened, remised, released, conveyed, confirmed, assigned, transferred and
set over unto the Trustee certain property of the Company acquired by it after
the execution and delivery of the Indenture; and

      WHEREAS, since the execution and delivery of said supplemental indenture
dated -----------------, the Company has acquired property which, in 3
accordance with the

<PAGE>
                                       3

provisions of the Indenture, is subject to the lien thereof and the Company
desires to confirm such lien; and

      WHEREAS, the Indenture has been amended or supplemented from time to time;
and

      WHEREAS, it is provided in the Indenture that no bonds other than those of
the 5-1/2% Series due 1959 therein authorized may be issued thereunder unless a
supplemental indenture providing for the issue of such additional bonds shall
have been executed and delivered by the Company to the Trustee; and

      WHEREAS, the Company desires to provide for the issue of $--------------
principal amount of bonds secured by said Indenture of a series to be designated
as "First and Refunding Mortgage Bonds, -----% Series ---- due -----"
(hereinafter sometimes called "Series ----------"); and

      WHEREAS, the text of the bonds of the Series --- and of the certificates
of authentication to be borne by the bonds of the Series --- shall be
substantially of the following tenor:

                                 [FORM OF BOND]
                                     [FACE]

REGISTERED                                                REGISTERED
NUMBER                                                    AMOUNT
RU                                                        $

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                       FIRST AND REFUNDING MORTGAGE BOND,
                    -----------% SERIES ------- DUE --------.

      Public Service Electric and Gas Company (hereinafter called the
"Company"), a corporation of the State of New Jersey, for value received, hereby
promises to pay to -------------, or registered assigns, on the surrender
hereof, the principal sum of --------- Dollars, on ------------ and to pay
interest thereon from the date hereof, at the rate of ----% per annum, and until
payment of said principal sum, such interest to be payable --------- and
---------- in each year.

      Both the principal hereof and interest hereon shall be paid at the
principal corporate trust office of Wachovia Bank, National Association, in the
City of Morristown, State of New Jersey, or (at the option of the registered
owner) at the corporate trust office of Morgan Guaranty Trust Company of New
York, in the Borough of Manhattan, City and State of New York, in such coin or
currency of the United States of America as at the time of payment shall
constitute legal tender for the payment of public and private debts.

<PAGE>
                                       4

      Reference is hereby made to the further provisions of this Bond set forth
on the reverse hereof and such further provisions shall for all purposes have
the same effect as though fully set forth at this place.

      This Bond shall not be entitled to any security or benefit under the
indenture mentioned on the reverse hereof, as amended and supplemented, and
shall not become valid or obligatory for any purpose, until the certificate of
authentication, hereon endorsed, shall have been signed by or on behalf of
Wachovia Bank, National Association, as Trustee, or by or on behalf of its
successor in trust under said indenture.

      IN WITNESS WHEREOF, the Company has caused this Bond to be duly executed
by its proper officers under its corporate seal.

        Dated

                                            PUBLIC SERVICE ELECTRIC AND GAS
                                                   COMPANY,

                                            By ..............................
                                            (Vice) President

(Seal)

Attest:

.............................
(Assistant) Secretary

<PAGE>
                                       5

[FORM OF CERTIFICATE OF AUTHENTICATION]
CERTIFICATE OF AUTHENTICATION

      This Bond is one of the Bonds of the series designated therein which are
described in the within-mentioned indenture and supplemental indenture dated
--------------------, as secured thereby.

                             WACHOVIA BANK, NATIONAL ASSOCIATION, TRUSTEE

                                            By .............................
                                                   Authorized Signatory

                [FORM OF ALTERNATE CERTIFICATE OF AUTHENTICATION]
                     ALTERNATE CERTIFICATE OF AUTHENTICATION

      This Bond is one of the Bonds of the series designated therein which are
described in the within-mentioned indenture and supplemental indenture dated
---------, as secured thereby.

                             WACHOVIA BANK, NATIONAL ASSOCIATION, TRUSTEE

                                            By ..............................
                                                   Authenticating Agent

                                            By ...............................
                                                   Authorized Signatory

<PAGE>
                                       6

                                 [FORM OF BOND]
                                    [REVERSE]

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                       FIRST AND REFUNDING MORTGAGE BOND,
                      ----------- % SERIES DUE ----------.

      This Bond is one of the First and Refunding Mortgage Bonds of the Company
issued and to be issued under and pursuant to, and all equally secured by, an
indenture of mortgage or deed of trust dated August 1, 1924, as supplemented and
amended by supplemental indentures thereto, including supplemental indentures
dated March 1, 1942, June 1, 1949, May 1, 1950, October 1, 1953, May 1, 1954,
November 1, 1956, September 1, 1957, August 1, 1958, June 1, 1959, September 1,
1960, August 1, 1962, June 1, 1963, September 1, 1964, September 1, 1965, June
1, 1967, June 1, 1968, April 1, 1969, March 1, 1970, May 15, 1971, November 15,
1971, April 1, 1972, March 1, 1974, October 1, 1974, April 1, 1976, September 1,
1976, October 1, 1976, June 1, 1977, September 1, 1977, November 1, 1978, July
1, 1979, September 1, 1979 (No. 1), September 1, 1979 (No. 2), November 1, 1979,
June 1, 1980, August 1, 1981, April 1, 1982, September 1, 1982, December 1,
1982, June 1, 1983, August 1, 1983, July 1, 1984, September 1, 1984, November 1,
1984 (No. 1), November 1, 1984 (No. 2), July 1, 1985, January 1, 1986, March 1,
1986, April 1, 1986 (No. 1), April 1, 1986 (No. 2), March 1, 1987, July 1, 1987
(No. 1), July 1, 1987 (No. 2), May 1, 1988, September 1, 1988, July 1, 1989,
July 1, 1990 (No. 1), July 1, 1990 (No. 2), June 1, 1991 (No. 1), June 1, 1991
(No. 2), November 1, 1991 (No. 1), November 1, 1991 (No. 2), November 1, 1991
(No. 3), February 1, 1992 (No. 1), February 1, 1992 (No. 2), June 1, 1992 (No.
1), June 1, 1992 (No. 2), June 1 , 1992 (No. 3), January 1, 1993 (No. 1),
January 1, 1993 (No. 2), March 1, 1993, May 1, 1993, May 1, 1993 (No. 2), May 1,
1993 (No. 3), July 1, 1993, August 1, 1993, September 1, 1993, September 1, 1993
(No. 2), November 1, 1993, February 1, 1994, March 1, 1994 (No. 1), March 1,
1994 (No. 2), May 1, 1994, June 1, 1994, August 1, 1994, October 1, 1994 (No.
1), October 1, 1994 (No. 2), October 1, 1995 (No. 1), October 1, 1995 (No. 2),
January 1, 1996 (No.1), January 1, 1996 (No.2), December 1, 1996, April 1, 1997,
June 1, 1997 and May 1, 1998, September 1, 2002, August 1, 2003, December 1,
2003 (No. 1), December 1, 2003 (No. 2), December 1, 2003 (No. 3) and December 1,
2003 (No. 4) each duly executed by the Company and Wachovia Bank, National
Association (formerly known as Fidelity Union Trust Company), a national banking
association organized under the laws of the United States of America, as
Trustee. This Bond is one of the ---------% Series due --------, which series is
limited to aggregate principal amount of ----------- and is issued pursuant to
said supplemental indenture dated -----------. Reference is hereby made to said
indenture and all supplements thereto for a specification of the principal
amount of Bonds from time to time issuable thereunder, and for a description of
the properties mortgaged and conveyed or assigned to said Trustee or its
successors, the nature and extent of the security, and the rights of the holders
of said Bonds and any coupons appurtenant thereto, and of the Trustee in respect
of such security.

      In and by said indenture, as amended and supplemented, it is provided that
with the written approval of the Company and the Trustee, any of the provisions
of said indenture may from time to time be eliminated or modified and other
provisions may be added thereto provided

<PAGE>
                                       7

the change does not alter the annual interest rate, redemption price or date,
date of maturity or amount payable on maturity of any then outstanding Bond or
conflict with the Trust Indenture Act of 1939 as then in effect, and provided
the holders of 85% in principal amount of the Bonds secured by said indenture
and then outstanding (including, if such change affect the Bonds of one or more
series but less than all series then outstanding, a like percentage of the then
outstanding Bonds of each series affected by such change, and excluding Bonds
owned or controlled by the Company or by the parties owning at least 10% of the
outstanding voting stock of the Company, as more fully specified in said
indenture) consent in writing thereto, all as more fully set forth in said
indenture, as amended and supplemented.

      First and Refunding Mortgage Bonds issuable under said indenture are
issuable in series, and the Bonds of any series may be for varying principal
amounts and in the form of coupon bonds and of registered bonds without coupons,
and the Bonds of any one series may differ from the Bonds of any other series as
to date, maturity, interest rate and otherwise, all as in said indenture
provided and set forth. The Bonds of the ------% Series due ----, in which this
Bond is included, are designated "First and Refunding Mortgage Bonds, ------%
Series due ------".

      In case of the happening of an event of default as specified in said
indenture and said supplemental indenture dated March 1, 1942, the principal sum
of the Bonds of this series may be declared or may become due and payable
forthwith, in the manner and with the effect in said indenture provided.

      Said supplemental indenture dated ------------ provides for a sinking or
improvement fund the requirements of which may be satisfied, at the option of
the Company, in whole or in part by payment of cash, by delivery of Bonds 8 of
this Series, or by utilization of additions or improvements, all as more fully
provided therein.

      As more fully provided in said supplemental indenture dated ---------, the
Bonds of this series are subject to redemption prior to maturity, on notice
given as below provided, (a) as a whole at any time or in part on any interest
payment date, at the election of the Company (subject to the approval of the
Board of Public Utilities of the State of New Jersey first applied for and
obtained), upon payment of the percentages of the principal amount thereof
specified below under "Regular Redemption Price" during the respective 12-month
periods beginning ----- of each of the years mentioned below, provided, however,
that prior to --------- no Bonds of this series may be so redeemed, and (b) on
----------- of each year, beginning in ---------, by operation of said sinking
or improvement fund, or at any time by the application of proceeds of released
property or other money held by the Trustee and which, pursuant to the
provisions of said indenture, as amended and supplemented, is applied to the
redemption of Bonds of this series, upon payment of the percentages of the
principal amount thereof specified below under "Special Redemption Price" during
such respective 12-month periods:

<PAGE>
                                       8

12-Month                                  12-Month
Period       Regular       Special        Period      Regular        Special
Beginning    Redemption    Redemption     Beginning   Redemption     Redemption
1            Price         Price          1           Price          Price

                       %             %                          %              %

together in each case with accrued interest to the date fixed for redemption.
Notice of any such redemption shall be given by mailing the same to the
respective registered owners of the Bonds of this series so called for
redemption, not less than 30 nor more than 40 days in advance of the date fixed
for redemption. In the case of redemption of Bonds of this series at the
election of the Company, the notice of redemption may be conditioned upon the
deposit of the total regular redemption price of all the Bonds so called, with
accrued interest thereon to the redemption date, with the Trustee on or before
the date fixed for redemption.

      If this Bond or any portion thereof be called for redemption and payment
be duly provided therefor, interest shall cease to accrue on this Bond or such
portion on the date fixed for such redemption.

      This Bond is transferable, but only as provided in said indenture, upon
surrender hereof, by the registered owner in person or by attorney duly
authorized in writing, at either of said offices where the principal hereof and
interest hereon are payable; upon any such transfer a new Bond similar hereto
will be issued to the transferee. No service charge shall be made for any such
transfer, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto. The
Company and the Trustee and any paying agent may deem and treat the person in
whose name this Bond is registered as the absolute owner hereof for the purpose
of receiving payment of or on account of the principal hereof and the interest
hereon and for all other purposes; and neither the Company nor the Trustee nor
any paying agent shall be affected by any notice to the contrary.

<PAGE>
                                       9

      The Bonds of this series are issuable only in fully registered form, in
denominations of $1,000 and any multiple of $1,000. Such fully registered Bonds
of the several denominations may be exchanged for fully registered Bonds of
other authorized denominations, but only as provided in said indenture, upon
surrender thereof, by the registered owner in person or by attorney duly
authorized in writing, at either of said offices where the principal thereof and
interest thereon are payable. No service charge shall be made for any such
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto.

      The Company shall not be required to issue or make transfers or exchanges
of Bonds of this series for a period of ten days next preceding any interest
payment date or next preceding the date of any drawing of such Bonds to be
redeemed, and the Company shall not be required to make transfers or exchanges
of any such Bonds drawn in whole or in part for such redemption.

      No recourse under or upon any obligation, covenant or agreement contained
in said indenture or in any indenture supplemental thereto, or in any Bond or
coupon issued thereunder, or because of any indebtedness arising thereunder,
shall be had against any incorporator, or against any past, present or future
stockholder, officer, or director, as such, of the Company or of any successor
corporation, either directly or through the Company or any successor
corporation, under any rule of law, statute or constitutional provision or by
the enforcement of any assessment or by any legal or equitable proceeding or
otherwise, it being expressly agreed and understood that said indenture, any
indenture supplemental thereto and the obligations issued thereunder, are solely
corporate obligations, and that no personal liability whatever shall attach to,
or be incurred by, such incorporators, stockholders, officers or directors, as
such, of the Company, or of any successor corporation, or any of them, because
of the incurring of the indebtedness thereby authorized, or under or by reason
of any of the obligations, covenants or agreements contained in the indenture or
in any indenture supplemental thereto or in any of the Bonds or coupons issued
thereunder, or implied therefrom.

                            ------------------------

      WHEREAS, the execution and delivery of this supplemental indenture have
been duly authorized by the Board of Directors of the Company; and

      WHEREAS, the Company represents that all things necessary to make the
bonds of the series hereinafter described, when duly authenticated by or on
behalf of the Trustee and issued by the Company, valid, binding and legal
obligations of the Company, and to make this supplemental indenture a valid and
binding agreement supplemental to the Indenture, have been done and performed;

      NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH that the Company,
in consideration of the premises and the execution and delivery by the Trustee
of this

<PAGE>
                                       10

supplemental indenture, and in pursuance of the covenants and agreements
contained in the Indenture and for other good and valuable consideration, the
receipt of which is hereby acknowledged, has granted, bargained, sold, aliened,
remised, released, conveyed, confirmed, assigned, transferred and set over, and
by these presents does grant, bargain, sell, alien, remise, release, convey,
confirm, assign, transfer and set over unto the Trustee, its successors and
assigns, forever, all the right, title and interest of the Company in and to all
property of every kind and description (except cash, accounts and bills
receivable and all merchandise bought, sold or manufactured for sale in the
ordinary course of the Company's business, stocks, bonds or other corporate
obligations or securities, other than such as are described in Part V of the
Granting Clauses of the Indenture, not acquired with the proceeds of bonds
secured by the Indenture, and except as in the Indenture and herein otherwise
expressly excluded) acquired by the Company since the execution and delivery of
the supplemental indenture dated -------------- subsequent to the Indenture
(except any such property duly released from, or disposed of, free from the lien
of the Indenture, in accordance with the provisions thereof) and all such
property which at any time hereafter may be acquired by the Company;

      All of which property it is intended shall be included in and granted by
this supplemental indenture and covered by the lien of the Indenture as
heretofore and hereby amended and supplemented;

      UNDER AND SUBJECT to any encumbrances or mortgages existing on property
acquired by the Company at the time of such acquisition and not heretofore
discharged of record; and

      SUBJECT also, to the exceptions, reservations and provisions in the
Indenture and in this supplemental indenture recited, and to the liens,
reservations, exceptions, limitations, conditions and restrictions imposed by or
contained in the several deeds, grants, franchises and contracts or other
instruments through which the Company acquired or claims title to the aforesaid
property; and SUBJECT, also, to the existing leases, to liens on easements or
rights of way, to liens for taxes, assessments and governmental charges not in
default or the payment of which is deferred, pending appeal or other contest by
legal proceedings, pursuant to Section 4 of Article Five of the Indenture, or
the payment of which is deferred pending billing, transfer of title or final
determination of amount, to easements for alleys, streets, highways, rights of
way and railroads that may run across or encroach upon the said property, to
joint pole and similar agreements, to undetermined liens and charges, if any,
incidental to construction, and other encumbrances permitted by the Indenture as
heretofore and hereby amended and supplemented;

      TO HAVE AND TO HOLD the property hereby conveyed or assigned, or intended
to be conveyed or assigned, unto the Trustee, its successor or successors and
assigns, forever;

<PAGE>
                                       11

      IN TRUST, NEVERTHELESS, upon the terms, conditions and trusts set forth in
the Indenture as heretofore and hereby amended and supplemented, to the end that
the said property shall be subject to the lien of the Indenture as heretofore
and hereby amended and supplemented, with the same force and effect as though
said property had been included in the Granting Clauses of the Indenture at the
time of the execution and delivery thereof;

      AND THIS SUPPLEMENTAL INDENTURE FURTHER WITNESSETH that for the
considerations aforesaid, it is hereby covenanted between the Company and the
Trustee as follows:

                                   ARTICLE I.
                           BONDS OF THE SERIES -----.

      The series of bonds authorized by this supplemental indenture to be issued
under and secured by the Indenture shall be designated "First and Refunding
Mortgage Bonds, ----% Series ---- due -----"; shall be limited to the aggregate
principal amount of $---------; shall mature -------------; shall bear interest
at the rate of ------% per annum, payable on ------------- and ---------------
of each year; shall be payable as to both principal and interest in such coin or
currency of the United States of America as at the time of payment shall
constitute legal tender for the payment of public and private debts, at the
principal corporate trust office of Wachovia Bank, National Association, in the
City of Morristown, State of New Jersey, or, as may be desired by the persons
entitled to receive such principal and interest respectively, at the corporate
trust office of Morgan Guaranty Trust Company of New York, in the Borough of
Manhattan, City and State of New York; shall be issuable only in the form of
fully registered bonds in the denominations of $1,000 and any multiple of
$1,000; and the several denominations shall be interchangeable. The date of each
bond of the Series ---- shall be the semi-annual interest payment date next
preceding the date of authentication, unless such date of authentication be an
interest payment date, in which case the date shall be the date of
authentication, or unless such date of authentication be prior to the first
semi-annual interest payment date, in which case the date shall be .---------

      The Company shall not be required to issue or make transfers or exchanges
of bonds of the Series ----- for a period of ten days next preceding any
interest payment date or next preceding the date of any drawing of such bonds to
be redeemed, and the Company shall not be required to make transfers or
exchanges of any such bonds drawn in whole or in part for such redemption.

      The bonds of the Series --- shall be issuable in fully registered global
book-entry form and shall initially be registered in the name of the Depository
Trust Company ("DTC"), or its nominee, who is designated as "Holder." As long as
DTC's nominee holds the certificates representing any bonds of the Series --- in
the book-entry system of DTC, no certificates for such bonds of the Series ---
will be delivered by any selling Beneficial Owner (as defined below) to reflect
any transfer of the Bonds of the Series ---.

<PAGE>
                                       12

                                   ARTICLE II.

        REDEMPTION OF BONDS--SINKING OR IMPROVEMENT FUND--OF SERIES ---.

      SECTION 2.01. Redemption--Redemption Prices. Bonds of the Series -----
shall be subject to redemption

      (a)   as a whole at any time or in part on any interest payment date, at
            the election of the Company (subject to the approval of the Board of
            Public Utilities of the State of New Jersey first applied for and
            obtained) as provided in Section 2.03 hereof, upon payment of the
            percentages of the principal amount thereof specified under "Regular
            Redemption Price" in the tabulation in the Form of Bond hereinbefore
            set forth during the respective 12-month periods beginning
            --------------, of each of the years mentioned in said tabulation,
            provided, however, that prior to ------------------ no bonds of the
            Series ---- may be so redeemed, and

      (b)   on ------------------ of each year, beginning in ------, by
            operation of the sinking or improvement fund as provided in Section
            2.02 hereof, or at any time by the application of any proceeds of
            released property or other money held by the Trustee and which,
            pursuant to Section 4C of Article Eight of the Indenture, as amended
            and supplemented, is applied to the redemption of bonds of the
            Series , upon payment of the percentages of the principal amount
            thereof specified under "Special Redemption Price" in the tabulation
            in the Form of Bond hereinbefore set forth during the respective
            12-month periods beginning --------------- of each of the years
            mentioned in said tabulation, together in each case with accrued
            interest to the date fixed for redemption. The amounts specified in
            said tabulation under said heading (exclusive of accrued interest)
            are herein referred to, respectively, as "regular redemption prices"
            and "special redemption prices".

      SECTION 2.02. Sinking or Improvement Fund--Sinking or Improvement Fund
Redemptions--Redemptions Pursuant to Section 4C of Article Eight of the
Indenture. The Company covenants to pay to the Trustee for a sinking or
improvement fund on ------ of each year, commencing on ----------, an amount
equal to the special redemption price, in effect on such ------, of -------% of
the maximum principal amount of bonds of the Series outstanding at any one time
prior to the date of such payment, the amount 14 of such payment, however, to be
reduced by any credit to which the Company may be entitled under the next
succeeding paragraph of this Section.

      The Company may, at any time not later than --------- prior to the due
date of each sinking or improvement fund installment, elect to satisfy such
installment, in whole or in part, as provided in the following subdivision (a),
or as provided in the following subdivision (b), or partly as provided in said
subdivision (a) and partly as provided in said subdivision (b):

<PAGE>
                                       13

      (a) by delivering to the Trustee outstanding bonds of the Series -----, in
negotiable form or registered in the name of the Company, not later than -------
prior to the due date of such installment, upon receipt of which the Trustee
shall credit the same against such installment at the special redemption price
applicable upon the due date of such installment, or

      (b) by delivering to the Trustee not later than the ---------- prior to
the due date of such installment, a certificate signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer of the Company
which shall state the following items:

            (1) an amount (to the extent the Company shall elect to include the
      same) equal to the cost of any additions or improvements acquired or
      constructed by the Company to its property after December 31, 1948, which
      shall not have formed the basis for any authentication of bonds,
      withdrawal of cash, or release of property under the Indenture, as
      supplemented and amended, and which shall not have been included in any
      maintenance certificate filed under any indenture supplemental to the
      Indenture, or in any certificate filed with the Trustee pursuant to any
      sinking or improvement fund under any indenture supplemental to the
      Indenture, after deducting from such cost the cost (or the estimated cost
      if the actual cost is not ascertainable) of property retired after
      December 31, 1948, and which shall not theretofore have been deducted upon
      any authentication of bonds, withdrawal of cash, or release of property
      under the Indenture, as supplemented and amended, or in any such
      maintenance certificate or in any such certificate filed pursuant to any
      sinking or improvement fund, and

            (2) an amount equal to 60% of the amount stated in item (1) above.

      Upon the receipt of such certificate the Trustee shall credit against such
installment an amount determined by multiplying the amount set forth in item (2)
thereof by the percentage specified as the special redemption price applicable
upon the due date of such installment. No additions or improvements included in
item (1) of any such certificate shall thereafter be available as the basis for
authentication of bonds or the withdrawal of cash or the release of property
under any provisions of the Indenture, as supplemented and amended, or be
included in any maintenance certificate filed under any indenture supplemental
to the Indenture, or in any certificate filed with the Trustee pursuant to any
sinking or improvement fund under any Indenture supplemental to the Indenture,
and no retirements deducted in such item (1) shall thereafter be required to be
deducted under Section 7C(3) of Article Two of the Indenture.

      The Company shall, not later than --------- prior to the due date of each
sinking or improvement fund installment, deliver to the Trustee a certificate
signed by its President or a Vice President and by its Treasurer or an Assistant
Treasurer specifying the amount,

<PAGE>
                                       14

if any, which the Company will pay to the Trustee on the following ------------
pursuant to the provisions of this Section 2.02.

      The Trustee, not later than 30 days prior to the due date of each sinking
or improvement fund installment, shall draw by lot according to such method as
it shall deem proper, from all the bonds of the Series --- then outstanding,
such principal amount thereof as the balance of such sinking or improvement fund
installment (after crediting against the same any credits to which the Company
shall be entitled under the second paragraph of this Section) shall, at the
special redemption price prevailing on the next ensuing interest payment date,
suffice to redeem.

      After such drawing the Trustee shall, beginning not later than 30 nor
earlier than 40 days in advance of the next ensuing interest payment date, give,
in the name of the Company, notice by mail that bonds of the Series bearing the
serial numbers specified have been called for redemption through the sinking or
improvement fund, that they will be due and payable on the next ensuing interest
payment date, at the principal corporate trust office of the Trustee in Newark,
New Jersey, or (at the option of the holder) at the office or agency of the
Company in the Borough of Manhattan, City and State of New York, at a stated
amount (which shall be the special redemption price 16 applicable upon such
redemption date), and that all interest thereon will cease to accrue after said
date. Such notice shall be mailed to the several registered owners of the bonds
so called, at their respective addresses as the same may appear on the registry
books. Failure duly to give such notice of redemption to the registered owner of
any bond called for redemption in whole or in part shall not affect the validity
of the proceedings for the redemption of any other bond.

      If, pursuant to Section 4C of Article Eight of the Indenture, as amended
and supplemented, any proceeds of released property or other money then held by
the Trustee shall be applied to the redemption of bonds of the Series -----,
such redemption shall be effected in the manner provided in the next two
preceding paragraphs of this Section in respect of redemption of bonds of said
series through the sinking or improvement fund. Bonds of said series so redeemed
shall be cancelled.

      All bonds of the Series ---- delivered to the Trustee as a credit against
any sinking or improvement fund installment or redeemed by operation of the
sinking or improvement fund shall be cancelled and such bonds shall not be made
the basis for the authentication and delivery of bonds under the provisions of
Section 5 of Article Three of the Indenture.

      SECTION 2.03. Redemption at Election of Company. The election of the
Company to redeem any of the bonds of the Series ---- shall be evidenced by a
resolution of the Board of Directors of the Company calling for redemption on a
stated date all or a stated principal amount thereof. Any such call may be
conditioned upon the deposit with the Trustee, on or before such redemption
date, of the total regular redemption price of the bonds so called, with accrued
interest thereon to the redemption date. At least 40 days prior to such
redemption date (or at such later time as shall be satisfactory to the Trustee)
the Company shall file with the Trustee a certified copy of such resolution.
Unless such call shall be conditioned upon the deposit of the

<PAGE>
                                       15

regular redemption price and accrued interest with the Trustee on or before the
redemption date and unless the notice below provided for shall so state, the
Company shall on or before such redemption date deposit with the Trustee the
total regular redemption price of all the bonds so called, with accrued interest
thereon to the redemption date.

      If the Company elects to redeem less than all of the bonds of the Series
-----, the particular bonds or portions thereof to be redeemed shall, upon 17
request of the Company, be drawn by lot by the Trustee, according to such method
as it shall deem proper, from the bonds of said series then outstanding. The
Trustee shall certify to the Company the serial numbers of the bonds so drawn.

      The Company shall thereupon give notice of such redemption, in the manner
and substantially in the form provided in Section 2.02 hereof to be given in the
case of bonds of the Series ----- called through the sinking or improvement
fund, except that (1) such notice shall state that the bonds specified have been
called for redemption at the election of the Company, and that they will be
payable on the date specified in the resolution of the Board of Directors of the
Company at a stated amount (which shall be the regular redemption price
applicable upon such redemption date), (2) if all the bonds of the Series --- be
called, the notice shall so state and may omit the serial numbers thereof, (3)
if the date fixed for redemption be other than an interest payment date, the
notice shall state that the bonds will be payable at the stated redemption
price, plus accrued interest to the redemption date, (4) the mailing of such
notice to registered owners of bonds of said series shall take place not less
than 30 nor more than 40 days in advance of the date fixed for redemption, but
failure duly to give such notice of redemption to the registered owner of any
bond called for redemption in whole or in part shall not affect the validity of
the proceedings for the redemption of any other bond, and (5) if the call of
such bonds for redemption shall have been conditioned upon the deposit of the
regular redemption price and accrued interest with the Trustee on or before the
redemption date, as above permitted, the notice shall so state, and shall state
that unless such deposit is made on or before such date the call for redemption
and the notice shall be of no effect.

      Before any money shall be applied by the Trustee to the redemption of
bonds under this Section, the Company shall deliver to the Trustee a certificate
or opinion by the President or a Vice President of the Company and an opinion of
counsel, stating that all conditions precedent provided for herein (including
any covenants compliance with which constitutes a condition precedent) relating
to such redemption have been complied with.

      SECTION 2.04. Called Bonds to be Surrendered--Interest to Cease. Each bond
or portion thereof of the Series ---- so called under either Sections 2.02 or
2.03 hereof shall be due and payable (upon surrender thereof) at the places and
price and on the date specified in such notice,

<PAGE>
                                       16

anything herein or in such bond to the contrary notwithstanding, except that if
the call of any bonds or portions thereof under Section 2.03 hereof shall have
been conditioned upon the deposit of the redemption price with the Trustee on or
before the redemption date specified in such notice, with accrued interest
thereon to the redemption date, such bonds or such portions thereof shall not be
due and payable on the specified redemption date unless such deposit shall have
been so made with the Trustee on or before such date. From and after the date
when each bond or portion thereof of the Series ---- shall be due and payable as
aforesaid (unless upon said date the full amount due thereon shall not be held
by the Trustee and be immediately available for payment), all further interest
shall cease to accrue on such bond or on such portion thereof, as the case may
be.

      SECTION 2.05. Bonds Called in Part. If only a portion of any bond of the
Series ---- shall be drawn by lot by the Trustee pursuant to Sections 2.02 or
2.03 hereof, the notice of redemption hereinbefore provided for shall specify
the serial number of such bond and the portion of the principal amount thereof
to be redeemed. Upon surrender of such bond for partial redemption and upon
payment of the portion so called for redemption, a new bond or bonds of the
Series -----, in aggregate principal amount equal to the unredeemed portion of
such surrendered bond, shall be executed by the Company, authenticated by or on
behalf of the Trustee, and delivered to the registered owner thereof, without
expense to such owner.

      SECTION 2.06 Provisions of Indenture Not Applicable. The provisions of
Article Four of the Indenture, as amended and supplemented, shall not apply to
the administration of the sinking or improvement fund provided for in this
Article or to the procedure for the exercise of any right of redemption reserved
by the Company in this Article in respect of the bonds of the Series ----.

                                  ARTICLE III.
                                 MISCELLANEOUS.

      SECTION 3.01. Authentication of Bonds of Series ----. None of the bonds of
the Series ----, the issue of which is provided for by this supplemental
indenture, shall be authenticated by or on behalf of the Trustee except in 19
accordance with the provisions of the Indenture, as amended and supplemented,
and this supplemental indenture, and upon compliance with the conditions in that
behalf therein contained.

      SECTION 3.02. Authenticating Agent. As long as any of the bonds of the
Series ---- remain outstanding, the Trustee may appoint an authenticating agent
to act on its behalf and subject to its direction in connection with the
authentication of bonds of the Series ----. Such authenticating agent shall be
appointed by the Trustee by an instrument in writing and shall have no
responsibility or liability for any action taken by it at the direction of the
Trustee. Such authenticating agent shall at all times be a corporation organized
and doing business under the laws of the United States or of any State or
Territory or of the District of Columbia authorized under such laws to act as
authenticating agent, having a combined capital and surplus of at least

<PAGE>
                                       17

$5,000,000, subject supervision or examination by Federal, State, Territorial,
or District of Columbia authority and, if there be such a corporation willing
and able to act as authenticating agent on reasonable and customary terms,
having its principal office and place of business in The City of New York. If
such corporation publishes reports of condition at least annually, pursuant to
law or to the requirements of the aforesaid supervising or examining authority,
then for the purposes of this Section 3.02 the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published.

      Any corporation into which any authenticating agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion, or consolidation to which any authenticating agent
shall be a party, or any corporation succeeding to the corporate agency business
of any authenticating agent, shall continue to be the authenticating agent
without the execution or filing of any paper or any further act on the part of
the Trustee or the authenticating agent.

      Any authenticating agent may at any time resign by giving written notice
of resignation to the Trustee and to the Company. The Trustee may at any time
terminate the agency of any authenticating agent by giving written notice of
termination to such authenticating agent and to the Company. Upon receiving such
a notice of resignation or upon such a termination, or in case at any time any
authenticating agent shall cease to be eligible in accordance with the
provisions of this Section 3.02, the Trustee may appoint a successor 20
authenticating agent. The Trustee shall give written notice of such appointment
to the Company and shall mail notice of such appointment to all registered
owners of the bonds of the Series -------, at their respective addresses as the
same may appear on the registry books. Any successor authenticating agent, upon
acceptance of its appointment, shall become vested with all the rights, powers,
duties and responsibilities of its predecessor, with like effect as if
originally appointed authenticating agent. No successor authenticating agent
shall be appointed unless eligible under the provisions of this Section 3.02.

      The Trustee agrees to pay to the authenticating agent from time to time
reasonable compensation for its services, and the Trustee shall be entitled to
be reimbursed for such payments as provided in the Indenture.

      SECTION 3.03. Additional Restrictions on Authentication of Additional
Bonds Under Indenture. The Company covenants that from and after the date of
execution of this supplemental indenture, no additional bonds (as defined in
Section 1 of Article Two of the Indenture) shall be

<PAGE>
                                       18

authenticated and delivered by the Trustee under Subdivision A of Section 4 of
said Article Two on account of additions or improvements to the mortgaged
property:

            (1) unless the net earnings of the Company for the period required
      by Subdivision C of Section 6 of said Article Two shall have been at least
      twice the fixed charges (in lieu of 1 3/4 times such fixed charges, as
      required by said Subdivision C); and for the purpose of this condition (a)
      such fixed charges shall in each case include interest on the bonds
      applied for, notwithstanding the parenthetical provision contained in
      clause (4) of said Subdivision C, and (b) in computing such net earnings
      there shall be included in expenses of operation (under paragraph (c) of
      said Subdivision C) all charges against earnings for depreciation,
      renewals or replacements, and all certificates with respect to net
      earnings delivered to the Trustee in connection with any authentication of
      additional bonds under said Article Two shall so state; and

            (2) except to the extent of 60% (in lieu of 75% as permitted by
      Subdivision A of Section 7 of said Article Two) of the cost or fair value
      to the Company of the additions or improvements forming the basis for such
      authentication of additional bonds.

      SECTION 3.04. Restriction on Dividends. The Company will not declare or
pay any dividend on any shares of its common stock (other than dividends payable
in shares of its common stock) or make any other distribution on any such
shares, or purchase or otherwise acquire any such shares (except shares acquired
without cost to the Company) whenever such action would reduce the earned
surplus of the Company to an amount less than $10,000,000 or such lesser amount
as may remain after deducting from said $10,000,000 all amounts appearing in the
books of account of the Company on December 31, 1948, which shall thereafter,
pursuant to any order or rule of any regulatory body entered after said date, be
required to be removed, in whole or in part, from the books of account of the
Company by charges to earned surplus.

      SECTION 3.05. Use of Facsimile Seal and Signatures. The seal of the
Company and any or all signatures of the officers of the Company upon any of the
bonds of the Series ---- may be facsimiles.

      SECTION 3.06. Time for Making of Payment. All payments of principal or
redemption price of, interest on and sinking or improvement fund installments
for, the bonds of the Series shall be made either prior to the due date thereof,
or on the due date thereof in immediately available funds. In any case where the
date of any such payment shall be a Saturday or Sunday or a legal holiday or a
day on which banking institutions in the city of payment are authorized by law
to close, then such payment need not be made on such date but may be made on the
next succeeding business day with the same force and effect as if made on the
due date, and no interest on such payment shall accrue for the period after such
date.

<PAGE>
                                       19

      SECTION 3.07. Effective Period of Supplemental Indenture. The preceding
provisions of Articles I, II and III of this supplemental indenture shall remain
in effect only so long as any of the bonds of the Series ---- shall remain
outstanding.

      SECTION 3.08. Effect of Approval of Board of Public Utilities of the State
of New Jersey. The approval of the Board of Public Utilities of the State of New
Jersey of the execution and delivery of these presents and of the issue of any
bonds of the Series ---- shall not be construed as approval of said Board of any
other act, matter or thing which requires approval of said Board under the laws
of the State of New Jersey.

      SECTION 3.09. Execution in Counterparts. For the purpose of facilitating
the recording hereof, this supplemental indenture has been executed in several
counterparts, each of which shall be and shall be taken to be an original, and
all collectively but one instrument.

      IN WITNESS WHEREOF, Public Service Electric and Gas Company, party hereto
of the first part, after due corporate and other proceedings, has caused this
supplemental indenture to be signed and acknowledged or proved by its President
or one of its Vice Presidents and its corporate seal hereunto to be affixed and
to be attested by the signature of its Secretary or an Assistant Secretary; and
Wachovia Bank, National Association, as Trustee, party hereto of the second
part, has caused this supplemental indenture to be signed and acknowledged or
proved by one of its Vice Presidents and its corporate seal to be hereunto
affixed and to be attested by the signature of one of its Vice Presidents.
Executed and delivered this ---- day of ------.

                                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                                     By ..................................
                                            (                          )
                                            Vice President
Attest: ........................
(                        )
Assistant Secretary
(CORPORATE SEAL)

                                     WACHOVIA BANK, NATIONAL ASSOCIATION

                                     By ..................................
                                              (                        )
                                              Vice President
Attest: .......................
(                            )
Vice President
(CORPORATE SEAL)

<PAGE>
                                       20

STATE OF NEW JERSEY
                             ss.:
COUNTY OF ESSEX

      BE IT REMEMBERED, that on this ---- day of -----, before me, the
subscriber, a Notary Public of the State of New Jersey, personally appeared
----------------------- who, I am satisfied, is a Vice President of PUBLIC
SERVICE ELECTRIC AND GAS COMPANY, one of the corporations named in and which
executed the foregoing instrument, and is the person who signed the said
instrument as such officer, for and on behalf of such corporation, and I having
first made known to him the contents thereof, he did acknowledge that he signed
the said instrument as such officer, that the said instrument was made by such
corporation and sealed with its corporate seal, that the said instrument is the
voluntary act and deed of such corporation, made by virtue of authority from its
Board of Directors, and that said corporation, the mortgagor, has received a
true copy of said instrument.

STATE OF NEW JERSEY
                             ss.:
COUNTY OF ESSEX

        BE IT REMEMBERED, that on this ----- day of -------, before me, the
subscriber, a Notary Public of the State of New Jersey, personally appeared
----------------- who, I am satisfied, is a Vice President of WACHOVIA BANK,
NATIONAL ASSOCIATION, one of the corporations named in and which executed the
foregoing instrument, and is the person who signed the said instrument as such
officer, for and on behalf of such corporation, and I having first made known to
him the contents thereof, he did acknowledge that he signed the said instrument
as such officer, that the said instrument was made by such corporation and
sealed with its corporate seal, and that the said instrument is the voluntary
act and deed of such corporation, made by virtue of authority from its Board of
Directors.

<PAGE>
                                       21

                            CERTIFICATE OF RESIDENCE

      Wachovia Bank, National Association, Mortgagee and Trustee within named,
hereby certifies that its precise residence is 21 South Street, Morristown, New
Jersey 07960.

                                    WACHOVIA BANK, NATIONAL ASSOCIATION

                                               By ........................
                                                   (                 )
                                                   Vice PresidentExhibit 4-116

================================================================================

                               Guarantee Agreement

                                     between

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                 (as Guarantor)

                                       and

                       WACHOVIA BANK, NATIONAL ASSOCIATION
                             (as Guarantee Trustee)

                                   Dated as of

                                 --------------

================================================================================

<PAGE>

                                       16

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                    ARTICLE I
                                   DEFINITIONS

SECTION 1.01.  Definitions.....................................................1

                                   ARTICLE II
                               TRUST INDENTURE ACT

SECTION 2.01.  Trust Indenture Act; Application................................3
SECTION 2.02.  List of Holders ................................................4
SECTION 2.03.  Reports by the Guarantee Trustee................................4
SECTION 2.04.  Periodic Reports to Guarantee Trustee...........................4
SECTION 2.05.  Evidence of Compliance with Conditions Precedent ...............4
SECTION 2.06.  Events of Default; Waiver ......................................5
SECTION 2.07.  Event of Default; Notice .......................................5

                                   ARTICLE III
                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

SECTION 3.01.  Powers and Duties of the Guarantee Trustee .....................5
SECTION 3.02.  Certain Rights of Guarantee Trustee.............................7
SECTION 3.03.  Indemnity.......................................................9

                                   ARTICLE IV
                                GUARANTEE TRUSTEE

SECTION 4.01.  Guarantee Trustee; Eligibility..................................9
SECTION 4.02.  Appointment, Removal and Resignation of the Guarantee Trustee..10

                                    ARTICLE V
                                    GUARANTEE

SECTION 5.01.  Guarantee......................................................10
SECTION 5.02.  Waiver of Notice and Demand....................................10
SECTION 5.03.  Obligations Not Affected.......................................11
SECTION 5.04.  Rights of Holders..............................................11

                                       i

<PAGE>

                                                                            Page
                                                                            ----

SECTION 5.05.  Guarantee of Payment...........................................12
SECTION 5.06.  Subrogation....................................................12
SECTION 5.07.  Independent Obligations........................................12

                                   ARTICLE VI
                           COVENANTS AND SUBORDINATION

SECTION 6.01.  Subordination..................................................12

                                   ARTICLE VII
                                   TERMINATION

SECTION 7.01.  Termination....................................................12

                                  ARTICLE VIII
                                  MISCELLANEOUS

SECTION 8.01.  Successors and Assigns.........................................13
SECTION 8.02.  Amendments.....................................................13
SECTION 8.03.  Notices........................................................13
SECTION 8.04.  Benefit........................................................14
SECTION 8.05.  Interpretation.................................................14
SECTION 8.06.  Governing Law..................................................15

                                       ii

<PAGE>

                             CROSS-REFERENCE TABLE*

Section of                                                            Section of
Trust Indenture Act                                                    Guarantee
of 1939, as amended                                                    Agreement
-------------------                                                   ----------

310(a)  .................................................................4.01(a)
310(b)  ...........................................................4.01(c), 2.08
310(c)  ............................................................Inapplicable
311(a)  .................................................................2.02(b)
311(b)  .................................................................2.02(b)
311(c)  ............................................................Inapplicable
312(a)  .................................................................2.02(a)
312(b)  .................................................................2.02(b)
313     ....................................................................2.03
314(a)  ....................................................................2.04
314(b)  ............................................................Inapplicable
314(c)  ....................................................................2.05
314(d)  ............................................................Inapplicable
314(e)  ........................................................1.01, 2.05, 3.02
314(f)  ..............................................................2.01, 3.02
315(a)  .................................................................3.01(d)
315(b)  ....................................................................2.07
315(c)  ....................................................................3.01
315(d)  .................................................................3.01(d)
316(a)  ........................................................1.01, 2.06, 5.04
316(b)  ....................................................................5.03
316(c)  ....................................................................8.02
317(a)  ............................................................Inapplicable
317(b)  ............................................................Inapplicable
318(a)  .................................................................2.01(b)
318(b)  ....................................................................2.01
318(c)  .................................................................2.01(a)

------------------------
* This Cross-Reference Table does not constitute part of the Guarantee Agreement
and shall not affect the interpretation of any of its terms or provisions.

                                      iii

<PAGE>

                               GUARANTEE AGREEMENT

      This GUARANTEE  AGREEMENT,  dated as of  _______________,  is executed and
delivered by Public Service Electric and Gas Company,  a New Jersey  corporation
(the "Guarantor"),  to Wachovia Bank, National  Association,  a national banking
association  duly  organized and existing under the laws of the United States of
America,  as trustee (the "Guarantee  Trustee"),  for the benefit of the Holders
(as defined  herein) from time to time of the Preferred  Securities  (as defined
herein) of PSE&G Capital Trust V, a Delaware statutory trust (the "Issuer").

      WHEREAS,  pursuant to an Amended and Restated  Trust  Agreement  for PSE&G
Capital Trust V (the "Trust Agreement"), dated as of _________________ among the
Trustees named therein, the Guarantor,  as Depositor,  and the Holders from time
to time of  undivided  beneficial  interests  in the assets of the  Issuer,  the
Issuer  is  issuing  $________  aggregate   liquidation  amount  of  its  _____%
Cumulative Quarterly Income Preferred Securities,  Series __ (liquidation amount
of  $__  per  preferred  security)  (the  "Preferred  Securities")  representing
undivided  beneficial interests in the assets of the Issuer and having the terms
set forth in the Trust Agreement;

      WHEREAS,  the  Preferred  Securities  will be issued by the Issuer and the
proceeds thereof,  together with the proceeds from the sale by the Issuer of its
Common  Securities  will be used to purchase the  Debentures  (as defined in the
Trust  Agreement) of the Guarantor  which will be deposited  with Wachovia Bank,
National  Association,  as Property Trustee under the Trust Agreement,  as Trust
Property (as defined in the Trust Agreement); and

      WHEREAS,  as incentive for the Holders to purchase  Preferred  Securities,
the Guarantor desires  irrevocably and  unconditionally  to agree, to the extent
set  forth  herein,  to pay to the  Holders  of  the  Preferred  Securities  the
Guarantee Payments (as defined herein) and to make certain other payments on the
terms and conditions set forth herein.

      NOW,  THEREFORE,  in  consideration  of the  purchase  by each  Holder  of
Preferred  Securities,  which purchase the Guarantor hereby agrees shall benefit
the Guarantor,  the Guarantor executes and delivers this Guarantee Agreement for
the benefit of the Holders from time to time of the Preferred Securities.

                                    ARTICLE I

                                   DEFINITIONS

      SECTION 1.01.  Definitions.  As used in this Guarantee Agreement,  each of
the terms set forth below shall, unless the context otherwise requires, have the
following  meaning.  Each  capitalized  or  otherwise  defined term used but not
otherwise  defined  herein shall have the meaning  assigned to such terms in the
Trust Agreement as in effect on the date hereof.

      "Affiliate"  of any  specified  Person means any other Person  directly or
indirectly  controlling  or  controlled  by or under  direct or indirect  common
control  with  such  specified

<PAGE>

Person. For the purposes of this definition, "control" when used with respect to
any specified  Person means the power to direct the  management  and policies of
such Person,  directly or  indirectly,  whether  through the ownership of voting
securities,   by  contract  or  otherwise;   and  the  terms  "controlling"  and
"controlled" have meanings correlative to the foregoing.

      "Common Securities" means the securities representing undivided beneficial
interests in the assets of the Issuer and having the rights provided therefor in
the Trust Agreement.

      "Event of Default"  means a default by the Guarantor on any of its payment
or other obligations under this Guarantee Agreement;  provided, that except with
respect to a default resulting from a failure to pay any Guarantee Payment,  the
Guarantor  shall have  received  notice of default and shall not have cured such
default within 60 days after receipt of such notice.

      "Guarantee  Payments" means the following  payments or  Distributions  (as
defined  in the Trust  Agreement),  without  duplication,  with  respect  to the
Preferred  Securities,  to the  extent  not paid or made by or on  behalf of the
Issuer: (i) any accumulated and unpaid Distributions  required to be paid on the
Preferred  Securities,  to the  extent the  Issuer  shall  have funds  available
therefor,  (ii) the  redemption  price,  including  all  accumulated  and unpaid
Distributions to the date of redemption (the "Redemption  Price"),  with respect
to the Preferred  Securities  called for redemption by the Issuer, to the extent
the Issuer shall have funds  available  therefor,  and (iii) upon a voluntary or
involuntary  termination,  winding-up  or  liquidation  of  the  Issuer,  unless
Debentures are  distributed  to the Holders,  the lesser of (a) the aggregate of
the  liquidation  amount of $___ per  Preferred  Security plus  accumulated  and
unpaid  Distributions on the Preferred Securities to the date of payment, to the
extent the Issuer  shall have  funds  available  therefor  and (b) the amount of
assets  of the  Issuer  remaining  available  for  distribution  to  Holders  in
liquidation of the Issuer (in either case, the "Liquidation Distribution").

      "Guarantee  Trustee" means Wachovia Bank,  National  Association,  until a
Successor  Guarantee  Trustee  (as  defined  below) has been  appointed  and has
accepted such appointment  pursuant to the terms of this Guarantee Agreement and
thereafter means each such Successor Guarantee Trustee.

      "Holder"  means a Person in whose name a Preferred  Security is registered
in the Securities Register;  provided,  however, that in determining whether the
holders of the  requisite  percentage  of  Preferred  Securities  have given any
request, notice, consent or waiver hereunder,

      "Holder"  shall not include the  Guarantor,  the Guarantee  Trustee or any
Affiliate of the Guarantor or the Guarantee Trustee.

      "Indenture"  means the Indenture dated as of ____________,  between Public
Service  Electric and Gas Company and Wachovia Bank,  National  Association,  as
trustee thereunder.

      "List of Holders" has the meaning specified in Section 2.02(a).

                                       2
<PAGE>

      "Majority in liquidation amount of the Preferred Securities" means, except
as provided by the Trust Indenture Act, a vote by the Holders,  of more than 50%
of the aggregate liquidation amount of all then outstanding Preferred Securities
issued by the Issuer.

      "Officers'  Certificate" means a certificate  signed by the Chairman,  the
President,  any Vice  President,  the Treasurer,  any Assistant  Treasurer,  the
Secretary or any Assistant Secretary of the Guarantor.

      "Person" means any individual, corporation, partnership, limited liability
company, joint venture, association,  joint-stock company, trust, unincorporated
organization,  government or any agency or political  subdivision thereof or any
other entity.

      "Responsible  Officer" means, with respect to the Guarantee  Trustee,  any
Vice  President,  any Assistant Vice  President,  any Trust Officer or Assistant
Trust  Officer or any other  officer of the  Corporate  Trust  Department of the
Guarantee Trustee customarily performing functions similar to those performed by
any of  the  above  designated  officers  and  also  means,  with  respect  to a
particular  corporate  trust  matter,  any other  officer to whom such matter is
referred  because  of that  officer's  knowledge  of and  familiarity  with  the
particular subject.

      "Senior   Indebtedness"  means  Senior  Indebtedness  as  defined  in  the
Indenture.

      "Successor   Guarantee  Trustee"  means  a  successor   Guarantee  Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.01.

      "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed;  provided,  however,  that in
the event the Trust  Indenture  Act of 1939 is amended  after such date,  "Trust
Indenture Act" means, to the extent  required by any such  amendment,  the Trust
Indenture Act of 1939, as so amended.

                                   ARTICLE II

                               TRUST INDENTURE ACT

      SECTION 2.01. Trust Indenture Act; Application.

            (a) This  Guarantee  Agreement is subject to the  provisions  of the
      Trust  Indenture  Act  that  are  required  to be part  of this  Guarantee
      Agreement  and  shall,  to the  extent  applicable,  be  governed  by such
      provisions.

            (b) If and to the  extent  that  any  provision  of  this  Guarantee
      Agreement  limits,  qualifies  or  conflicts  with the  duties  imposed by
      Sections 310 to 317,  inclusive,  of the Trust Indenture Act, such imposed
      duties shall control.

                                       3
<PAGE>

      SECTION 2.02. List of Holders.

            (a) The  Guarantor  shall  furnish or cause to be  furnished  to the
      Guarantee Trustee (a) semiannually, on or before January 15 and July 15 of
      each year, a list,  in such form as the Guarantee  Trustee may  reasonably
      require,  of the names and addresses of the Holders ("List of Holders") as
      of a date not more than 15 days prior to the delivery thereof,  and (b) at
      such other times as the Guarantee  Trustee may request in writing,  within
      30 days after the receipt by the Guarantor of any such request,  a List of
      Holders  as of a date not more than 15 days prior to the time such list is
      furnished,  in  each  case  to  the  extent  such  information  is in  the
      possession  or  control  of  the  Guarantor  and  is  not  identical  to a
      previously  supplied List of Holders or has not otherwise been received by
      the Guarantee  Trustee in its capacity as such. The Guarantee  Trustee may
      destroy  any List of  Holders  previously  given to it on receipt of a new
      List of Holders.

            (b) The Guarantee  Trustee shall comply with its  obligations  under
      Sections 311(a),  Section 311(b) and Section 312(b) of the Trust Indenture
      Act.

      SECTION 2.03. Reports by the Guarantee  Trustee.  Within 60 days after May
31 of each year, the Guarantee Trustee shall provide to the Holders such reports
as are required by Section 313 of the Trust  Indenture  Act, if any, in the form
and in the  manner  provided  by Section  313 of the Trust  Indenture  Act.  The
Guarantee  Trustee shall also comply with the  requirements of Section 313(d) of
the Trust Indenture Act.

      SECTION 2.04.  Periodic Reports to Guarantee Trustee.  The Guarantor shall
provide to the Guarantee Trustee, the Securities and Exchange Commission and the
Holders such documents,  reports and information, if any, as required by Section
314 of the  Trust  Indenture  Act and the  compliance  certificate  required  by
Section 314 of the Trust  Indenture  Act in the form and manner and at the times
required by Section 314 of the Trust Indenture Act.

      SECTION  2.05.  Evidence of  Compliance  with  Conditions  Precedent.  The
Guarantor  shall  provide to the  Guarantee  Trustee such evidence of compliance
with such conditions precedent, if any, provided for in this Guarantee Agreement
that  relate  to any of the  matters  set forth in  Section  314(c) of the Trust
Indenture Act. Each Officers'  Certificate and Opinion of Counsel delivered with
respect  to  compliance  with a  condition  or  covenant  provided  for in  this
Guarantee Agreement shall include:

            (a) a statement that each officer signing the Officers'  Certificate
      or  Opinion  of  counsel  has  read  the  covenant  or  condition  and the
      definition relating thereto;

            (b) a brief  statement of the nature and scope of the examination or
      investigation  undertaken  by each  officer  in  rendering  the  Officers'
      Certificate or Opinion of Counsel and upon which the statements  contained
      therein are based;

                                       4
<PAGE>

            (c) a statement that each such officer has made such  examination or
      investigation as, in such officer's  opinion,  is necessary to enable such
      officer to express an informed  opinion as to whether or not such covenant
      or condition has been complied with; and

            (d) a statement as to whether,  in the opinion of each such officer,
      such condition or covenant has been complied with.

      SECTION  2.06.  Events of  Default;  Waiver.  The Holders of a Majority in
liquidation  amount of the Preferred  Securities  may, by vote, on behalf of the
Holders, waive any past Event of Default and its consequences. Upon such waiver,
any such Event of Default shall cease to exist, and any Event of Default arising
therefrom  shall be  deemed  to have  been  cured,  for  every  purpose  of this
Guarantee Agreement,  but no such waiver shall extend to any subsequent or other
default or event of Default or impair any right consequent therefrom.

      SECTION 2.07. Event of Default; Notice.

            (a) The Guarantee Trustee shall, within 90 days after the occurrence
      of an Event of Default,  transmit by mail, first class postage prepaid, to
      the  Holders,  notices  of all Events of  Default  known to the  Guarantee
      Trustee,  unless such  defaults  have been cured before the giving of such
      notice,  provided, that, except in the case of a default in the payment of
      a  Guarantee  Payment,   the  Guarantee  Trustee  shall  be  protected  in
      withholding  such  notice  if and so long as the Board of  Directors,  the
      executive  committee or a trust committee of directors and/or  Responsible
      Officers  of the  Guarantee  Trustee  in good  faith  determines  that the
      withholding of such notice is in the interests of the Holders.

            (b) The Guarantee  Trustee shall not be deemed to have  knowledge of
      any Event of Default  unless the  Guarantee  Trustee  shall have  received
      written notice, or a Responsible  Officer charged with the  administration
      of the Trust Agreement shall have obtained  written notice,  of such Event
      of Default.

                                   ARTICLE III

                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

      SECTION 3.01. Powers and Duties of the Guarantee Trustee.

            (a) This Guarantee  Agreement shall be held by the Guarantee Trustee
      for the  benefit  of the  Holders,  and the  Guarantee  Trustee  shall not
      transfer this Guarantee Agreement to any Person except a Holder exercising
      his  or her  rights  pursuant  to  Section  5.04  (iv)  or to a  Successor
      Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its
      appointment to act as Successor  Guarantee  Trustee.  The right, title and
      interest  of  the  Guarantee  Trustee  shall  automatically  vest  in  any
      Successor

                                       5
<PAGE>

      Guarantee  Trustee upon acceptance by such Successor  Guarantee Trustee of
      its appointment hereunder and such vesting and cessation of title shall be
      effective  whether or not  conveyancing  documents  have been executed and
      delivered pursuant to the appointment of such Successor Guarantee Trustee.

            (b) If an Event of  Default  has  occurred  and is  continuing,  the
      Guarantee  Trustee shall enforce this Guarantee  Agreement for the benefit
      of the Holders.

            (c) The  Guarantee  Trustee,  before the  occurrence of any Event of
      Default  and after  the  curing of all  Events  of  Default  that may have
      occurred,  shall undertake to perform only such duties as are specifically
      set forth in this Guarantee  Agreement,  and no implied covenants shall be
      read into this Guarantee  Agreement against the Guarantee Trustee. In case
      an Event of Default has occurred and is continuing (and has not been cured
      or waived pursuant to Section 2.06), the Guarantee  Trustee shall exercise
      such of the rights and powers  vested in it by this  Guarantee  Agreement,
      and use the same degree of care and skill in its  exercise  thereof,  as a
      prudent  person  would  exercise  or use in the  conduct of his or her own
      affairs.

            (d) No provision of this Guarantee  Agreement  shall be construed to
      relieve the Guarantee Trustee from liability for its own negligent action,
      its own  negligent  failure to act or its own willful  misconduct,  except
      that:

                  (i) prior to the  occurrence of any Event of Default and after
            the curing or waiving  of all such  Events of Default  that may have
            occurred:

                        (A) the duties and obligations of the Guarantee  Trustee
                  shall be determined  solely by the express  provisions of this
                  Guarantee  Agreement,  and the Guarantee  Trustee shall not be
                  liable  except  for  the   performance   of  such  duties  and
                  obligations  as are  specifically  set forth in this Guarantee
                  Agreement; and

                        (B) in the  absence  of bad  faith  on the  part  of the
                  Guarantee  Trustee,  the  Guarantee  Trustee may  conclusively
                  rely, as to the truth of the statements and the correctness of
                  the  opinions  expressed  therein,  upon any  certificates  or
                  opinions  furnished to the Guarantee Trustee and conforming to
                  the requirements of this Guarantee Agreement;  but in the case
                  of any such  certificates  or opinions  that by any  provision
                  hereof or of the Trust Indenture Act are specifically required
                  to be  furnished  to  the  Guarantee  Trustee,  the  Guarantee
                  Trustee shall be under a duty to examine the same to determine
                  whether  or not  they  conform  to the  requirements  of  this
                  Guarantee Agreement;

                  (ii) the  Guarantee  Trustee shall not be liable for any error
            of  judgment  made in good  faith by a  Responsible  Officer  of the
            Guarantee  Trustee,  unless  it shall be proved  that the  Guarantee
            Trustee was negligent in ascertaining the pertinent facts upon which
            such judgment was made;

                                       6
<PAGE>

                  (iii) the  Guarantee  Trustee shall not be liable with respect
            to any  action  taken or  omitted to be taken by it in good faith in
            accordance  with the  direction  of the  Holders  of a  Majority  in
            liquidation amount of the Preferred Securities relating to the time,
            method  and  place  of  conducting  any  proceeding  for any  remedy
            available to the Guarantee Trustee, or exercising any trust or power
            conferred upon the Guarantee Trustee under this Guarantee Agreement;
            and

                  (iv) no provision of this  Guarantee  Agreement  shall require
            the  Guarantee  Trustee  expend or risk its own  funds or  otherwise
            incur personal financial  liability in the performance of any of its
            duties or in the  exercise  of any of its rights or  powers,  if the
            Guarantee  Trustee shall have reasonable  grounds for believing that
            the repayment of such funds or liability is not  reasonably  assured
            to it under  the terms of this  Guarantee  Agreement  or  reasonable
            indemnity  against such risk or liability is not reasonably  assured
            to it.

      SECTION 3.02. Certain Rights of Guarantee Trustee.

            (a) Subject to the provisions of Section 3.01:

                  (i)  The  Guarantee  Trustee  may  rely  and  shall  be  fully
            protected in acting or refraining  from acting upon any  resolution,
            certificate,   statement,   instrument,   opinion,  report,  notice,
            request,  direction,  consent,  order, bond, debenture,  note, other
            evidence of indebtedness  or other paper or document  believed by it
            to be genuine  and to have been  signed,  sent or  presented  by the
            proper party or parties.

                  (ii) Any  direction or act of the  Guarantor  contemplated  by
            this  Guarantee  Agreement  shall be  sufficiently  evidenced  by an
            Officers' Certificate unless otherwise prescribed herein.

                  (iii)  Whenever,  in  the  administration  of  this  Guarantee
            Agreement,  the  Guarantee  Trustee  shall deem it desirable  that a
            matter be proved or established before taking, suffering or omitting
            to take any action  hereunder,  the Guarantee  Trustee (unless other
            evidence is herein  specifically  prescribed) may, in the absence of
            bad  faith  on  its  part,   request  and  rely  upon  an  Officers'
            Certificate  which,  upon receipt of such request from the Guarantee
            Trustee, shall be promptly delivered by the Guarantor.

                  (iv) The Guarantee Trustee may consult with legal counsel, and
            the  written  advice or  Opinion of  Counsel  with  respect to legal
            matters shall be full and complete  authorization  and protection in
            respect of any action  taken,  suffered or omitted to be taken by it
            hereunder  in good  faith  and in  accordance  with  such  advice or
            opinion. Such legal counsel may be legal counsel to the Guarantor or
            any of its Affiliates and may be one of its employees. The Guarantee
            Trustee

                                       7
<PAGE>

            shall have the right at any time to seek instructions concerning the
            administration  of  this  Guarantee  Agreement  from  any  court  of
            competent jurisdiction.

                  (v) The  Guarantee  Trustee  shall be under no  obligation  to
            exercise any of the rights or powers vested in it by this  Guarantee
            Agreement  at the request or  direction  of any Holder,  unless such
            Holder shall have provided to the Guarantee  Trustee such reasonable
            indemnity as would  satisfy a  reasonable  person in the position of
            the  Guarantee  Trustee,  against  the  costs,  expenses  (including
            attorneys' fees and expenses) and liabilities that might be incurred
            by it in complying  with such request or direction;  provided  that,
            nothing  contained  in this  Section  3.02(a)(v)  shall  be taken to
            relieve the Guarantee  Trustee,  upon the  occurrence of an Event of
            Default,  of its litigation to exercise the rights and powers vested
            in it by this Guarantee Agreement.

                  (vi)  The  Guarantee  Trustee  shall  not be bound to make any
            investigation  into the facts or matters  stated in any  resolution,
            certificate,   statement,   instrument,   opinion,  report,  notice,
            request,  direction,  consent,  order, bond, debenture,  note, other
            evidence  of  indebtedness  or  other  paper  or  document,  but the
            Guarantee Trustee, in its discretion,  may make such further inquiry
            or investigation into such facts or matters as it may see fit.

                  (vii) The  Guarantee  Trustee may execute any of the trusts or
            powers  hereunder or perform any duties hereunder either directly or
            by or through its agents or  attorneys,  and the  Guarantee  Trustee
            shall not be  responsible  for any  misconduct  or negligence on the
            part of any such  agent or  attorney  appointed  with due care by it
            hereunder.

                  (viii)  Whenever  in  the  administration  of  this  Guarantee
            Agreement the  Guarantee  Trustee shall deem it desirable to receive
            instructions with respect to enforcing any remedy or right or taking
            any other action  hereunder,  the Guarantee  Trustee (A) may request
            instructions  from the Holders,  (B) may refrain from enforcing such
            remedy or right or taking such other action until such  instructions
            are  received,  and (C) shall be protected  in acting in  accordance
            with such instructions.

            (b) No  provision  of this  Guarantee  Agreement  shall be deemed to
      impose any duty or obligation on the Guarantee  Trustee to perform any act
      or acts or exercise  any right,  power,  duty or  obligation  conferred or
      imposed  on it in any  jurisdiction  in which it shall be  illegal,  or in
      which  the  Guarantee  Trustee  shall be  unqualified  or  incompetent  in
      accordance  with  applicable  law,  to perform  any such act or acts or to
      exercise any such right, power, duty or obligation. No permissive power or
      authority  available to the  Guarantee  Trustee shall be construed to be a
      duty to act in accordance with such power and authority.

                                       8
<PAGE>

      SECTION 3.03.  Indemnity.  The Guarantor agrees to indemnify the Guarantee
Trustee for,  and to hold it harmless  against,  any loss,  liability or expense
incurred without  negligence or willful  misconduct on the part of the Guarantee
Trustee,  arising out of or in connection with the acceptance or  administration
of this  Guarantee  Agreement,  including  the costs and  expenses of  defending
itself  against  any claim or  liability  in  connection  with the  exercise  or
performance of any of its powers or duties hereunder. The Guarantee Trustee will
not claim or exact any lien or charge on any  Guarantee  Payments as a result of
any amount due to it under this Guarantee Agreement.

                                   ARTICLE IV

                                GUARANTEE TRUSTEE

      SECTION 4.01. Guarantee Trustee; Eligibility.

            (a) There shall at all times be a Guarantee Trustee which shall:

                  (i) not be an Affiliate of the Guarantor; and

                  (ii)  be a  Person  that is  eligible  pursuant  to the  Trust
            Indenture Act to act as such and has a combined  capital and surplus
            of at least fifty million U.S. dollars ($50,000,000), and shall be a
            corporation  meeting the requirements of Section 310(a) of the Trust
            Indenture Act. If such corporation publishes reports of condition at
            least  annually,  pursuant  to  law or to  the  requirements  of the
            supervising or examining  authority,  then, for the purposes of this
            Section and to the extent  permitted by the Trust Indenture Act, the
            combined capital and surplus of such corporation  shall be deemed to
            be its combined  capital and surplus as set forth in its most recent
            report of condition so published.

            (b) If at any time the Guarantee  Trustee shall cease to be eligible
      to so act under Section 4.01(a),  the Guarantee  Trustee shall immediately
      resign in the manner and with the effect set out in Section 4.02(c).

            (c) If the Guarantee  Trustee has or shall acquire any  "conflicting
      interest" within the meaning of Section 310(b) of the Trust Indenture Act,
      the Guarantee  Trustee and Guarantor shall in all respects comply with the
      provisions of Section  310(b) of the Trust  Indenture  Act. In determining
      whether the  Guarantee  Trustee has a  "conflicting  interest"  within the
      meaning of Section  310(b)(1) of the Trust  Indenture  Act, the provisions
      contained in the proviso to Section  310(b)(1) of the Trust  Indenture Act
      and the Guarantee  Trustee's Statement of Eligibility on Form T-1 shall be
      deemed incorporated herein.

                                       9
<PAGE>

      SECTION  4.02.  Appointment,  Removal  and  Resignation  of the  Guarantee
Trustee.

            (a)  Subject  to  Section  4.02(b),  the  Guarantee  Trustee  may be
      appointed or removed without cause at any time by the Guarantor.

            (b) The Guarantee Trustee shall not be removed until a new, eligible
      guarantee trustee has been appointed (a "Successor Guarantee Trustee") and
      has  accepted  such  appointment  and assumed the  applicable  obligations
      hereunder  by written  instrument  executed  by such  Successor  Guarantee
      Trustee and delivered to the Guarantor.

            (c) The Guarantee  Trustee may resign from office  (without need for
      prior or subsequent  accounting)  by an instrument in writing  executed by
      the Guarantee  Trustee and delivered to the Guarantor,  which  resignation
      shall  not  take  effect  until a  Successor  Guarantee  Trustee  has been
      appointed  and has accepted  such  appointment  by  instrument  in writing
      executed  by  such  Successor  Guarantee  Trustee  and  delivered  to  the
      Guarantor and the resigning Guarantee Trustee.

            (d) If no Successor  Guarantee Trustee shall have been appointed and
      accepted appointment as provided in this Section 4.02 within 60 days after
      delivery to the Guarantor of an instrument of  resignation,  the resigning
      Guarantee Trustee may petition, at the expense of the Guarantor, any court
      of  competent  jurisdiction  for  appointment  of  a  Successor  Guarantee
      Trustee. Such court may thereupon,  after prescribing such notice, if any,
      as it may deem proper, appoint a Successor Guarantee Trustee.

                                    ARTICLE V

                                    GUARANTEE

      SECTION 5.01.  Guarantee.  The Guarantor  irrevocably and  unconditionally
agrees to pay in full to the Holders of the Outstanding Preferred Securities the
Guarantee  Payments  (without  duplication of amounts  theretofore paid by or on
behalf  of the  Issuer  pursuant  to the  Trust  Agreement  or by the  Guarantor
pursuant to the Indenture), as and when due, regardless of any defense, right of
set-off or  counterclaim  which the Issuer may have or assert.  The  Guarantor's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Guarantor to the Holders or by causing the Issuer to pay
such amounts to the Holders.

      SECTION 5.02.  Waiver of Notice and Demand.  The  Guarantor  hereby waives
notice of acceptance of the Guarantee Agreement and of any liability to which it
applies or may apply,  presentment,  demand for payment,  any right to require a
proceeding first against the Guarantee  Trustee,  the Issuer or any other Person
before proceeding against the Guarantor,  protest, notice of nonpayment,  notice
of dishonor, notice of redemption and all other notices and demands.

                                       10
<PAGE>

      SECTION  5.03.  Obligations  Not  Affected.  The  obligations,  covenants,
agreements and duties of the Guarantor  under this Guarantee  Agreement shall in
no way be affected or impaired by reason of the  happening  from time to time of
any of the following:

            (a) the release or waiver, by operation of law or otherwise,  of the
      performance  or  observance  by the  Issuer  of  any  express  or  implied
      agreement,   covenant,   term  or  condition  relating  to  the  Preferred
      Securities to be performed or observed by the Issuer;

            (b) the  extension  of time for the  payment by the Issuer of all or
      any  portion of the  Distributions  (other than an  extension  of time for
      payment of  Distributions  that results  from an  Extension  Period on the
      Debentures as so provided in the Indenture), Redemption Price, Liquidation
      Distribution  or any other sums payable  under the terms of the  Preferred
      Securities  or the  extension  of time for the  performance  of any  other
      obligation  under,  arising out of, or in connection  with,  the Preferred
      Securities;

            (c) any failure, omission, delay or lack of diligence on the part of
      the Holders to enforce, assert or exercise any right, privilege,  power or
      remedy  conferred  on the Holders  pursuant to the terms of the  Preferred
      Securities, or any action on the part of the Issuer granting indulgence or
      extension of any kind;

            (d) the voluntary or involuntary liquidation,  termination,  sale of
      any collateral,  receivership,  insolvency, bankruptcy, assignment for the
      benefit  of  creditors,   reorganization,   arrangement,   composition  or
      readjustment  of debt of,  or other  similar  proceedings  affecting,  the
      Issuer or any of the assets of the Issuer;

            (e) any  invalidity  of, or detect or  deficiency  in, the Preferred
      Securities;

            (f) the settlement or compromise of any obligation guaranteed hereby
      or hereby incurred; or

            (g)  to  the  extent  permitted  by  law,  any  other   circumstance
      whatsoever that might otherwise  constitute a legal or equitable discharge
      or defense of a  guarantor,  it being the intent of this Section 5.03 that
      the  obligations  of  the  Guarantor   hereunder  shall  be  absolute  and
      unconditional under any and all circumstances.

      There shall be no  obligation  of the Holders to give notice to, or obtain
the  consent  of, the  Guarantor  with  respect to the  happening  of any of the
foregoing.

      SECTION  5.04.  Rights of Holders.  The Guarantor  expressly  acknowledges
that: (i) this Guarantee  Agreement will be deposited with the Guarantee Trustee
to be held for the benefit of the Holders;  (ii) the  Guarantee  Trustee has the
right to enforce this  Guarantee  Agreement on behalf of the Holders;  (iii) the
Holders of a Majority in liquidation amount of the Preferred Securities have the
right to direct the time,  method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of this Guarantee Agreement
or exercise  or direct the  exercise  of any trust or power  conferred  upon the
Guarantee  Trustee  under

                                       11
<PAGE>

this  Guarantee  Agreement;  and (iv) if the  Guarantee  Trustee  has  failed to
enforce this Guarantee  Agreement as above provided,  any Holder may institute a
legal proceeding directly against the Guarantor to enforce its rights under this
Guarantee  Agreement,  without first instituting a legal proceeding  against the
Guarantee Trustee, the Issuer or any other Person.

      SECTION 5.05.  Guarantee of Payment.  This Guarantee  Agreement  creates a
guarantee of payment and not of collection. This Guarantee Agreement will not be
discharged  except  by  payment  of the  Guarantee  Payments  in  full  (without
duplication of amounts  theretofore paid by the Issuer) or upon  distribution of
Debentures to Holders as provided in the Trust Agreement.

      SECTION 5.06.  Subrogation.  The Guarantor  shall be subrogated to all (if
any) rights of the Holders  against the Issuer in respect of any amounts paid to
the Holders by the Guarantor  under this Guarantee  Agreement and shall have the
right to waive  payment  by the  Issuer  pursuant  to  Section  5.01;  provided,
however,  that the  Guarantor  shall  not  (except  to the  extent  required  by
mandatory provisions of law) be entitled to enforce or exercise any rights which
it may acquire by way of subrogation or any  indemnity,  reimbursement  or other
agreement,  in all cases as a result of payment under this Guarantee  Agreement,
if, at the time of any such  payment,  any amounts are due and unpaid under this
Guarantee  Agreement.  If any amount shall be paid to the Guarantor in violation
of the preceding sentence, the Guarantor agrees to hold such amount in trust for
the Holders and to pay over such amount to the Holders.

      SECTION 5.07. Independent Obligations. The Guarantor acknowledges that its
obligations  hereunder are  independent  of the  obligations  of the Issuer with
respect to the Preferred  Securities  and that the Guarantor  shall be liable as
principal and as debtor  hereunder to make  Guarantee  Payments  pursuant to the
terms of this Guarantee  Agreement  notwithstanding  the occurrence of any event
referred to in subsections (a) through (g),inclusive, of Section 5.03 hereof.

                                   ARTICLE VI

                           COVENANTS AND SUBORDINATION

      SECTION 6.01.  Subordination.  This Guarantee Agreement will constitute an
unsecured  obligation of the Guarantor and will rank  subordinate  and junior in
right of payment to all general liabilities of the Guarantor.

                                   ARTICLE VII

                                   TERMINATION

      SECTION 7.01. Termination. This Guarantee Agreement shall terminate and be
of no  further  force and  effect  upon (i) full  payment  by the  Issuer or the
Guarantor,  as the  case  may be,

                                       12
<PAGE>

of the Redemption Price for all Preferred  Securities,  (ii) the distribution of
the  Debentures  to the Holders in  accordance  with  Article  VIII of the Trust
Agreement upon  liquidation of the Issuer or (iii) full payment by the Issuer or
the Guarantor, as the case may be, of the amounts payable in accordance with the
Trust Agreement upon liquidation of the Issuer.  Notwithstanding  the foregoing,
this Guarantee Agreement will continue to be effective or will be reinstated, as
the case may be, if at any time any Holder must restore payment of any sums paid
with respect to Preferred Securities or this Guarantee Agreement.

                                  ARTICLE VIII

                                  MISCELLANEOUS

      SECTION  8.01.  Successors  and Assigns.  All  guarantees  and  agreements
contained  in this  Guarantee  Agreement  shall  bind the  successors,  assigns,
receivers,  trustees and representatives of the Guarantor and shall inure to the
benefit  of the  Holders  of the  Preferred  Securities  then  outstanding.  The
Guarantor  may not  consolidate  with or merge  with or into,  or sell,  convey,
transfer or lease its properties and assets as an entirety or  substantially  as
an entirety  (either in one  transaction  or a series of  transactions)  to, any
Person unless permitted under Article Five of the Indenture.  In connection with
a consolidation,  merger or sale involving the Guarantor that is permitted under
Article  Five  of  the  Indenture  the  Person  formed  by  or  surviving   such
consolidation  or merger or to which such sale,  conveyance,  transfer  or lease
shall have been made, if other than the Guarantor, shall expressly assume all of
the obligations of the Guarantor hereunder and under the Trust Agreement.

      SECTION 8.02. Amendments.  Except with respect to any changes which do not
adversely  affect the rights of the  Holders in any  material  respect (in which
case no consent of the Holders will be required),  this Guarantee  Agreement may
only be  amended  with the  prior  approval  of the  Holders  of a  Majority  in
liquidation  amount  of  the  Preferred  Securities   (excluding  any  Preferred
Securities  held by the Guarantor or an affiliate  thereof).  The  provisions of
Article VI of the Trust Agreement concerning meetings of the Holders shall apply
to the giving of such approval.

      SECTION 8.03. Notices. Any notice, request or other communication required
or permitted to be given hereunder shall be in writing and delivered, telecopied
or mailed by first class mail, postage prepaid, as follows:

            (a) if given to the  Guarantor,  to the  address  set forth below or
      such other address as the Guarantor may give notice of to the Holders:

            Public Service Electric and Gas Company
            80 Park Plaza
            P.O. Box 570
            Newark, NJ  07101
            Facsimile No:
            Attention:  Treasurer

                                       13
<PAGE>

            (b) if given to the Issuer, in care of the Guarantee Trustee, at the
      Issuer's  (and the  Guarantee  Trustee's)  address set forth below or such
      other  address as the  Guarantee  Trustee on behalf of the Issuer may give
      notice to the Holders:

            PSE&G Capital Trust V
            80 Park Plaza
            Newark, NJ  07101
            Facsimile No:
            Attention:  Treasurer

            with a copy to:

            Wachovia Bank, National Association
            21 South Street
            Morristown, NJ  07960
            Facsimile No:
            Attention:  Corporate Trust Department

            (c) if  given  to  any  Holder,  at the  address  set  forth  in the
      Securities Register.

      All notices  hereunder shall be deemed to have been given when received in
person,  telecopied  with  receipt  confirmed,  or mailed by first  class  mail,
postage prepaid except that if a notice or other document is refused delivery or
cannot be delivered  because of a changed  address of which no notice was given,
such notice or other document shall be deemed to have been delivered on the date
of such refusal or inability to deliver.

      SECTION 8.04. Benefit.  This Guarantee Agreement is solely for the benefit
of the Holders and is not separately transferable from the Preferred Securities.

      SECTION 8.05.  Interpretation.  In this  Guarantee  Agreement,  unless the
context otherwise requires:

            (a) all references to "the Guarantee  Agreement" or "this  Guarantee
      Agreement" are to this Guarantee  Agreement as modified,  supplemented  or
      amended from time to time;

            (b) all  references  in this  Guarantee  Agreement  to Articles  and
      Sections are to Articles and Sections of this Guarantee  Agreement  unless
      otherwise specified;

            (c) a term defined in the Trust  Indenture  Act has the same meaning
      when used in this Guarantee  Agreement  unless  otherwise  defined in this
      Guarantee Agreement or unless the context otherwise requires;

            (d) a reference to the singular  includes the plural and vice versa;
      and

                                       14
<PAGE>

            (e) the  masculine,  feminine or neuter  genders  used herein  shall
      include the masculine, feminine and neuter genders.

      SECTION 8.06. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND  INTERPRETED  IN ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW
JERSEY AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW JERSEY
WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

      This  instrument  may be executed in any number of  counterparts,  each of
which so executed shall be deemed to be an original,  but all such  counterparts
shall together constitute but one and the same instrument.

                                       15
<PAGE>

      THIS  GUARANTEE  AGREEMENT  is executed as of the day and year first above
written.

                                    PUBLIC SERVICE ELECTRIC AND GAS COMPANY,
                                    as Guarantor

                                    By: ______________________________________
                                         Name
                                         Title:

                                    WACHOVIA BANK, NATIONAL  ASSOCIATION,
                                    as Guarantee Trustee

                                    By: ______________________________________
                                         Name:
                                         Title:

                                       16

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