Document:

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                                                                   Exhibit 10.40

        [Letterhead of First Allmerica Financial Life Insurance Company]

                                                               November 19, 2001

Eric A. Simonsen

Dear Eric:

      You and First Allmerica Financial Life Insurance Company (the "Company")
have agreed to terminate your employment relationship pursuant to the terms and
conditions set forth below.

1. Resignation. Effective as of October 1, 2001 you will resign as an officer of
the Company and as an officer and/or director of any subsidiary or affiliate of
the Company. Your resignation will be in accordance with Exhibit A. Your
resignation will not adversely affect your employment status as set forth in
paragraph 2 below.

2. Paid/Unpaid Leave. At the close of business on September 28, 2001, you will
be placed in paid leave of absence status. This status will continue until
October 26, 2001. You are not required to sign this agreement to receive this
four week paid leave of absence.

      If you accept the terms and conditions of this Letter Agreement your paid
leave will be extended pursuant to the terms of this Letter Agreement up to
April 1, 2002. During your paid leave of absence you will continue to receive
your current base compensation of $450,000 per year, payable bi-weekly, and the
fringe benefits set forth on Exhibit B. It shall be noted that after September
28, 2001 you will not be eligible for vacation accrual, to participate in the
Group Disability Plans or the Group Accidental Death Plan. (This status is
hereinafter referred to as "Paid Leave"). Your receipt of the benefits set forth
in Exhibit B or your participation in the Plans set forth in Exhibit B shall be
in accordance with the Plan provisions that govern such benefits or the
provisions as such may exist from time to time.

      At the close of business on the last day of your Paid Leave, your
employment status will be changed from Paid Leave to unpaid leave (as defined
below). If you commence new employment (as said term is defined below) during
your Paid Leave, your employment status will be changed from Paid Leave to an
unpaid leave. During your unpaid leave you will receive no compensation or
benefits. (This status is hereinafter referred to as "Unpaid Leave"). Your
Unpaid Leave will continue until April 1, 2003 unless terminated earlier by the
Company pursuant to the terms of this Letter Agreement for a violation of the
provisions of Sections 8, 9, 10 and/or 11.

<PAGE>
Eric A. Simonsen
November 19, 2001
Page 2

      In Paid Leave or Unpaid Leave, you will still be a Participant as said
term is defined in the Allmerica Financial Corporation Amended Long-Term Stock
Incentive Plan (the "Stock Plan"). As a Participant in the Stock Plan your
rights and benefits are subject to the terms and conditions of the Stock Plan as
they exist or may exist from time to time. A list of the stock options and
restricted stock granted to you is set forth in Exhibit C. On your termination
date (as defined below), all vested but unexercised options, all unvested
options and all shares of Allmerica Financial Corporation which are restricted
on your termination date shall lapse and you shall have no further right to such
options or shares.

      If your Paid Leave ends because the date April 1, 2002 is reached or
because of new employment or your death, the Company will pay you, or in the
event of your death your beneficiary, within thirty (30) days after your Paid
Leave ends, Four Hundred Fifty Thousand Dollars ($450,000) LESS the amount you
received while you were in Paid Leave. New employment shall mean full-time
employment wherein you are eligible for group medical benefits, providing
consulting services on a full-time basis or engaging on a full-time basis in a
sole proprietorship or partnership. Full-time basis shall mean an average of
thirty (30) hours or more a week.

      In the event there is a material violation of any provision(s) in
paragraphs 8 and/or 11 which is not cured as set forth below or any violation of
the provisions in paragraph(s) 9 and/or 10 , the Company may, in its sole
discretion, terminate your employment status and stop making payment due you
under the provisions of this Letter Agreement and may, in the event of a
violation of the provisions in paragraph(s) 9 and/or 10, demand the return of
payment(s) made to you under the terms of this paragraph prior to your violation
of the provisions in paragraphs 9 and/or 10 as follows:

      a)    If you violate the provisions of paragraph 9 on or before April 1,
            2005, the Company may demand a return of all payments made to you
            under the provisions of this Letter Agreement; and/or;

      b)    If you violate the provisions of paragraph 10 on or before your Paid
            Leave ends, the Company may demand a return of all payments made to
            you under the provisions of this Letter Agreement.

      In the event you materially violate the provisions of paragraph(s) 8
and/or 11, the Company shall have no right to demand a return of payments made
to you under the provisions of this Letter Agreement prior to the date of your
material violation. In the event you materially violate the provisions of
paragraph(s) 8 and/or 11, the Company also agrees to give you notice of such
violation and allow you thirty (30) days to correct, rectify and/or eliminate
any such violation.

<PAGE>
Eric A. Simonsen
November 19, 2001
Page 3

      In the event of your death, any monies due to you pursuant to the terms of
this paragraph shall be paid to the beneficiary you have designated prior to
your death, or if there is no such designation, then to your estate. In the
event of your death prior to your Termination Date, all options held by you,
regardless of whether then exercisable, shall vest and will be exercisable by
your beneficiary or legal representative for up to three years following your
death, but in no event beyond the date the options otherwise expire.
Notwithstanding the foregoing, you hereby agree that the 4,000 options that
would vest on February 21, 2004 and are a portion of the grant you received on
February 21, 1999 are hereby rescinded and you agree that you shall have no
further right or claim to such options as of the date this agreement becomes
effective. The restricted stock you received on February 21, 1999 and March 10,
2000 shall also vest in the event of your death. However, the restricted stock
you received on March 16, 2001 shall not vest and you hereby agree that those
shares shall be returned to the Company when this agreement becomes effective
and you acknowledge and agree that your interest in these shares shall be
extinguished as of said date.

      During your Paid Leave or until April 1, 2002, if later, you agree to be
generally available to respond to questions and/or inquiries and provide other
information concerning matters that were within the scope of your responsibility
and to cooperate to ensure a smooth transition. It is anticipated that most
matters can be addressed through phone calls and/or e-mails. Certain matters,
however, may require meetings at mutually acceptable times and places.

      Unless your employment is terminated earlier for a material violation of
the provisions in paragraph(s) 8 and/or 11 or any violation of the provisions of
paragraph(s) 9 and/or 10, your employment will terminate when your Unpaid Leave
ends, namely, April 1, 2003. This will be your Termination Date.

3. Other Entitlements. The Company will also pay you, on or around the date this
agreement becomes effective, any unused vacation days which you are entitled to
as of September 28, 2001. Signing this agreement is not required for you to
receive this payment. The Company's records reflect that you are entitled to
eight (8) vacation days as of September 28, 2001.

      In addition, you are entitled to the benefits set forth in Exhibit D.
These benefits are not subject to forfeiture if you materially violate any of
the provisions in Section(s) 8 and/or 11 or if you violate any of the provisions
in Section(s) 9 and/or 10. The Company also acknowledges that you are entitled
to be indemnified pursuant to the terms of Section 8 of the Company's By-Laws as
such provision may exist from time to time. Such indemnification shall cover
matters arising from your having been an officer of the Company.

4. Outplacement. The Company will provide you, at its cost, with executive
outplacement from a mutually acceptable outplacement firm. This outplacement
will continue until you commence new employment. If you materially violate the
provisions of paragraph(s) 8 and/or

<PAGE>
Eric A. Simonsen
November 19, 2001
Page 4

11 and such violation is not cured as set forth in paragraph 2 above or if you
violate the provisions of paragraph(s) 9 and/or 10, you shall no longer be
entitled to this benefit as of the date of such violation. Under current
Internal Revenue Service guidelines, the value of this benefit is not considered
taxable income to you.

5. 2001 Incentive Compensation. You acknowledge and agree that you will not
receive a Short-Term Incentive Compensation award for 2001.

6. Release. In consideration of the Company's agreement as set forth herein, you
hereby knowingly and voluntarily release Allmerica Financial Corporation
("AFC"), its subsidiaries and affiliates including, but not limited to, the
Company, its and their present, current and former officers, directors,
employees, agents and their successors and assigns (collectively "Releasees")
from any and all liabilities, demands, debts, damages, suits, covenants,
agreements, contracts, benefits, promises, claims including, but not limited to,
claims for payment(s) under the Company's 2001 Short Term Incentive Compensation
Plan, and rights or benefits, if any, after your Termination Date in connection
with stock options and restricted stock received from the Stock Plan including,
but not limited to, the 18,000 shares of Restricted Stock you received on March
16, 2001 from the Stock Plan and rights or benefits under the AFC Employment
Continuity Plan and claims arising under the Title VII of the Civil Rights Act
of 1964, as amended, including, but not limited to, any and all claims which you
may have for age, race or sex discrimination and rights or claims arising under
the Age Discrimination in Employment Act, the Fair Labor Standards Act, the
American with Disabilities Act, the Family and Medical Leave Act and claims, if
any, for wrongful termination or any claim arising out of or in any way relating
to your employment with the Company. However, this Release shall not affect any
obligations of the Company made pursuant to the terms of this Letter Agreement.

In addition, this Release does not waive any rights or claims that arise after
the date this Release is executed or the right to assist the Massachusetts
Commission Against Discrimination in its investigation of any claim of
discrimination against the Company.

THE FOREGOING MEANS THAT BY SIGNING THIS LETTER AGREEMENT YOU WILL HAVE WAIVED
ANY RIGHT YOU HAVE TO BRING A LAWSUIT OR MAKE ANY LEGAL CLAIM AGAINST ALLMERICA
FINANCIAL CORPORATION, THE COMPANY, OR ANY OF THE RELEASEES UP TO THE DATE OF
THE SIGNING OF THIS LETTER AGREEMENT, AND THAT YOU WILL HAVE RELEASED THE
RELEASEES OF ANY AND ALL CLAIMS OF ANY NATURE ARISING ON OR BEFORE THE DATE OF
THE SIGNING OF THIS LETTER AGREEMENT. HOWEVER, THIS RELEASE DOES NOT WAIVE ANY
RIGHTS OR CLAIMS THAT ARISE AFTER THE DATE THIS RELEASE IS EXECUTED.

<PAGE>
Eric A. Simonsen
November 19, 2001
Page 5

6A. Company Statement. Without having made any specific inquiry, the Company
does hereby state that as of the date of this Letter Agreement the Company is
not aware of any claims it may have against you.

7. Consent to Removal. You hereby agree to consent to be removed as a
participant in the Allmerica Financial Corporation Employment Continuity Plan
effective as of October 1, 2001.

8. Confidentiality. The terms and conditions of this Letter Agreement shall be
held in confidence by the Company and by you, except as may be required by law,
by state or federal tax or regulatory agencies, by an order of a court of
competent jurisdiction, or as may be necessary by either party in connection
with the enforcement of the terms hereof.

      You agree not to directly or indirectly discuss with or provide
information to the news media, legislative or regulatory bodies, the brokerage,
financial or insurance communities, current employees or officers of the
Company, or in any form of communication reveal, in any way, information which
is detrimental to the best interest of Allmerica Financial Corporation, its
subsidiaries and its/their directors, officers and employees.

      The Company agrees not to directly or indirectly discuss with or provide
information to the news media, legislative or regulatory bodies, the brokerage,
financial or insurance communities, current employees or officers of the
Company, or in any form of communication reveal, in any way, information which
is detrimental to your best interest.

9. Non-Solicitation. You acknowledge that you are currently subject to the terms
and conditions of certain Non-Solicitation Agreements. These Agreements are
between you and Allmerica Financial Corporation ("AFC") and are dated December
7, 1996 (the "December Agreement") and April 4, 1997 (the "April Agreement").
You hereby acknowledge and agree that the non-solicitation period on the April
Agreement and the December Agreement is a period of two years after the
termination of your employment.

10. Non-Compete. You agree, for the period that you are in Paid Leave, that you
will not directly or indirectly own, operate, join, control, participate in or
be connected as an officer, director, employee, partner, stockholder, consultant
or otherwise with any business or entity which competes with the business of the
Company (or its successor or assigns) as such business is now constituted.
Notwithstanding the foregoing, you may own up to one percent of the outstanding
amount of stock of any company and such ownership shall be not be construed as a
violation of the terms and conditions of this paragraph. Similarly, you may seek
and accept full time employment which, once commenced, will end the Paid Leave
period, and such activity shall not be considered as a violation of the terms
and conditions of this paragraph.

<PAGE>
Eric A. Simonsen
November 19, 2001
Page 6

      You and the Company are of the belief that the period of time and the area
herein specified are reasonable in view of the nature of the business in which
the Company is engaged and proposes to engage and your knowledge of this
business. However, if such period or such area should be adjudged unreasonable
at any proceeding, then the period of time shall be reduced by such number of
months or such area shall be reduced by elimination of such portion or such area
or both as are deemed unreasonable so that this covenant may be enforced in such
area and during such period of time as is adjudged to be reasonable.

11. Proprietary Information. You acknowledge that your position with the Company
has been one of high trust and confidence and that in the course of your
services to the Company you have had access to and contact with Proprietary
Information. You agree not to disclose to others, or use for your benefit or the
benefit of others, any Proprietary Information. For purposes of this Agreement,
Proprietary Information shall mean confidential information concerning the
business, prospects, and goodwill of AFC, the Company and/or its subsidiaries
including, by way of illustration and not limitation, all non-public information
(whether or not patentable and whether or not copyrightable) owned, possessed or
used by AFC, the Company and/or its subsidiaries including, without limitation,
any vendor information, policyholder information, potential policyholder lists,
trade secrets, new product information, technical data, computer programs,
software, software documentation, software development, marketing or business
plans, unpublished financial information, budgetary/price/cost information or
agent, broker, employee or insured lists.

12. Remedies. You acknowledge that any material breach of the provisions of
section(s) 8 and/or 11 or any breach of the provisions of section(s) 9 and/or 10
of this Letter Agreement shall result in serious and irreparable injury to the
Company and/or its subsidiaries or affiliates for which the Company cannot be
adequately compensated by monetary damages alone. You agree, therefore, that in
addition to any other remedy which it may have, the Company shall be entitled to
specific performance for a material breach of Section(s) 8 and/or 11 or any
breach of section(s) 9 and/or 10 of this Letter Agreement by you and to seek
both temporary and permanent injunctive relief (to the extent permitted by law)
without the necessity of proving actual damages.

13. Advice of Counsel. You acknowledge that you have been advised by the Company
to consult with an attorney prior to executing this Letter Agreement and that
you have been given at least twenty-one (21) days in which to consider this
agreement. You acknowledge that you were given an earlier version of this
agreement on September 26, 2001.

14. Revocation Period. Upon your execution of this Letter Agreement, you shall
have seven days in which you may revoke this agreement. In addition, this
agreement will not become effective or enforceable until this revocation period
has elapsed.

15. Withholding. You acknowledge that any payments made pursuant to this
agreement will be subject to appropriate federal and state withholding in the
year in which paid.

<PAGE>
Eric A. Simonsen
November 19, 2001
Page 7

16. Arbitration. If any dispute shall arise between you and the Company with
reference to the interpretation of this agreement or the rights of either party
with respect to any transaction under this Letter Agreement, the dispute shall
be referred to an arbitrator mutually acceptable to you and the Company. In the
event we do not agree on the selection of the arbitrator within thirty (30)
days, then the arbitrator shall be selected pursuant to the Commercial
Arbitration Rules of the American Arbitration Association.

      The arbitration shall take place in the Commonwealth of Massachusetts and
the arbitration proceedings are to be governed by the rules of the American
Arbitration Association and the Massachusetts Arbitration law. The decision of
the arbitrator shall be final and binding upon both you and the Company and
judgment upon the award rendered by the arbitrator may be entered into any court
having jurisdiction thereof.

      The expense of arbitrator and of the arbitration shall be equally divided
between you and the Company. Arbitration is the sole remedy for disputes arising
under this Letter Agreement.

17. Successors and Assigns. This Letter Agreement shall be binding upon you,
your heirs, executors, administrators and assigns and upon the Company, its
successors and assigns.

                                               Very truly yours,

                                               FIRST ALLMERICA FINANCIAL
                                               LIFE INSURANCE COMPANY

                                           By: /s/ Bruce C. Anderson
                                               ----------------------
                                               Vice President

Accepted: 12/05/ 2001

I knowingly understand and voluntarily agree to and accept the terms and
conditions set forth herein.

/s/ Eric A. Simonsen
--------------------
Eric A. Simonsen

Date: 11/26/01
      --------

This agreement shall not be effective or enforceable until seven days following
its execution and may be revoked by Eric A. Simonsen prior to its effective
date.<PAGE>

                                                                   Exhibit 10.11

                               SERVICES AGREEMENT

         THIS SERVICES AGREEMENT (the "Agreement") is entered into as of
September 13, 2001 between PG&E Energy Trading-Power, L.P. ("PGET"), a
Delaware limited partnership, having an office at 7500 Old Georgetown Road,
Bethesda, MD 20814, and Buzzard Power Corporation ("Buzzard"), a Delaware
corporation having an office at 2151 Lisbon Road, Kennerdell, PA 16374,
collectively referred to herein as the "Parties".

         WHEREAS, Buzzard expects to own, as lessee of the Scrubgrass generating
facility, certain NOx emission allowances and wishes to engage PGET to perform
certain marketing services relating to such allowances pursuant to the terms and
conditions set forth in this Agreement; and

         WHEREAS, PGET wishes to perform such services;

         NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties, intending to be bound hereby, agree
as follows:

         SECTION 1.               SERVICES.
                                  --------

         Pursuant to separate transaction agreements between the Parties,
substantially in the form of Exhibit A attached hereto (subject to Section 2
below), to be executed on or before December 1, 2001 (the "Buzzard/PGET Sale
Documents"), Buzzard shall sell, and PGET shall purchase, the quantity of NOx
emission allowances identified on Exhibit B attached hereto (the "Identified
Allowances"). Pursuant to the terms hereof, PGET shall use commercially
reasonable efforts to resell the Identified Allowances, on or before November
15, 2001, to a third party at the highest available price (the "Third Party Sale
Price"); provided, however, that Buzzard may direct PGET, from time to time, to
sell any or all of the Identified Allowances on terms acceptable to Buzzard.
Each Party expressly acknowledges and agrees that PGET shall not act as or be an
agent for Buzzard.

         SECTION 2.               COMPENSATION.
                                  ------------

         (a) In consideration of PGET's services in reselling the Identified
Allowances, the price payable by ET for each Identified Allowance to Buzzard, as
set forth in the Buzzard /PGET Sale Documents, shall be equal to:

         Third Party Sale Price - $35 - ( 25% x Profit);

         Where:        Profit = Average Third Party Sale Price for the
                       5-year stream indicated in Exhibit B - Benchmark
                       Price; provided however, that if Profit equals a
                       negative value, Profit shall be deemed to equal zero;
                       and Benchmark Price = $5,000, if Exhibit B reflects a
                                                3-year stream; or
                                             $4,000, if Exhibit B reflects a
                                                5-year stream

                                       1

<PAGE>

                            NO CONSEQUENTIAL DAMAGES.
                            ------------------------
Neither Party shall be liable to the other Party for any consequential or
indirect losses or damages that may be incurred in connection with the services
provided hereunder, including, without limitation, loss of use, lost profits or
revenues, cost of capital, or loss of goodwill.

                                 GOVERNING LAW.
                                 -------------
         THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK.

                           EXECUTION IN COUNTERPARTS.
                           -------------------------
         This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which counterparts,
when so executed and delivered, shall be deemed to be an original and all of
which counterparts, taken together, shall constitute but one and the same
Agreement.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       2

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         IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.

                                              BUZZARD:

                                              BUZZARD POWER CORPORATION

                                              By: /s/ Joseph E. Cresci
                                                  ---------------------------
                                                  Name: Joseph E. Cresci
                                                  Title: Vice President

                                              ACKNOWLEDGED AND AGREED TO:

                                              SCRUBGRASS GENERATING COMPANY,
                                              L.P.

                                              By: /s/ P. Chrisman Iribe
                                                  ---------------------------
                                                  Name: P. Chrisman Iribe
                                                  Title: President

                                              SELLER:

                                              PG&E ENERGY TRADING - POWER, L.P.
                                              BY PG&E ENERGY TRADING HOLDINGS
                                              CORPORATION, ITS SOLE GENERAL
                                              PARTNER

                                              By: /s/ Lyndell E. Maddox
                                                  ---------------------------
                                                  Name: Lyndell E. Maddox
                                                  Title: President & CEO

<PAGE>

                                    Exhibit A

October 29, 2001

Scrubgrass Generating Company, L.P.
RR1, Box 238
Kennerdell, PA  16374

Fax: (814) 385-6661

RE:  NOx Transaction

         This letter shall confirm the agreement reached between PG&E Energy
Trading - Power, L.P. ("PGET") and Buzzard Power Corporation ("Counterparty")
regarding the transaction set forth below.

Introduction:               The Clean Air Act contains a program for control of
                            NOx emissions, under which parties may buy and sell
                            NOx Emission Allowances which are valid for NOx
                            emissions emitted from May 1 - September 30 of each
                            year 1999-2002 (the "Ozone Season"). The NOx
                            Emission Allowance program is administered by EPA,
                            pursuant to regulations issued by that agency under
                            the Clean Air Act. Buyer and Seller expect this
                            program to be continued for the Ozone Seasons of
                            years 2003-2007. Seller is interested in selling
                            certain NOx Emission Allowances for vintage years
                            2003, 2004, 2005, 2006, and 2007, and Buyer is
                            interested in purchasing those same Allowances.

Commodity:                  NOx Emission Allowances

Trade Date:                 October 22, 2001

Seller:                     Counterparty

Buyer:                      PGET

Vintage Year(s):            2003, 2004, 2005, 2006, 2007

Contract Quantity:          150 Allowances for 2003, 140 Allowances per year for
                            2004 through 2007, (710 total)

<PAGE>

Price(s):                   $3,420 per NOx Emission Allowance for Vintage 2003,
                            $3,420 per NOx Emission Allowance for Vintage 2004,
                            $3,420 per NOx Emission Allowance for Vintage 2005
                            $3,420 per NOx Emission Allowance for Vintage 2006
                            $3,420 per NOx Emission Allowance for Vintage 2007

Condition Precedent:        Buyer and Seller recognize the NOx Allowances are
                            originating from the Commonwealth of Pennsylvania
                            Department of Environmental Protection ("DEP"), and
                            as such, if Pennsylvania DEP and EPA have not funded
                            Seller's EPA NOx account by _____ of each Vintage
                            Year, neither Seller nor Buyer shall have any
                            obligation hereunder for that respective Vintage
                            Year's Allowances. However, all obligations to
                            deliver subsequent Vintage Year's Allowances shall
                            continue consistent with the terms set forth herein.

<PAGE>

Delivery/Documentation:     Within 10 business days of the EPA's funding of
                            Seller's EPA NOx Allowance Tracking System ("NATS")
                            account of each Vintage Years' Allowances, Seller
                            will deliver a partially executed Allowance Transfer
                            Form or its legal equivalent ("ATF") to Buyer,
                            authorizing the transfer of the Contract Quantity
                            from Seller's account into the appropriate to
                            Buyer's account.

                            PGET's EPA NATS account information:
                            NOx:
                            AAR:  Sarah M. Barpoulis, 1073
                            ALT:  Lisa Wildes, 1813
                            NATS Acct. # 999900000014

                            Counterparty's EPA NATS account information:
                            NOx:
                            AAR:______________________, #_______
                            NATS Acct. #

                            Within three business days of receiving the ATF or
                            its legal equivalent, Buyer will execute the form
                            and cause it to be placed on file with the EPA in
                            accordance with all applicable regulations.

                            Buyer may, with Seller's prior written approval,
                            modify any documentation provided by Seller prior to
                            its submission to the EPA. Buyer will promptly
                            furnish to Seller or its designated representative
                            copies of any documentation which Buyer submits to
                            the EPA to effectuate this transfer. Excluded from
                            this requirement is documentation concerning Buyer's
                            confidential matters.

                            Upon notification by the EPA that the transfer
                            contemplated by this transaction letter will not be
                            recorded, the parties shall promptly confer, and
                            then they shall cooperate in taking all reasonable
                            actions necessary to cure any defects in the
                            proposed transfer, so that the transfer can be
                            recorded.

Payment:                    For each Vintage Years' Allowances, payment shall be
                            made by Buyer in immediately available funds (U.S.
                            Dollars) by wire transfer to Seller's account
                            specified below (or in such other form as reasonably
                            requested by Seller) within three Business Days of
                            written or electronic notification by the EPA that
                            the Vintage Years' Allowances have been transferred
                            from Seller to Buyer.

Additional Terms and        This transaction is subject to the Additional Terms
Conditions:                 and Conditions set forth below.

<PAGE>

Definitions:                "Allowance" means a NOx Emission Allowance, as
                            defined by the Clean Air Act and regulated by the
                            EPA.

                            "Clean Air Act" means Title IV of the Clean Air Act
                            Amendments of 1990 (effective November 15, 1990) as
                            well as any amendments thereto and regulations
                            promulgated thereunder, all of which are the basis
                            for the federal air pollution control program for
                            NOx emissions.

                            "Confidential Information" means all oral and
                            written information exchanged between Seller and
                            Buyer with respect to the pricing of Allowances
                            hereunder. The following exceptions, however, do not
                            constitute Confidential Information for the purposes
                            of this transaction: (a) information that is or
                            becomes generally available to the public other than
                            as a result of a disclosure by either party in
                            violation of this transaction letter; (b)
                            information that was already known by either party
                            on a non-confidential basis prior to this
                            transaction letter; and (c) information that becomes
                            available to either party on a non-confidential
                            basis from a source other than the other party if
                            such source was not subject to any prohibition
                            against disclosing the information to such party.

                            "EPA" means the United States Environmental
                            Protection Agency or any successor agency with
                            similar jurisdiction.

<PAGE>

                        ADDITIONAL TERMS AND CONDITIONS
                        -------------------------------

Netting. If Buyer and Seller are each required to pay an amount to the other on
-------
the same day, then such amounts with respect to each party may be aggregated and
the parties may discharge their obligations to pay through netting, in which
case the party, if any, owing the greater aggregate amount shall pay to the
other party the difference between the amounts owed.

Security. If a party (the "Beneficiary Party") reasonably determines that the
--------
other party's creditworthiness, financial responsibility or performance
viability is unsatisfactory, the Beneficiary Party may require Performance
Assurance. "Performance Assurance" means, at the option of the Beneficiary
Party: (i) the posting of a letter of credit; (ii) a cash prepayment; or (iii)
the posting of other acceptable collateral or security by the party with
impaired credit. The Performance Assurance shall be delivered within two (2)
business days of the date of such request.

Events of Default. An "Event of Default" shall mean with respect to a party
-----------------
("Defaulting Party"): (i) any representation or warranty made by the Defaulting
Party herein shall at any time prove to be false or misleading in any material
respect; (ii) the failure by the Defaulting Party to perform any covenant set
forth herein; (iii) the Defaulting Party shall make an assignment or any general
arrangement for the benefit of its creditors, files a petition or otherwise
commences, authorizes or acquiesces in the commencement of a proceeding or cause
under any bankruptcy or similar law for the protection of creditors, or has such
a petition filed against it and such proceeding remains undismissed for 30 days,
otherwise becomes bankrupt or insolvent (however evidenced), or becomes unable
to pay its debts as they fall due (each of the foregoing shall be referred to as
a "Bankruptcy Proceeding"); (iv) the occurrence of a material adverse change
with respect to the Defaulting Party; provided, such material adverse change
shall not be considered an Event of Default if the Defaulting Party establishes
and maintains for so long as the material adverse change is continuing,
Performance Assurance for the benefit of the other party (the "Non-Defaulting
Party") in a form and amount reasonably acceptable to the Non-Defaulting Party;
(vi) the failure by the Defaulting Party to establish, maintain, extend or
increase Performance Assurance when required pursuant to this transaction; (vii)
in the event a party has posted a guarantee, the failure by the guarantor of the
Defaulting Party to perform any covenant set forth in the guarantee it delivered
in respect of any such transaction, any representation or warranty made by such
guarantor shall prove to have been false or misleading in any material respect
when made or when deemed to be repeated, or the guaranty shall expire or be
terminated or shall in any way cease to guaranty the obligations of the
Defaulting Party hereunder; or (viii) the guarantor of the Defaulting Party
shall be subject to a Bankruptcy Proceeding.

Remedies upon an Event of Default.
---------------------------------

(a) In the event of a default by Buyer, this transaction can be terminated
immediately by Seller upon written notice to Buyer. Upon such termination, Buyer
will be obligated to pay Seller damages equal to the positive difference, if
any, between (a) the aggregate price set forth in this transaction and (b) the
aggregate market price of these Allowances as of the date of

<PAGE>

termination, to be determined based upon the average of two quotes from
brokerage firms or third-party intermediaries reasonably selected by Seller, net
of reasonably expected transaction costs. If Buyer has already made a partial
payment to Seller, the amount owed under this provision will be decreased by
that amount already paid. Except with respect to breaches of Buyer's obligations
under Confidentiality, no other damages will be available to Seller.
      ---------------

(b) In the event of a default by Seller, this transaction can be terminated
immediately by Buyer upon written notice to Seller. Upon such termination,
Seller will be obligated to pay Buyer an amount equal to the cost to Buyer
(including its transaction costs) of purchasing Allowances equivalent to those
that were to be delivered under this transaction but which Seller failed to
deliver, less the cost that Buyer would have had to pay Seller for the same
number of Allowances. Except with respect to breaches of Seller's obligations
under Confidentiality, no other damages will be available to Buyer.
      ---------------

Audit. Each party has the right, at its sole expense, to examine the records of
-----
the other party during normal business hours to the extent reasonably necessary
to verify the accuracy of any statement rendered to such party. If any such
examination reveals any inaccuracy in any statement, the necessary adjustments
in such statement and the payments made pursuant to such inaccurate statement
shall be adjusted; provided, however, that such adjustments shall be made prior
to the lapse of one calendar year following the date on which the inaccurate
statement was delivered.

Late Payments. All overdue payments shall bear interest from (and including) the
-------------
due date to (but excluding) the date of payment at a rate equal to two percent
(2%) over the per annum rate of interest equal to the prime lending rate as may
from time to time be published in the Wall Street Journal under "Money Rates";
provided, the interest rate shall never exceed the maximum lawful rate permitted
by applicable law.

Limitation of Remedies, Liability and Damages. THE PARTIES CONFIRM THAT THE
---------------------------------------------
EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED HEREIN SATISFY THE ESSENTIAL
PURPOSES HEREOF. FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR
MEASURE OF DAMAGES IS PROVIDED, SUCH EXPRESS REMEDY OR MEASURE OF DAMAGES SHALL
BE THE SOLE AND EXCLUSIVE REMEDY, THE OBLIGOR'S LIABILITY SHALL BE LIMITED AS
SET FORTH IN SUCH PROVISION AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN
EQUITY ARE WAIVED. IF NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY HEREIN
PROVIDED, THE OBLIGOR'S LIABILITY SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES
ONLY, SUCH DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND ALL
OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. UNLESS EXPRESSLY
HEREIN PROVIDED, NEITHER PARTY SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL,
PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS
INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT, UNDER ANY INDEMNITY
PROVISION OR OTHERWISE. IT IS THE INTENT OF THE PARTIES THAT THE LIMITATIONS
HEREIN IMPOSED ON REMEDIES AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE
CAUSE OR CAUSES

<PAGE>

RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH NEGLIGENCE
BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. TO THE EXTENT ANY DAMAGES
REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE
DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN
ADEQUATE REMEDY IS INCONVENIENT AND THE LIQUIDATED DAMAGES CONSTITUTE A
REASONABLE APPROXIMATION OF THE HARM OR LOSS.

Taxes. Each party shall pay any taxes or other fees that are associated with its
-----
respective purchase or sale of the Allowances as described herein.

Assignment. Neither party shall assign this transaction or its rights hereunder
----------
without the prior written consent of the other party. Upon any assignment made
in compliance with this section, this transaction shall inure to and be binding
upon the successors and assigns of the assigning party. Notwithstanding the
foregoing, either party may, without the need for consent from the other party
(and without relieving itself from liability hereunder), (a) transfer, pledge or
assign this transaction as security for any financing with financial
institutions; (b) transfer or assign this transaction to an affiliate of such
party provided that such assignee has substantially equivalent financial
capability to the assignor; or (c) transfer or assign this transaction to any
person or entity succeeding to all or substantially all of the assets of such
assignor; provided, however, in each case, that any such assignee shall agree to
be bound by the terms and conditions thereof.

Notices. Any notice, request, demand, statement or payment provided for herein
-------
to either Seller or Buyer shall be confirmed in writing and shall be made as
specified below. A notice sent by facsimile transmission shall be deemed
received by the close of the business day on which such notice was transmitted
or such earlier time as confirmed by the receiving party and notice by overnight
mail or courier shall be deemed to have been received two (2) business days
after it was sent or such earlier time as is confirmed by the receiving party
unless it confirms a prior verbal communication, in which case any such notice
shall be deemed received on the day sent.

Notices & Correspondence:                   Payments & Invoices:
PG&E Energy Trading-Power, L.P.             PG&E Energy Trading-Power, L.P.
7500 Old Georgetown Road                    7500 Old Georgetown Road
Bethesda, Maryland 20814                    Bethesda, Maryland 20814
Attn:  Emissions Trader                     Attn: Director, Power Accounting
Telephone:  (301) 280-6600                  Telephone: (301) 280-6600
Fax:        (301) 280-6912                  Fax:  (301) 280-6601 or 280-6604

Scrubgrass Generating Company L.P.          Scrubgrass Generating Company L.P.
Buzzard Power Corporation                   Buzzard Power Corporation
2151 Lisbon Road                            2151 Lisbon Road
Kennerdell, PA  16374                       Kennerdell, PA  16374
Attn:  General Manager                      Attn: Accounting
Telephone:  (814) 385-6661 x15              Telephone: (814) 385-6661
Fax:        (814) 385-6704                  Fax:       (814) 385-6704

<PAGE>

with a copy to:
Assistant General Counsel                   Assistant General Counsel
Scrubgrass Generating Company, L.P.         PG&E Energy Trading-Power, L.P.
7500 Old Georgetown Road, 13th Floor        7500 Old Georgetown Road, 13th Floor
Bethesda, MD 20814                          Bethesda, MD 20814
Telephone:  (301) 280-6800                  Telephone: (301) 280-6600
Fax:        (301) 280-6913                  Fax:       (301) 280-6060

<PAGE>

Payments by Wire Transfer:
Boston Safe Deposit and Trust Company
Account Title: PG&E Energy Trading-Power, L.P.
Account Number: 145513
ABA Number: 011 001 234

Bankers Trust Company, NY
Corporate Trust Agency Group
Account Title: Venango (Scrubgrass) Operating A/C
Account Number: 01419647
ABA Number: 021001033

From time to time Seller and/or Buyer may change the foregoing addresses by
sending notice of such change in accordance with this section.

Representations and Warranties. Seller hereby represents and warrants to Buyer
------------------------------
as follows:

                  (a) Seller has and, at all times during the term of this
transaction will have, all necessary power and authority to execute, deliver and
perform its obligations hereunder.

                  (b) The execution, delivery and performance of this
transaction by Seller have been duly authorized by all necessary action and do
not violate any of the terms or conditions of Seller's governing documents, or
any contract to which it is a party, or any law, rule, regulation, order,
judgment or other legal or regulatory determination applicable to Seller.

                  (c) There is no pending or threatened litigation, arbitration
or administrative proceeding that materially adversely affects Seller's ability
to perform this transaction.

                  (d) Seller is, or will be prior to any transfer to Buyer, the
owner, free and clear of any liens, encumbrances, charges, agreements or claims,
of the Allowances herein being transferred.

Seller makes NO representations or warranties as to the following:

                  (a) There is no warranty or representation that Buyer's use
for compliance or transferability or merchantability of these Allowances will
not be challenged by a government agency, private party, or other interested
third party. Except as expressly set forth in this transaction letter, Seller
expressly negates any other representations or warranties, whether written or
oral, and whether express or implied.

Buyer hereby represents and warrants to Seller as follows:

                  (a) Buyer has, and at all times during the term of this
transaction will have, all necessary power and authority to execute, deliver and
perform its obligations hereunder.

<PAGE>

                  (b) The execution, delivery and performance of this
transaction by Buyer have been duly authorized by all necessary action and do
not violate any of the terms or conditions of Buyer's governing documents, or
any contract to which it is a party, or any law, rule, regulation, order,
judgment or other legal or regulatory determination applicable to Buyer.

                  (c) There is no pending or threatened litigation, arbitration
or administrative proceeding that materially adversely affects Buyer's ability
to perform this transaction.

Entire Agreement. This transaction letter is the final and entire agreement
----------------
between the parties. No modification or amendment of this transaction letter
shall be effective or binding unless set forth in writing signed by both
parties.

No Waiver. Waiver of any breach of this transaction shall not be construed as a
---------
waiver of any other breach.

Governing Law. INCLUDING ANY COUNTERCLAIMS AND CROSS CLAIMS ASSERTED IN SUCH
-------------
ACTION, THIS TRANSACTION SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF _____, INCLUDING THE UNIFORM COMMERCIAL CODE, WITHOUT
REGARD TO THE LAWS OF SUCH STATE REQUIRING THE APPLICATION OF THE LAWS OF
ANOTHER STATE. It is agreed that this transaction is enforceable as a "qualified
financial contract" within the meaning of New York General Obligations Law
Section 5-701(b).

Confidentiality.       Except as provided in this Section, neither party shall
---------------
publish, disclose, or otherwise divulge Confidential Information to any person,
at any time during or after the term of this transaction, without the other
party's prior express written consent. Each party shall permit knowledge of and
access to the Confidential Information only to those of its corporate
affiliates, attorneys, accountants, representatives, agents and employees who
have a need to know related to this transaction.

         If required by any law, statute, ordinance, decision, order or
regulation passed, adopted, issued or promulgated by a court, governmental
agency or authority having jurisdiction over a party, that party may release
Confidential Information, or a portion thereof, to the court, governmental
agency or authority, as required by the applicable law, statute, ordinance,
decision, order or regulation, and a party may disclose Confidential Information
to accountants in connection with audits, provided that such party has notified
the other party of the required disclosure, such that the other party may
attempt (if such party so chooses) to cause that court, governmental agency,
authority or accountant to treat such information in a confidential manner and
to prevent such information from being disclosed or otherwise becoming part of
the public domain.

         This Section survives for a period of one (1) year following the
expiration or termination of this transaction.

<PAGE>

Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Counterparty by returning an executed copy of this
transaction letter via facsimile to PGET at (301) 280-6060. Your response should
reflect the appropriate party in your organization who has the authority to
enter into the transaction.

PG&E ENERGY TRADING - POWER, L.P.
By:  PG&E Energy Trading Holdings
Corporation - its sole general partner

By: /s/ Sarah M. Barpoulis
   -----------------------
Name: Sarah M. Barpoulis
      Senior Vice President

ACCEPTED AND AGREED:

SCRUBGRASS GENERATING COMPANY, L.P.

By: /s/ Gary F. Weidenger
   ----------------------
Name:  Gary F. Weidenger
Title: Senior Vice President

<PAGE>

                                    Exhibit B

                    Identification of NOx Emission Allowances

-------------------------------------------------------------------------------
           Originating State               Vintage Year            Quantity
-------------------------------------------------------------------------------
             Pennsylvania                      2003                150 tons
-------------------------------------------------------------------------------
             Pennsylvania                      2004                140 tons
-------------------------------------------------------------------------------
             Pennsylvania                      2005                140 tons
-------------------------------------------------------------------------------
             Pennsylvania                      2006                140 tons
-------------------------------------------------------------------------------
             Pennsylvania                      2007                140 tons
-------------------------------------------------------------------------------

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