EMPLOYMENT AGREEMENT

            This EMPLOYMENT AGREEMENT (the "Agreement") is made as of August 1,
2002 between PEPCO HOLDINGS, INC. (the "Company") and JOHN M. DERRICK,
JR. (the "Executive").

                                                            RECITALS:

            The Board of Directors of the Company (the "Board of Directors") recognizes that
outstanding management of the Company is essential to advancing the best interests of
the Company, its shareholders and its subsidiaries. The Board of Directors believes that
it is particularly important to have stable, excellent management at the present time. The
Board of Directors believes that this objective may be achieved by giving key
management employees assurances of financial security for a period of time, so that they
will not be distracted by personal risks and will continue to devote their full time and best
efforts to the performance of their duties.

            The Human Resources Committee of the Board of Directors (the "Committee")
has recommended, and the Board of Directors has approved, entering into amended and
restated employment agreements with the Company's key management executives in
order to achieve the foregoing objectives. Accordingly, this Agreement amends, restates
and supercedes the employment agreement previously entered into between the Company
and the Executive, dated December 10, 1999 (the "Prior Agreement"). Upon execution
of this Agreement, the Prior Agreement shall be of no further force or effect. The
Executive is a key management executive of the Company and is a valuable member of
the Company's management team. The Company acknowledges that the Executive's
contributions to the past and future growth and success of the Company have been and
will continue to be substantial. The Company and the Executive are entering into this
Agreement to induce the Executive to remain an employee of the Company and to
continue to devote his full energy to the Company's affairs. The Executive has agreed to
continue to be employed by the Company under the terms and conditions hereinafter set
forth.

            NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained in this Agreement, the parties agree as follows:

1.          Term of this Agreement. The term of this Agreement shall begin on the date first
set forth above and shall end on the Executive's normal retirement date of April 1, 2005
(the "Term of this Agreement") or, if earlier, after all of the Company's and the
Executive's obligations hereunder have been satisfied following termination of the
Executive's employment during the Term of this Agreement.

2.          Duties. The Company and the Executive agree that, while employed during the
Term of this Agreement, the Executive will serve in a senior management position with
the Company. The Executive (a) will devote his knowledge, skill and best efforts on a
full-time basis to performing his duties and obligations to the Company (with the
exception of absences on account of illness or vacation in accordance with the Company's
policies and civic and charitable commitments not involving a conflict with the
Company's business), and (b) will comply with the directions and orders of the Board of
Directors with respect to the performance of his duties.

3.          Affiliates. Employment by an Affiliate of the Company or a successor to the
Company will be considered employment by the Company for purposes of this
Agreement, and the Executive's employment with the Company shall be considered
terminated only if the Executive is no longer employed by the Company or any of its
Affiliates or successors. The term "Company" as used in this Agreement will be deemed
to include Affiliates and successors. For purposes of this Agreement, the term "Affiliate"
means the subsidiaries of the Company and other entities under common control with the
Company.

4.          Compensation and Benefits.

             (a)       During the Term of this Agreement, while the Executive is employed by
the Company, the Company will pay to the Executive the following salary and incentive
awards for services rendered to the Company:

                         (i)       The Company will pay to the Executive an annual salary in an
             amount not less than the base salary in effect for the Executive as of the date on
             which this Agreement is executed (in the event the Executive's rate of annual
             base salary is increased, such increased rate shall not be decreased during the
             Term of this Agreement); and

                         (ii)     The Executive will be entitled to receive incentive awards if and to
             the extent that the Board of Directors determines in good faith that the
             Executive's performance merits payment of an award according to the terms of
             the incentive compensation plans applicable to senior executives of the
             Company.

If the Executive is employed by an Affiliate or a successor (as described in Section 3),
the term "Board of Directors" as used in this Section 4(a) and in Section 5(a) means the
Board of Directors of the Executive's employer.

             (b)       During the Term of this Agreement, while the Executive is employed by
the Company, the Executive will be eligible to participate in a similar manner as other
senior executives of the Company in retirement plans, fringe benefit plans, supplemental
benefit plans and other plans and programs provided by the Company for its executives

 

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