EMPLOYMENT AGREEMENT

        This EMPLOYMENT AGREEMENT (the "Agreement") is made as of August 1,
2002 (the "Effective Date") between PEPCO HOLDINGS, INC. (the "Company") and
THOMAS S. SHAW (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 employment
agreements with the Company's key management executives in order to achieve the
foregoing objectives. 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 Effective
Date and shall end on the fifth anniversary thereof ("Term of this Agreement").
Notwithstanding the forgoing, if the Executive's employment is terminated during the
Term of this Agreement and all of the Company's and the Executive's obligations
hereunder have been satisfied prior to the end of the Term of this Agreement, this
Agreement shall expire upon satisfaction of all such obligations.

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 and Chief Executive Officer of the Company 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 or
employees from time to time.

        (c)     The Company shall pay to the Executive $1,000,000 on the first business day
of the month following the Effective Date.

        (d)     For purposes of determining the Executive's benefit under the Company's
supplemental retirement plans, on each of the first, second and third anniversary of the
Effective Date, the Executive shall be credited with an additional year of service and be
deemed one year older than the Executive's actual age if the Executive is employed by
the Company on such anniversary.

5.     Termination of Employment.

        (a)     If, during the Term of this Agreement, the Company terminates the
Executive's employment other than for Cause (as defined in Section 7), the Company will
pay to the Executive in cash within 30 days after the Executive's termination of
employment

                  (i)     a lump sum payment equal to three (3) times the sum of: (A) the highest
        annual base salary rate in effect for the Executive at any time during the three-year
        period preceding employment termination, plus (B) the highest of (1) the annual
        bonus for the year in which the termination of employment occurs, or (2) the highest
        annual bonus received by the Executive during the three calendar years preceding
        the calendar year in which the termination of employment occurs; and

                 (ii)    any unpaid salary through the date of employment termination, unpaid
        annual bonus for the prior year and a pro-rated portion of the annual bonus for the
        year in which termination of employment occurs.

For purposes of Sections 5(a)(i)(B)(1), 5(a)(ii), and 5(b)(ii), the annual bonus for the year
in which termination of employment occurs will be the "target" annual bonus for such
year unless, before the Executive's termination of employment, the Board of Directors
made a good faith final determination of the amount of the Executive's actual annual
bonus for such year. If the Board of Directors made such a determination, the applicable
award will be computed based on the Board of Directors' determination, rather than on
the "target" amount for such year.

        (b)     If, during the Term of this Agreement, the Company terminates the
Executive's employment other than for Cause (as defined in Section 7), the Executive
will be entitled to receive the following additional benefits determined as of the date of
his termination of employment:

                 (i)     Any outstanding restricted stock that would become vested (that is,
        transferable and nonforfeitable) if the Executive remained an employee through the
        Term of this Agreement will become vested as of the date of the Executive's
        termination of employment (or as of the date described in the next sentence, if
        applicable). In addition, if the Company has agreed to award the Executive
        restricted stock at the end of a performance period, subject to the Company's
        achievement of performance goals, and the date as of which the restricted stock is to
        become vested falls within the Term of this Agreement, the stock will be awarded
        and become vested at the end of the performance period if and to the extent that the
        performance goals are met.

                 (ii)     A supplemental retirement benefit payable in cash in a lump sum equal
        to the difference between (A) the present value of the vested retirement benefits that
        the Executive had accrued at the time of termination of employment under the
        Company's qualified defined benefit retirement plan (the "Retirement Plan"), any
        excess or supplemental retirement plans in which the Executive participates and/or
        other supplemental retirement benefits to which the Executive is entitled under any
        contract or agreement (together, the "SERPs"), assuming for this purpose that the
        Executive would begin receiving benefits at the first early retirement date provided
        under the applicable plan or, if the Executive is eligible to receive retirement
        benefits upon termination of employment under the applicable plan, assuming the
        Executive will begin receiving benefits at the time of termination of employment,
        and (B) the benefit the Executive would be entitled to receive under the Retirement
        Plan and the SERPs, assuming for all such benefit determinations. The additional
        credit under Section 4(d) hereof is three. For purposes of the calculations required
        under this Section 5(b)(ii), the same actuarial assumptions that are used under the
        Company's qualified retirement plan shall be used.

        (c)     If the Executive voluntarily terminates employment with the Company during
the Term of this Agreement under circumstances described in this subsection (c), the
Executive will be entitled to receive the benefits described in subsections (a) and (b)
above as if the Company had terminated the Executive's employment other than for
Cause. Subject to the provisions of this subsection (c), these benefits will be provided if
the Executive voluntarily terminates employment after (i) the Company reduces the
Executive's base salary (except a reduction consistent and proportional with an overall
reduction, due to extraordinary business conditions, in the compensation of all other
senior executives of the Company), (ii) the Executive is not in good faith considered for
incentive awards as described in Section 4(a)(ii), (iii) the Company fails to provide
benefits as required by Section 4(b), (iv) the Company relocates the Executive's primary
place of employment to a location, other than the Washington D.C. metropolitan area,
further than 50 miles from the Executive's primary place of employment on the Effective
Date, or (v) the Company demotes the Executive to a position that is not a senior
management position (other than on account of the Executive's disability, as defined in
Section 6 below). In order for this subsection (c) to be effective: (1) the Executive must
give written notice to the Company indicating that the Executive intends to terminate
employment under this subsection (c), (2) the Executive' s voluntary termination under
this subsection must occur within 60 days after the Executive knows or reasonably should
know of an event described in clause (i), (ii), (iii), (iv), or (v) above, or within 60 days
after the last in a series of such events, and (3) the Company must have failed to remedy
the event described in clause (i), (ii), (iii), (iv), or (v), as the case may be, within 30 days
after receiving the Executive's written notice. If the Company remedies the event
described in clause (i), (ii), (iii), (iv), or (v), as the case may be, within 30 days after
receiving the Executive's written notice, the Executive may not terminate employment
under this subsection (c) on account of the event specified in the Executive's notice.
Termination under the circumstances above shall be deemed an involuntary termination
without Cause for purposes of non-qualified benefit plans.

        (d)     Notwithstanding subsection (a), (b), and (c) of this Section 5, if the
independent public accountants for the Company (the "Accountants") determine that if
the payments and/or benefits to be provided under subsections (a), (b), and (c) of this
Section 5 (and/or any other payments and/or benefits provided or to be provided to the
Executive under any applicable plan, program, agreement or arrangement maintained,
contributed to or entered into by the Company or any group or entity whose actions result
in a change of ownership or effective control (as those terms are defined in Code Section
280G and regulations promulgated thereunder) or any affiliate of the Company) (a
"Payment" or collectively "Payments") were provided to the Executive (x) the Executive
would incur an excise tax under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (such excise tax, together with any interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), and (y) the net after tax benefits
to the Executive attributable to the Payments would not be at least $10,000 greater than
the net after tax benefits that would accrue to the Executive if the Payments that would
otherwise cause the Executive to be subject to the Excise Tax were not provided, the
Payments shall be reduced so that the Payments provided to the Executive are the greatest
(as determined by the Accountants) that may be provided without any such Payment
being subject to the Excise Tax. If the Payments are to be reduced under this subsection
5(d), the Executive shall be given the opportunity to designate which Payments shall be
reduced and in what order of priority.

                 (i)     If the Executive receives reduced Payments pursuant to subsection 5(d),
        or if it had been determined that no such reduction was required, but it nonetheless is
        established pursuant to the final determination of a court or an Internal Revenue
        Service proceeding that, notwithstanding the good faith of the Executive and the
        Company in applying the terms of subsection 5(d), the aggregate Payments to the
        Executive would result in any Payment being subject to the Excise Tax, and that a
        reduction pursuant to subsection 5(d) should have occurred, then the Executive shall
        be deemed for all purposes to have received a loan made on the date of the receipt of
        the Payments in an amount such that, after taking into consideration such loan, no
        portion of the aggregate Payments would be subject to the Excise Tax. The
        Executive shall have an obligation to repay such loan to the Company on demand,
        together with interest on such amount at the applicable Federal rate (as defined in
        Section 1274(d) of the Code) from the date of the Executive's receipt of such loan
        until the date of such repayment.

                 (ii)    If the Executive's Payments are reduced or are to be reduced pursuant to
        subsection 5(d), and it is determined that the Payments were or are to be reduced
        pursuant to subsection 5(d) to a greater extent than was or is necessary to avoid the
        Excise Tax or it is determined that the Executive's Payments should not be or should
        not have been reduced pursuant to subsection 5(d), then the Company shall promptly
        pay to the Executive the amount necessary so that, after such adjustment, the
        Executive will have received or be entitled to receive the maximum payments
        payable under this subsection 5(d), together with interest at the applicable Federal
        rate (as defined in Section 1274(d) of the Code) on amounts that were incorrectly
        reduced pursuant to subsection 5(d).

                 (iii)     Gross-Up Payment.

                            (A)     Anything in this Agreement to the contrary notwithstanding, if it
                                       shall be determined that any Payments would be subject to the
                                       Excise Tax or any interest or penalties are incurred, and it is
                                       determined that the Payments should not be reduced pursuant to
                                       subsection 5(d), then the Executive shall be entitled to receive an
                                       additional payment (a "Gross-Up Payment") in an amount such
                                       that after payment by the Executive of all taxes (including any
                                       interest or penalties imposed with respect to such taxes),
                                       including, without limitation, any income taxes, employment
                                       taxes (and any interest and penalties imposed with respect
                                       thereto) and Excise Taxes imposed upon the Gross-Up Payment,
                                       the Executive retains an amount of the Gross-Up Payment equal
                                       to the Excise Tax imposed upon the Payments.

                            (B)     All determinations required to be made under this subsection
                                      5(d)(iii), including whether and when a Gross-Up Payment is
                                      required and the amount of such Gross-up Payment and the
                                      assumptions to be utilized in arriving at such determination, shall
                                      be made by the Accountants, who shall provide detailed
                                      supporting calculations both to the Company and the Executive
                                      within 15 business days of the receipt of notice from the
                                      Executive that there has been a Payment, or such earlier time as is
                                      requested by the Company. All fees and expenses of the
                                      Accountants shall be borne solely by the Company. Any Gross-
                                      Up Payment, as determined pursuant to this subsection 5(d)(iii),
                                      shall be paid by the Company to the Executive within five days of
                                      the receipt of the Accountants' determination. Any determination
                                      made independently and in good faith by the Accountants shall be
                                      binding upon the Company and the Executive. As a result of the
                                      uncertainty in the application of Sections 280G and 4999 of the
                                      Code, at the time of the initial determination by the Accountants
                                      hereunder, it is possible that Gross-Up Payments which will not
                                      have been made by the Company should have been made
                                      ("Underpayment") consistent with the calculations required to be
                                      made hereunder. In the event that the Company exhausts its
                                      remedies pursuant to subsection 5(d)(iii)(C) and the Executive
                                      thereafter is required to make a payment of any Excise Tax, the
                                      Accountants shall determine the amount of the Underpayment
                                      that has occurred and any such Underpayment shall be promptly
                                      paid by the Company to or for the benefit of the Executive.

                            (C)     The Executive shall notify the Company in writing of any claim
                                       by the Internal Revenue Service that, if successful, would require
                                       the payment by the Company of the Gross-Up Payment. Such
                                       notification shall be given as soon as practicable but no later than
                                       thirty business days after the Executive is informed in writing of
                                       such claim and shall apprise the Company of the nature of such
                                       claim and the date on which such claim is requested to be paid.
                                       The Executive shall not pay such claim prior to the expiration of
                                       the 30-day period following the date on which it gives such
                                       notice to the Company (or such shorter period ending on the date
                                       that any payment of taxes with respect to such claim is due). If
                                       the Company notifies the Executive in writing prior to the
                                       expiration of such period that it desires to contest such claim, the
                                       Executive shall:

                                       (1)     give the Company any information reasonably requested
                                                 by the Company relating to such claim,

                                       (2)     take such action in connection with contesting such claim
                                                 as the Company shall reasonably request in writing from
                                                 time to time, including, without limitation, accepting legal
                                                 representation with respect to such claim by an attorney
                                                 reasonably selected by the Company,

                                       (3)     cooperate with the Company in good faith in order
                                                 effectively to contest such claim, and

                                       (4)      permit the Company to participate in any proceedings
                                                  relating to such claim;

                                       provided, however, that the Company shall bear and pay directly
                                       all costs and expenses (including additional interest and
                                       penalties) incurred in connection with such contest and shall
                                       indemnify and hold the Executive harmless, on an after-tax basis,
                                       for any Excise Tax or income tax (including interest and
                                       penalties with respect thereto) imposed as a result of such
                                       representation and payment of costs and expenses. Without
                                       limitation on the foregoing provisions of this subsection 5(d)(iii),
                                       the Company shall control all proceedings taken in connection
                                       with such contest and, at its sole option, may pursue or forego
                                       any and all administrative appeals, proceedings, hearings and
                                       conferences with the taxing authority in respect of such claim
                                       and may, at its sole option, either direct the Executive to pay the
                                       tax claimed and sue for a refund or contest the claim in any
                                       permissible manner, and the Executive agrees to prosecute such
                                       contest to a determination before any administrative tribunal, in a
                                       court of initial jurisdiction and in one or more appellate courts, as
                                       the Company shall determine; provided, further, that if the
                                       Company directs the Executive to pay such claim and sue for a
                                       refund, the Company shall advance the amount of such payment
                                       to the Executive, on an interest-free basis and shall indemnify
                                       and hold the Executive harmless, on an after-tax basis, from any
                                       Excise Tax or income tax (including interest or penalties with
                                       respect thereto) imposed with respect to such advance or with
                                       respect to any imputed income with respect to such advance; and
                                       provided, further, that any extension of the statute of limitations
                                       relating to payment of taxes for the taxable year of the Executive
                                       with respect to which such contested amount is claimed to be due
                                       is limited solely to such contested amount. Furthermore, the
                                       Company's control of the contest shall be limited to issues with
                                       respect to which a Gross-Up Payment would be payable
                                       hereunder and the Executive shall be entitled to settle or contest,
                                       as the case may be any other issue raised by the Internal Revenue
                                       Service or any other taxing authority.

                            (D)     If, after the receipt by the Executive of an amount advanced by
                                       the Company pursuant to subsection 5(d)(iii)(C), the Executive
                                       becomes entitled to receive any refund with respect to such
                                       claim, the Executive shall (subject to the Company's complying
                                       with the requirements of subsection 5(d)(iii)) promptly pay to the
                                       Company the amount of such refund (together with any interest
                                       paid or credited thereon after taxes applicable thereto). If after
                                       the receipt by the Executive of an amount advanced by the
                                       Company pursuant to subsection 5(d)(iii), a determination is
                                       made that the Executive shall not be entitled to any refund with
                                       respect to such claim and the Company does not notify the
                                       Executive in writing of its intent to contest such denial of refund
                                       prior to the expiration of 30 days after such determination, then
                                       such advance shall be forgiven and shall not be required to be
                                       repaid and the amount of such advance shall offset, to the extent
                                       thereof, the amount of Gross-Up Payment required to be paid.

6.     Disability or Death. Upon the Executive's death or disability, the provisions of
Sections 1, 2, 4, and 5 of this Agreement will terminate. This contract provides no
benefits due to disability or death in addition to any death, disability and other benefit
provided under the Company benefit plans in which the executive participates. The
Executive shall be considered disabled if the Executive is entitled to long-term disability
benefits under the Company's disability plan or policy.

7.     Cause. For purposes of this Agreement, the term "Cause" means (i) intentional
fraud or material misappropriation with respect to the business or assets of the Company,
(ii) persistent refusal or willful failure of the Executive to perform substantially his duties
and responsibilities to the Company, other than an asserted responsibility which would
give rise under Section 5(c) above to a right to terminate and have such termination
considered an involuntary termination without Cause, which continues after the
Executive receives notice of such refusal or failure, (iii) conduct that constitutes
disloyalty to the Company, and that materially damages the property, business or
reputation of the Company, or (iv) conviction of a felony involving moral turpitude.

8.     Termination. This Agreement shall terminate upon the successful completion of the
Term of this Agreement; provided, however, that if the Executive's employment is
terminated during the Term of this Agreement and the Company's and the Executive's
obligations under Sections 5, 9 or 10 hereof have not been satisfied as of the last day of
the Term of this Agreement, such obligations shall survive the expiration of the Term of
this Agreement and shall remain in effect until such time as all such obligations have
been satisfied. No additional payments are required by the termination of this
Agreement. The Executive, if he has remained an employee during the Term of this
Agreement and has attained a minimum of age 55, shall be considered vested in the
benefits provided under the Company's Supplemental Executive Retirement Plan,
Executive Performance Supplemental Retirement Plan and Supplemental Benefit Plan.

9.     Fees and Expenses. The Company will pay all reasonable fees and expenses, if any,
(including, without limitation, legal fees and expenses) that are incurred by the Executive
to enforce this Agreement and that result from a breach of this Agreement by the
Company, unless such fees and expenses result from a claim made by the Executive that
is deemed by an arbitrator, mediator, or court, as applicable, to be frivolous or made in
bad faith, in which case each party shall pay its own fees and expenses.

10.    Tax Withholding. The Company may withhold from all amounts payable under this
Agreement an amount necessary to satisfy its income and payroll tax withholding
obligations.

11.    Assignment. The rights and obligations of the Company under this Agreement will
inure to the benefit of and will be binding upon the successors and assigns of the
Company. If the Company is consolidated or merged with or into another corporation, or
if another entity purchases all or substantially all of the Company's assets, the surviving
or acquiring corporation will succeed to the Company's rights and obligations under this
Agreement. The Executive's rights under this Agreement may not be assigned or
transferred in whole or in part, except that the personal representative of the Executive's
estate will receive any amounts payable under this Agreement after the death of the
Executive.

12.    Rights Under this Agreement. The right to receive benefits under the Agreement
will not give the Executive any proprietary interest in the Company or any of its assets.
Benefits under the Agreement will be payable from the general assets of the Company,
and there will be no required funding of amounts that may become payable under the
Agreement. The Executive will for all purposes be a general creditor of the Company.
The interest of the Executive under the Agreement cannot be assigned, anticipated, sold,
encumbered or pledged and will not be subject to the claims of the Executive's creditors.

13.     Notice. For purposes of this Agreement, notices and all other communications to
the Executive must be in writing addressed to the Executive or his personal representative
at his last known address. All notices to the Company must be directed to the attention of
the Chief Executive Officer. Such other addresses may be used as either party may have
furnished to the other in writing. Notices are effective when mailed if sent by United
States registered mail, return receipt requested, postage prepaid. Notices sent otherwise
are effective when received. Notwithstanding the forgoing, notices of change of address
are effective only upon receipt.

14.     Miscellaneous. To the extent not governed by federal law, this Agreement will be
construed in accordance with the law of the State of Maryland without reference to its
conflict of laws rules. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing and the
writing is signed by the Executive and the Company. A waiver of any breach of or
compliance with any provision or condition of this Agreement is not a waiver of similar
or dissimilar provisions or conditions. The invalidity or unenforceability of any
provision of this Agreement will not affect the validity or enforceability of any other
provision of this Agreement, which will remain in full force and effect. This Agreement
may be executed in one or more counterparts, all of which will be considered one and the
same agreement.

          WITNESS the following signatures.

PEPCO HOLDINGS, INC.                                           EXECUTIVE


By:    JOHN M. DERRICK, JR.                                         T. S. SHAW    
Chairman of the Board and Chief                                  Thomas S. Shaw
Executive Officer