SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27638; 70-10097 and 70-9699)

KeySpan Corporation
Northeast Gas Markets LLC, et al.

Order and Supplemental Order Authorizing Exemption from Cost Standards under Section 13(b)

January 14, 2003

Northeast Gas Markets LLC ("NEGM"), Beverly, Massachusetts, a nonutility subsidiary of KeySpan Corporation ("KeySpan"), a registered holding company; KeySpan's utility subsidiaries Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery New York ("KEDNY"), Brooklyn New York; KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery Long Island ("KEDLI"), Hicksville, New York; Boston Gas d/b/a KeySpan Energy Delivery New England ("Boston Gas") and Essex Gas Company d/b/a KeySpan Energy Delivery New England ("Essex Gas"), both located in Boston, Massachusetts; and EnergyNorth Natural Gas, Inc. d/b/a KeySpan Energy Delivery New England ("ENGI"), Manchester, New Hampshire¹ (collectively "EnCana Declarants"), have filed with the Securities and Exchange Commission ("Commission") a declaration, as amended under File No. 70-10097 ("EnCana Declaration"), under sections 12(f) and 13(b) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 54 under the Act. The Commission issued a notice of the filing of the EnCana Declaration on November 22, 2002 (Holding Co. Act Release No. 27607). In addition, Alberta Northeast Gas Limited ("ANE") and Boundary Gas, Inc. ("Boundary"), both nonutility affiliate companies of KeySpan, together with NEGM and KeySpan (collectively with the EnCana Declarants, "Declarants") have filed post-effective amendment No. 12 in File No. 70-9699 ("ANE Declaration") also under section 13(b) of the Act and rule 54 under the Act. The Commission issued a notice of the underlying application-declaration in File No. 70-9699 on September 21, 2000 (Holding Co. Act Release No. 27234). The Commission did not receive any requests for a hearing. The two matters have been consolidated for purposes of the requested orders.

By orders dated November 7, 2000 and December 1, 2000 (Holding Co. Act Release Nos. 27271 and 27286) (collectively, the "Merger Order"), the Commission authorized KeySpan to acquire Eastern Enterprises. By orders dated November 8, 2000, and December 1, 2000 (Holding Co. Act Release Nos. 27272 and 27287) (collectively, "Financing Order") the Commission authorized various external and intrasystem financing transactions and approved of KeySpan's service companies and other intrasystem transactions. KeySpan registered as a holding company on November 8, 2000.

The Financing Order also granted an interim exemption, through November 8, 2001, from the "at cost" standards of rules 90 and 91 for NEGM's provision of contract administrative services to ANE and Boundary ("Contract Services"). By subsequent orders dated November 8, 2001, and May 7, 2002 (Holding Co. Act Release Nos. 27271 and 27286), the Commission has extended the interim exemption through January 15, 2003. The Boundary arrangements end on January 15, 2003, and the ANE arrangements will expire on October 31, 2007.

NEGM, a Delaware limited liability company, is a nonutility company that provides natural gas procurement, contract management and marketing services to customers in connection with large natural gas supply contracts with Western Canadian gas producers.² NEGM provides contract services to ANE and Boundary under longstanding management services arrangements. The Boundary management services arrangement commenced in 1984; the ANE management services arrangement commenced in 1991.³ Each of ANE and Boundary purchase Canadian natural gas and resell it to numerous local distribution companies ("US Customers") in the northeast United States. ANE and Boundary were each formed by their respective US Customers to facilitate the purchase of Canadian gas supplies.

The US Customers served by Boundary include the KeySpan Gas Utilities and nine gas utility companies that are not affiliated with KeySpan. The nine unaffiliated US Customers hold entitlements to 42.62% of the gas sold by Boundary while the KeySpan Gas Utilities hold the remaining entitlements. Ownership interests in Boundary are proportionate to the gas entitlements.

As noted above, the Boundary gas project expires on January 15, 2003, and the KeySpan Gas Utilities will no longer buy Canadian gas from Boundary. In the EnCana Declaration the EnCana Declarants state that in order to avoid interruption of the base load supplies once the Boundary arrangement ends, the KeySpan Gas Utilities as well as several gas utilities that are Boundary participants but not affiliated with KeySpan ("Unaffiliated Utilities"),⁴ have each entered into contracts with EnCana Corporation ("EnCana") to supply Canadian gas beginning on January 15, 2003 ("EnCana Gas Contracts"). NEGM assisted the Unaffiliated Utilities and the KeySpan Gas Utilities in their negotiation and execution of the new EnCana Gas Contracts. The record indicates that because NEGM represented customers whose aggregate gas supply consisted of large volumes, they were able to obtain more favorable prices and terms than would have been available had these utilities negotiated separately. NEGM's longstanding experience with the Canadian gas market and suppliers through the Boundary and ANE arrangements was an important factor in these utilities choosing NEGM to assist in the EnCana transaction.

The Unaffiliated Utilities and the KeySpan Gas Utilities have entered into a management service agreement and agency agreement (collectively, the "M&A Agreement") under which NEGM will provide contract services to the utilities for the EnCana Gas Contracts after the Boundary arrangement expires. However, the KeySpan Gas Utilities and NEGM have executed a letter of agreement which states that the effectiveness of the M&A Agreement as between NEGM and the KeySpan Gas Utilities is conditioned upon obtaining any necessary approvals from the Commission under the Act and applicable state regulatory commissions.⁵

In accordance with the M&A Agreement it has negotiated with the Unaffiliated Utilities and the KeySpan Gas Utilities, NEGM will provide day-to-day contract services consisting of notifying EnCana of the amounts of gas the utilities would like to schedule for delivery; processing and auditing the EnCana gas supply bills to ensure their accuracy and submitting to the utilities their pro rata share of the gas supply costs based on the amount of gas they each purchased; preparing and filing regulatory and customs reports in Canada and the U.S. relating to the EnCana gas supply; providing informational support to the gas utilities for their federal and state regulatory filings; and daily interactions with EnCana regarding the EnCana Gas Contracts (including price negotiations when appropriate). These are the same types of services NEGM currently provides under the Boundary and ANE arrangements. The fee structure under the M&A Agreement with NEGM is the same as for the Boundary and ANE projects -- $0.0128/Mcf of contracted volume. Because the KeySpan Gas Utilities and the Unaffiliated Utilities are parties to the same M&A Agreement, all of the participating utilities (affiliated and non-affiliated) will receive the same services at the same price and terms.

The fee Boundary and ANE pay NEGM for services under the Boundary and ANE arrangements is passed directly through to their US Customers, on an "as billed" basis⁶ as part of the price they pay for gas to ANE and Boundary.⁷ Thus, the fee is treated by the US Customers as part of the cost of gas. The KeySpan Gas Utilities will continue to treat the NEGM fee paid under the M&A agreement as a cost of gas under the proposed new EnCana arrangements. Each of the KeySpan Gas Utilities' respective retail gas distribution rates are subject to regulation by the state public utility commissions in the states in which each utility provides gas service and their gas costs are reviewed by the state regulators in their respective rate proceedings.

NEGM's fee with regard to the provision of Contract Services to ANE and Boundary is subject to the review of the Department of Energy and/or the Federal Energy Regulatory Commission. Further, Applicants represent that neither ANE or Boundary are permitted to operate at a profit or loss, and all of their costs are charged to their customers on an "as-billed" basis.

With respect to the KeySpan Gas Utilities, the EnCana Gas Contracts and the M&A Agreement expire on March 31, 2004, unless extended pursuant to the terms of those agreements. Once these arrangements terminate, NEGM may wish to enter into contracts to provide the KeySpan Gas Utilities with contract services for new Canadian gas supplies that the KeySpan Gas Utilities purchase. Accordingly, Declarants request authority (A) until October 31, 2007, for NEGM to continue to provide Contract Services to ANE for the duration of the ANE arrangement; and (B) until March 31, 2006, for NEGM to enter into transactions, under the EnCana Gas Contracts and the M&A Agreement described above, to provide contract services to the KeySpan Gas Utilities with respect to their gas supplies provided the following conditions are met: (1) the price charged to a KeySpan Gas Utility (a) is no greater than the prices that unaffiliated entities pay to NEGM for the same type of contract services and (b) will not be greater than $0.0128/Mcf with respect to the KeySpan Utilities; (2) the non-price terms of any NEGM gas contract services provided to a KeySpan Gas Utility are the same as those provided to non-affiliated entities obtaining the same type of service from NEGM; and (3) a KeySpan Gas Utility's cost of gas is regulated by its applicable state commission and the utility treats the price paid for NEGM services as a cost of gas.

The fee NEGM will charge for its contract services under the M&A Agreement will be calculated on the same basis for the Unaffiliated Utilities and the KeySpan Gas Utilities. The M&A Agreement under which the Unaffiliated Utilities will also obtain services from NEGM attests to the arm's-length nature of the NEGM fee and services and demonstrates that the fee does not exceed market prices. In addition, the current fee under the ANE contract and the EnCana contract was originally established in arms-length negotiations between numerous non-affiliates in 1995, well before KeySpan acquired NEGM or its interests in certain of the Boundary and ANE utility participants.

Declarants state that there is no data available to determine accurately the cost of shifting the EnCana/ANE contract administration from NEGM to an internal group within the KeySpan Gas Utilities. Administering these consortium-based import purchases on a utility-by-utility basis, as opposed to the joint administration basis reflected in the arrangements with NEGM, has never been considered because of the cost and operational inefficiencies which would be involved. Declarants state that it would be materially more costly and inefficient to administer consortium import purchases on an individual utility-by-utility. Moreover, the fee structure for the NEGM services has been in effect for nearly twenty years. The NEGM fee is the result of arms-length negotiations between NEGM and the numerous utilities, including the KeySpan Gas Utilities, who are participants in the Boundary, ANE and EnCana purchases, and who were wholly unaffiliated with NEGM when the fees were originally negotiated. Based upon the unique facts and circumstances in this request, the exemption from the cost requirement under section 13(b) is warranted.⁸

KeySpan states, for purposes of rule 54, that it is in compliance with all requirements of rule 53(a), except clause (1). In a Commission order issued on December 6, 2002 (Holding Co. Act Release No. 27612) ("EWG/FUCO Order"), the Commission, among other things, authorized KeySpan to invest in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs"), as defined in sections 32 and 33 of the Act, respectively, so that KeySpan's aggregate investment (as defined in rule 53(a)(1)(i)) in EWGs and FUCOs, does not exceed $2.2 billion ("EWG/FUCO Limit"). At September 30, 2002, KeySpan's aggregate investment in EWGs and FUCOs, was approximately $895,000,000, or about 180% of KeySpan's "consolidated retained earnings" as defined in rule 53(a)(1), for the period ending September 30, 2002.

Although KeySpan's aggregate investment exceeds the 50% "safe harbor" limitation contained in rule 53, KeySpan's aggregate investment is below the EWG/FUCO Limit authorized in the EWG/FUCO Order. In addition, KeySpan states that it has complied and will comply with the record-keeping requirements of rule 53(a)(2), the employee limitation under rule 53(a)(3) and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail regulatory commissions. Finally, none of the circumstances described in rule 53(b) has occurred or is continuing.

According to the application upon which the Financing Order was based, as of June 30, 2000, the most recent period for which the financial statement information was evaluated in the Financing Order, KeySpan's pro forma consolidated common equity to total capitalization ratio was approximately 35%. As of September 30, 2002, KeySpan's consolidated capitalization consisted of approximately 33.0% equity and 67% debt. KeySpan represents that the proposed transactions will have no adverse impact on the requirement that it maintain a common equity ratio that is at least 30% of its capitalization. Further, as of September 30, 2002, KeySpan's senior unsecured debt was rated investment grade by all major rating agencies.

Fees and expenses to be incurred in connection with the proposed transaction are estimated to be approximately $291,000. Declarants maintain that, other than as outlined above, no other state or federal commission, other than this Commission, has jurisdiction over the proposed transaction.

Due notice of the filing of the EnCana Declaration and the ANE Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the EnCana and ANE Declarations be permitted to become effective, subject to the terms and conditions prescribed in rule 24 under the Act.

NEGM shall file, within 60 days of the close of each financial quarter, quarterly reports with the Commission detailing: (a) the type of gas services rendered and to whom; (b) the price for such gas services and how that price was determined and (c) income statements and balance sheets of NEGM.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

¹ KEDNY, KEDLI, Boston Gas, Essex Gas and ENGI are collectively referred to as the "KeySpan Gas Utilities."

² Keyspan indirectly holds a 90% ownership interest in NEGM. Michael S. Lucy Associates, a company which is wholly owned by Michael S. Lucy, owns the remaining 10% interest of NEGM. Mr. Lucy is the president of NEGM.

³ NEGM was originally owned by a private energy project development company in Boston ("JMC"). JMC was sold to PG&E and Bechtel in 1996 and NEGM became an affiliate of U.S. Generating Company ("U.S. Gen"). KeySpan and Mr. Lucy purchased NEGM from U.S. Gen in 1998.

⁴ The Unaffiliated Utilities are Bay State Gas Company, The Berkshire Gas Company, and Northern Utilities, Inc., gas utility subsidiaries of NiSource and Energy East, both registered holding companies under the Act.

⁵ Other than the approval of the Commission, the Applicants do not require any other federal or foreign governmental approvals to effectuate the M&A Agreement. Under the New York Public Service Law and certain New York Public Service Commission ("NYPSC") requirements, KEDNY and KEDLI were required to file their EnCana Gas Contracts and the associated M&A Agreement with the NYPSC and made such filing on August 16, 2002. These were notice filings and no NYPSC approval is required as a result of this process.

Under Massachusetts law, Boston Gas and Essex Gas are required to obtain approval from the Department of Telecommunications and Energy ("DTE") of their EnCana Gas Contracts as well as the M&A Agreement because they are contracts with an affiliate for a term of greater than one year under which the utilities will be making payment for services received from the affiliate. On November 27, 2002, the DTE issued an order approving the contracts.

Under New Hampshire law, ENGI is required to file any affiliate contract in excess of $500 with the New Hampshire Public Utilities Commission ("NHPUC") within ten days of its execution. On August 26, 2002, ENGI made the required filing of the M&A Agreement. No additional action on the filing is required by the NHPUC.

⁶ "As-billed" means that all of the ANE and Boundary customers are charged the exact same amount on the exact same basis for the administrative services provided by NEGM as are ANE and Boundary. Specifically, when NEGM charges ANE and Boundary $0.0128 per Mcf for administrative services, ANE and Boundary charge their customers that same $0.0128 per Mcf.

⁷ Boundary Gas, Inc. 40 FERC ¶61,088, at 61,244 (1987); Brooklyn Union Gas Co., 1 FE ¶ 70,285, at 71,200.

⁸ New England Electric System, et al., Holding Co. Act Release No. 22309 (December 9, 1981); Columbus Southern Power Co., et al., Holding Co. Act Release No. 25326 (June 5, 1991); and Blackhawk Coal Co., et al., Holding Co. Act Release No. 23834 (September 20, 1985).

http://www.sec.gov/divisions/investment/opur/filing/35-27638.htm