
                                AGENCY AGREEMENT

     This Agency Agreement  ("Agency  Agreement") dated the 1st day of December,
1996, is entered into between Public Service Company of North Carolina,  Inc., a
North  Carolina  corporation  ("Principal"),  and Sonat Public  Service  Company
L.L.C., a Delaware limited liability company ("SPSC").

     WHEREAS,  Principal is a party to numerous firm  transportation and storage
contracts  providing for transportation and storage of natural gas on its behalf
by various interstate pipeline companies  (including any such contracts to which
Principal shall be party during the term of this Agency Agreement,  collectively
the "Contracts"); and

     WHEREAS,  from time to time Principal has unused firm transportation and/or
storage  capacity  under its Contracts  ("Unused  Capacity")  that it desires to
release   temporarily  to  third  parties  in  accordance  with  the  rules  and
regulations of the Federal Energy Regulatory Commission ("FERC"); and

     WHEREAS,  in view of SPSC's  expertise in the  utilization and marketing of
interstate  pipeline  capacity,  Principal  desires  to  have  SPSC  handle  the
marketing of Principal's Unused Capacity on its behalf.

     NOW, THEREFORE, the parties hereby agree as follows:

     1. Subject to the provisions of Section 3 hereof, Principal hereby appoints
and authorizes  SPSC as its sole and exclusive  agent for marketing  Principal's
Unused  Capacity  to third  parties  in  accordance  with the  FERC's  rules and
regulations and the tariffs of the applicable interstate pipelines. As agent for
Principal,  SPSC shall have the authority to perform all functions  necessary to
carry out its  responsibilities  hereunder,  including  but not  limited to, the
authority to post all Unused  Capacity for bid on the electronic  bulletin board
of the applicable interstate pipeline and to specify all of the terms applicable
to the proposed release of capacity.

     In addition to the foregoing,  Principal and SPSC  expressly  recognize and
agree that SPSC shall have the right to itself acquire from time to time some or
all of Principal's  Unused  Capacity and that it shall be entitled to do so on a
prearranged basis in accordance with the FERC's rules and regulations,  provided
that SPSC is willing to pay Principal an amount for such Unused Capacity that is
not less than the gross  compensation  received in  connection  with the same or
similar transactions between Principal and non-affiliated parties.

     2. SPSC hereby  acknowledges  and agrees that Principal shall have the sole
and exclusive right to determine:

     (a)  the time period for the release of any Unused Capacity;

     (b)  the location and path of any Unused Capacity to be released;


<PAGE>



     (c)  the quantity of Unused Capacity to be released at any time;

     (d)  any and all  conditions on which such Unused  Capacity may be recalled
          by Principal;

     (e)  the methodology to be used to select the successful  bidder other than
          the methodology specified in the applicable pipeline's tariff;

     (f)  any applicable  rate  requirements  such as minimum rates,  volumetric
          rates or reservation rates.

     3. SPSC hereby agrees that during the term of this Agency Agreement it will
undertake to market  Principal's Unused Capacity in such a manner as to maximize
the  revenues  received by  Principal  in  connection  with all Unused  Capacity
released  by  Principal.  Principal  hereby  agrees that in the event and to the
extent it chooses to release any of its Unused Capacity, SPSC will have the sole
and exclusive  right to remarket such Unused  Capacity  pursuant to the terms of
this Agency Agreement;  provided,  however, that in the event that Principal has
the  opportunity  to utilize  its Unused  Capacity to make a  "secondary  market
transaction"  (as defined in the North Carolina  Utilities  Commission  ("NCUC")
December 22, 1995 "Order Approving Stipulation" in Docket No. G-100, Sub 67), it
shall promptly advise SPSC of such opportunity and SPSC, as its agent,  shall be
obligated to implement that transaction unless SPSC has an alternative secondary
market transaction which would utilize the same capacity and which would yield a
higher rate than the transaction proposed by Principal.

     4.  Principal  hereby  agrees to  cooperate  with SPSC in  developing  such
procedures,  to furnish to SPSC such  information,  and to execute  such further
agreements  as may be  reasonably  necessary  in order for SPSC to  fulfill  its
obligations as agent under this Agency Agreement. SPSC shall be entitled to rely
and shall be fully  protected  in relying on all  information  provided to it by
Principal in connection with its responsibilities hereunder.

     5. This Agency Agreement shall become effective as of the date first stated
above and shall  remain in full  force and effect for a period of ten years from
said  date.  Notwithstanding  the  foregoing,  Principal  shall be  entitled  to
terminate this Agreement (i) in the event and effective on the date that neither
PSNC  Production  Corporation  nor any other  affiliate  of  Principal  (a "PSNC
Affiliate") holds a membership  interest in SPSC (such date shall be referred to
herein as the "Withdrawal  Date") provided that Principal has given SPSC written
notice  no less than five days  prior to the  Withdrawal  Date of its  intent to
terminate this  Agreement on the  Withdrawal  Date or (ii) in the event that the
NCUC by final and unappealable order (excluding any order approving a settlement
voluntarily  entered  into by  Principal  other  than a  settlement  voluntarily
entered into by Principal  which was  previously  discussed  with SPSC and which
both Principal and SPSC  previously  agreed was in their mutual best  interests)
requires  Principal to absorb any of the costs of  Principal's  Unused  Capacity
rights as a result of any actions or  omissions to act by SPSC  hereunder,  said
termination  to be  effective  as of the  effective  date  of the  NCUC's  final
unappealable order. Principal agrees that it shall use all reasonable efforts to
oppose any action by the NCUC that would require  Principal to absorb any of the
costs of Principal's Unused Capacity

                                       -2-


<PAGE>



rights.  In the event of any termination of this Agency  Agreement in accordance
with the preceding  sentence,  any capacity  release which is in place as of the
date of such  termination  will  continue  in effect for its  original  duration
notwithstanding the termination of this Agency Agreement.

     6. In  consideration  for SPSC's  agreement  to act as agent for  Principal
under this Agency Agreement,  Principal agrees that it shall pay SPSC each month
during  the term of this  Agency  Agreement  an  amount  equal to 25% of the net
compensation  (as  defined in the NCUC's  December  22,  1995  "Order  Approving
Stipulation" in Docket No. G-100,  Sub 67) earned by it for all secondary market
transactions  associated with  Principal's  Unused Capacity rights on interstate
pipeline  companies during such month,  calculated in accordance with the "Order
Approving  Stipulation"  issued by the North  Carolina  Utilities  Commission in
Docket No. G-100, Sub 67, on December 22, 1995,  provided,  however,  that in he
event that the NCUC at any time reduces below 25% percent the  percentage of net
compensation from secondary market  transactions that natural gas companies such
as Principal may retain for their  shareholders,  then the amount that Principal
shall be required to pay to SPSC as  compensation  for its  services  under this
Agency  Agreement  shall be reduced to such  percentage of the net  compensation
received by Principal during each month from all secondary  market  transactions
associated with Principal's Unused Capacity rights (as calculated above) that is
equal to the percentage of net compensation  from secondary market  transactions
which may be retained  by natural  gas  companies  such as  Principal  for their
shareholders at such time.

     7. This Agency  Agreement  shall be governed by and construed in accordance
with the laws of the State of Delaware,  without  giving effect to its conflicts
of laws  rules.  Each  party  hereto  expressly  consents  to the  non-exclusive
jurisdiction  of the  state  courts  located  in the  State of  Delaware  in all
disputes  arising under or related to this  Agreement.  Each party hereto hereby
waives any objection it may have to the venue of any action,  suit or proceeding
brought in such courts or the  convenience  of the forum.  Service of process on
each party in any action  arising  under or related to this  Agreement  shall be
effective  if  delivered  or sent to such  party in  accordance  with  Section 9
hereof.

     8.  Principal  hereby agrees that SPSC and all of its  officers,  committee
members, owners and representatives shall have no liability to Principal for and
shall,  to the fullest extent  permitted by applicable  law, be indemnified  and
held harmless by Principal from any and all losses, liabilities,  damages, costs
and expenses  (including all reasonable  attorney's  fees and all costs of suit)
resulting  from or arising out of any act or omission  to act  hereunder  unless
such act or omission to act constitutes gross negligence,  willful misconduct or
bad faith.

     9. All notices,  requests,  demands, and other  communications  required or
permitted to be given or delivered  under or by reason of the provisions of this
Agreement  shall be in writing  and shall be given by  certified  or  registered
mail,  postage  prepaid,  or delivered by hand or by nationally  recognized  air
courier  service,  or in the form of a telecopy  or  telegram,  directed  to the
address or telecopy number of such party set forth below:

                                       -3-


<PAGE>



         If to Principal:

                  Public Service Company of North Carolina Inc.
                  400 Cox Road
                  P.O. Box 1398
                  Gastonia, North Carolina  28053-1395
                  Attention:  Frank Yoho, Senior Vice President
                  Telecopy Number:  (704) 834-6548
                  Telephone Number:  (704) 834-6505

         If to SPSC:

                  Sonat Public Service Company L.L.C.
                  c/o Sonat Marketing Company L.P.
                  Four Greenway Plaza
                  Houston, Texas  77046

         or

                  P.O. Box 1513
                  Houston, Texas  77252-1513
                  Attention:  Paul Koonce, Senior Vice President
                  Telecopy Number:  (713) 840-4999
                  Telephone Number:  (713) 840-4977

Any such notice shall become effective when received by the addressee,  provided
that any notice or  communication  that is  received  other than  during  normal
business  hours of the  recipient  shall be  deemed  to have  been  given at the
opening of business on the next business day of the recipient. From time to time
any party hereto may designate a new address or telecopy  number for purposes of
notice hereunder by notice to the other party hereto.

         IN WITNESS  WHEREOF,  the  parties  hereto  have  executed  this Agency
Agreement as of the date hereinabove first stated.

PUBLIC SERVICE COMPANY                   SONAT PUBLIC SERVICE
OF NORTH CAROLINA, INC.                  COMPANY L.L.C.



By:                                          By:
   ------------------------------            -----------------------------
      Name:                                      Name:
      Title:                                     Title:



                                       -4-


