<PAGE>
 
                                                                   EXHIBIT 10.16
                                                                          93002E


                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                     ------------------------------------ 


This Agreement ("Agreement") is made and entered into this 1st day of September,
1994, by and between Algonquin Gas Transmission Company, a Delaware Corporation
(herein called "Algonquin"), and Boston Gas Company (herein called "Customer"
whether one or more persons).

WHEREAS, Algonquin and Customer entered into a Service Agreement dated June 1,
1993, for service under Rate Schedule AFT-E; and

WHEREAS, Algonquin and its customers entered into a settlement agreement in
Algonquin's Docket Nos. RP93-14-000, et al. which provided, among other things,
for revised daily and annual contract entitlements under Rate Schedules AFT-1,
AFT-E, AFT-1S and AFT-ES; and

WHEREAS, the Federal Energy Regulatory Commission issued an order on July 8,
1994, approving the settlement in Docket Nos. RP93-14-000 et al; and
                                                          -- --     

WHEREAS, Algonquin and Customer desire to execute a superseding service
agreement under Rate Schedule AFT-E in accordance with the terms of the
settlement as approved by the Commission's July 8, 1994 order;

NOW, THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties do agree as follows:

                                   ARTICLE I
                              SCOPE OF AGREEMENT


1.1  Subject to the terms, conditions and limitations hereof and of Algonquin's
     Rate Schedule AFT-E, Algonquin agrees to receive from or for the account of
     Customer for transportation on a firm basis quantities of natural gas
     tendered by Customer on any day at the Point(s) of Receipt; provided,
     however, Customer shall not tender without the prior consent of Algonquin,
     at any Point of Receipt on any day a quantity of natural gas in excess of
     the applicable Maximum Daily Receipt Obligation for such Point of Receipt
     plus the applicable Fuel Reimbursement Quantity; and provided further that
     Customer shall not tender at
<PAGE>
 
                                                                          93002E

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      -----------------------------------


                                  ARTICLE  I
                              SCOPE OF AGREEMENT
                                  (Continued)

     all Point(s) of Receipt on any day or in any year a cumulative quantity of
     natural gas, without the prior consent of Algonquin, in excess of the
     following quantities of natural gas plus the applicable Fuel Reimbursement
     Quantities:



                 Maximum Daily Transportation Quantity (MMBtu)
                 -------------------------------------------- 

<TABLE>
                     <S>                     <C>
                     Nov 16 - Apr 15         30,000*
                     Apr 16 - May 31         28,824
                     Jun  1 - Sep 30         26,473
                     Oct  1 - Nov 15         28,824
 
</TABLE>

     *MDTQ to be utilized in applying monthly Reservation Charge

          Maximum Annual Transportation Quantity             10,411,514 MMBtu

1.2  Algonquin agrees to transport and deliver to or for the account of Customer
     at the Point(s) of Delivery and Customer agrees to accept or cause
     acceptance of delivery of the quantity received by Algonquin on any day,
     less the Fuel Reimbursement Quantities; provided, however, Algonquin shall
     not be obligated to deliver at any Point of Delivery on any day a quantity
     of natural gas in excess of the applicable Maximum Dally Delivery
     Obligation.
<PAGE>
 
                                                                          93002E

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      -----------------------------------

                                  ARTICLE II
                               TERM OF AGREEMENT
                                        
2.1  This Agreement shall become effective as of the date set forth hereinabove
     and shall continue in effect for a term ending on and including October 31,
     1996 ("Primary Term") and shall remain in force from year to year
     thereafter unless terminated by either party by written notice one year or
     more prior to the end of the Primary Term or any successive term
     thereafter; Algonquin's right to cancel this Agreement upon the expiration
     of the Primary Term hereof or any succeeding term shall be subject to
     Customer's rights pursuant to Sections 8 and 9 of the General Terms and
     Conditions.

2.2  This Agreement may be terminated at any time by Algonquin in the event
     Customer fails to pay part or all of the amount of any bill for service
     hereunder and such failure continues for thirty days after payment is due;
     provided Algonquin gives ten days prior written notice to Customer of such
     termination and provided further such termination shall not be effective
     if, prior to the date of termination, Customer either pays such outstanding
     bill or furnishes a good and sufficient surety bond guaranteeing payment to
     Algonquin of such outstanding bill; provided that Algonquin shall not be
     entitled to terminate service pending the resolution of a disputed bill if
     Customer complies with the billing dispute procedure currently on file in
     Algonquin's tariff.

                                  ARTICLE III
                                 RATE SCHEDULE
                                        
3.1  Customer shall pay Algonquin for all services rendered hereunder and for
     the availability of such service under Algonquin's Rate Schedule AFT-E as
     filed with the Federal Energy Regulatory Commission and as the same may be
     hereafter revised or changed; The rate to be charged Customer for
     transportation hereunder shall not be more than the maximum rate under Rate
     Schedule AFT-E, nor less than the minimum rate under Rate Schedule AFT-E.
<PAGE>
 
                                                                          93002E

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      ----------------------------------- 

                                  ARTICLE III
                                 RATE SCHEDULE
                                  (Continued)

3.2  This Agreement and all terms and provisions contained or incorporated
     herein are subject to the provisions of Algonquin's applicable rate
     schedules and of Algonquin's General Terms and Conditions on file with the
     Federal Energy Regulatory Commission, or other duly constituted authorities
     having jurisdiction, and as the same may be legally amended or superseded,
     which rate schedules and General Terms and Conditions are by this reference
     made a part hereof.

3.3  Customer agrees that Algonquin shall have the unilateral right to file with
     the appropriate regulatory authority and make changes effective in (a) the
     rates and charges applicable to service pursuant to Algonquin's Rate
     Schedule AFT-E, (b) Algonquin's Rate Schedule AFT-E, pursuant to which
     service hereunder is rendered or (c) any provision of the General Terms and
     Conditions applicable to Rate Schedule AFT-E. Algonquin agrees that
     Customer may protest or contest the aforementioned filings, or may seek
     authorization from duly constituted regulatory authorities for such
     adjustment of Algonquin's existing FERC Gas Tariff as may be found
     necessary to assure that the provisions in (a), (b), or (c) above are just
     and reasonable.

                                  ARTICLE IV
                              POINT(S) OF RECEIPT
 
Natural gas to be received by Algonquin for the account of Customer hereunder
shall be received at the outlet side of the measuring station(s) at or near the
Primary Point(s) of Receipt set forth in Exhibit A of the service agreement,
with the Maximum Daily Receipt Obligation and the receipt pressure obligation
indicated for each such Primary Point of Receipt. Natural gas to be received by
Algonquin for the account of Customer hereunder may also be received at the
outlet side of any other measuring station on the Algonquin system, subject to
reduction pursuant to Section 6.2 of Rate Schedule AFT-E.

                                   ARTICLE V
                             POINT(S) OF DELIVERY
                                        
Natural gas to be delivered by Algonquin for the account of Customer hereunder
shall be delivered on the outlet side of the measuring station(s) at or near the
Primary Point(s) of Delivery set forth in Exhibit B of the service agreement,
with the Maximum Daily Delivery Obligation and the delivery pressure obligation
indicated for each such Primary Point of Delivery.
<PAGE>
 
                                                                          93002E

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      ---------------------------------- 

Natural gas to be delivered by Algonquin for the account of Customer hereunder
may also be delivered at the outlet side of any other measuring station on the
Algonquin system, subject to reduction pursuant to Section 6.4 of Rate Schedule
AFT-E.

                                  ARTICLE VI
                                   ADDRESSES

Except as herein otherwise provided or as provided in the General Terms and
Conditions of Algonquin's FERC Gas Tariff, any notice, request, demand,
statement, bill or payment provided for in this Agreement, or any notice which
any party may desire to give to the other, shall be in writing and shall be
considered as duly delivered when mailed by registered, certified, or first
class mail to the post office address of the parties hereto, as the case may be,
as follows:

     (a)  Algonquin: Algonquin Gas Transmission Company
                     1284 Soldiers Field Road
                     Boston, MA 02135
                     Attn: John J. Mullaney
                           Vice President, Marketing

     (b)  Customer:  Boston Gas Company
                     One Beacon Street
                     Boston, MA 02108
                     Attn: William R. Luthern
                           Vice President, Gas Supply and Production

or such other address as either party shall designate by formal written notice.
<PAGE>
 
                                                                          93002E

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      -----------------------------------

                                  ARTICLE VII
                                INTERPRETATION

The interpretation and performance of the Agreement shall be in accordance with
the laws of the Commonwealth of Massachusetts, excluding conflicts of law
principles that would require the application of the laws of a different
jurisdiction.

                                 ARTICLE VIII
                          AGREEMENTS BEING SUPERSEDED
                                        
When this Agreement becomes effective, it shall supersede the following
agreements between the parties hereto.

Service Agreement No. 93002E executed by Customer and Algonquin under Rate
Schedule AFT-E dated June 1, 1993.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective agents thereunto duly authorized, the day and year first
above written.

                                        ALGONQUIN GAS TRANSMISSION COMPANY

                                        By:    /s/ John J. Mullarey
                                               -------------------------------  
                                        Title: VICE PRESIDENT, MARKETING
                                               -------------------------------


                                        BOSTON GAS COMPANY

                                        By:    /s/ William R. Luthern
                                               -------------------------------
                                        Title: Vice President
                                               -------------------------------
<PAGE>
 

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      --------------------------------- 

                                   EXHIBIT A
                              Point(s) of Receipt
                              -------------------

                            Dated: September 1, 1994

          To the service agreement under Rate Schedule AFT-E between
Algonquin Gas Transmission Company (Algonquin) and Boston Gas Company (Customer)
                         concerning Point(s) of Receipt

<TABLE>
<CAPTION>
     Primary                    Maximum Daily              Maximum
     Point of                Receipt Obligation        Receipt Pressure
     Receipt                      (MMBtu)                   (Psig)
     -------                 ------------------        ----------------  
     <S>                     <C>                       <C>  
     Hanover, NJ (TETCO)                               At any pressure requested
           Nov 16 - Apr 15         11,439              by Algonquin but not in
           Apr 16 - May 31         10,991              excess of 750 Psig.
           Jun  1 - Sep 30         10,094
           Oct  1 - Nov 15         10,991
 
     Lambertville, NJ                                  At any pressure requested
           Nov 16 - Apr 15         18,561              by Algonquin but not in
           Apr 16 - May 31         17,833              excess of 750 Psig.
           Jun  1 - Sep 30         16,379
           Oct  1 - Nov 15         17,833
</TABLE>


Signed for Identification

Algonquin: /s/ John J. Mullarey                                       
          ---------------------

Customer:  /s/ W. R. Luthern
          ---------------------
<PAGE>
 
                                                                          93002E

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      --------------------------------- 

                                   EXHIBIT B
                             Point(s) of Delivery
                             --------------------

                           Dated: September 1, 1994

          To the service agreement under Rate Schedule AFT-E between
Algonquin Gas Transmission Company (Algonquin) and Boston Gas Company (Customer)
                        concerning Point(s) of Delivery

<TABLE>
<CAPTION>
     Primary                               Maximum Daily           Minimum
     Point of                           Delivery Obligation    Delivery Pressure
     Delivery                               (MMBtu)                (Psig)
     --------                           -------------------    -----------------
     <S>                                <C>                    <C> 
     At Customer's reduction
     valves located at Everett, MA                                   75
       Nov 16 - Apr 15                         11,534
       Apr 16 - May 31                         11,082
       Jun  1 - Sep 30                         10,178
       Oct  1 - Nov 15                         11,082
  
     At the property line 
     on the outlet side of
     meter stations located at:
     Waltham, MA                                                    125
       Nov 16 - Apr 15                           5,287
       Apr 16 - May 31                           5,080
       Jun  1 - Sep 30                           4,665
       Oct  1 - Nov 15                           5,080
 
     East Braintree, MA                                             125
       Nov 16 - Apr 15                             526
       Apr 16 - May 31                             505
       Jun  1 - Sep 30                             464
       Oct  1 - Nov 15                             505
</TABLE>

Signed for Identification

Algonquin:/s/ John J. Mullarey
          --------------------

Customer: /s/ W R. Luthern
          -------------------- 
<PAGE>
 
                                                                          93002E

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      --------------------------------- 

                                   EXHIBIT B
                             Point(s) of Delivery
                             --------------------
                                  (Continued)

                            Dated: September 1, 1994

          To the service agreement under Rate Schedule AFT-E between
Algonquin Gas Transmission Company (Algonquin) and Boston Gas Company (Customer)
                        concerning Point(s) of Delivery

<TABLE>
<CAPTION>
     Primary                        Maximum Daily             Minimum           
     Point of                    Delivery Obligation     Delivery Pressure      
     Delivery                        (MMBtu)                 (Psig)             
     --------                    --------------------    -----------------      
     <S>                         <C>                     <C> 
     Weston, MA                                                100              
      Nov 16 - Apr 15                    480                                    
      Apr 16 - May 31                    461                                    
      Jun  1 - Sep 30                    424                                    
      Oct  1 - Nov 15                    461                                    
                                                                                
     Wellesley, MA                                              60              
      Nov 16 - Apr 15                  6,247                                    
      Apr 16 - May 31                  6,002                                    
      Jun  1 - Sep 30                  5,513                                    
      Oct  1 - Nov 15                  6,002                                    
                                                                                
     Ponkapoag, MA                                             200              
      Nov 16 - Apr 15                 15,186                                    
      Apr 16 - May 31                 14,591                                    
      Jun  1 - Sep 30                 13,401                                    
      Oct  1 - Nov 15                 14,591                     
</TABLE>


SIGNED for Identification

Algonquin: /s/ John J. Mullarey
           --------------------

Customer: /s/ W R. Luttern
          --------------------- 
<PAGE>
 

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-E)
                      ---------------------------------- 

                                   EXHIBIT B
                             Point(s) of Delivery
                             --------------------
                                  (Continued)

                            Dated: September 1, 1994

          To the service agreement under Rate Schedule AFT-E between
Algonquin Gas Transmission Company (Algonquin) and Boston Gas Company (Customer)
                        concerning Point(s) of Delivery

<TABLE>
<CAPTION>
     Primary                   Maximum Daily                Minimum
     Point of              Delivery Obligation          Delivery Pressure
     Delivery                   (MMBtu)                       (Psig)
     --------              -------------------          -----------------
     <S>                   <C>                          <C> 
     Norwood, MA                                               75
      Nov 16 - Apr 15            742
      Apr 16 - May 31            713
      Jun 1  - Sep 30            655
      Oct 1  - Nov 15            713
</TABLE>

     Algonquin's Maximum Daily Delivery Obligations for the East Braintree and
     Potter Street Points of Delivery under Contract Nos. 93002E and 93002 shall
     not exceed a combined daily total equal to the aggregate of the former
     Maximum Daily Delivery Obligations at the East Braintree Point of Delivery
     under Rate Schedules AFT-i (F-1) and AFT-E (F-1) in the amounts of 16,948
     MMBtu and 5,238 MMBtu, respectively.

Signed for Identification

Algonquin: /s/ John J. Mullarey
           -------------------- 

Customer:  /s/ W. R. Luttern
           --------------------