OK. To start with the last point, extinct peerages reverted to the Crown (essentially being added to the Monarch's titles officially, but not being recorded), hence if the Monarch wants to grant an extince peerage to someone, essentially they just can as it's merely the equivelent of willing a peerage to a second member of the family. That said, it has been traditional that the 'Royal' Dukedoms are not awarded (Lancaster and Cornwall/Rothersay are reserved for HM and the the Prince of Wales, York, Clarence, Gloucester and now Edinburgh, Kent, Sussex and Cambridge for other members (William may be granted Sussex, Cambridge or Clarence after the marriage, or as he's already very well as 'Prince William of Wales' known HM may just issue a writ making Kate 'Princess Catherine of Wales' to avoid confusion by being suddenly referred to by a different title.).
In terms of the creation of a new peerage, this is essentially a royal writ, though it may have to be approved by Parliament thesedays (I suspect not officially, but it may require the approval of Parliament). In terms of naming, an extant earldom can be raised to a Dukedom (for example 4th Earl of Devonshire becoming 1st Duke of Devonshire), the Dukedom may be named after a major city of the realm (such as Edinburgh for Prince Phillip of London that was offered to Churchill), or after a battle (for example Earl of St. Vincent), or alternatively may be suggested to by the recipient for a particularly prominent personal connotation. Default for lower elements of the peerage is the surname.
Wellington is named after the town of Wellington in Somerset (the family title of Earl of Mornington belonging to his elder brother Richard), so essentially if you want to alter it just choose any prominant town in England (preferrably the South) that sounds nice, such as Exeter, Dorchester, Hastings, Oxford etc. if the main estate is there.