<PAGE>
 
                                                                   EXHIBIT 10.21

                                                                          86002C

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-1)
                       --------------------------------- 


This Agreement ("Agreement") is made and entered into this 1/st/ day of January,
1998, 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, pursuant to a settlement agreement approved on July 8, 1994, by the
Federal Energy Regulatory Commission in Docket Nos. RP93-14-000, et al.,
Algonquin and Customer entered into a Service Agreement (No. 86002) dated
September 1, 1994, and another Service Agreement through a permanent capacity
release (No. 86008R1) dated November 1, 1994, for service under Rate Schedule
AFT-1; and

WHEREAS, to enhance the ability of both parties' to administer, among other
things, nominations and capacity releases, Algonquin and Customer desire to
combine the two aforementioned service agreements into a single service
agreement under Rate Schedule AFT-1;

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-1, 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 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                      6,280 MMBtu
          Maximum Annual Transportation Quantity                 1,695,600 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
<PAGE>
 
                                                                          86002C

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-1)
                       --------------------------------- 


     to deliver at any Point of Delivery on any day a quantity of natural gas in
     excess of the applicable Maximum Daily Delivery Obligation.



                                  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 April 30,
     1999 ("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-1 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-1, nor less than the minimum rate under Rate Schedule AFT-1.



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
<PAGE>
 
                                                                          86002C

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-1)
                       --------------------------------- 
                                        

     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.


                                  ARTICLE III
                                 RATE SCHEDULE
                                        

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-1, (b) Algonquin's Rate Schedule AFT-1, pursuant to which
     service hereunder is rendered or (c) any provision of the General Terms and
     Conditions applicable to Rate Schedule AFT-1. 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-1.


                                   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. Natural gas to be delivered 
by Algonquin for the account of Customer

<PAGE>
 
                                                                          86002C

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-1)
                       --------------------------------- 


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-1 


                                  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
                           5400 Westheimer Court
                           Houston, TX 77056


       (b)  Customer:      Boston Gas Company
                           One Beacon Street
                           Boston, MA 02108


or such other address as either party shall designate by formal written notice.


                                  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.
<PAGE>
 
                                                                          86002C

                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-1)
                       --------------------------------- 
                                        

                                 ARTICLE VIII
                          AGREEMENTS BEING SUPERSEDED
                                        

When this Agreement becomes effective, it shall supersede the following
agreements between the parties hereto.

Service Agreement Nos. 86002, dated September 1, 1994 and 86008R1, dated
November 1, 1994, executed by Customer and Algonquin under Rate Schedule AFT-1.

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/ Robert B. Evans
                                       ------------------------------ 
                   
                                   Title:   Sr. Vice President
                                           --------------------------
                   
                   
                                   BOSTON GAS COMPANY
                   
                   
                                   By:  /s/ W. R. Luthern
                                         ---------------------------- 
                    
                                   Title:   VICE PRESIDENT
                                           --------------------------
<PAGE>
 
                                                                          
                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-1)
                       --------------------------------- 
                                        


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


                            Dated: January 1, 1998



              To the service agreement under Rate Schedule AFT-1S
            between Algonquin Gas Transmission Company (Algonquin)
                       and (Customer) Boston Gas Company
                        concerning Point(s) of Receipt

Primary            Maximum Daily            Maximum
Point of           Receipt Obligation    Receipt Pressure
Receipt               (MMBtu)               (Psig)
-------            ------------------    ----------------

                                         At any pressure requested 
                                         by Algonquin not in excess of 750 Psig.


Signed for Identification



Algonquin:  /s/ Robert B. Evans
           ---------------------------


Customer:  /s/ W. R. Luthern
          ----------------------------
<PAGE>
 
                                                                          
                               SERVICE AGREEMENT
                      (APPLICABLE TO RATE SCHEDULE AFT-1)
                       --------------------------------- 
                                        


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



                            Dated: January 1, 1998



              To the service agreement under Rate Schedule AFT-1S
            between Algonquin Gas Transmission Company (Algonquin)
                       and Boston Gas Company (Customer)
                        concerning Point(s) of Delivery


Primary            Maximum Daily               Minimum
Point of         Delivery Obligation       Delivery Pressure
Delivery              (MMBtu)                   (Psig)
--------         -------------------       -----------------


Signed for Identification


Algonquin:  /s/ Robert B. Evans
           --------------------------- 


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