<PAGE>

                                                                    EXHIBIT 10.7
                                                                           99058

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


This Agreement ("Agreement") is made and entered into this 27 day of July, 2000,
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, Customer desires Algonquin to transport natural gas for Customer's
account on a firm basis pursuant to the terms and conditions of Pipeline's Rate
Schedule AFT-1; and

     WHEREAS, Algonquin desires to transport natural gas for Customer's account
on a firm basis pursuant to the terms and conditions of Pipeline's Rate Schedule
AFF-1; and

     NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements 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, 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          15,000 Dth
               Maximum Annual Transportation Quantity      5,475,000 Dth

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 Daily Delivery
     Obligation.
<PAGE>

                                                                           99058

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


                                   ARTICLE II
                                TERM OF AGREEMENT

2.1  This Agreement shall become effective on November 1, 2000, and shall
     continue in effect for a term ending on and including October 31, 2001,
     ("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 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.

                                        2
<PAGE>

                                                                           99058

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


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 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.



                                        3
<PAGE>

                                                                           99058

                                SERVICE AGREEMENT
                       (APPLICABLE TO 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.

                                       4
<PAGE>

                                                                           99058

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

                                  ARTICLE VIII
                           AGREEMENTS BEING SUPERSEDED

When service commences under this Agreement, it shall supersede the following
agreements between the parties hereto, except that in the case of conversions
from former Rate Schedules F-2 and F-3, the parties' obligations under Article
II of the service agreements pertaining to such rate schedules shall continue in
effect.

                                 Not Applicable

                                       5
<PAGE>

                                                                           99058

                                SERVICE AGREEMENT
                       (APPLICABLE TO RATE SCHEDULE AFF-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/ Gregory J. Rizzo
                                           -------------------------------------
                                                     Gregory J. Rizzo
                                                 Vice President, Marketing

                                       BOSTON GAS COMPANY

                                       By:
                                           -------------------------------------

                                       6
<PAGE>

                                                                           99058

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


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

                              Dated: July 27, 2000


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


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


     Lambertville, NJ         15,000                   At any pressure requested
                                                       by Algonquin but not in
                                                       excess of 750 PSIG




Signed for Identification

Algonquin:
           --------------------------

Customer:
          ---------------------------

                                       7
<PAGE>

                                                                           99058

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

                                    Exhibit B

                              Point(s) of Delivery

                               Dated: July 27,2000

           To the service agreement under Rate Schedule APT-1 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                    (Dth)                     (Psig)
     --------               -------------------        -----------------


     Ponkapoag, MA              15,000                 Algonquin's line pressure
                                                       as may exist from time
                                                       to time.


Signed for Identification

Algonquin:
           --------------------------

Customer:
          ---------------------------

                                       8