Installation of PostgreSQL on Ubuntu is straightforward, see http://library.linode.com/databases/postgresql/ubuntu-10.04-lucid
To create a simple database with its own user use the command line:
appenv=myapptst psql <<EOF create user ${appenv} createdb password '*****'; EOF createdb --username=postgres --owner ${appenv} ${appenv}
To access the database from Rails use pg
gem install pg
Entries in database.yml should look like
development: adapter: postgresql username: myappstst password: mypwd database: myapptst