I see a similar question for Ubuntu, but I'm interested in hosting my own OpenID provider through my Rails-based site that already has an identity and authentication system in place.
Note that I'm not looking for the delegate method to use the site as an OpenID.
What's the best way to do this properly?
This "No Shit Guide To Supporting OpenID In Your Applications" seems to be a step-by-step tutorial for what you want to do.
Railscasts episode 68 OpenID authentication describes how to do exactly this. It's about a year old, so you may have to do some stuff differently. I'd also strongly for either an updated or newer OpenID plugin (the link for the one in the video is labeled "outdated").
Err, wait, that is to support OpenID authentication in a Rails application you are writing, not to have run an OpenID endpoint in rails.. Here is a guide to implimenting an OpenID server/endpoint in Rails pretty-much form scratch.. gem install openid-server might be easier, but you'll learn more implementing it yourself, and the code is pretty simple.
This reminds me that the overview docs for ruby-openid server are still missing. But you can see the example, and until the docs are ported over, see the docs for the python implementation which follows the same object model.