Xcel Energy has agreed to a somewhat smaller bill increase for natural gas customers in Minnesota, as long as state utility regulators approve a deal the company negotiated with state officials, unions and affordability advocates.

Minneapolis-based Xcel said Wednesday that it would shrink its original request for a 9.6%, $59.03 million rate increase to a 7.5%, $46.31 million hike on bills.

Under the agreement, the increase for residential customers would be smaller than for large commercial businesses and would result in bills that are $4.20 per month higher for the average residential customer.

"We've worked collaboratively with stakeholders to achieve an outcome that supports improvements in system reliability and resiliency, strengthening safety and inspection programs and taking steps to operate the cleanest possible natural gas system that includes more than 9,700 miles of underground infrastructure in Minnesota," said Xcel spokesman Theo Keith.

The rate increase is smaller than a temporary 8.5% rate increase the Public Utilities Commission (PUC) approved for 2024, meaning customers would receive a refund for the difference. Xcel estimates that would be a roughly $9 one-time credit on bills for residential customers. However, it's still a large increase overall.

Xcel said it wanted higher rates to upgrade and maintain its gas transmission and distribution infrastructure as well as safety systems at gas peaking plants and for projects in other parts of the business.

The 9.6% increase would have resulted in a typical residential natural gas customer paying an extra $6.93 per month. Xcel is the second-largest gas provider in Minnesota with 477,000 customers.

Keith said if the PUC approves the settlement, gas rates for Minnesota residential customers would remain below the national average.

Xcel struck the deal with every party that officially intervened in the case, including the Minnesota Department of Commerce, Attorney General Keith Ellison, the ratepayer watchdog nonprofit Citizens Utility Board of Minnesota (CUB) and two trade unions.

The PUC has the final word on the docket, however, and there were Minnesotans who asked the commission to reject the initial increase.

"For retired people, it's hard to pay for increases in everything, natural gas, gasoline, food, just everything, for persons on a fixed income," said Shoreview resident Ray Gordner in a handwritten letter to the PUC.

Brian Edstrom, senior regulatory advocate for CUB, said consumers are "really struggling" and that was reflected in public comments on the case. Still, he said the deal was better than what Xcel had asked for and protects ratepayers in important ways.

CUB and Ellison's office successfully campaigned to stop Xcel from billing customers for about $300,000 in dues to the American Gas Association, an industry trade group. CUB argued the gas association promotes continued use of fossil fuels rather than carbon-free energy.

The settlement also reduces by $100,000 the amount of money Xcel can recoup from customers for compensation of company executives.

"Periodic rate increases are inevitable and necessary for utilities to continue to provide safe and reliable service," Edstrom said. "Obviously, though, it's in our interest to try to limit those increases as much as possible so that they are truly only allowing the utility to recover what is needed."

The PUC in March 2023 approved a 2.7%, $20.9 million gas rate increase for Xcel. That was significantly smaller than the 6.6% hike Xcel initially asked for in 2021. Before that, Xcel requested much smaller rate increases for natural gas service in 2009, 2006 and 2004.

Last June, the PUC also granted Xcel a 9.6% rate increase through three years for its electric service. That fell short of what Xcel wanted, though the company in April dropped an appeal about a key profit measure.