Xcel Energy Inc. officials are backing a settlement of a proposed natural gas rate increase that would boost the minimum monthly charge that North Dakota residential customers pay, while imposing a rate freeze until 2010.

The accord would increase Xcel Energy residential natural gas customers' bills by about 3.4 percent annually, or less than $3 a month for a typical homeowner. Commercial customers would see a much smaller increase, company officials said.

Kent Larson, an Xcel vice president, and company consultant David Sederquist met with the state Public Service Commission on Friday to discuss the $2.17 million settlement, which would affect about 43,600 North Dakota natural gas customers. Most live in Fargo, West Fargo and Grand Forks.

Xcel initially requested a $2.8 million natural gas rate increase in a filing last December. In February, the company raised its rates by $2.16 million, using a recently approved North Dakota law that allows utilities to temporarily boost their rates while they await a verdict from state regulators.

If the proposed settlement is adopted, it will increase Xcel Energy's revenues only by about $10,000 annually from what the company has been collecting since mid-February. The charges would be apportioned differently, with residential customers paying more and commercial accounts less.

For homeowners, the most notable part of Xcel's request is an increase in the company's minimum service charge, which is billed to customers monthly whether or not they use any gas.

Before the rate increase was filed, Xcel charged residential natural gas customers a minimum of $15.69 monthly. In February, the charge went up to $18.13. If the settlement is approved, it will increase again, to $18.48.

The higher minimum charge will supply most of Xcel's requested revenue increase, commission President Susan Wefald said.

She disputed company officials' description of the settlement's terms as a 3.4 percent increase in homeowners' gas bills. Should the commission accept the settlement, an Xcel residential customer's minimum charge will increase by 17.8 percent.

"That's the percentage increase, actually, that the company is going to be making on this case," Wefald told Larson and Sederquist. "For you, as a company, it reflects a significantly larger increase … in revenues."

Sederquist and Commissioner Kevin Cramer said customers would consider the case's effect on their entire gas bills, not just one element of them.

"Our concern has been to make sure when this is talked about in the media, and whatever, that customers don't get the wrong impression about how this is going to impact them," Sederquist said.

The increase in the minimum charge is intended to cover Xcel's costs for expanding its natural gas delivery network in growth areas - primarily in Fargo - and to offset increased operations and maintenance costs.

The Public Service Commission has granted Xcel natural gas rate increases in 2001 and 2005, which had the effect of boosting its annual revenues by $1.25 million. The latest settlement proposal includes a freeze on Xcel's natural gas rates until Jan. 1, 2010.

A utility's rate structure is intended to cover its costs for supplying gas or electricity to customers while providing a financial return to its shareholders.

Larson said Xcel Energy's returns on equity have lagged in the past decade, hovering just above 6 percent on average. Public filings indicate that in 2005, Xcel Energy's return on equity in North Dakota was 5.71 percent; in 2006, it was 6.33 percent.

The proposed settlement includes the possibility of credits on customers' natural gas bills if Xcel Energy's returns reach 10.75 percent in the next three years.

Fifty percent of the utility's earnings would be returned to customers, in the form of credits on their natural gas bills, if its earnings are greater than 10.75 percent, the proposed agreement says. If earnings rise above 11.25 percent, the earnings rebate would rise to 75 percent.

Cramer and Commissioner Tony Clark said they doubted Xcel's earnings would reach those benchmarks. Sederquist described them as having "symbolic value."

"This demonstrates that we're not trying to push a settlement here that is going to give us excess earnings," Sederquist said.