Xcel Energy would whittle down a proposed rate increase under a new agreement with a key state regulator and other interested organizations.

The utility has agreed to reduce its requested electricity rate hike from 9.8 percent over three years to 6.1 percent over four years.

"We would characterize that as a significant reduction," said Ross Corson, a spokesman for the Minnesota Department of Commerce, which is a party to the agreement filed Tuesday with the Minnesota Public Utilities Commission (PUC).

The so-called "settlement agreement" signifies progress in the electric company's rate case before the PUC, but the matter still won't likely be completed until next year.

Minneapolis-based Xcel last November filed for a $297 million rate increase over three years with the largest chunk of that — $195 million, or 6.4 percent — occurring in 2016.

In June, the Commerce Department and the Minnesota attorney general's office objected to Xcel's proposal as excessive, with Commerce specifically asking that Xcel's 2016 request be lopped from $195 million to $44 million.

Both agencies are tasked with looking out for the public interest in rate cases before the PUC. Unlike the Commerce Department, the attorney general's office isn't part of the settlement agreement with Xcel, Minnesota's largest electric utility.

Under the agreement, Xcel would increase rates in 2016 by $74.99 million, or 2.47 percent, according to the PUC filing. Rates would increase $59.86 million, or 1.97 percent in 2017; stay flat in 2018; and then rise $50.12 million, or 1.65 percent, in 2019.

Other organizations backing the agreement include the Minnesota Chamber of Commerce, the city of Minneapolis, commercial and industrial customers of Xcel and the nonprofit group Energy CENTS Coalition, which looks out for low-income consumers. AARP, which often argues against rate increases, isn't a part of the settlement agreement.

While rate cases often are contentious, they can involve mediation.

"The settlement agreement is the result of the mediation process," Xcel said in a statement to the Star Tribune. "The result still enables us to make the investments needed to keep our facilities running safely and reliably."

Xcel has said the major drivers of the rate increase are upgrades to the power grid and nuclear plants, investments in cleaner energy, higher property taxes, and normal business cost increases. The next rate increase for Xcel will follow five consecutive years of rate hikes.

Mike Hughlett • 612-673-7003