The state Public Service Commission on Monday approved an increase in rates for Columbia Gas of Kentucky, giving it roughly half of what it initially sought.

Under the approved deal, residential customers will pay $3.05 more monthly in customer charges, an increase from $9.30 to $12.35. The company's gas delivery charge will remain at $1.87 per thousand cubic feet (Mcf).

Columbia Gas initially proposed to raise the average residential customer's monthly bill by $6.73.

Columbia Gas, which has 140,000 customers in 31 counties in Central and Eastern Kentucky, will wind up with an annual increase of $6.125 million total.

The resulting deal came out of a settlement reached between the utility and intervenors in the case including the state attorney general, the Lexington-Fayette Urban County Government and the Kentucky Industrial Utility Customers, which represents large businesses.

Columbia Gas had requested the rate increase to continue a program to replace aging gas lines. The 30-year program's goal is to replace 525 miles of lines through Central and Eastern Kentucky.

Many of the lines "are bare steel or unprotected or uncoated pipe," Columbia Gas spokeswoman Lisa Smith said. "It was the preferred material when it was installed in the 1920s to 1940s.

"It has served a good useful life, but it's starting to experience leaks more frequently, and it's time to replace it with new material."

The program also includes moving meters outside at older homes where they had been installed indoors.

The approved higher rates are also being used to develop a residential energy-efficiency program that would provide home energy audits, create an incentive program for customers to install more efficient appliances and offer assistance to low-income customers who are weatherizing their homes. A second phase of the program will include a furnace replacement program for low-income customers. The program will be administered by the Community Action Council.

Another change in rates will be a fee for late payment by residential customers. The PSC approved the fee but low-income customers who receive financial assistance will be exempted, the commission said.

An idea the commission rejected was Columbia's proposal to redesign its rates to switch their delivery fees to a flat fee.

Delivery fees account for almost half of bills and are where natural gas companies make their profits. The majority is the cost of gas, which is not allowed under the law to be marked up.

Under the PSC-approved plan, the delivery fee for residential customers will continue to include a fixed monthly charge, which is now higher, plus an existing additional charge that is tied to how much gas is used. If you use more, you pay more.

Columbia Gas has agreed not to refile a similar proposal until October 2010 at the earliest, the PSC said.

The change in rates is the first for the utility since 2007. In that case, bills rose $4.22 monthly for the average residential customer. The company had sought a total increase of $12.65 million in that case but was approved for $7.25 million.