The state's Public Service Commission granted Kentucky American Water a 29 percent rate hike Tuesday, or about three-quarters of what the utility had requested.
Because the amount approved is less than the 37 percent increase the utility put in place in late September, customers will get a refund of the difference.
But the increase comes on top of an 18 percent increase the PSC granted to Kentucky American last year.
The approved 29 percent increase applies to an average residential customer who uses 5,000 gallons of water a month. That person would see the water portion of their monthly bill rise from $27.46 to $35.40.
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Because bills are divided into a monthly service charge and a charge based on the amount of water used, someone who uses less than the average amount would see a less than 29 percent increase, and a customer who uses more water would see a higher increase.
The company had said more than 90 percent of the current requested increase would go toward paying for a controversial $164 million treatment plant on the Kentucky River north of Frankfort and a pipeline to carry the water to Lexington.
About a quarter of last year's increase went toward the plant and pipeline.
Kentucky American spokeswoman Susan Lancho said that, while the company still is studying the 91-page PSC decision, the cost of building the plant and pipeline have been included in the last two cases, "and that's it."
The rate increase played a significant role in the recent Lexington mayor's race.
In February, the water utility requested the 37 percent rate hike. When the PSC hadn't acted by late September, Kentucky American took advantage of a state law that allowed it to put the full increase into effect.
Mayor-elect Jim Gray, who had opposed the plant and pipeline project, intensified his criticism of incumbent Mayor Jim Newberry after the higher rate was put in place. Newberry supported the project but objected to the size of the rate increase.
The day after the Nov. 2 election, Newberry said water rates were the main issue that cost him the city's top job.
Gray released a statement Tuesday that said the new treatment plan, "was extravagant and did little but secure higher profits at the expense of Lexington's citizens."
He also said the PSC "worked hard to get a good deal," adding that "the current process is a deck stacked against the citizens."
"The best businesslike approach at this point is to prepare for the 2015 franchise negotiations and drive a hard bargain for our taxpayers," Gray said.
Through a spokesman, Gray declined to expand on how franchise negotiations could influence rates that are the responsibility of the PSC.
Kentucky American's current 20-year franchise agreement with the city expires in 2015. The franchise gives the water company the exclusive right to operate a water system in Fayette County.
Asked about Gray's comment, Lindsey Ingram III, an attorney who represents Kentucky American, said "we look forward to renewing that franchise for the benefit of all customers."
Newberry released a statement that said he was pleased that, as he had expected, the PSC reduced Kentucky American's rates. He also credited the efforts of the attorney general's office and the city's attorneys.
"I regret that Kentucky American elected to unnecessarily impose an excessive charge on consumers while the Public Service Commission's decision was pending," Newberry said.
The increase approved by the PSC Tuesday will raise the utility's annual revenues by $18.8 million. The increase Kentucky American had requested would have generated an additional $25.85 million.
The PSC trimmed a number of Kentucky American's requests, most significantly reducing the rate of return on shareholder equity, or the profit shareholders can expect for investing in things such as the new plant and pipeline. The company had argued for a rate of 11.5 percent. The PSC said 9.7 percent "provides Kentucky American with a fair and reasonable rate of return."
The commission also denied the cost of scheduled pay raises for Kentucky American employees, bonuses for non-union employees and stock bonus for company executives.
In response to a request from the Community Action Council for Lexington-Fayette, Bourbon, Harrison and Nicholas counties, the PSC told Kentucky American to start collecting more information on customers who have trouble paying their bills. Community Action, which advocates for low-income ratepayers, had argued for a system that increases the per-gallon cost for a customer who used more water. The PSC told Kentucky American to work with Community Action and others to come up with possible solutions for low-income customers.
The PSC also told Kentucky American to immediately stop disconnecting customers because they don't pay the Lexington water quality and landfill fees that appear on water bills. State law allows water service to be discontinued for non-payment of sewer fees, which also appear on the bill, but not the water quality or landfill fees.
Although the lion's share of its customers live in Lexington, Kentucky American serves 119,000 customers (homes, apartments, businesses and factories) in 10 counties.
The PSC considered the rate case for 10 months. It held hearings in Lexington and Frankfort. Also taking part in the case was the state attorney general, Community Action and the city of Lexington.
Lancho, the Kentucky American spokeswoman, described the process as "quite rigorous, quite comprehensive, quite extensive and quite transparent."
The PSC faced a Dec. 26 deadline to make a decision in the case, or Kentucky American would have been allowed to keep the full amount that it had requested.