Customers of Aquarion Water Co. should reap the benefits in their monthly bill from a $29 million settlement reached between the state and water utility related to a change in the Internal Revenue Service’s accounting regulations.

Aquarion stands to recover about $29 million for taxes paid since 2007 and, as part of a settlement agreement, the company will refund those dollars to its customers over a three-year period, Consumer Counsel Elin Swanson Katz and Attorney General George Jepsen recently announced.

Under the settlement, Aquarion will provide water bill credits to customers equal to the amount of the income tax refund. The company also agreed that it would not apply for a general rate increase to go into effect prior to October 2017. Consumers would begin receiving credits on their bills in January 2015. Customers will see their bills decrease by about 5.6 percent.

The agreement was filed with the state Public Utilities Regulatory Authority (PURA) and must receive the regulators’ approval in order to take effect.

“I commend Aquarion for coming forward to resolve this tax issue,” said Jepsen in a statement. “Ratepayers fund capital expenses, like infrastructure maintenance and repair, and ultimately ratepayers should be the beneficiaries of changes in federal regulations that lead to savings. This is an excellent settlement for Aquarion customers who will not only see a reduction to their bill but also will see stability in their water rates for the near future.”

In September 2013, the IRS issued regulations which allow businesses – including Connecticut’s public service companies – to adopt an alternative method of determining how capital expenditures can be treated for federal tax purposes. The IRS now allows certain qualified capital spending associated with the repair and maintenance of a utility plant to be deducted as an expense, rather than capitalized for tax purposes. The regulations further allow the companies to “reach back” for all taxes paid for a number of years.

Last year, prior to the IRS regulations announcement, the water company proposed a 23 percent rate increase, which Jepsen opposed in a brief filed with PURA. He argued that the rate increase was excessive and unnecessary.

Aquarion is the largest public water supply company in the state, servicing more than 625,000 people in 47 cities and towns throughout Connecticut, as well as serving customers in Massachusetts and New Hampshire. It is the largest investor-owned water utility in New England and among the seven largest in the U.S. The company is based in Bridgeport and has been in the public water supply business since 1857.

“The change in regulations has resulted in a great settlement for our customers,” Aquarion’s President and CEO Charles Firlotte said in a statement. “They will receive an ongoing benefit by not only seeing a reduction to their bill, but also stability in their water rates.”

Richard Sobolewski, supervisor of technical analysis for the Office of Consumer Counsel, Victoria Hackett, the office’s staff attorney and Dave Thompson, their utilities examiner, are assisting Consumer Counsel Katz with this matter.

Assistant Attorneys General John Wright and Michael Wertheimer, with Associate Attorney General Joseph Rubin, are assisting Jepsen with this settlement.