Due to changes in the federal Internal Revenue Service’s (IRS) accounting regulations, Aquarion Water Co. will recover about $29 million for taxes paid since 2007 and refund those dollars to its customers over a three-year period.

Under a proposed settlement just reached with state regulators, Aquarion will reduce rates by 5.6% for the next three years, effective Jan. 1, 2015.

Aquarion also has agreed to not apply for any general rate increase that would go into effect prior to October 2017.

The state Public Utilities Regulatory Authority (PURA) must review and approve the proposed settlement before it can go into effect.

The settlement was announced by Aquarion officials and two state officials, Consumer Counsel Elin Swanson Katz and Attorney General George Jepsen.

The new IRS regulations, issued in September 2013, effectively allow Aquarion to adopt an alternative to how capital expenditures are treated for income tax purposes.

Charles V. Firlotte, Aquarion president and CEO, said customers “will receive an ongoing benefit by not only seeing a reduction to their bill, but also stability in their water rates.”

Aquarion will continue to pursue an ongoing infrastructure improvement program. The company is replacing aging and undersized water mains to enhance water system reliability, public fire protection, and conservation of water and power.

The infrastructure upgrades will be funded through a rate adjustment to take effect this October. The rate adjustment previously had been scheduled to be implemented next month.

Katz called the result “a very positive result for Aquarion’s customers. They will see nearly $10 million in bill credits annually over the next three years, which will make a noticeable difference in customer’s bills.”

Jepsen commended Aquarion “for coming forward to resolve this tax issue that was initially brought out last year in the company’s rate proceeding. This resolution not only provides consumers sizable rate relief over the next three years, but will reduce income tax expenses in future rate cases.

“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,” Jepsen said.