Peco Energy Co. has reached a settlement on a proposed electric-rate increase that will boost income by $127 million a year, about a third less than the Philadelphia utility initially sought.

The proposed increase, Peco's first in five years, would increase the company's distribution revenue by 10.9 percent. Peco said monthly bills for its 1.6 million customers will increase by less than 4 percent.

The settlement, negotiated with staff of the Pennsylvania Public Utility Commission and advocates for various customer classes, will require the formal approval of the PUC before it goes into effect on Jan. 1. It was filed Thursday with the commission.

Peco said the monthly total on a typical residential electric bill, showing use of about 700 kilowatt hours of electricity, would increase $4.17. The typical bill for a small-business customer would increase by about $17.02 a month, and monthly bills for a large customer would increase, on average, by $432.32.

In its March filing, Peco, a subsidiary of Chicago-based Exelon Corp., had sought a $190 million rate increase. After public hearings, utilities often settle rate increases rather than leaving the decision to an administrative law judge.

"With this funding we will continue to ensure safe and reliable electric service and develop new helpful programs and services for our customers," Craig Adams, Peco's president, said in a statement. "We appreciate the hard work and cooperation of all involved as we worked together on this necessary increase."

The monthly fixed charge for residential customers will increase from $7.13 to $8.45, or 18.5 percent.

Peco had proposed increasing the fixed fee to $12 a month, part of a growing nationwide trend among utilities to improve revenue flows by reducing reliance on per kilowatt rates, which are based on the volume of energy consumed. Electricity consumption has been flat.

Utilities argue that they need stable sources of revenue to maintain aging electrical-distribution systems, and say that the higher customer charges are a more fair way of allocating system costs.

Critics, including the AARP and energy-efficiency advocates, say boosting the fixed charges creates a disincentive for customers to conserve electricity.