Minnesota officials on Thursday urged regulators to slash two-thirds off the rate increase that Xcel Energy Inc. has proposed for its 1.2 million electric customers across the state.

Xcel’s 10.7 percent proposed increase is creating “rate shock” among customers, officials said. The smaller rate hike recommended by the state Department of Commerce would still mean an increase of about 3 percent to 4 percent.

The department, which analyzes utility finances on behalf of ratepayers, said Xcel’s request for a $285 million increase should be reduced by more than $191 million, or 67 percent. Even with a smaller rate increase, the Minneapolis-based utility will be financially strong enough to offer safe, reliable service and invest in distribution, transmission and generation facilities, the department said.

Xcel officials didn’t respond in detail to the state’s objections, but said they would carefully study them during the regulatory review now underway.

“The request that we put in really reflects what we think is needed to run our business and serve our customers,” Laura McCarten, an Xcel regional vice president, said in an interview.

The objections were filed with the state Public Utilities Commission, which is considering Xcel’s rate hike. The financial details of the rate case are being reviewed by an administrative law judge, and public hearings are scheduled to begin Monday in Minneapolis. A decision is likely later this year.

Public hearings on XCEL rate increase Public hearings begin Monday on Xcel Energy’s proposed electric rate increase. Four of the seven hearings are next week. Monday: 1 p.m., Earle Brown Center, and 7 p.m., Sabathani Center, in Minneapolis. Thursday: 7 p.m., Central Park, Woodbury. Friday: 1 p.m., West Minnehaha Rec Center, St. Paul. Details and future hearing dates are at startribune.com/a2098.

The state attorney general’s office, which also intervenes in utility cases on behalf of consumers, separately urged regulators to scale back Xcel’s rate proposal, including its plan to boost the basic residential customer charge from $7.11 to $10 a month, or 40 percent. Customers pay that charge regardless of their kilowatt-hour usage.

“An increase in the magnitude of 40 percent by Xcel is unprecedented,” said Vincent Chavez, a financial analyst for the attorney general’s office, in written testimony Thursday.

Warning of customer “rate shock,” Chavez said Xcel “fails to acknowledge that its residential ratepayers are unable to pass the high cost of their energy bills off to other parties through sales of their products or services or to be able to take a tax deduction like Xcel’s business customers.”

The attorney general’s office also objected to Xcel’s request to charge ratepayers $756,000 to fly employees on corporate jets. Instead of paying $5,000 for a typical trip on a Xcel’s two company planes, employees could fly commercial at about $300 per trip, said financial analyst John Lindell.

Residential customers hit

For a typical residential customer, the full impact of the proposed rate hike would be 12 percent — or $9 on a monthly bill. Lindell said residential and lighting customers would be hit with higher-than-average increases compared with other ratepayers. Small businesses would see a 10.6 percent increase and large businesses a 9.5 percent boost, the utility has said.

Interim rate increases of about 9 percent overall took effect in January. If the PUC approves a permanent rate hike, it will be the fifth Xcel electric rate increase since 2005.

The utility has said the higher rates are needed to recoup investments in its two nuclear power plants, counter a drop in electric sales and pay for other power plant and transmission upgrades as well as higher property taxes.

But officials in the Commerce Department’s energy resources division recommended reducing Xcel’s cost for capital, employee benefits, income taxes, insurance and other operating and other costs. The department recommended reducing $22 million in administrative and general expenses by disallowing some incentive compensation.

Commerce officials also recommended lower return on equity of 10.24 percent, and an overall rate of return of 7.71 percent. Xcel had asked for a 10.6 percent return on equity and 7.9 percent return overall.

On employee pay, the department said Xcel should assume a 2.6 percent increase, rather than 4 percent. That would reduce the rate bump by $2.7 million, the department said.

The department also said it projects that Xcel’s revenue will be higher, diminishing the need to increase rates.