National Grid has resolved a series of disputes over how much it owes its biggest electricity supplier, but the resolution is going to mean a rate increase for the utility company’s Rhode Island customers.

The deal reached among National Grid, a state agency that represents ratepayers, and Constellation Energy of Baltimore calls for National Grid to make payments to Constellation over the next year that total $50.2 million. And under the agreement, ratepayers will pick up the tab.

The Public Utilities Commission, which on Tuesday voted 3 to 0 to approve the agreement, will decide how to assess customers the $50.2 million. If it decides that all the money should be collected in one year, it would mean a rate increase of $3.95 a month, or 4.2 percent, for a typical customer who uses 500 kilowatt-hours of electricity each month.

Electricity rates are already at an all-time high. In July, National Grid increased electricity rates by 21.7 percent because of a spike in the cost of natural gas and oil. A typical customer now pays $93.44 a month for electricity, according to the company.

Even though crude oil and natural gas have declined from their peaks this summer, National Grid has not suggested lowering its rates. The company plans to file new rates in November to go into effect in January.

National Grid said that although customers are facing another rate increase as a result of the settlement, they are far better off than they would be if the company lost the disputes in court. The company, and therefore its customers, could have been required to pay $300 million or more if Constellation won the pending lawsuits, said Ronald T. Gerwatowski, deputy general counsel for National Grid USA.

“The way we came out of this settlement is good news for customers, when you consider the potential liability that was hanging over our heads,” he said yesterday.

The settlement arose from two major disagreements that National Grid had with Constellation Energy, a company that supplies 66 percent of all the electricity delivered by National Grid in Rhode Island.

In a lawsuit filed in U.S. District Court in Worcester in April, Constellation claimed that National Grid breached two long-term contracts, signed by the companies in 1998, that required Constellation to provide electricity to National Grid through 2009.

Constellation said that the contract called for National Grid to pay a fixed charge for the power as well a “fuel adjustment factor” –– an extra charge that is assessed when the market price of oil and natural rise above certain dollar amounts.

Constellation said National Grid had been making these fuel adjustment payments through 2004, but stopped doing so in 2005. In a document submitted to state regulators, Constellation calculated that from 2005 through 2009, the extra payments National Grid was liable for would amount to $189.4 million.

National Grid has countered that it stopped making the fuel index payments in 2005 because the company believed it was no longer required to, based on its interpretation of the 1998 contract.

“It was our belief that the contract fairly read it was intended to have the fuel payments end after 2004,” Gerwatoski said. And beyond that, Constellation didn’t invoice National Grid for the extra payments, he said.

That changed this spring when a Massachusetts judge ruled against National Grid in a similar case involving similar contract language. The ruling was in favor of TransCanada, another National Grid supplier. In that case, National Grid stopped making fuel adjustment payments to TransCanada in 2005, just as it did with Constellation. But TransCanada immediately objected. National Grid agreed to resume the payments “under protest” until a court ruled on the contract language.

In March, U. S. District Judge F. Dennis Saylor IV sided with TransCanada. “There is no indication anywhere in the contract that [National Grid]’s obligations as to the fuel adjustment factor expire in 2004,” the judge wrote. “The contract is an unambiguous, integrated agreement, negotiated and executed by sophisticated corporate entities.”

Constellation filed its lawsuit against National Grid about two weeks later, citing the TransCanada ruling.

The other major dispute between Constellation and National Grid companies arose from a new system adopted in New England for compensating power generators. The system, which was approved by federal regulators in 2006, required generators to receive additional compensation based on how much capacity a generator had at a particular time. The change –– supported by ISO New England, the regional power grid operator –– was designed to ensure that generators had an incentive to build additional power plants to support the anticipated needs of the region.

The agreement that created the new payment system contained language that assigned this extra cost to the suppliers for the remainder of existing contracts, according to National Grid. But Constellation disagreed and contended National Grid owed the company for these capacity payments. National Grid filed suit in U.S. District Court in Rhode Island in September 2006, asking the court to decide the matter. The suit had not been resolved before the two companies reached their settlement.

Constellation told the Rhode Island Public Utilities Commission that National Grid could owe it $178.3 million for these capacity payments.

The settlement reached by the two companies resolves both of these issues. Gerwatowski, of National Grid, said that even though the company believed it would likely win both disputes, it was too risky to press on with the legal challenges, given the amount of money at stake.

“In this case, it could get up to $300 million and that was simply an unacceptable risk to take,” he said. “It wouldn’t be a prudent thing to do.”

tbarmann@projo.com