A local water utility will refund nearly $3.6 million to customers in Rancho Cordova and Arden Manor under a settlement with the California Public Utilities Commission.

Golden State Water Co. also will pay a $1 million fine to the state for overbilling customers for past plant improvement work conducted around the state.

The refunds to local customers, approved Thursday by the PUC, will be paid over three years. Although the amount of the refunds will vary based on usage and locations, the average will be about $65 per year per customer.

"Today's decision approves a settlement that was entered into after a robust investigation into allegations that Golden State Water did not exercise reasonable management oversight and failed to apply adequate internal controls over its procurement for plant improvements," said PUC President Michael Peevey.

Golden State Water, a unit of San Dimas-based American States Water Co., serves about 16,000 residents and businesses in eastern Sacramento County.

The company had no immediate comment on Thursday's PUC action. But in July, it issued a news release saying it disputed many of the PUC's findings but had "agreed to settle the case to avoid the uncertainty of a costly legal battle."

"The company had long ago put in place safeguards to ensure that such a problem would not happen again," said Robert Sprowls, CEO of American States Water.

The local refunds are in addition to $5.9 million that the company has agreed to return to customers elsewhere in the state. They stem from a lengthy investigation by the PUC into billing irregularities by the utility dating back to the 1990s.

According to the PUC, Golden State Water officials discovered in 2003 that two company managers had awarded more than 100 non-bid contracts totaling $20 million to a single engineering firm over a 15-year period.

An internal investigation by the company then found that the engineering firm overbilled the company, resulting in overcharges to customers, the PUC said.

Golden State Water later terminated the managers, but the PUC said the utility did not report the overbillings to the regulatory agency. The PUC said it discovered the problem only after a former Golden State Water executive came forward.

Most of the non-bid engineering work was for wells and water treatment facilities in Northern California.

As part of the settlement, Golden State Water will reduce its rate base for Arden and Rancho Cordova customers by about $1.2 million. The company also will conduct three audits of its operations over the next 10 years and will provide reports on its procurement practices to the PUC.

Founded more than 80 years ago, Golden State Water provides water to 256,000 customers throughout California.

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