Otter Tail Power Co. has asked South Dakota regulators for a rate increase to help pay for a $490 million environmental upgrade at the Big Stone Power plant on the South Dakota-Minnesota border.

The coal-fired plant is jointly owned by Otter Tail, Montana-Dakota Utilities Co. and Northwestern Energy, which serve customers in parts of South Dakota, North Dakota and Minnesota. The companies will share the cost of reducing pollution that causes haze.

Otter Tail, which is based in Fergus Falls, Minn., wants to boost rates by 2 percent in South Dakota beginning Oct. 1 to cover first-year construction expenses, a change that would cost its average residential customer an additional $1.56 a month. The eventual rate increase could reach 15 percent by the time construction is completed in 2016, according to the company, which also has customers in North Dakota and Minnesota.

The environmental upgrade is required by state and federal regulations, and it could eventually lead to higher rates for all three utility companies' customers in South Dakota and the other two states.

The South Dakota Public Utilities held its first public hearing on the Otter Tail request Tuesday, when commissioners assessed the company a filing fee and authorized its staff to hire consultants.

PUC Chairman Chris Nelson said the commission expects to make a decision in the case within six months to a year. The commission may decide to grant a much different increase than Otter Tail has requested, he said.

"What they want and what they're eventually going to get are two different things," Nelson said.

The Minnesota Public Utilities Commission voted in December to endorse the Big Stone environmental upgrade as prudent. Environmental groups, which wanted to replace the coal-fired plant with natural gas and renewable energy such as wind power, had argued that extending the plant's life would be a mistake because of rising coal prices and probable future regulation of greenhouse gases.

The South Dakota Environment Department's plan for reducing haze requires the plant, located near Big Stone City, S.D., to cut emissions of sulfur dioxide and nitrogen oxide, according to Otter Tail.

Otter Tail and Montana-Dakota Utilities officials have asked the North Dakota Public Service Commission for advance approval of the environmental upgrade as justified and prudent. If the commission approves the plan, that would make it easier for both utilities to get rate increases later to help cover the cost.

Otter Tail spokesman Cris Kling said both South Dakota and North Dakota allow rate "riders" that would permit recovery of the cost of environmental upgrades at Big Stone. The company is exploring how to seek a rate increase in Minnesota, she said.

Otter Tail has about 129,300 electricity customers in eastern Minnesota, northeastern South Dakota and eastern North Dakota, but only 11,700 are in South Dakota.

MDU spokesman Mark Hanson said the Bismarck, N.D.-based company, which has about 75,000 electricity customers in North Dakota and about 8,700 in South Dakota, is likely to seek rate increases in the two states later to recover the cost of upgrading the Big Stone plant.

"We'll eventually do something," Hanson said. "We don't have anything pending or ready to file."

Claudia Rapkoch of Northwestern said the company, based in Sioux Falls, plans to seek a rate increase for its 61,000 electricity in South Dakota next year. That would be the first general rate increase sought by the company in 30 years, though the company has increased charges to customers without formal rate cases as the cost of power has risen, she said.

Each of the three utilities that own Big Stone is handling cost recovery a little differently, Rapkoch said.