The owner of Dillingham Ranch on O'ahu's North Shore is seeking to roughly triple rates for supplying water to nearby residents under a proposal that would resolve a longstanding issue of operating an unregulated utility — but at a hefty price for users.

An affiliate of Beverly Hills, Calif.-based real estate investment firm Kennedy Wilson Inc., which bought the ranch and its water system over the past two years, recently filed an application with the state Public Utilities Commission to set rates for the private water company as a regulated utility.

The utility and Kennedy Wilson affiliate North Shore Water Co. LLC has proposed raising rates for the roughly 120 residential customers it serves in Mokule'ia.

The plan has drawn objections from several customers who attended a commission hearing earlier this week, including a few who expressed shock at the rate increase being sought.

"A 200 percent increase from prior rates?" area resident Marc Rousseau said in written testimony. "Prior operators of the system did not seek such ridiculous increases and the nature of the operations has not significantly changed."

The state Consumer Advocate, which is charged with representing local utility consumer interests and ensuring people have reliable service at a reasonable cost, is reviewing the rate request and plans to submit an opinion to the PUC in part based on public testimony at the hearing.

The PUC later will issue a ruling setting rates for the utility that could be at, below or above what the water system owner is seeking.

Such a large increase isn't unprecedented. In August, the owner of a private water system on Moloka'i serving roughly 1,200 customers won PUC approval to raise rates 90 percent to 178 percent, nearly double to triple prior rates. But that case involved the utility owner, Molokai Ranch, threatening to cease service to end utility financial losses after the ranch shut down.

The Dillingham Ranch water system for decades has been unregulated by the state, and evolved many decades ago as neighboring landowners made informal agreements to tap into the water system of the ranch acquired in 1897 by Benjamin Franklin Dillingham, founder of Oahu Railway & Land Co.

The water system became more of a public issue after the Dillingham family sold the property in 1979. Under one owner, Japan-based Sankyo Tsusho Co., which bought the ranch in 1987 with plans to develop a resort and golf course, the system deteriorated and led to problems with water quality and reliability.

Sankyo, doing business as Mokuleia Land Co., failed at its controversial development plan, and complaints about water service led to an informal PUC staff opinion in 1995 that the water utility should be regulated.

Sankyo, however, sold the utility with most of the ranch in 2002 to Metropolitan Mortgage & Securities Co., which planned to develop the property but ran into financial trouble and filed for bankruptcy.

In 2005, the PUC issued an order that the ranch water system become a regulated utility.

Kennedy Wilson bought most of the ranch from Metropolitan Mortgage in May 2006 for $26 million, and a year later obtained PUC approval to complete the purchase of the water system.

As an interim measure, the PUC last year allowed Kennedy Wilson to charge water customers the same rates in effect Oct. 1, 2006 for Honolulu Board of Water Supply customers.

That rate for residential customers using up to 9,000 gallons per month is $2 per 1,000 gallons. (Higher rates apply for additional consumption.) Kennedy Wilson is asking to raise the lowest rate to $4.10, to raise rates for additional consumption and to replace a $4.18 monthly billing charge with a monthly meter charge of $48 to $168.

Judith Nelson, a ranch utility customer, said a household using 30,000 gallons over a two-month billing cycle pays about $75 under present ranch rates, which would be about $87 at present municipal rates and about $233 at the proposed rates.

Some utility customers said they feel Kennedy Wilson, which is seeking to develop 77 "ranching-oriented" home lots on 400 acres of the 2,700-acre ranch, is trying to subsidize water system expansion costs for its planned subdivision with higher rates for existing customers.

"This subdivision will require a reliable source of water which the current customers of North Shore Water are being asked to subsidize," said Thomas Shell in written testimony.

North Shore Water in its application to become a regulated utility said its rate increase was calculated to eliminate a financial net loss for the system and to provide a 0.42 percent return. The company projects that it will receive about $33,000 next year from rate revenue, but would need to receive about $90,000 to achieve its goal.

In a feasibility report on its subdivision project, Kennedy Wilson said it plans to provide water for the project from one of two unused ranch wells that have allocations from the state Commission on Water Resource Management.

Customers of North Shore Water receive water from one of two operating wells on ranch land.

"We hope to do what's fair ratewise, and accommodate the people with hardships," Clifford Smith, a Kennedy Wilson senior vice president, told about 40 people at the PUC hearing.

Smith added that the company initially sought to convert the ranch water system to the county system through an extension, but that plan proved unfeasible. He said the company spent $85,000 on extension plans that it will not recover from the proposed rate increase.

Pattie Weaver, a ranch water customer, said it's difficult not to feel as though the developer is attempting to dump a water problem onto utility customers as it seeks to profit from developing the ranch.

"That's all I can feel," she said.