SAN DIEGO -- A tentative settlement deal was reached in a lawsuit alleging the city of San Diego unfairly charged homeowners sewer rates that should have been paid by industrial users, it was announced Monday.

The lawsuit was filed more than two years ago by Michael Shames, executive director of the Utility Consumers' Action Network.

Under the terms of the proposed settlement -- which must still be approved by the City Council -- San Diego would return $35 million to sewer customers who were incorrectly billed between 1994 and 2004.

According to City Attorney Michael Aguirre, the sewer rate overcharges amounted to $18.9 million annually.

Refunds would be distributed over the next four years, but would likely be offset by a proposed boost in wastewater fees.

Single-family sewer customers who are due a refund would automatically get a credit on their bill, according to Scott Tulloch, director of the Metropolitan Wastewater Department. A "claims process" is being established for sewer customers who have moved and are due a refund, he said.

It wasn't immediately clear how many of San Diego's 225,000 single-family sewer customers would be eligible to collect.

San Diego would also be obligated to pay about $5 million in attorneys' fees related to the case and $20,000 to hire an independent monitor to ensure the refunds are properly distributed to customers.

The city has also enacted a new rate structure to correct its past disproportionate wastewater billing practices, officials said.

"The imbalance that led Mr. Shames to sue the city have been corrected," Mayor Jerry Sanders said. "The inequities of billing practices have been corrected and residential ratepayers are no longer shouldering the burden of supporting the unfair cost of maintaining our wastewater system."

The proposed settlement announcement comes a day before Sanders is scheduled to outline a boost in water and wastewater fees.

"We need new rates in order to address the critical backlog of projects necessary to keep our wastewater system operating and to effect the terms of the settlement agreement," he said.

The mayor said the settlement would help "offset" some of the rate increases for single-family residential sewer customers.

The City Council is scheduled to consider the settlement Tuesday.