Koch Foods, one of Chattanooga’s biggest water users, reduced its poultry processing operations and laid off 35 workers Monday in response to rising utility and feed expenses.

“This is our first layoff ever,” Dan Nuckolls, senior operations manager for the poultry plant, told the Tennessee Regulatory Authority during a public hearing on water rates Monday night. “But my fear is that if our costs get out of line, as they appear to be doing in Tennessee, this facility doesn’t have a very bright future.”

Mr. Nuckolls said a proposed 20.6 percent water rate increase proposed by Tennessee-American Water Co., coming a year after a 12.3 percent hike in water rates, threatens to make Koch’s 335-employee Chattanooga plant less competitive than the company’s other poultry facilities. The proposed water rate increase, if accepted in full by state regulators, would boost Koch’s annual water bill by more than $100,000.

Tennessee-American officials insist higher rates are needed in response to rising fuel, labor and chemical costs and to fund more than $21 million of improvements planned for the 138-year-old water system.

In his opening argument before a three-member TRA panel, Tennessee-American Attorney Dale Grimes said Chattanooga’s water rates are now below most water suppliers in Tennessee and have increased less than most utilities over the past decade. Mr. Grimes said electricity, gasoline and natural gas prices have all risen more than water rates in the past decade.

“We can’t ignore economic reality,” Mr. Grimes told a three-member TRA panel which is hearing the water rate case this week in Chattanooga. “If you look at the average Tennessee-American Water rate increase since 1995, even adding in a full rate increase in this case, you will see that Tennessee-American customer rates have increased on average 4.6 percent a year — and that certainly compares favorably with other increasing costs.”

Among 243 water systems in Tennessee, water rates in Chattanooga would still rank about average at No. 123 if the TRA grants the full requested 20.6 percent increase and would remain cheaper than Eastside Utility District, Mr. Grimes said. The increase is projected to cost the average water user $3.65 more a month, or 12 cents a day, Mr. Grimes said.

But representatives for the state’s Consumer Advocate Office, the city of Chattanooga and the Chattanooga Manufacturers Association questioned the need for another water rate hike, which would collect an extra $7.6 million from the water company’s 74,400 customers.

“Our member companies have seen the increases come from Tennessee-American more frequently for larger amounts and the story that Dan Nuckolls told (about plant cutbacks due to rising water costs) can be replicated several times,” said Ray Childers, president of the Chattanooga Manufacturers Association.

Rick Hitchcock, an attorney for the city, said the requested rate hike in Chattanooga is part of $271 million of increases being sought this year by the parent company of Tennessee-American to help boost its stock price. Mr. Hitchcock said American Water Works, which owns the Chattanooga water system, has written off $1.1 billion since 2003, “leading to an aggressive campaign to raise rates” to boost profits for shareholders.

State Rep. Richard Floyd, R-Chattanooga, accused the water utility of using “smoke and mirrors” in its rate filings by asking twice as much as what the company expects the TRA to approve.

“They’ll take anything they can get,” he said. “I would be willing to bet my retirement that they will be back again next year, but there is no reason why Chattanooga has to have to highest rates of any major city in Tennessee.”

Vance Broemel, an attorney for Tennessee’s Consumer Advocate, said Tennessee-American actually should cut rates by $1.6 million, rather than raise rates, because the company is spending too much on attorneys and managers and trying to collect too much for its shareholders.

John Watson, general manager for Tennessee-American, said the water company looks for ways to operate more efficiently to reduce costs. He said the company is facing sharply higher expenses beyond its control, including four electric rate increases since April 2007, sharply rising costs for water treatment chemicals and a federally mandated payment to employees’ pension funds.

Jerry Hightower, a Chattanooga engineer who has worked for Tennessee-American and other water utilities, said essential water from Tennessee-American is still only a third as expensive for the average household as discretionary cable TV service.

“Even with this increase, water will still be only a half cent per gallon delivered to your home,” Mr. Hightower told the TRA.

The regulatory authority must decide how much, if any, rate increase to grant the water utility by September. Any rate change would become effective Oct. 1.