NASHVILLE — Attorneys for the city of Chattanooga contend that Tennessee-American Water Co.’s corporate parent is trying to pump up its stock price by seeking large rate increases through its subsidiaries such as Tennessee-American.

Staff File Photo by John Rawlston The Tennessee American Water Company facility in Chattanooga is shown in this aerial photograph taken in February of 2007.

But Tennessee-American maintains that the 21.2 percent rate increase it is seeking from the Tennessee Regulatory Authority is justified by soaring inflationary costs in areas such as the chemicals necessary to treat water and the need to maintain infrastructure such as water mains as well as legitimate obligations to investors.

The back-and-forth comes in written, post-hearing arguments filed by the city, the water company, the Chattanooga Manufacturers Association and the state’s Consumer Advocate and Protection Division.

Regulatory authority directors heard the rate case over a week-and-a-half period that ended last Thursday. The directors are expected to make a decision by Sept. 22 on whether to grant any or all of Tennessee-American’s request to earn an additional $7.6 million annually. Any rate increase would go into effect Oct. 1.

Chattanooga, state and local manufacturers are opposing Tennessee-American’s latest request, saying it is excessive, especially given the 12.3 percent rate increase that the regulatory authority approved last year for the company.

In its 31-page brief, the city’s legal team said that Tennessee-American’s parent company, American Water Works Co., filed rate cases in 12 states during the first three months of the year as it prepared to take American Water public in April.

Noting that American Water has been forced to write off $1.1 billion since 2003 and seen the value of its stock go down, the city’s brief argues the company is “promising its stock purchasers that it will solve its losses by ‘managing rate cases’ — meaning that TAWC (Tennessee-American) and its other subsidiaries will seek large rate increases.”

Tennessee-American attorneys countered that the company’s request to earn $7.6 million more from its 74,400 Chattanooga customers “is simply about economic reality.”

Company spokeswoman Kim Dalton said, “this is a rate case that seeks to recover the $21 million that was recently invested in Chattanooga’s water infrastructure to provide our customers with a high-quality and reliable water service.”

Moreover, she said, the increase also will “cover rising costs in electricity, gasoline and other expenses that all utilities and their customers are also experiencing.”

In their 83-page brief, Tennessee-American’s attorneys noted additional costs this year included about $500,000 in new charges for chemicals that ensure local water is pure.

But company attorneys also said Tennessee-American is entitled by law to a “fair rate of return.”

The company is seeking an 11.75 percent return on shareholder equity — a percentage the company maintains meets the “just and reasonable” requirement under state law. Water company attorneys argued that the law “requires the authority to examine not only what is just and reasonable for the customers, but also what is a just and reasonable rate of return for the utility company.”

The state says a 7.5 percent return on equity would be fair and reasonable for Tennessee-American. In fact, the state’s Consumer Advocate and Protection Division continued to argue that the company’s Chattanooga ratepayers deserve a $1.5 million cut in existing rates.

The city and manufacturers’ association are slightly more generous, arguing that Tennessee-American merits only a 9.9 percent return on equity at best. Instead of making an additional $7.6 million, the city and local manufacturers say Tennessee-American should make just $2.45 million more.

The state’s consumer advocate, Tim Phillips, said regulatory authority directors and staff are faced with going through a “massive amount of paperwork” as they sort through testimony and arguments. The case involved more than 60,000 pages of filings.

“But we feel confident that they (directors) will come out with a ruling that is in the best interests of the citizens of the state of Tennessee and, in particular, the citizens that have to pay the rates charged to them by Tennessee-American Water Co.,” Mr. Phillips said.

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