Staff File Photo by John Rawlston The Tennessee American Water Company is seen in the foreground of this aerial photo taken February 19, 2007. The Tennessee Regulatory Authority has approved a 4.37 percent increase after the company had sought a 21.7 percent increase.

NASHVILLE — Tennessee-American Water Co. officials must live with a $1.65 million rate increase instead of the $7.64 million they had sought as a result of Monday’s ruling by the Tennessee Regulatory Authority.

In their 2-1 decision, the authority directors approved a 4.37 percent increase for Chattanooga residential, industrial and commercial rate payers. The rate increase for the average Chattanooga residential users will be about 72 cents per month versus the $3.65 per month sought by Tennessee-American.

The company had sought a 21.7 percent increase, but received about 21.6 percent of what it sought. Tennessee-American officials argued that inflation, additional investments in water infrastructure and the needs of its investors merited the increase.

Last year, the Regulatory Authority approved a 12.3 percent hike for Tennessee-American.

The regulatory authority’s action will result in a 4.37 percent increase in rates for Tennessee-American customers in Catoosa County and Fort Oglethorpe in North Georgia. It also provides a 12.77 percent rate increase to Signal Mountain and Walden’s Ridge in Hamilton County.

The increase will go into effect at the earliest date permitted by a contract, estimated to be September 2009.

Veteran Regulatory Authority Director Eddie Roberson said the decision was what was “just and reasonable.”

“Overall, in my opinion, the company did not meet the burden of proving the rate case they filed,” he said.

But company officials and attorneys “were persuasive in some elements of their case,” he said. “Hence my awarding of an overall increase.”

TRA Chairman Tre´ Hargett, who was hearing his first major rate increase case, agreed with Mr. Roberson in the 2-to-1 vote. Another newcomer to the agency, Director Mary Freeman, a former aide to Gov. Phil Bredesen, voted no, arguing Tennessee-American deserved about $500,000 more in management charges.

Tennessee-American President John Watson said he was disappointed by the ruling, which he said was contrary to previous TRA orders in denying the company the right to recover the costs of its filing and in not using long-term normal weather patterns to estimate future water consumption.

“This decision, in our view, is inconsistent with the evidence and the past orders by the TRA and we do not believe it is in the best long-term interests of our customers or water system,” Mr. Watson told reporters Monday night outside the company’s Chattanooga headquarters. “But as one of Chattanooga’s oldest businesses we will move forward and remain focused on providing water and service that satisfies our customers.”

Mr. Watson said the company is still reviewing the order, but he said no decisions have been made about either challenging the TRA ruling in court or asking for future rate increases to make up for any shortfall.

Attorneys and representatives for the city of Chattanooga, the Chattanooga Manufacturers Association and Tennessee Attorney General Robert Cooper, who all fought the hike, said they were pleased with the outcome.

“We appreciate the thoroughness with which the directors acted,” Attorney General Cooper said in a statement. “Although we asked for a decrease in water rates, we feel this is a real victory for Chattanooga’s ratepayers.”

Chattanooga developer Randy Baker, chairman of a citizens’ group calling itself “Fight the Hike,” said in a statement that the community had “voiced their immense displeasure with the growing business plans of (Tennessee-American) coming back year after year asking for totally unsubstantiated rate increases.”

He praised the regulatory authority, then lashed out at American Water Works Co., Tennessee-American’s for-profit parent firm, saying he hopes the local decision “helps other communities across the country in their stance against this corporate irresponsibility and that it sends the message to American Water” that it cannot “not just assume unsuspecting customers will finance their growth and profits.”