Regulatory Matters:

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At June 30, 2014, Registrant had approximately $35.7 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $15.0 million relates to the underfunding of pension and other post-retirement obligations and $16.2 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense. The remainder relates to other items that do not provide for or incur carrying costs.

Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has suffered an asset impairment that would require a write-down in the assets’ valuation. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:



(dollars in thousands)	June 30, 2014			December 31, 2013
GSWC
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account	$	17,543		$	16,345
Base Revenue Requirement Adjustment Mechanism	9,966			8,725
Costs deferred for future recovery on Aerojet case	14,302			14,763
Pensions and other post-retirement obligations (Note 6)	18,568			20,241
Flow-through taxes, net (Note 5)	16,201			16,189
Low income rate assistance balancing accounts	9,747			9,979
General rate case memorandum accounts	9,868			15,645
Other regulatory assets	20,066			25,086
Various refunds to customers	(2,956		)	(4,292		)
Total	$	113,305		$	122,681

Regulatory matters are discussed in detail in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2013 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2013.

Alternative-Revenue Programs:

GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC. GSWC has implemented surcharges to recover all of its WRAM, net of the MCBA balances, as of December 31, 2013. The recovery or refund of the WRAM is netted against the MCBA over- or under-collection for the corresponding rate-making area and is interest bearing at the current 90-day commercial paper rate. Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months. For the three months ended June 30, 2014 and 2013, surcharges of approximately $4.5 million and $7.1 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM, net of MCBA accounts, and surcharges (net of surcredits) of approximately $6.4 million and $10.6 million were billed to customers during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, GSWC has a net aggregated regulatory asset of $17.5 million which is comprised of a $15.8 million under-collection in the WRAM accounts and $1.7 million under-collection in the MCBA accounts.

For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”) which adjusts certain revenues to adopted levels. Pending a final decision on the BVES general rate case, the 2013 and 2014 BRRAM balances have been recorded using 2012 adopted levels authorized by the CPUC. As of June 30, 2014, GSWC had a regulatory asset of $10.0 million under-collection in the BRRAM.

General Rate Case Memorandum Accounts:

The balance in the general rate case memorandum accounts represents the revenue differences between interim rates and final rates authorized by the CPUC due to delays in receiving decisions on various general rate case applications. As of June 30, 2014, there is an aggregate $9.9 million in the general rate case memorandum accounts, $5.8 million of which is for retroactive rate increases effective January 1, 2013 as a result of the final decision issued by the CPUC in May 2013 on GSWC’s water general rate case. Surcharges ranging from 12 to 24 months, with the majority being 12 months, were implemented during the third quarter of 2013 to recover the retroactive adopted revenues related to the May 2013 CPUC decision.

Other Regulatory Matters:

CPUC Approval to Serve New Area:

On June 26, 2014, the CPUC approved a Certificate of Public Convenience and Necessity application granting GSWC approval to provide water utility services to an area to be developed near Sacramento, in Sutter County, California, called Sutter Pointe. The CPUC's decision approved a settlement that was jointly filed by GSWC, Sutter County, the Sutter Pointe Developers, and a coalition of Sutter County residents. With the CPUC's approval, GSWC will create a water service district to supply the Sutter Pointe development with groundwater and surface water from the Sacramento River. The project will involve the construction of underground infrastructure, groundwater wells, a water treatment plant and storage facilities to serve retail, industrial and approximately 17,000 residential customers at final build out. As part of the agreement, GSWC will also request approval from the CPUC to acquire the water system that currently serves the community of Robbins in Sutter County.

CPUC Rehearing Matter:

In July 2011, the CPUC issued an order granting the rehearing of certain issues from the Region II, Region III and general office rate case approved in November 2010. Among the issues in the rehearing was the La Serena plant improvement project included in rate base totaling approximately $3.5 million. As a result of the CPUC's November 2010 decision, GSWC recorded a $2.2 million pretax charge during 2010, which included a disallowance of a portion of the La Serena capital costs and the related revenues earned on those capital costs to be refunded to customers. In March 2013, GSWC and the Office of Ratepayer Advocates ("ORA") reached a settlement agreement. In March 2013, GSWC filed for CPUC approval of the settlement agreement. The settlement agreement, if approved, will resolve all issues arising from the rehearing. As a result of the settlement agreement reached in March 2013, GSWC recorded a pretax charge during 2012 totaling $416,000 for an additional disallowance of the La Serena capital costs and the related revenues earned on those capital costs to be refunded to customers.

Procurement Audits:

In December 2011, the CPUC issued a final decision on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects. As part of the CPUC decision, GSWC agreed to be subject to three separate independent audits of its procurement practices over a period of ten years from the date the settlement was approved by the CPUC. The audits will cover GSWC’s procurement practices related to contracts with other contractors from 1994 forward and could result in disallowances of costs. The cost of the audits will be borne by shareholders and may not be recovered by GSWC in rates to customers. The first audit is currently underway. At this time, management cannot predict the outcome of these audits or determine an estimated loss or range of loss, if any, resulting from these audits.

BVES General Rate Case:

In February 2012, BVES filed its general rate case (“GRC”) for new rates in years 2013 through 2016. In August 2012, ORA issued its report on the GRC, which included recommendations for BVES to record a retroactively ratemaking increase to its accumulated depreciation balance, and to write-off one-half of its deferred rate case costs. On May 7, 2014, GSWC filed a settlement agreement with the CPUC that has been reached with all parties involved in the BVES general rate case. The settlement agreement, if approved, would resolve all matters in the pending electric rate case for rates in years 2013 through 2016. As a result of this settlement, GSWC does not believe any loss is probable with respect to ORA's recommendations; therefore, no provision for loss has been recorded in the financial statements as of June 30, 2014. A final decision from the CPUC is expected in late 2014. The settlement, once approved, will not have a significant impact on GSWC's financial statements. Pending a final decision on the BVES rate case, electric revenues have been recorded using 2012 adopted levels authorized by the CPUC.