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 December 31, 2014, Registrant had approximately $67.5 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $40.7 million relates to the underfunded positions of the pension and other post-retirement obligations, $3.3 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC’s purchase power contracts over the life of the contract, and $17.6 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 are offset against regulatory liabilities within each rate-making area. Amounts expected to be collected or refunded in the next 12-months have been classified as current assets and current liabilities by rate-making area. As of December 31, 2014, GSWC has a total of $125.7 million in net regulatory assets, of which $5.5 million have been included in “Other Current Liabilities”. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:



	December 31,
(dollars in thousands)	2014			2013
GSWC
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account	$	9,369		$	16,345
Base Revenue Requirement Adjustment Mechanism	7,761			8,725
Costs deferred for future recovery on Aerojet case	13,629			14,763
Pensions and other post-retirement obligations (Note 11)	43,426			20,241
Derivative unrealized loss (Note 4)	3,339			—
Flow-through taxes, net (Note 10)	17,612			16,189
Low income rate assistance balancing accounts	9,109			9,979
General rate case memorandum accounts	4,731			15,645
Other regulatory assets	17,487			25,086
Various refunds to customers	(759		)	(4,292		)
Total	$	125,704		$	122,681

Alternative-Revenue Programs:

Under the Water Revenue Adjustment Mechanism (“WRAM”), GSWC records the difference between the adopted level of volumetric revenues as authorized by the CPUC for metered accounts (adopted volumetric revenues) and the actual volumetric revenues recovered in customer rates. While the WRAM tracks volumetric-based revenues, the revenue requirements approved by the CPUC include service charges, flat rate charges, and other items that are not subject to the WRAM. The adopted volumetric revenues consider the seasonality of consumption of water based upon historical averages. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to an asset or liability balancing account (tracked individually for each rate making area). The variance amount may be positive or negative and represents amounts that will be billed or refunded to customers in the future. The WRAM only applies to customer classes with conservation rates in place. Currently, the majority of GSWC’s water customers have conservation rate structures.

Under the Modified Cost Balancing Account (“MCBA”), GSWC tracks adopted expense levels for purchased water, purchased power and pump taxes, as established by the CPUC. Variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power, and pump tax expenses are recorded as a component of the MCBA to be recovered from or refunded to GSWC’s customers at a later date. This is reflected with an offsetting entry to an asset or liability balancing account (tracked individually for each rate-making area). Unlike the WRAM, the MCBA applies to all customer classes.

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. During the year ended December 31, 2014, surcharges of $14.3 million were billed to customers to decrease previously incurred under-collections in the pre-2014 WRAM, net of MCBA accounts. During the year ended December 31, 2014, GSWC recorded an additional $7.4 million under-collection in the WRAM account, net of the MCBA. As of December 31, 2014, GSWC has a net aggregated regulatory asset of $9.4 million, which is comprised of a $10.5 million under-collection in the WRAM accounts and $1.1 million over-collection in the MCBA accounts.

As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM, net of its MCBA, within 24 months following the year in which an under-collection is recorded. In April 2012, the CPUC issued a final decision which, among other things, sets the recovery period for under-collected balances that are up to 15% of adopted annual revenues at 18 months or less. For under-collected balances greater than 15%, the recovery period is 19 to 36 months. As of December 31, 2014, the recovery periods for the majority of GSWC's WRAM/MCBA balances were primarily within the 12 to 18 month period. In addition to adopting an amortization schedule, the final decision sets a cap on total net WRAM/MCBA surcharges in any given calendar year of 10% of the last authorized revenue requirement. This cap has not impacted any WRAM/MCBA recoveries to-date. Surcharges are currently in place to recover the WRAM/MCBA balances for 2013.

For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism ("BRRAM") which adjusts certain revenues to adopted levels. In November 2014, the CPUC issued a final decision on BVES's general rate case, setting rates and adopted revenues for years 2013 through 2016. As a result of this decision, GSWC filed with the CPUC for recovery of the 2013 BRRAM under-collection of $2.3 million to be collected over 24 months.

Costs Deferred for Future Recovery:

The CPUC authorized a memorandum account to allow for the recovery of costs incurred by GSWC related to contamination lawsuits brought against Aerojet and the state of California. In July 2005, the CPUC authorized GSWC to recover approximately $21.3 million of the Aerojet litigation memorandum account, through a rate surcharge, which will continue for no longer than 20 years. Beginning in October 2005, a surcharge went into effect to begin amortizing the memorandum account over a 20-year period.

Aerojet also agreed to reimburse GSWC $17.5 million, plus interest accruing from January 1, 2004, for GSWC’s past legal and expert costs, which is included in the Aerojet litigation memorandum account. The reimbursement of the $17.5 million is contingent upon the issuance of land use approvals for development in a defined area within Aerojet property in Eastern Sacramento County and the receipt of certain fees in connection with such development. It is management’s intention to offset any proceeds from the housing development by Aerojet in this area against the balance in this litigation memorandum account.

At this time, management believes the full balance of the Aerojet litigation memorandum account will be collected either from customers or Aerojet.

Pensions and Other Postretirement Obligations:

A regulatory asset has been recorded at December 31, 2014 and 2013 for the costs that would otherwise be charged to “other comprehensive income” within shareholders’ equity for the underfunded status of Registrant’s pension and other postretirement benefit plans because the cost of these plans has historically been recovered through rates. As discussed in Note 11, as of December 31, 2014, Registrant’s underfunded position for these plans that have been recorded as a regulatory asset totaled $40.7 million. Registrant expects this regulatory asset to be recovered through rates in future periods.

The May 2013 CPUC decision in the water general rate case authorized GSWC to continue using a two-way balancing account for its three water regions and the general office to track differences between the forecasted annual pension expenses adopted in rates and the actual annual expense to be recorded by GSWC in accordance with the accounting guidance for pension costs. In November 2014, as part of the BVES general rate case decision, the CPUC also authorized the use of a balancing account for the electric segment. The two-way balancing accounts are interest bearing at the current 90-day commercial paper rate. As of December 31, 2014, GSWC has a net $2.7 million under-collection in the two-way pension balancing accounts, consisting of a $2.8 million under-collection related to the general office and water regions, and a $124,000 over-collection related to BVES. As authorized in the CPUC's final decision on the water rate case, GSWC implemented a twelve-month surcharge in 2013 to recover balances in the water two-way balancing account. Surcharges totaling $748,000 and $1.2 million were billed to customers during 2014 and 2013, respectively.

Low Income Balancing Accounts:

This regulatory asset reflects primarily the costs of implementing and administering the California Alternate Rates for Water program in GSWC’s water regions and the California Alternate Rate for Energy program in GSWC’s BVES division. These programs mandated by the CPUC provide a discount of a fixed dollar amount which is intended to represent a 15% discount based on a typical customer bill for qualified low-income water customers and 20% for qualified low-income electric customers. GSWC accrues interest on its low income balancing accounts at the prevailing rate for 90-day commercial paper. As of December 31, 2014, there is an aggregate $9.1 million under-collection in the low income balancing accounts. Surcharges have been implemented to recover the costs included in these balancing accounts.

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 December 31, 2014, there is an aggregate $4.7 million in the general rate case memorandum accounts, $4.1 million of which relates to retroactive rate increases resulting from the 2010 water general rate case, and $617,000 of which is for the general rate case approved by the CPUC in May 2013. 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. Unrecovered amounts will be addressed in a future rate case or other filing.

Other Regulatory Assets:

Other 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 recovered in future 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 regulatory assets are no longer recoverable in customer rates, GSWC would need to determine if it has suffered an asset impairment that would require a write-down in the assets’ valuation.

Other Regulatory Matters:

Procurement Audits:

In December 2011, the CPUC issued a final decision adopting a settlement between GSWC and the CPUC on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects primarily in one of GSWC’s three main geographic water regions. As part of the settlement reached with the CPUC on this matter, GSWC agreed to be subject to three separate independent audits of its procurement practices over a period of 10 years from the date the settlement was approved by the CPUC. The audits cover GSWC’s procurement practices for contracts with other contractors from 1994 forward. The first audit started in 2014 and covers almost a 20-year period from January 1, 1994 through September 30, 2013.

In December 2014, the accounting firm engaged by the CPUC to conduct the first audit provided its draft report to GSWC for comments. The draft report provides details on the accounting firm's findings and corresponding recommendations. The report asserts that GSWC had not complied, in all material respects, with the CPUC’s requirements and GSWC's procurement policies during the period from 1994 to 2006. Subsequent to 2006, except for certain instances of alleged noncompliance, GSWC was found to be in compliance, in all material respects, with the CPUC’s requirements and GSWC’s procurement policies. The findings and corresponding recommendations in the draft report focused on, among other things, inadequate documentation to support competitive bidding procedures, change orders, and sole source justifications.

In February 2015, management provided to the auditors its responses to the draft report and for each of the findings noted by the auditors. Among other things, GSWC informed the auditors of certain factual inaccuracies in their report, asserted that GSWC has complied, in all material respects, with the CPUC’s requirements throughout the entire audit period and, has been in material compliance with its own procurement policies throughout the audit period. The auditors are finalizing their audit report in light of GSWC’s comments. After the report is finalized, GSWC will meet with the CPUC to discuss what, if any, further action is required. If the CPUC determines that GSWC has violated the CPUC’s or GSWC’s procurement policies during the 20-year audit period, the CPUC may pursue disallowances and/or penalties from GSWC in the pending rate case proceeding or in a new proceeding. GSWC likely will be given an opportunity to defend itself against any such attempt by the CPUC to pursue disallowances and/or penalties. At this time management cannot predict the final outcome of this first audit and cannot determine a possible loss or range of loss, if any, associated with any disallowances and/or penalties that may be pursued by the CPUC against GSWC.

BVES General Rate Case:

In February 2012, BVES filed its general rate case for new rates in years 2013 through 2016. On May 7, 2014, GSWC filed a settlement agreement with the CPUC covering all matters in the rate case which had been approved by all parties. On November 6, 2014, the CPUC issued its final decision, adopting the settlement agreement. The final decision, which was retroactive to January 1, 2013, did not have a significant impact on GSWC's financial statements.

Renewables Portfolio Standard:

In December 2011, a renewables portfolio standard (“RPS”) law went into effect which changed, among other things, annual procurement targets to multi-year procurement targets. In December 2012, GSWC entered into a ten-year agreement with a third party to purchase renewable energy credits (“RECs”) whereby GSWC agreed to purchase approximately 582,000 RECs over a 10 -year period which would be used towards meeting the CPUC’s RPS procurement requirements. As of December 31, 2014, GSWC has purchased sufficient RECs to be in compliance for all periods through 2014. Accordingly, no provision for loss or potential penalties has been recorded in the financial statements as of December 31, 2014. GSWC intends to file its 2014 compliance report with the CPUC by the August 2015 deadline. The cost of these RECs has been included as part of the electric supply cost balancing account as of December 31, 2014.

Cost of Capital Proceeding for Water Regions:

In July 2012, the CPUC issued a final decision on GSWC’s water cost of capital proceeding. The decision authorized, among other things, a return on equity ("ROE") of 9.99% and for GSWC to continue the Water Cost of Capital Mechanism (“WCCM”). The WCCM adjusts ROE and rate of return on rate base between the three-year cost of capital proceedings only if there is a positive or negative change of more than 100 basis points in the average of the Moody’s Aa utility bond rate as measured over the period October 1 through September 30. If the average Moody’s rate for this period changes by over 100 basis points from the benchmark, the ROE will be adjusted by one half of the difference. For the period October 1, 2011 through September 30, 2012, the Moody’s rate declined by 112 basis points from the benchmark. As a result, in 2012 GSWC filed an advice letter to lower its water ROE by 56 basis points, from 9.99% to 9.43%, which was incorporated into 2013 water rates. For the period October 1, 2013 through September 30, 2014, the Moody’s rate increased by 30 basis points from the benchmark. As a result, GSWC's current water ROE of 9.43% remained unchanged for 2014.

GSWC was scheduled to file its next cost of capital application in March 2015 based on an extension previously granted. However, in November 2014 GSWC, along with three other Class A California water companies ("Joint Parties"), filed with the CPUC a request for further extension of the date by which each of them is required to file its 2015 Cost of Capital Application. The Joint Parties requested approval to postpone this filing date one additional year until March 31, 2016, with a corresponding effective date of January 1, 2017 in compliance with the Rate Case Plan. The Joint Parties believe that postponing the filing one year will alleviate administrative processing costs on the four Class A utilities as well as Commission staff, and provide relief for both Commission and utility resources already strained by numerous proceedings. The Joint Parties also believe that the current economic environment is such that a change from the currently adopted return on equity would be small. The CPUC approved this request in January 2015. As a result of the approval, GSWC's current authorized cost of capital will continue in effect through December 2016, and GSWC will forgo a cost of capital adjustment in 2016 in the event that the WCCM mechanism is triggered.