Regulatory Matters

9 Months Ended

Sep. 30, 2021

In accordance with accounting principles for rate-regulated enterprises, GSWC and BVESI record 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 September 30, 2021, GSWC and BVESI had approximately $28.2 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $77.4 million of regulatory liabilities are excess deferred income taxes arising from the lower federal income tax rate due to the Tax Cuts and Jobs Act ("Tax Act") enacted in December 2017 that are expected to be refunded to customers, (ii) $7.2 million of regulatory liabilities are from flowed-through deferred income taxes, (iii) $63.2 million of net regulatory assets relates to the underfunded position in GSWC's pension and other retirement obligations (not including the two-way pension balancing accounts), and (iv) a $7.9 million regulatory liability related to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVESI's purchase power contracts over the term of the contracts. The remainder relates to other items that do not provide for or incur carrying costs.

Regulatory assets represent costs incurred by GSWC and/or BVESI for which they have received or expect to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC and BVESI consider 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 either GSWC’s or BVESI's assets are not recoverable in customer rates, the applicable utility must determine if it has suffered an asset impairment that requires it to write down the asset's value. Regulatory assets are offset against regulatory liabilities within each ratemaking area. Amounts expected to be collected or refunded in the next twelve months have been classified as current assets and current liabilities by ratemaking area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:


(dollars in thousands)	September 30, 2021		December 31, 2020
GSWC
Water Revenue Adjustment Mechanism and Modified Cost Balancing Account	$	19,609	$	13,741
Costs deferred for future recovery on Aerojet case	5,557		6,751
Pensions and other post-retirement obligations (Note 8)	63,149		65,576
COVID-19 memorandum accounts	7,912		4,119
Excess deferred income taxes	(73,409)		(74,185)
Flow-through taxes, net	(6,620)		(9,722)
Other regulatory assets	11,372		10,670
Various refunds to customers	(3,929)		(4,577)
Total GSWC	$	23,641	$	12,373
BVESI
Derivative unrealized (gain) loss (Note 5)	(7,875)		1,537
Other regulatory assets	4,101		2,629
Total AWR	$	19,867	$	16,539

Regulatory matters are discussed in the consolidated financial statements and the notes thereto included in the Registrant's Form 10-K for the year ended December 31, 2020 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2020.

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 the Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC. The over- or under-collection of the WRAM is aggregated with the MCBA over- or under-collection for the corresponding ratemaking area and bears interest at the current 90-day commercial paper rate.

As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances within 24 months following the year in which an under-collection is recorded in order to recognize such amounts as revenue. The recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within 12 to 24 months. During the nine months ended September 30, 2021, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of approximately $10.7 million due primarily to higher-than-adopted supply costs currently in billed customer rates. As of September 30, 2021, GSWC had an aggregated regulatory asset of $19.6 million, which is comprised of a $3.4 million under-collection in the WRAM accounts and a $16.2 million under-collection in the MCBA accounts.

COVID-19 Memorandum Accounts:

The CPUC approved GSWC's and BVESI's requests to activate COVID-19-related memorandum accounts for the impact of the COVID-19 pandemic. GSWC's and BVESI's response to the pandemic has included suspending service disconnections for nonpayment, which has significantly increased the amount of delinquent customer accounts receivable during the COVID-19 pandemic. Costs incurred by GSWC and BVESI in response to the COVID-19 pandemic, including bad debt expense, in excess of what is included in their respective revenue requirements are being included in the COVID-19-related memorandum accounts for future recovery. As of September 30, 2021, GSWC and BVESI have recorded a total of $8.5 million in these accounts as regulatory assets, as it is believed such amounts are probable of recovery. The CPUC requires that amounts tracked in GSWC's and BVESI's COVID-19 memorandum accounts for unpaid customer bills be offset by any (i) federal and state relief for water utility bill debt, and (ii) customer payments through payment plan arrangements, prior to receiving recovery from customers. After these offsets are made, GSWC will file with the CPUC for recovery of the remaining balance. BVESI intends to include the remaining balance in its COVID-19 memorandum account for recovery in its next general rate case application expected to be filed in 2022.

Other Regulatory Assets:

Other regulatory assets represent costs incurred by GSWC or BVESI for which they have received or expect to receive rate recovery in the future. These regulatory assets are supported by regulatory rules and decisions, past practices, and other facts or circumstances that indicate recovery is probable. If the CPUC determines that a portion of either GSWC’s or BVESI's assets are not recoverable in customer rates, the applicable entity must determine if it has suffered an asset impairment that requires it to write down the asset's value. Included in other regulatory assets are CPUC-approved memorandum accounts to track the costs incurred in connection with the development and implementation of BVESI’s wildfire mitigation plans (“WMPs”), which are required by California legislation to be submitted annually to the CPUC for approval. The CPUC’s Wildfire Safety Division (now part of the California Natural Resources Agency effective July 1, 2021) has engaged an independent accounting firm to conduct examinations of the expenses and capital investments identified in the 2019 and 2020 WMPs for each of the investor-owned electric utilities, including BVESI. As of September 30, 2021, BVESI has approximately $2.2 million related to expenses accumulated in its WMPs memorandum accounts that have been recognized as regulatory assets for future recovery. BVESI’s examination of these expenses, as well as the capital investments incurred for its WMPs, is currently in progress and at this time, management cannot predict the outcome or recommendations that may result from this examination.

BVESI Other CEMA Regulatory Asset: BVESI activated a CEMA account to track the incremental costs incurred in response to a severe winter storm that occurred in February 2019 and which resulted in the declaration of an emergency by the governor of California. Incremental costs of approximately $455,000 were included in the CEMA account and recorded as a regulatory asset. BVESI subsequently filed for recovery of these costs. In May 2021, the CPUC issued a final decision denying BVESI’s request for recovery, claiming that BVESI did not adequately demonstrate that the costs incurred were incremental and beyond costs already included in BVESI’s revenue requirement. The decision permits BVESI to file a new application on the issue of incrementality should it wish to continue pursuing recovery. BVESI believes the storm costs were incremental and beyond what was included in its revenue requirement, and in October 2021 filed a new application to continue pursuing recovery. As a result, the costs in this CEMA account remain a regulatory asset at September 30, 2021 as the Company continues to believe the incremental costs were properly tracked and included in the CEMA account consistent with the CPUC's well-established past practices. If BVESI does not ultimately prevail in obtaining recovery, it will result in a charge to earnings from a write-off of this CEMA regulatory asset of approximately $455,000. Management cannot currently predict the final outcome of this matter.