Regulatory Matters

12 Months Ended

Dec. 31, 2021

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, 2021, Registrant had approximately $61.4 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $77.0 million of regulatory liabilities relates to the creation of an excess deferred income tax liability brought about by a lower federal income tax rate as a result of the 2017 Tax Cuts and Jobs Act ("TCJA") that is expected to be refunded to customers (Note 11), (ii) $6.3 million of net regulatory liabilities relates to flow-through deferred income taxes including the gross-up portion on the deferred tax resulting from the excess deferred income tax regulatory liability (Note 11), and (iii) $24.9 million of regulatory assets relates to the underfunded position in Registrant's pension and other post-retirement obligations (excluding the two-way pension balancing accounts). The remainder relates to other items that do not provide for or incur carrying costs.

Regulatory assets represent costs incurred by GSWC and BVESI for which either has received or expects 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 entity 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 liabilities, less regulatory assets, included in the consolidated balance sheets are as follows:


	December 31,
(dollars in thousands)	2021		2020
GSWC
Water Revenue Adjustment Mechanism, net of the Modified Cost Balancing Account	$	13,326	$	13,741
Costs deferred for future recovery on Aerojet case	5,210		6,751
Pensions and other post-retirement obligations (Note 12)	25,212		65,576
COVID-19 memorandum account	1,663		4,119
Other regulatory assets	11,739		10,670
Excess deferred income taxes (Note 11)	(73,000)		(74,185)
Flow-through taxes, net (Note 11)	(5,552)		(9,722)
Various refunds to customers	(2,680)		(4,577)
Total GSWC	$	(24,082)	$	12,373
BVESI
Derivative unrealized (gain) loss (Note 5)	(4,441)		1,537
Other regulatory assets	13,916		9,451
Various refunds to customers	(8,189)		(6,822)
Total AWR	$	(22,796)	$	16,539

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. During the year ended December 31, 2021, $7.5 million of pre-2021 WRAM/MCBA balances were recovered through surcharges. During 2021, GSWC recorded an additional $7.1 million net under-collection in the WRAM/MCBA. The majority of this balance represents an under-collection of supply costs incurred and recorded in the MCBA due to a higher volume of purchased water as compared to adopted. As of December 31, 2021, GSWC had an aggregated regulatory asset of $13.3 million, which is comprised of a $3.8 million over-collection in the WRAM accounts and a $17.1 million under-collection in the MCBA accounts.

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. As of December 31, 2021, there were no WRAM under-collections that were estimated to be collected over more than 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-General Corporation ("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 Post-retirement Obligations:

A regulatory asset has been recorded at December 31, 2021 and 2020 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 post-retirement benefit plans because the cost of these plans has historically been recovered through rates. As discussed in Note 12, as of December 31, 2021, Registrant’s underfunded position for these plans that have been recorded as a regulatory asset totaled $25.0 million. Registrant expects this regulatory asset to be recovered through rates in future periods.

The CPUC has authorized GSWC and BVESI to each use two-way balancing accounts to track differences between the forecasted annual pension expenses adopted in their respective customer rates and the actual annual expense to be recorded in accordance with the accounting guidance for pension costs. The two-way balancing accounts bear interest at the current 90-day commercial paper rate. As of December 31, 2021, GSWC has a $261,000 under-collection related to the general office and water regions, and BVESI has a $246,000 over-collection in its two-way balancing account.

COVID-19 Memorandum Accounts:

The CPUC has approved GSWC and BVESI to activate memorandum accounts, such as a Catastrophic Event Memorandum Account ("CEMA"), to track incremental COVID-19-related costs, including bad debt expense in excess of what is included in their respective revenue requirements. As previously discussed, in December 2021, GSWC received approval from the SWRCB for $9.5 million of relief funding of customers' unpaid water bills incurred during the pandemic, and subsequently received the funds from the state of California in January of 2022. As of December 31, 2021, GSWC has reflected these relief funds as a reduction to its CEMA account, as well as a reduction to its estimated customer bad debt reserve. However, GSWC continues to experience delinquent account activity because of the ongoing pandemic. As of December 31, 2021, GSWC has approximately $1.7 million in regulatory asset accounts related to bad debt expense in excess of its revenue requirements, the purchase of personal protective equipment, additional incurred printing costs, and other incremental COVID-19 related costs.

In February 2022, BVESI received $321,000 from the state of California for similar customer relief funding for unpaid electric bills incurred during the pandemic. As of December 31, 2021, BVESI has approximately $302,000 in a regulatory asset account related to bad debt expense in excess of BVESI’s revenue requirements, and other incremental COVID-19 related costs. This balance takes into consideration the relief funds received in 2022 for unpaid electric bills.

The CPUC requires that amounts tracked in GSWC's and BVESI's COVID-19 memorandum accounts for unpaid customer bills be first offset by any (i) federal or state relief for customers' utility bill debt, and (ii) customer payments through payment-plan arrangements prior to receiving recovery from customers at large. After these offsets are made, GSWC and BVESI will each file with the CPUC for recovery of any remaining balances.

Other BVESI Regulatory Assets:

Vegetation Management, Wildfire Mitigation Plans and Legislation

In August 2019, the CPUC issued a final decision on the electric general rate case, which set new rates for the years 2018 - 2022. Among other things, the decision authorized BVESI to record incremental costs related to vegetation management, such as costs for increased minimum clearances around electric power lines, in a CPUC-approved account for future recovery. As of December 31, 2021, BVESI has approximately $5.8 million in incremental vegetation management costs recorded as a regulatory asset, which BVESI intends to include for recovery in its next general rate case application scheduled to be filed with the CPUC in 2022 to set new rates for the years 2023 through 2026.

California legislation enacted in September 2018 requires all investor-owned electric utilities to submit an annual wildfire mitigation plan (WMP) to the CPUC for approval. The WMP must include a utility's plans on constructing, maintaining, and operating its electrical lines and equipment to minimize the risk of catastrophic wildfire. In September 2021, the CPUC approved BVESI's most recent WMP submission. Capital expenditures and other costs incurred as a result of the WMP are subject to CPUC audit. As a result, the CPUC’s Wildfire Safety Division (now part of the California Natural Resources Agency effective July 1, 2021) 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 December 31, 2021, BVESI has approximately $2.8 million related to expenses accumulated in its WMP memorandum accounts that have been recognized as regulatory assets for future recovery. In December 2021, the independent accounting firm issued its final examination report, which contains the auditors' results and recommendations. While the final report did not identify any findings of inappropriate costs included in the WMP memorandum accounts under review, the report suggested that the CPUC should evaluate whether some of the costs recorded in the WMP memorandum accounts are incremental to what is being recovered in customer rates when BVESI seeks recovery in a future proceeding. At this time, BVESI considers the auditor's examination complete and does not expect further developments. In the future, the CPUC may refer to the recommendations of the final report when BVESI seeks recovery of the WMP memorandum accounts. All capital expenditures and other costs incurred through December 31, 2021 as a result of BVESI's WMPs are not currently in rates and are expected to be filed for future recovery in BVESI's next general rate case application.

BVESI Winter Storm Regulatory Asset

BVESI activated a memorandum account to track the incremental costs incurred in response to a severe winter storm that occurred in February 2019 and resulted in the declaration of an emergency by the governor of California. Incremental costs of approximately $455,000 were included in the winter storm memorandum 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, but permits BVESI to file a new application solely on the issue of incrementality. 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 memorandum account remain a regulatory asset at December 31, 2021 as BVESI continues to believe the incremental costs were properly tracked and included in the memorandum account consistent with the CPUC's well-established past practices, and that these costs are probable of recovery. However, if BVESI does not ultimately prevail in obtaining recovery, it will result in a charge to earnings from a write-off of this regulatory asset of approximately $455,000.

Other Regulatory Assets:

Other regulatory assets represent costs incurred by GSWC or BVESI for which it has received or expects 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.