Regulatory Matters

3 Months Ended

Mar. 31, 2022

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 March 31, 2022, GSWC and BVESI had approximately $63.1 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $76.7 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) $5.8 million of regulatory liabilities are from flow-through deferred income taxes, (iii) $25.1 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 $7.0 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 liabilities, less regulatory assets, included in the consolidated balance sheets are as follows:


(dollars in thousands)	March 31, 2022		December 31, 2021
GSWC
Water Revenue Adjustment Mechanism and Modified Cost Balancing Account	$	19,530	$	13,326
Costs deferred for future recovery on Aerojet case	4,994		5,210
Pensions and other post-retirement obligations (Note 8)	24,975		25,212
COVID-19 memorandum accounts	4,471		1,663
Excess deferred income taxes	(72,765)		(73,000)
Flow-through taxes, net	(5,075)		(5,552)
Other regulatory assets	12,513		11,739
Various refunds to customers	(3,782)		(2,680)
Total GSWC	$	(15,139)	$	(24,082)
BVESI
Derivative unrealized gain (Note 5)	(7,020)		(4,441)
Other regulatory assets	15,683		13,916
Various refunds to customers	(9,016)		(8,189)
Total AWR	$	(15,492)	$	(22,796)

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, 2021 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2021.

Water General Rate Case:

In July 2020, GSWC filed a general rate case application for all of its water regions and its general office. This general rate case will determine new water rates for the years 2022–2024. In November 2021, GSWC and the Public Advocates Office at the CPUC ("Public Advocates") filed with the CPUC a joint motion to adopt a settlement agreement between GSWC and Public Advocates on this general rate case application. The settlement agreement, if approved, resolves all issues related to the 2022

annual revenue requirement in the general rate case application, leaving only three unresolved issues. Due to the delay in finalizing the water general rate case, water revenues billed and recorded for the first quarter of 2022 were based on 2021 adopted rates, pending a final decision by the CPUC in this general rate case application. When approved, the new rates will be retroactive to January 1, 2022, and cumulative adjustments will be recorded in the quarter the new rates are approved by the CPUC.

Cost of Capital Proceeding:

GSWC filed a cost of capital application with the CPUC in May 2021. A final decision on this proceeding, once issued by the CPUC, is expected to have an effective date retroactive to January 1, 2022. The cost of debt of 5.1% requested in this application is lower than the cost of debt of 6.6% included in 2021 rates currently being billed to water customers, pending a final decision in the water general rate case. GSWC expects the impact of the new cost of capital, once approved by the CPUC, will include an adjustment of the cost of debt from 6.6% to approximately 5.1%. As a result, for the three months ended March 31, 2022, GSWC reduced revenues by $1.4 million to reflect the effect of this lower cost of debt and recorded a corresponding regulatory liability for revenues subject to refund. A proposed decision on the cost of capital proceeding is expected in the second half of 2022.

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 three months ended March 31, 2022, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of approximately $8.8 million, based on 2021 authorized amounts, pending a final decision on the water general rate case. Once the CPUC issues a final decision on the general rate case, the WRAM and MCBA amounts recorded in 2022 will be updated to reflect the authorized 2022 amounts. In April 2022, surcharges were implemented to recover 2021 WRAM/MCBA under-collections. 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 March 31, 2022, there were no WRAM under-collections that were estimated to be collected over more than 24 months.

BVESI 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 $448,000 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 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 allowed BVESI to file a new application 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 CEMA account remain a regulatory asset at March 31, 2022 since the Company continues to believe the incremental costs were properly tracked and included in the CEMA account and, therefore, are probable of recovery. If BVESI does not ultimately prevail in obtaining recovery, it will result in a charge to earnings from the write-off of this CEMA regulatory asset of approximately $448,000. Hearings on this matter are scheduled for May 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 regulatory asset to the amount that is probable of recovery.