Balancing and Memorandum Account Recovery Procedures

In California, the CPUC has established a balancing account mechanism for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. San Jose Water Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, cost of capital, WCMA, drought surcharges, Monterey Water Revenue Adjustment Mechanism, and other approved activities or as directed by the CPUC.

Balancing and memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the WCMA, San Jose Water Company follows the requirements of ASC Topic 980-605-25—“Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve will be recorded for amounts SJW Corp. estimates will not be collected within the 24-month period. This reserve is based on the difference between authorized usage in the last general rate case decision and an estimate of actual usage over the recovery period, offset by applicable drought surcharges. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support for balance recognition, the balances are recorded in SJW Corp.'s financial statements.

Based on FASB ASC Topic 980-605-25—“Alternative Revenue Programs,” San Jose Water Company recognized $3,014 of lost revenues accumulated in the WCMA account for three months ended March 31, 2016. The regulatory asset this created was offset by a regulatory liability in the amount of $3,014 created by Tariff Rule 14.1 drought surcharges collected during the same period as allowed for in Advice Letter 473A which was approved by the CPUC and became effective June 15, 2015. These amounts have been recorded in the 2016 WCMA row shown in the table below.



	Three months ended March 31, 2016											Three months ended March 31, 2015
	Beginning Balance			Revenue Increase (Reduction)		Refunds (Collections)		Surcharge Offset		Ending Balance		Beginning Balance			Revenue Increase (Reduction)		Refunds (Collections)		Surcharge Offset	Ending Balance

Memorandum accounts:
2014 WCMA*	$	2,944		—		(517	)	—		2,427		$	—		—		—		—	—
2015 WCMA*	5,372			(20	)	—		—		5,352		—			—		—		—	—
2016 WCMA	—			3,014		—		(3,014	)	—		—			—		—		—	—
All others	594			517		(1	)	—		1,110		(1,377		)	423		165		—	(789	)
Total memorandum accounts	8,910			3,511		(518	)	(3,014	)	8,889		(1,377		)	423		165		—	(789	)

Balancing accounts, net assets:
Water supply costs	2,771			(313	)	(22	)	—		2,436		890			(12	)	(53	)	—	825
Drought surcharges	(359		)	—		(3,167	)	3,014		(512	)	—			—		—		—	—
Pension	(552		)	280		(155	)	—		(427	)	1,412			(606	)	(383	)	—	423
2012 General Rate Case true-up	33,070			—		(2,498	)	—		30,572		44,400			1,876		(2,759	)	—	43,517
All others	1,366			(130	)	(11	)	—		1,225		1,736			(114	)	(29	)	—	1,593
Total balancing accounts	$	36,296		(163	)	(5,853	)	3,014		33,294		$	48,438		1,144		(3,224	)	—	46,358

Total	$	45,206		3,348		(6,371	)	—		42,183		$	47,061		1,567		(3,059	)	—	45,569

* As of March 31, 2016, the reserve balance for the 2014 WCMA and 2015 WCMA was $1,278 and $2,343, respectively, which has been netted from the balances above. There was no reserve recorded for the 2014 WCMA and 2015 WCMA at March 31, 2015.

As of March 31, 2016, the total balance in San Jose Water Company's balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of $1,288. All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in San Jose Water Company's next general rate case or at the time an individual account reaches a threshold of 2% of authorized revenue, whichever occurs first.