Balancing and Memorandum Account Recovery Procedures

San Jose Water Company established balancing accounts 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, 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 is 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, the balances are recorded in SJW Corp.'s financial statements.

Based on ASC Topic 980-605-25, San Jose Water Company recognized regulatory assets of $5,863 and $12,624 due to lost revenues accumulated in the 2016 WCMA account for three and nine months ended September 30, 2016, respectively. These regulatory assets were offset by a regulatory liability in the amount of $5,863 and $12,624 for three and nine months ended September 30, 2016, respectively, 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 tables below.

On June 28, 2016, San Jose Water Company filed Advice Letter 492 for a surcharge of $8,767 to true-up the difference between interim rates and 2015 General Rate Case authorized rates, which is expected to be collected during a 12-month recovery period once approved. The $8,767 of revenue was recorded in the 2015 General Rate Case true-up row for the nine months ended September 30, 2016 table below. This amount includes $185 related to water supply accounts that have previously been recorded and have been deducted from the appropriate row in the nine months ended September 30, 2016 table below.



	Three months ended September 30, 2016											Three months ended September 30, 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*	$	1,563		164		(1,044	)	—		683		$	—		—		—		—	—
2015 WCMA*	4,747			528		(1,883	)	—		3,392		—			—		—		—	—
2016 WCMA	—			5,863		—		(5,863	)	—		—			—		—		—	—
All others	1,661			232		176		—		2,069		(229		)	301		150		—	222
Total memorandum accounts	7,971			6,787		(2,751	)	(5,863	)	6,144		(229		)	301		150		—	222

Balancing accounts, net assets:
Water supply costs	2,641			2,420		452		—		5,513		1,070			2,153		(32	)	—	3,191
Drought surcharges	(1,716		)	—		(10,467	)	5,863		(6,320	)	(80		)	—		(6,333	)	—	(6,413	)
Pension	(520		)	280		(1,055	)	—		(1,295	)	140			(231	)	(230	)	—	(321	)
2012 General Rate Case true-up	27,740			—		(3,850	)	—		23,890		40,367			—		(3,813	)	—	36,554
2015 General Rate Case true-up	8,767			—		(1,204	)	—		7,563		—			—		—		—	—
All others	1,101			(106	)	(523	)	—		472		1,453			(88	)	(17	)	—	1,348
Total balancing accounts	$	38,013		2,594		(16,647	)	5,863		29,823		$	42,950		1,834		(10,425	)	—	34,359

Total	$	45,984		9,381		(19,398	)	—		35,967		$	42,721		2,135		(10,275	)	—	34,581



	Nine months ended September 30, 2016											Nine months ended September 30, 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		11		(2,272	)	—		683		$	—		—		—		—	—
2015 WCMA*	5,372			431		(2,411	)	—		3,392		—			—		—		—	—
2016 WCMA	—			12,624		—		(12,624	)	—		—			—		—		—	—
All others	594			1,298		177		—		2,069		(1,377		)	1,122		477		—	222
Total memorandum accounts	8,910			14,364		(4,506	)	(12,624	)	6,144		(1,377		)	1,122		477		—	222

Balancing accounts, net assets:
Water supply costs	2,771			2,364		378		—		5,513		890			2,445		(144	)	—	3,191
Drought surcharges	(359		)	—		(18,585	)	12,624		(6,320	)	—			—		(6,413	)	—	(6,413	)
Pension	(552		)	840		(1,583	)	—		(1,295	)	1,412			(692	)	(1,041	)	—	(321	)
2012 General Rate Case true-up	33,070			—		(9,180	)	—		23,890		44,400			1,937		(9,783	)	—	36,554
2015 General Rate Case true-up	—			8,767		(1,204	)	—		7,563		—			—		—		—	—
All others	1,366			(332	)	(562	)	—		472		1,735			(310	)	(77	)	—	1,348
Total balancing accounts	$	36,296		11,639		(30,736	)	12,624		29,823		$	48,437		3,380		(17,458	)	—	34,359

Total	$	45,206		26,003		(35,242	)	—		35,967		$	47,060		4,502		(16,981	)	—	34,581

* As of September 30, 2016, the reserve balance for the 2014 WCMA and 2015 WCMA was $1,267 and $1,892, respectively, which has been netted from the balances above.

As of September 30, 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 $2,949. 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.