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 Group estimates will not be collected within the 24-month period. This reserve is based on 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 Group’s financial statements.

Based on ASC Topic 980-605-25, San Jose Water Company recognized regulatory assets of $3,954 and $11,003 due to lost revenues accumulated in the 2017 WCMA account for the three and nine months ended September 30, 2017, respectively. These regulatory assets were partially offset by a regulatory liability in the amount of $(6) and $6,042 for three and nine months ended September 30, 2017, respectively, created by Tariff Rule 14.1 drought surcharges collected as allowed for in Advice Letter 473A. At the end of the second quarter of 2017, there was no longer a balance of drought surcharges collected to fully offset the 2017 WCMA account. The remaining balance in the drought surcharge account at September 30, 2017 related to amounts collected outside of the California regulated entity. Of the $3,954 and $11,003 recognized in the 2017 WCMA account for the three and nine months ended September 30, 2017, respectively, $4,826 and $6,103 was not covered by drought surcharges and was recognized as revenue for the three and nine months ended September 30, 2017, respectively, less $866 and $1,142, respectively, recorded for reserve which is the estimated amount that may not be collected within the 24-month period defined in the guidance. These amounts have been recorded in the 2017 WCMA row shown in the table below.



	Three months ended September 30, 2017										Three months ended September 30, 2016
	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*	$	908		—		(866	)	—	42		$	1,563		164		(1,044	)	—		683
2015 WCMA*	2,095			(11	)	(1,799	)	—	285		4,747			528		(1,883	)	—		3,392
2016 WCMA	—			55		—		—	55		—			5,863		—		(5,863	)	—
2017 WCMA*	1,001			3,954		—		6	4,961		—			—		—		—		—
All others	4,550			144		—		—	4,694		1,661			232		176		—		2,069
Total memorandum accounts	8,554			4,142		(2,665	)	6	10,037		7,971			6,787		(2,751	)	(5,863	)	6,144

Balancing accounts, net assets:
Water supply costs	7,314			2,278		—		—	9,592		2,641			2,420		452		—		5,513
Drought surcharges	(961		)	—		—		—	(961	)	(1,716		)	—		(10,467	)	5,863		(6,320	)
Pension	(2,907		)	224		—		—	(2,683	)	(520		)	280		(1,055	)	—		(1,295	)
2012 General Rate Case true-up	15,765			—		(4,123	)	—	11,642		27,740			—		(3,850	)	—		23,890
2015 General Rate Case true-up	2,411			—		(2,297	)	—	114		8,767			—		(1,204	)	—		7,563
All others	(1,160		)	(94	)	—		—	(1,254	)	1,101			(106	)	(523	)	—		472
Total balancing accounts	$	20,462		2,408		(6,420	)	—	16,450		$	38,013		2,594		(16,647	)	5,863		29,823

Total	$	29,016		6,550		(9,085	)	6	26,487		$	45,984		9,381		(19,398	)	—		35,967



	Nine months ended September 30, 2017											Nine months ended September 30, 2016
	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*	$	—		1,089		(1,047	)	—		42		$	2,944		11		(2,272	)	—		683
2015 WCMA*	1,589			2,101		(3,405	)	—		285		5,372			431		(2,411	)	—		3,392
2016 WCMA	—			1,507		—		(1,452	)	55		—			12,624		—		(12,624	)	—
2017 WCMA*	—			11,003		—		(6,042	)	4,961		—			—		—		—		—
All others	2,768			1,473		453		—		4,694		594			1,298		177		—		2,069
Total memorandum accounts	4,357			17,173		(3,999	)	(7,494	)	10,037		8,910			14,364		(4,506	)	(12,624	)	6,144

Balancing accounts, net assets:
Water supply costs	5,190			3,833		569		—		9,592		2,771			2,364		378		—		5,513
Drought surcharges	(7,688		)	—		(767	)	7,494		(961	)	(359		)	—		(18,585	)	12,624		(6,320	)
Pension	(2,009		)	670		(1,344	)	—		(2,683	)	(552		)	840		(1,583	)	—		(1,295	)
2012 General Rate Case true-up	20,682			—		(9,040	)	—		11,642		33,070			—		(9,180	)	—		23,890
2015 General Rate Case true-up	5,528			—		(5,414	)	—		114		—			8,767		(1,204	)	—		7,563
All others	(151		)	(540	)	(639	)	76		(1,254	)	1,366			(332	)	(562	)	—		472
Total balancing accounts	$	21,552		3,963		(16,635	)	7,570		16,450		$	36,296		11,639		(30,736	)	12,624		29,823

Total	$	25,909		21,136		(20,634	)	76		26,487		$	45,206		26,003		(35,242	)	—		35,967

* As of September 30, 2017, the reserve balance for the 2017 WCMA was $1,142 which has been netted from the balance above. 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, 2017, 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 $3,810. 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.