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 $2,060 due to lost revenues accumulated in the 2017 WCMA account for three months ended March 31, 2017. These regulatory assets were offset by a regulatory liability in the amount of $2,060 for three months ended March 31, 2017 created by Tariff Rule 14.1 drought surcharges collected 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 2017 WCMA row shown in the table below.

In the first quarter of 2017, San Jose Water Company updated the allocation of new customer accounts between residential and business customers to align closer to the current residential and business statistics for the year ended December 31, 2016. The reallocation resulted in a recalculation of the 2016 WCMA account and a recognition of additional regulatory assets of $1,371 for the three months ended March 31, 2017. Based on quantitative as well as qualitative factors, the Company determined that this amount was not material to quarterly or annual net income and earnings per share in 2016, quarterly net income and earnings per share in the first fiscal quarter of 2017, and is not expected to be material to 2017 annual financial results. As such, the Company corrected the error in the current period. In addition, recorded interest related to the 2016 WCMA balance as of March 31, 2017 was $36. The amount recorded as a regulatory asset was offset by a regulatory liability in the amount of $1,407 for three months ended March 31, 2017 created by Tariff Rule 14.1 drought surcharges. These amounts have been recorded in the 2016 WCMA row shown in the table below.



	Three months ended March 31, 2017											Three months ended March 31, 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*	$	—		112		(112	)	—		—		$	2,944		—		(517	)	—		2,427
2015 WCMA*	1,589			(71	)	(1,120	)	—		398		5,372			(20	)	—		—		5,352
2016 WCMA	—			1,407		—		(1,407	)	—		—			3,014		—		(3,014	)	—
2017 WCMA	—			2,060		—		(2,060	)	—		—			—		—		—		—
All others	2,768			671		241		—		3,680		594			517		(1	)	—		1,110
Total memorandum accounts	4,357			4,179		(991	)	(3,467	)	4,078		8,910			3,511		(518	)	(3,014	)	8,889

Balancing accounts, net assets:
Water supply costs	5,190			197		297		—		5,684		2,771			(313	)	(22	)	—		2,436
Drought surcharges	(7,688		)	—		(833	)	3,467		(5,054	)	(359		)	—		(3,167	)	3,014		(512	)
Pension	(2,009		)	173		(703	)	—		(2,539	)	(552		)	280		(155	)	—		(427	)
2012 General Rate Case true-up	20,682			—		(2,258	)	—		18,424		33,070			—		(2,498	)	—		30,572
2015 General Rate Case true-up	5,528			—		(1,431	)	—		4,097		—			—		—		—		—
All others	(151		)	(214	)	(334	)	76		(623	)	1,366			(130	)	(11	)	—		1,225
Total balancing accounts	$	21,552		156		(5,262	)	3,543		19,989		$	36,296		(163	)	(5,853	)	3,014		33,294

Total	$	25,909		4,335		(6,253	)	76		24,067		$	45,206		3,348		(6,371	)	—		42,183

* As of March 31, 2017, the reserve balance for the 2014 WCMA and 2015 WCMA was $978 and $2,183, respectively, which has been netted from the balances above. 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.

As of March 31, 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 $3,361. 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.