Regulatory Matters

In accordance with accounting principles for rate-regulated enterprises, Registrant records 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, 2018, Registrant had approximately $59.1 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $82.7 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) $17.1 million of regulatory liabilities are from flowed-through deferred income taxes, (iii) $34.2 million of regulatory assets relates to the underfunded position in Registrant's pension and other post-retirement obligations (not including the two-way pension balancing accounts), and (iv) $2.6 million of regulatory assets relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVES'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 for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers 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 GSWC’s assets are not recoverable in customer rates, GSWC 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 rate-making area. Amounts expected to be collected or refunded in the next twelve months have been classified as current assets and current liabilities by rate-making area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:



(dollars in thousands)	March 31, 2018			December 31, 2017
GSWC
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account	$	29,011		$	29,556
Costs deferred for future recovery on Aerojet case	10,510			10,656
Pensions and other post-retirement obligations (Note 8)	32,178			33,019
Derivative unrealized loss (Note 5)	2,625			2,941
Low income rate assistance balancing accounts	5,640			5,972
General rate case memorandum accounts	9,264			10,522
Excess deferred income taxes	(82,680		)	(83,231		)
Flow-through taxes, net	(17,133		)	(17,716		)
Other regulatory assets	15,449			14,875
Various refunds to customers	(9,592		)	(4,552		)
Total	$	(4,728	)	$	2,042

Regulatory matters are discussed in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2017 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2017.

Alternative-Revenue Programs:

GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the WRAM and 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.

As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances, net of its MCBA, within 24 months following the year in which an under-collection is recorded in order to recognize such amounts as revenue. The recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within 12 to 24 months. GSWC has implemented surcharges to recover its WRAM/MCBA balances as of December 31, 2017. For the three months ended March 31, 2018 and 2017, surcharges (net of surcredits) of approximately $4.2 million and $4.0 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. During the three months ended March 31, 2018, GSWC recorded additional under-collections in the WRAM/MCBA accounts of $3.7 million due to higher than adopted supply costs as well as lower than adopted customer water usage. As of March 31, 2018, GSWC had an aggregated regulatory asset of $29.0 million, which is comprised of a $3.3 million under-collection in the WRAM accounts and a $25.7 million under-collection in the MCBA accounts.

Other Regulatory Matters:

Tax Cuts and Jobs Act:

In March 2018, GSWC filed updated testimony revising the revenue requirements to reflect the impacts of the Tax Act in its pending water general rate case that will set new rates for the years 2019 - 2021. Also, as a result of the CPUC's Water Division having directed water utilities to establish a memorandum account, effective January 1, 2018, to track the impact on the revenue requirements resulting from the Tax Act, GSWC established a regulatory liability during the first quarter to begin capturing this impact for the year ending December 31, 2018. For the three months ended March 31, 2018, approximately $2.3 million of reduced water-revenue requirements was tracked and recorded as a regulatory liability. The timing to refund the liability to water customers has not been determined. In April 2018, GSWC also updated its pending electric general rate case filing, which will determine electric rates for the years 2018 - 2021, to reflect the impacts of the Tax Act. As a result, for the three months ended March 31, 2018, GSWC reduced electric revenues by approximately $335,000 and recorded a corresponding regulatory liability that will be satisfied as part of implementing overall new rates from the general rate case on a retroactive basis to January 1, 2018. Reductions in the water and electric revenue requirements resulting from the impacts of the Tax Act are offset by decreases in GSWC's income tax expense (see Note 7).

Cost of Capital Proceeding:

In March 2018, the CPUC adopted a revised proposed decision in the cost of capital proceeding for GSWC and three other water utilities for the years 2018 - 2020. Among other things, the final decision adopted for GSWC a return on equity of 8.90%, with a return on rate base of 7.91%. The previously authorized return on equity for GSWC’s water segment was 9.43%, with a return on rate base of 8.34%. Including the effects of the Tax Act, the lower return on equity and rate base is expected to decrease GSWC’s annual adopted revenue requirement beginning in 2018 by approximately $3.6 million. Since the decision is expected to be retroactive to January 1, 2018, for the first quarter ended March 31, 2018, GSWC recorded a regulatory liability with a corresponding decrease in water revenues of approximately $780,000 resulting from the lower return on rate base.