In accordance with accounting principles for rate-regulated enterprises, GSWC and BVES record regulatory assets, which represent probable future recovery of costs from customers through the rate making process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the rate making process. At March 31, 2023, GSWC and BVES had approximately $77.6 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $75.2 million of regulatory liabilities are excess deferred income taxes arising from the lower federal income tax rate under the Tax Cuts and Jobs Act enacted in December 2017 that are being refunded to customers, (ii) $2.3 million of regulatory assets relates to the underfunded position in Registrant's pension and other retirement obligations (not including the two-way pension balancing accounts), and (iii) $6.7 million regulatory liability related 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 including flowed-through deferred income taxes.

Regulatory assets represent costs incurred by GSWC and/or BVES for which they have received or expect to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC and BVES consider 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 either GSWC’s or BVES’s assets are not recoverable in customer rates, the applicable utility 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 liabilities, less regulatory assets, included in the consolidated balance sheets are as follows:


(dollars in thousands)	March 31, 2023		December 31, 2022
GSWC
2022/2023 general rate case memorandum accounts (unbilled revenue)	$	38,419	$	—
Water revenue adjustment mechanism, net of the modified cost balancing account	29,069		31,803
COVID-19 memorandum account	3,540		3,478
Excess deferred income taxes	(71,418)		(71,870)
Flowed-through income taxes	447		(1,134)
Other regulatory assets	22,390		19,964
Other regulatory liabilities	(13,198)		(8,815)
Total GSWC	$	9,249	$	(26,574)
BVES
Derivative instrument memorandum account (Note 5)	(6,669)		(11,847)
Wildfire mitigation and other fire prevention related costs memorandum accounts	14,131		13,007
Other regulatory assets	9,480		7,965
Other regulatory liabilities	(8,565)		(8,005)
Total AWR	$	17,626	$	(25,454)

In July 2020, GSWC filed a general rate case application for all of its water regions and its general office. This general rate case determines new water rates for the years 2022–2024. On April 13, 2023, GSWC received a proposed decision on this application from the assigned administrative law judge at the CPUC. Among other things, the proposed decision approves and adopts in its entirety the settlement agreement between GSWC and the Public Advocates Office at the CPUC (“Public Advocates”) that had been filed with the CPUC in November 2021, and resolves all issues related to the 2022 annual revenue requirement in the general rate case application and allows for additional increases in adopted revenues for 2023. The new rates

for 2022 and 2023 are effective and retroactive to January 1, 2022 and January 1, 2023, respectively. As a result of receiving a proposed decision that approves the settlement agreement in its entirety, the impact of retroactive rates for the full year of 2022 and the estimated second-year rate increases for the three months ended March 31, 2023 have been reflected in the 2023 first quarter results as it became probable that the approved retroactive rates for the full year of 2022 and the first three months of 2023 would be permitted to be billed to customers in the future. GSWC expects to receive a final decision during the second quarter of 2023.

Due to the delay in finalizing the water general rate case, water revenues billed to customers for the year ended December 31, 2022 and for the three months ended March 31, 2023 were based on 2021 adopted rates, pending a final decision by the CPUC. GSWC has been authorized to create general rate case memorandum accounts to track the revenue differences between the 2021 adopted rates and the new 2022 and 2023 rates authorized by the CPUC. As of March 31, 2023, there is an aggregate cumulative amount of $38.4 million in the general rate case memorandum accounts that relates to water revenues recorded during the three months ended March 31, 2023, and which represent the difference between the 2021 adopted rates billed to customers and the rates authorized in the proposed decision for the full year of 2022 and the estimated increases for the period ended March 31, 2023. Additional increases in adopted revenues for 2023 are subject to an earnings test and changes to the forecasted inflationary index values. The best estimate of 2023 rate increases have been computed at this time using inflationary index values as of March 31, 2023. Actual increases for 2023 will be determined when the filings to implement the new rate increases are approved by the CPUC, and will be calculated using the inflationary index values at that time. GSWC will file for the 2023 increases once the CPUC approves the final decision. Once a final decision is issued by the CPUC, GSWC will also request recovery through a surcharge of the cumulative amounts included in the general rate case memorandum accounts.

Furthermore, the proposed decision addressed the three remaining unresolved issues related to GSWC's requests for: (i) a medical insurance cost balancing account, (ii) a general liability insurance cost balancing account, and (iii) the consolidation of two of GSWC’s customer service areas. The proposed decision approved both balancing accounts and denied GSWC’s consolidation of its two customer service areas. The proposed decision also approved the recovery of previously incurred costs that were being tracked in other CPUC-authorized memorandum accounts. GSWC recorded the amounts tracked in the balancing and memorandum accounts that are being approved in the proposed decision, the net impact of which was not material to 2023 first quarter results.

GSWC currently records the difference between what it bills its water customers and what is authorized by the CPUC using the Water Revenue Adjustment Mechanism (“WRAM”) and the Modified Cost Balancing Account (“MCBA”) approved by the CPUC. The over- or under-collection of the WRAM is aggregated with the MCBA over- or under-collection for the corresponding rate making area and bears interest at the current 90-day commercial-paper rate.

During the three months ended March 31, 2023, GSWC recorded net under-collections in the WRAM/MCBA accounts of approximately $9.5 million due to lower-than-adopted water usage and to reflect the authorized 2023 amounts. In addition, GSWC recorded a net reduction of $9.8 million of under-collection during the first quarter of 2023 to reflect the cumulative full-year impact of 2022 based on authorized 2022 amounts for both WRAM/MCBA accounts as a result of receiving the proposed water general rate case decision. Surcharges for the 2022 WRAM/ MCBA balance is expected to be requested after the final CPUC-decision is received on GSWC's general rate case. Surcharges and surcredits have been implemented for all pre-2022 WRAM/MCBA balances. As of March 31, 2023, GSWC had an aggregated regulatory asset of $29.1 million, which is comprised of a $28.9 million under-collection in the WRAM accounts and a $189,000 under-collection in the MCBA accounts.

As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances within 24 months following the year in which an under-collection is recorded. As of March 31, 2023, there were no material WRAM under-collections that were estimated to be collected over more than 24 months.

GSWC filed a cost of capital application in May 2021 currently pending CPUC approval. Hearings on this proceeding occurred in May 2022 and briefs were filed in June 2022. On May 9, 2023, GSWC received a proposed decision from the assigned administrative law judge at the CPUC on the cost of capital proceeding. Among other things, the proposed decision (i) adopts GSWC’s requested capital structure and cost of debt filed in the application; (ii) adopts a return on equity of 8.85% for GSWC as compared to 8.9% previously authorized; (iii) allows for the continuation of the Water Cost of Capital Mechanism (“WCCM”); and (iv) adopts the new cost of capital for the three-year period commencing January 1, 2022, through December 31, 2024. Comments on the proposed decision are due on May 30. In March 2023, the CPUC issued a decision that approved an extension of the statutory deadline for a final decision in the cost of capital proceeding to August 10, 2023.

Based on management’s analysis of this regulatory proceeding and the associated accounting to date, for the three months ended March 31, 2023 and 2022, GSWC reduced revenues by $1.8 million, and $1.4 million, respectively, and recorded a corresponding regulatory liability for revenues subject to refund based on its best estimate, which relates to the impact of GSWC’s lower cost of debt requested in its application and adopted in the proposed decision. Also, an additional reduction to revenues of $1.1 million was recorded during the first quarter of 2023 to reflect the incremental impact of revenues subject to refund from the new 2022 rates in the proposed water general rate case decision that results from the lower cost of debt in the

pending cost of capital proceeding. As of March 31, 2023, GSWC had an aggregated regulatory liability of $9.3 million for the estimated revenues subject to refund from the pending cost of capital proceeding. However, at this time, management cannot predict the ultimate outcome and any changes that may be made to the final decision in the cost of capital application, and the associated impact on 2022 and 2023 revenues. Changes in estimates will be made, if necessary, as more information in this proceeding becomes available.

Furthermore, the proposed decision continues the WCCM for the years 2023 and 2024, which adjusts the return on equity and rate of return on rate base between the three-year cost of capital proceedings only if there is a positive or negative change of more than 100 basis points in the average of the Moody’s Aa utility bond rate as measured over the period October 1 through September 30. If there is a positive or negative change of more than 100 basis points, the return on equity is adjusted by one half of the difference. For the period from October 1, 2021 through September 30, 2022, the Moody’s rate increased by 103 basis points from the benchmark, which triggers the WCCM adjustment. GSWC recognized revenues for the first quarter of 2023 and all of 2022 based on the previously authorized return of equity of 8.9% that is presently being billed to water customers pending a final decision in the cost of capital proceeding.

The CPUC has authorized GSWC and BVES to track incremental costs, including bad debt expense, in excess of what is included in their respective revenue requirements incurred as a result of the pandemic in COVID-19 emergency-related memorandum accounts. During the first quarter of 2023, GSWC and BVES incurred some incremental costs in excess of their revenue requirements due to the lingering effects of the pandemic that are being tracked in COVID-19-related memorandum accounts and recorded as regulatory assets, which GSWC and BVES intend to file with the CPUC for future recovery. As of March 31, 2023, GSWC and BVES had approximately $3.5 million and $500,000, respectively, in regulatory asset accounts related to bad debt expense in excess of their revenue requirements, the purchase of personal protective equipment, additional incurred printing costs, and other incremental COVID-19-related costs. Emergency-related memorandum accounts are well-established cost recovery mechanisms authorized as a result of a state/federal declared emergency, and are therefore recognized as regulatory assets for future recovery. As a result, the amounts recorded in the COVID-19 emergency-related memorandum accounts have not impacted GSWC’s or BVES’s earnings. On April 10, 2023, the Biden Administration terminated the COVID-19 national emergency. The COVID-19 emergency-related memorandum accounts for GSWC and BVES expired when the COVID-19 national emergency ended and no additional amounts will be included in these memorandum accounts.

The CPUC requires that amounts tracked in GSWC’s and BVES’s COVID-19 memorandum accounts for unpaid customer bills be first offset by any (i) federal and state relief for water or electric utility bill debt, and (ii) customer payments through payment plan arrangements, prior to receiving recovery from customers at large. After these offsets are made, GSWC will file with the CPUC for recovery of the remaining balance. BVES intends to include the remaining balance in its COVID-19 memorandum account for recovery once all alternative sources of funding have been exhausted and credited to eligible customer accounts.

The CPUC adopted regulations intended to enhance the fire safety of overhead electric power lines. Those regulations included increased minimum clearances around electric power lines. BVES was authorized to track incremental costs incurred to implement the regulations in a fire hazard prevention memorandum account for the purpose of obtaining cost recovery in a future general rate case. In August 2019, the CPUC issued a final decision on the electric general rate case, which set new rates through the year 2022. Among other things, the decision authorized BVES to record incremental costs related to vegetation management, such as costs for increased minimum clearances around electric power lines, in the CPUC-approved memorandum account for future recovery. As of March 31, 2023, BVES had approximately $9.3 million in incremental vegetation management costs recorded as a regulatory asset, which has been included in the new general rate case application filed with the CPUC in August 2022 for future recovery. The incremental costs related to vegetation management included in the memorandum account will be subject to review during the general rate case proceeding.

California legislation enacted in September 2018 requires all investor-owned electric utilities to submit an annual wildfire mitigation plan (“WMP”) to the CPUC for approval. The WMP must include a utility’s plans on constructing, maintaining and operating its electrical lines and equipment to minimize the risk of catastrophic wildfire. In December 2022, the Office of Energy Infrastructure Safety under the California Natural Resources Agency approved BVES's 2022 WMP update. In February 2023, the CPUC ratified BVES’s current WMP. As of March 31, 2023, BVES has approximately $4.8 million related to expenses accumulated in its WMP memorandum accounts that have been recognized as regulatory assets for future recovery.

BVES activated a catastrophic emergency memorandum account (“CEMA”) to track the incremental costs incurred in response to a severe winter storm that occurred during the first quarter of 2023, which resulted in the declaration of an emergency by the governor of California. Incremental costs of approximately $810,000 were incurred and included in the CEMA account, which has been recorded as a regulatory asset as of March 31, 2023 for future recovery. The incremental costs included in the CEMA account will be subject to review and approval by the CPUC. CEMA accounts are well-established cost recovery mechanisms authorized as a result of a state/federal declared emergency, and are therefore recognized as regulatory assets for future recovery. As a result, the amounts recorded in this CEMA account did not impact BVES’s earnings.