Regulatory Matters

6 Months Ended

Jun. 30, 2024

In accordance with accounting principles for rate-regulated enterprises, GSWC and BVES record regulatory assets, which represent probable future recovery of incurred 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 June 30, 2024, GSWC and BVES had approximately $61.3 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $73.3 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) $7.2 million of net regulatory assets relates to flowed-through deferred income taxes including the gross-up portion on the deferred tax resulting from the excess deferred income tax regulatory liability, (iii) $3.5 million of net regulatory liabilities relates to the overfunded position in Registrant’s pension and other retirement obligations (not including the two-way pension balancing accounts), and (iv) $5.6 million of regulatory assets relate to memorandum accounts 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 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 regulatory 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 ratemaking area. Amounts expected to be collected or refunded in the next twelve months have been classified as current assets and current liabilities by ratemaking area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:


(dollars in thousands)	June 30, 2024		December 31, 2023
GSWC
2022/2023 general rate case memorandum accounts (unbilled revenue)	$	46,527	$	52,795
Water revenue adjustment mechanism, net of modified cost balancing account	50,842		41,545
Asset retirement obligations	7,418		7,099
Flowed-through deferred income taxes, net	5,667		3,190
Low income rate assistance balancing accounts	7,747		5,763
Other regulatory assets	10,018		10,661
Excess deferred income taxes	(69,567)		(70,189)
Pensions and other post-retirement obligations	(4,828)		(4,867)
Other regulatory liabilities	(510)		(268)
Total GSWC	$	53,314	$	45,729
BVES
Derivative instrument memorandum account (Note 5)	5,593		2,360
Wildfire mitigation and other fire prevention related costs memorandum accounts	19,864		17,716
Electric supply cost adjustment mechanism	777		2,583
Other regulatory assets	8,181		7,697
Other regulatory liabilities	(7,677)		(6,578)
Total AWR	$	80,052	$	69,507

Regulatory matters are discussed in the consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2023 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2023.

Water General Rate Case and the 2022/2023 General Rate Case Memorandum Accounts:

In June 2023, the CPUC adopted a final decision in GSWC’s general rate case application for all its water regions and its general office that determines new water rates for the years 2022–2024. The new rates approved were retroactive to January 1, 2022. Upon receiving the final decision, GSWC filed for the implementation of new 2023 rate increases that went into effect on July 31, 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 period from January 1, 2023 to July 30, 2023 were based on 2021 adopted rates. GSWC was authorized to create general rate case memorandum accounts to track the revenue differences between the 2021 adopted rates and the 2022 and 2023 rates authorized by the CPUC for future recovery. In October 2023, surcharges were implemented to recover the cumulative retroactive rate differences over 36 months. As of June 30, 2024, there is an aggregate cumulative amount of $46.5 million under-collection in the general rate case memorandum accounts that GSWC has recorded as regulatory assets for retroactive water revenues.

Alternative-Revenue Programs:

GSWC records the difference between what it bills its water customers and that which 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 ratemaking area and bears interest at the current 90-day commercial-paper rate.

As of June 30, 2024, GSWC had an aggregated net regulatory asset of $50.8 million, which is comprised of a $54.6 million under-collection in the WRAM accounts and a $3.8 million over-collection in the MCBA accounts. During the six months ended June 30, 2024, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of approximately $15.3 million that resulted largely from lower-than-adopted water usage as authorized in the general rate case decision. In May 2024, the CPUC approved the recovery of all pre-2024 WRAM/MCBA balances, with the majority of the balances to be recovered within 18 months. Accordingly, effective May 1, 2024, GSWC implemented surcharges to recover all of its WRAM/MCBA balances accumulated as of December 31, 2023.

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 June 30, 2024, there were no significant WRAM under-collections that were estimated to be collected over more than a 24 month period.

BVES Regulatory Assets:

Wildfire Mitigation and Other Fire Prevention Related Costs Memorandum 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 for BVES 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 a CPUC-approved memorandum account for future recovery. As of June 30, 2024, BVES had approximately $13.3 million in incremental vegetation management costs recorded as a regulatory asset. BVES has requested future recovery of these costs in its general rate case application filed with the CPUC in August 2022. 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 have a wildfire mitigation plan (“WMP”) approved by the Office of Energy Infrastructure Safety (“OEIS”) and ratified by the CPUC. 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. The OEIS has approved and the CPUC has ratified BVES’s 2023-2025 WMP. As of June 30, 2024, BVES has approximately $6.6 million related to expenses accumulated in its other WMP memorandum accounts that have been recognized as regulatory assets for future recovery.

All capital expenditures and other incremental costs incurred through June 30, 2024 as a result of BVES’s WMPs are not currently in rates and are being addressed for future recovery in BVES’s general rate case application. These costs are subject to review during BVES’s general rate case proceeding.

Other Regulatory Assets:

Other regulatory assets represent costs incurred by GSWC or BVES for which they have received or expect to receive rate recovery in the future. Registrant believes that these regulatory assets are supported by regulatory rules and decisions, past

practices, and other facts or circumstances that indicate recovery is probable. If the CPUC determines that a portion of either GSWC’s or BVES’s regulatory assets are not recoverable in customer rates, the applicable entity must determine if an asset impairment has occurred that requires it to write down the regulatory asset to the amount that is probable of recovery.