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, 2015, Registrant had approximately $68.6 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $40.2 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $6.2 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC's purchase power contracts over the term of the contracts, and $17.1 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense. 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 would require a write-down in the assets’ valuation. Regulatory assets are offset against regulatory liabilities within each rate-making area. Amounts expected to be collected or refunded in the next 12-months have been classified as current assets and current liabilities by rate-making area. As of March 31, 2015, GSWC has a total of $131.9 million in net regulatory assets, of which $4.3 million of regulatory liabilities have been included in “Other Current Liabilities”. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:



(dollars in thousands)	March 31, 2015			December 31, 2014
GSWC
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account	$	17,948		$	9,369
Base Revenue Requirement Adjustment Mechanism	6,452			7,761
Costs deferred for future recovery on Aerojet case	13,457			13,629
Pensions and other post-retirement obligations (Note 7)	42,884			43,426
Derivative unrealized loss (Note 4)	6,176			3,339
Flow-through taxes, net (Note 6)	17,092			17,612
Low income rate assistance balancing accounts	9,215			9,109
General rate case memorandum accounts	4,651			4,731
Other regulatory assets	14,686			17,487
Various refunds to customers	(640		)	(759		)
Total	$	131,921		$	125,704

Regulatory matters are discussed in detail in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2014 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2014.

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 Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC. GSWC has implemented surcharges to recover all of its WRAM, net of the MCBA balances, as of December 31, 2014. The recovery or refund of the WRAM is netted against the MCBA over- or under-collection for the corresponding rate-making area and is interest bearing at the current 90-day commercial paper rate. Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months. For the three months ended March 31, 2015 and 2014, surcharges (net of surcredits) of approximately $600,000 and $1.8 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM, net of MCBA accounts. During the three months ended March 31, 2015 and 2014, GSWC recorded under-collections of $8.0 million and $3.6 million, respectively, in the WRAM, net of the MCBA accounts. As of March 31, 2015, GSWC has a net aggregated regulatory asset of $17.9 million which is comprised of a $13.7 million under-collection in the WRAM accounts and $4.2 million under-collection in the MCBA accounts.

For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”) which adjusts certain revenues to adopted levels. In November 2014, the CPUC issued a final decision on BVES' general rate case, setting rates and adopted revenues for years 2013 through 2016. In March 2015, surcharges were implemented to collect the 2014 BRRAM under-collection of $3.1 million over 24 months. As of March 31, 2015, GSWC had a regulatory asset of $6.5 million under-collection in the BRRAM.

Other Regulatory Matters:

Procurement Audits:

In December 2011, the CPUC issued a final decision adopting a settlement between GSWC and the CPUC on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects primarily in one of GSWC's three main geographic water regions. As part of the settlement reached with the CPUC on this matter, GSWC agreed to be subject to three separate independent audits of its procurement practices over a period of ten years from the date the settlement was approved by the CPUC. The audits cover GSWC’s procurement practices for contracts with other contractors from 1994 forward. The first audit started in 2014 and covers almost a 20-year period from January 1, 1994 through September 30, 2013.

In December 2014, the accounting firm engaged by the CPUC to conduct the first audit provided its draft report to GSWC for comments. The report asserted that GSWC had not complied, in all material respects, with the CPUC’s requirements and GSWC's procurement policies during the period from 1994 to 2006. Subsequent to 2006, except for specific instances of alleged noncompliance, GSWC was found to be in compliance, in all material respects, with the CPUC’s requirements and GSWC’s procurement policies. The findings and corresponding recommendations in the draft report included, among other things, instances of inadequate documentation to support competitive bidding procedures, change orders, and sole source justifications.

In February 2015, management provided to the auditors its responses to the draft report and each of the findings noted by the auditors. GSWC informed the auditors of certain inaccuracies in their report, asserted that GSWC complied, in all material respects, with the CPUC’s requirements throughout the entire audit period and, has been in material compliance with its own procurement policies throughout the audit period. In March 2015, the accounting firm issued its final report to the CPUC. The final report includes GSWC's responses to the accounting firm’s findings, as well as the firm’s responses to GSWC's comments. Based upon discussions with the CPUC's Division of Water and Audits ("DWA"), DWA does not intend to pursue further investigation, refunds, or penalties in respect of past procurement activities as a result of the final report. However, the CPUC's Office of Ratepayer Advocates ("ORA") has requested that the CPUC convene a separate phase of GSWC's current general rate case to consider the findings and recommendations in the final report. ORA may separately pursue disallowances and/or penalties from GSWC in that pending rate case proceeding. At this time management cannot predict the final outcome of this first audit and cannot determine a possible loss or range of loss, if any, associated with any disallowances and/or penalties that may be pursued against GSWC.