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, 2019, Registrant had approximately $56.0 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $80.9 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) $14.9 million of regulatory liabilities are from flowed-through deferred income taxes, (iii) $35.7 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) $336,000 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, 2019			December 31, 2018
GSWC
Water Revenue Adjustment Mechanism and Modified Cost Balancing Account	$	24,998		$	17,763
Costs deferred for future recovery on Aerojet case	9,397			9,516
Pensions and other post-retirement obligations (Note 8)	32,606			33,124
Derivative unrealized loss (Note 5)	336			311
Low income rate assistance balancing accounts	2,505			2,784
General rate case memorandum accounts	3,956			5,054
Excess deferred income taxes	(80,930		)	(81,465		)
Flow-through taxes, net	(14,859		)	(15,273		)
Other regulatory assets	16,215			15,656
Tax Cuts and Jobs Act memorandum accounts	(9,036		)	(8,293		)
Various refunds to customers	(8,914		)	(7,517		)
Total	$	(23,726	)	$	(28,340	)

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, 2018 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2018.

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. 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, 2018. For the three months ended March 31, 2019 and 2018, surcharges (net of surcredits) of approximately $2.8 million and $4.2 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. During the three months ended March 31, 2019, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of approximately $10.0 million due to lower than adopted customer water usage, as well as higher than adopted supply costs currently in billed customer rates. As of March 31, 2019, GSWC had an aggregated regulatory asset of $25.0 million, which is comprised of a $10.1 million under-collection in the WRAM accounts and a $14.9 million under-collection in the MCBA accounts.

Pending General Rate Case Filings:

Water Segment:

In July 2017, GSWC filed a general rate case application for its water regions and the general office. The general rate case will determine new water rates for the years 2019 through 2021. On August 15, 2018, GSWC and the CPUC’s Public Advocates Office filed a joint motion to adopt a settlement agreement between the two parties in connection with the general rate case.

On April 8, 2019, the assigned Administrative Law Judge issued a proposed decision ("PD") on the general rate case. The PD approves the settlement agreement, with the exception of advice letter capital projects totaling approximately$20.4 million that were agreed to by GSWC and the CPUC’s Public Advocates Office in the settlement. The PD does not explicitly disallow these projects, but instead instructs GSWC to include these projects in its next general rate case filing. As a result, no impairment charges were recorded for the three months ended March 31, 2019 related to the immaterial costs incurred to date for these projects. GSWC and the CPUC's Public Advocates Office have separately filed their response and comments to the PD, and both parties dispute the ALJ's rejection of the advice letter capital projects. At this time, GSWC cannot predict the final outcome regarding this matter. Due to the delay in receiving a final decision by the CPUC on the water general rate case, billed water revenues for the first quarter of 2019 were based on 2018 adopted rates. Once a final decision is issued, new water rates will be retroactive to January 1, 2019 and retroactive adjustments will be recorded accordingly.

Electric Segment:

In May 2017, GSWC filed its electric general rate case application with the CPUC to determine new electric rates for the years 2018 through 2021. In November 2018, GSWC and the Public Advocates Office filed a joint motion to adopt a settlement agreement between the two parties resolving all issues in connection with the general rate case. Among other things, the settlement incorporates a previous stipulation in the case, which authorizes a new return on equity for GSWC's electric segment of 9.60%, as compared to its previously authorized return of 9.95%. The stipulation also includes a capital structure and debt cost the same to those approved by the CPUC in March 2018 in connection with GSWC's water segment cost of capital proceeding. Because of the delay in finalizing the electric general rate case, billed electric revenues during the first quarter of 2019, and all of 2018, were based on 2017 adopted rates pending a final decision by the CPUC in the rate case application. A decision on the case is expected later in 2019 and, when approved by the CPUC, the new rates will be retroactive to January 1, 2018 and retroactive adjustments will be recorded accordingly.