3. Regulatory Environment

Our regulatory framework for the Class A water utilities in California, including these six companies,³ is a strong and responsive framework and is recognized as such. It provides stable and predictable reviews in the form of general rate cases where we examine in detail and adopt a revenue requirement sufficient to provide an opportunity to recover reasonable operating costs. Additionally, we carefully review and determine an appropriate cost of capital and return on equity. This consolidated proceeding is a specific regulatory enhancement adopted in the latest rate case plan for water utilities. Finally, we provide individually for each company based upon reasonable showing of need a comprehensive array of balancing accounts and memorandum accounts which assure recovery of reasonably incurred costs and provide an opportunity to address numerous unpredictable events ill-suited to inclusion in general rate cases. Thus, the regulatory framework provides timely reasonableness reviews of these numerous balancing and memorandum accounts that recover significant portions of the companies' costs free of the forecast risk inherent in general rate cases.

We know that California depends on having financially viable public utilities, and therefore all of our decisions must ensure that these regulated entities have a reliable process to recover just and reasonable costs and an opportunity to earn a fair return.

³ We refer to six companies because Park Water Company (Park) and Apple Valley Ranchos Water Company (Apple Valley) are otherwise separately regulated with independent revenue requirements and rates. Because of their common ownership, we can set a single cost of capital for both companies. We note that the application asked for a single capital structure and cost of capital and did not distinguish the two operations.