Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company, AWR conference call discussing the company's third quarter 2015 results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5:00 P.M. Eastern Time and run through November 11th, 2015, on the company's website, www.aswater.com. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. This call will be limited to an hour. As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.
Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company.
Thank you, Allison. Welcome, everyone, and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls. For the third quarter of 2015, diluted earnings were $0.56 per share compared to $0.54 per share for the same period in 2014. Earnings at our water segment increased by $0.03 per share. Earnings at our electric and contracted services segments were flat. Earnings at the parent company decreased by $0.01 per share for the quarter. For the quarter, water revenue increased by $573,000 to $97.3 million as compared to the same period in 2014. The increase is primarily due to third-year rate increases and the increase generated from revenue recovery on capital projects approved by the California Public Utilities Commission or the CPUC through advice letter filings.
Bill consumption decreased 24% during the quarter as compared to the third quarter last year. As we continue to work with our customers to meet the state-mandated conservation targets. This decrease in consumption has not had a significant impact on the company's water gross margin due to CPUC-authorized Water Revenue Adjustment Mechanism, or the WRAM. The WRAM mechanism is in place for all of our water service areas. Excluding the effect of surcharges, which has no impact to pre-tax earnings, our water gross margin approximates the authorized water margin approved by the CPUC. Bob will discuss the company's effort in dealing with the drought situation in California later in the call.
It is, however, important to remember that we can recognize the undercollected revenue only if Golden State Water collects its WRAM balances within 24 months following the year in which they are recorded, as required by the accounting guidance for such revenue recognition. Due to the lower level of water usage experienced this year in response to the state's mandate to conserve water, Golden State Water has recorded a $36 million WRAM undercollection for the nine months ended September 30, 2015. We estimate that this balance will be collected in 24 months following the end of 2015, and therefore, have included this $36 million as part of our revenue through September 30. If we continue to experience declining water usage, the 2015 WRAM undercollection will continue to increase through the end of this year.
A large WRAM balance may result in amortization periods greater than 24 months under the current CPUC amortization guidelines. This could affect the timing of when we record our fourth quarter WRAM revenue for certain rate-making areas, resulting in the deferral of a portion of fourth quarter revenues to future periods. This is pursuant to the accounting guidance for revenue recognition in this area. There's no recoverability issue with the CPUC, rather a timing issue of which this revenue can be recorded under the accounting rules. Another key point to note here is that forecasted consumptions used to set rates for 2016 through 2018 in the pending rate case reflect state-mandated consumption levels. We do not expect the WRAM balances to continue growing beyond 2015 at the same rate as in 2015. Moving on to our other segments revenues.
For the third quarter of 2015, revenue from electric operations were $7.9 million as compared to $8.6 million for the same period last year. The decrease is primarily due to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC's November 2014 final decision on our electric general rate case. Differences in the monthly allocation of the annual adopted revenue for 2015 versus 2014 are expected to reverse by the end of this year. Revenues for our contracted services business, American States Utility Services, or ASUS, decreased $5.3 million to $27.8 million for the third quarter of 2015. This decrease was due largely to completion of several large capital projects during 2014, which did not recur in 2015. The decrease was partially offset by increasing O&M management fees due to successful resolution of various price redeterminations received during the quarter.
These price redeterminations resulted in higher monthly O&M management fees, which increased the earning by $0.01 per share for this quarter. The favorable resolution also included retroactive O&M management fees of $3.5 million recorded during the quarter. In the third quarter last year, ASUS also received $2.4 million of retroactive revenue in connection with price redetermination. In comparison, retroactive O&M revenue received this quarter increased the earning by $0.02 per share. Our water and electric supply costs were $31.4 million for the third quarter of 2015. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing account, which will be recovered from or refunded to our customers in the future.
Other operation expenses increased by $98,000 for the third quarter of 2015, primarily due to an increase at the contracted services business as a result of a higher percentage of labor attributable to operation-related activities, partially offset by lower expenses at the water segment. The decrease at the water segment was due to lower water treatment costs, driven by lower consumption, partially offset by an increase in drought-related costs such as printing and postage incurred for customer notifications related to drought awareness. We have been authorized by the CPUC to track incremental drought-related costs incurred in a memorandum account for possible future recovery. Such incremental drought-related costs are being expensed until recovery is approved by the CPUC.
Administrative and general expenses for third quarter decreased at the water segment due to lower legal and other outside services costs for condemnation and other activities as compared to the same period last year. We expect to incur additional legal costs in the future to defend two of our water systems from condemnation actions. A&G expenses for contracted services increased primarily due to an increase in labor and other indirect costs for A&G-related activity in support of various functions for all military bases. This increase was largely offset by a decrease in such costs included in construction expenses as compared to the third quarter of last year.
Construction expenses at ASUS decreased by $5.6 million to $14.9 million during the quarter as compared to the same period in 2014, due primarily to decrease in construction activities, as well as a shift in labor and other indirect costs incurred as A&G activities, while in the same period of 2014, a higher percentage was incurred for construction-related activities. Income tax expenses increased by $918,000 to $14.4 million as compared to the same period last year, driven by an increase in pre-tax income, as well as an overall higher effective income tax rate due primarily to differences between book and taxable income that are treated as a flow-through adjustment in accordance to regulatory requirements. Moving on to liquidity and capital resources.
Net cash provided by operating activity decreased by $34 million to $86.1 million for the nine months ended September 30, 2015, as compared to $120.1 million for the same period last year. The decrease was primarily due to a decrease in customer water usage resulting from conservation efforts, which lowered customer billings at Golden State Water and increased the WRAM regulatory assets. There was also a decrease in cash generated by contracted services due to the timing of billing and cash receipts for construction work at military bases during the nine months ended September 30, 2015. During last year's nine months ended September 30, 2014, cash payments were received for the completion of several large capital upgrade projects that did not recur during the same period in 2015.
In regards to Golden State Water Company's capital expenditures, we spent $57.6 million in company-funded capital expenditures during the nine months ended September 30, 2015. We expect to invest approximately $85 million-$90 million in capital projects during 2015. For additional details on our third quarter and year-to-date performance, please refer to our earnings release and Form 10-Q issued yesterday. With that, I'll turn the call over to Bob.
Thank you, Eva. Good afternoon, everyone. I appreciate everyone joining us today. The company has made good progress on a number of fronts since our last earnings conference call. During the third quarter, we continued to execute on our California Drought Action Plan and align with the state's emergency regulations. Last month, we completed an asset purchase agreement and acquired all the operating assets of Rural Water Company. In addition, we saw the successful resolution of outstanding price redeterminations at our contracted services segment. I would like to begin by discussing water conservation in light of the ongoing drought situation in California. As a result of the Governor's executive order expiring in February 2016, we continue to work with our customers to meet the state-mandated water conservation targets, which call for reductions in water usage by 25% as compared to 2013 levels.
During the third quarter, billed water consumption decreased by 24% as compared to the same period in 2014 due to our customers' conservation efforts. All of our water service areas are currently in stage 1 of our staged mandatory water conservation and rationing plan, which outlines restrictions for outdoor irrigation for Golden State Water Company customers without imposing penalties. Through October, nearly all of Golden State Water Company's service areas have met their cumulative targets. We intend to implement stage 2 or higher stages of the staged mandatory water conservation and rationing plan in those areas which have not met their cumulative targets. Stages 2 and higher include penalties for customers that use water in excess of their allotments. In connection with conservation, the Commission has authorized us to track incremental costs incurred in promoting conservation and implementing restriction measures in drought memorandum accounts for possible future recovery.
As for Golden State Water Company's pending general rate case for all of our water regions and the general office, we are waiting for a proposed decision from the Commission. The rate case will determine rates for the years 2016, 2017, and 2018. As I mentioned in our previous calls, Golden State Water Company's requested capital budgets in the application average approximately $90 million a year for the three-year period. The 2016 water gross margin is expected to decrease as compared to the currently adopted levels, due in part to a decrease in annual depreciation expense resulting from an updated depreciation study and other expenses. Hearings for the rate case were completed in June of this year, and settlements for certain items and legal briefs were filed in July.
As Eva mentioned earlier, the consumption levels used to calculate rates for 2016 through 2018 and incorporated into the settlement with the PUC's Office of Ratepayer Advocates in the pending rate case reflect the state-mandated conservation targets for each rate-making area. In this settlement, Golden State Water and ORA also agreed to a process that would allow adjustments to rates if consumption levels deviate from adopted levels over a certain percentage for 2017 and 2018. Any variances between actual sales volumes and adopted sales volumes of greater than 10% will result in an adjustment to the following year's adopted sales volumes by one-half of that variance. By having this process in place, adopted sales for the next rate cycle will better reflect actual water usage patterns and should result in smaller RAM balances. Of course, the CPUC has to first approve the settlement agreement in the current general rate case.
On October 14th, 2015, we completed the acquisition of all of the operating assets of Rural Water Company for a purchase price of $1.7 million. As a result, Golden State Water now serves approximately 960 new customers near the city of Arroyo Grande in the county of San Luis Obispo, California, which is near our Santa Maria customer service area in coastal California. Let me now discuss our contracted services segment. During the third quarter, the U.S. government approved price redeterminations related to the operations at Andrews Air Force Base in Maryland, Fort Jackson in South Carolina, and the military bases ASUS serves in Virginia. These price redeterminations included retroactive operation and maintenance management fees for prior periods. Accordingly, ASUS recorded approximately $3.5 million of retroactive revenues and pre-tax operating income.
In connection with these contract modifications during the three months ended September 30th, 2015, of which $3.0 million is for the periods prior to 2015. As a result of the successful resolutions of these price redeterminations, pricings on all of our 50-year contracts with the U.S. government is now current. In coordination with the U.S. government, all of our 50-year contracts will be transitioning to an annual Economic Price Adjustment model, whereby operation and maintenance management fees and renewal and replacement funds will be adjusted annually for inflation, as well as for changes in the amount of infrastructure served. By shifting from price redetermination filings every three years to a yearly Economic Price Adjustment model, our contracts will be updated on a timely basis. Filings for price redeterminations and Economic Price Adjustments and requests for equitable adjustment provide our contracted services segment with additional revenues and margin.
We also continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases. During the third quarter of this year, the U.S. government awarded us approximately $50 million in new construction projects, the majority of which are expected to be completed during the next 12 months. This compares favorably to the $27 million that we received during the third quarter of last year. In addition, we are actively engaged in pursuing new bases and expect the U.S. government to release additional bases for bidding over the next several years. We remain optimistic about the future of our contracted services business. I'd like to turn our attention to dividends.
On October 27th, 2015, American States Board of Directors approved a fourth quarter dividend of $0.224 per share on the common shares of the company. Dividends on the common shares will be payable on December 1st, 2015 to shareholders of record at the close of business on November 16th, 2015. American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year since 1954. Given our current payout ratio compared to the companies that we compete with for capital, as well as our high shareholders' equity ratio as a percent of total capitalization, there is room to grow the dividend in the future. Additionally, pursuant to the 1.2 million share stock repurchase program approved by our board in May of this year, we have repurchased approximately 962,000 common shares on the open market through September 30th.
Before I close with my prepared remarks, I'd like to thank you for your interest in American States Water, I'll now turn the call over to the operator for questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Richard Verdi of Ladenburg Thalmann. Please go ahead.
Hi, Bob and Eva, good afternoon. Actually, I guess good morning out there. Good afternoon here. Bob, the tail end of your prepared remarks actually dovetail perfectly into what I was wondering. Can you just talk a little bit about the dividend policy and what we should be thinking for next year, maybe there?
Sure. Be happy to. Hello, Richard.
Hi, Richard.
Yes. Our dividend policy, the driver there is trying to maintain an increase in our dividend of 5% on an annual basis, sort of on a long-term annual basis. That's really the driver. We do look at payout ratios from time to time and make sure that we're where we need to be, but it's really the trying to grow the dividend at 5% or more each year.
Okay. When you're thinking about increasing the dividend and you're looking at the buyback program, what is the strategy or the plan between those two and how you determine, do we increase the dividend or do we buy back more shares? What's the balancing act there, I guess?
Sure, Richard. Really, the impetus behind the buyback program was our shareholders' equity ratio had gotten to too high a level. We take a look at what sort of a reasonable equity ratio for Golden State Water Company is. We look at what a reasonable equity ratio for ASUS is. Based upon their relative sizes, we look at, well, what should the consolidated entity's equity ratio be? Really, the driver behind the buyback program was to try to bring that equity ratio back down closer to where it needed to be. It was north of 60% at one point in time. As you know, in the last rate case, Golden State Water Company received a 55% equity ratio.
Though ASUS is in a somewhat more competitive business than Golden State Water Company, it's not that much more competitive, we tend to focus on a 60% equity ratio for ASUS. When you then weight those, you're looking at something maybe in the 56%, 57%, 58% range. That was one primary motivator behind the buyback program. The other motivator was we had some substantial cash that the company had generated over time. Some of that had to do with the fact that we'd sold our Arizona operation back in 2011, and really didn't do anything with the extra cash or the extra equity at that particular business. Additionally, we've had extra cash because of bonus depreciation and the repair allowance regulations from a sort of tax payment standpoint. We had quite a bit of cash.
We had the higher equity ratio, and that sort of drove the buyback program. I think dividend is sort of a different animal there. That's really more what's the sustainable earnings of the company? What sort of sustainable dividend can the earnings going forward support? That's really the philosophy we have. Probably more than you wanted to know, but
No, it's very helpful. Thank you, Bob. It's a great call.
Okay.
In what you just said there, you had mentioned the equity ratio. Where things are now, do you feel comfortable with the equity ratio, or do you feel that there's the possibility to implement another buyback program when this current one comes to its close?
As you know, we've got some shares still to buy back as part of the second program. We'll take another look at it. Right now, though, our cash is not in the same situation it was a year or two ago because of the buyback programs. We spent close to, I want to say, $70 million, Eva?
About that.
We do understand that buyback programs are liked by investors. They tend to be accretive to earnings. Right now, we have no plans for a third buyback program.
Okay. Just the last one from me, I'll jump out. On the ASUS front, listen, I know for competitive reasons you can only share so much, I don't blame you. Could you please maybe just give us some sort of color surrounding the progress, how the company's making out on that front in terms of signing new contracts, where the opportunity pipeline is right now, just some sort of color would be excellent.
Sure. We've gone through the government records, as to what Army and Air Force bases they plan to put out in the next 5-10 years, in terms of the water and wastewater. We think there's probably, I want to say, 30-50 bases still to be privatized during that time period.
The company's, we believe we've been very aggressive at bidding on bases, though we haven't reported any new bases that we've won recently, we are very focused on winning additional bases and feel like we have a really good reputation with the government in terms of the bases we do have. There's reasons, I think, to be optimistic about us getting our fair share of new bases as these sort of roll out.
Okay. Great. I'll tell you what, just one more, Bob. When we were at NAWC a few weeks ago, that Monday, American States announced that they were doing a price redetermination at one of the bases. I'm wondering, is there anything else in that pipeline where maybe we could see something like that materialize over the next 12-24 months? Just any sort of color there would be real helpful as well.
Sure. I'd be happy to amplify that. We had put out a press release on that before market that Monday, just informing the market of our success on these price redeterminations that we had at the Virginia bases and at Fort Jackson in South Carolina. Previously, we had won a base, or had won a redetermination, or got through a redetermination at Andrews Air Force Base in Maryland. We've been real successful in not only getting through the price redeterminations, but also being able to record the retroactive revenues because the process has been delayed, but the government has, true to their word, allowed us to get paid for the period when the redetermination should have started. Right now, we are completely up to date on the redetermination front for the first time in the company's history. We're proud of that. It's sort of good news, bad news.
The good news is we're up to date. The bad news is we don't have any pending retroactive revenues that we can pull forward going forward. I did mention that there is a sort of a new plan going forward, where we've now got an Economic Price Adjustment approach at one set of bases as part of the redetermination process. In lieu of having sort of these three-year price redetermination processes, we instead will get sort of this inflation adjustment every year on our O&M management fees and on our renewal and replacement fees. We're in the process of converting each of our current contracts to that EPA type model going forward, which should give us more timely recognition of the need to sort of increase prices to cover operating costs.
Richard, during that process, even though it's an inflationary adjustment, we also are able to submit our changes in the asset we manage. As we're putting more and more capital each year, we manage more assets on each basis. Doing those annual process, we also can true up the management fee for additional assets that we managed.
One other comment, too, that was part of that press release. We did sort of mention that we had received $50 million of additional capital work outside of the renewal and replacement. These are sort of new capital upgrade projects at the bases we serve. That 50 compares to 27 last year. We have been pretty aggressive in working through and identifying what needs to be done at each of the bases and then putting our requests in with the U.S. government.
I applaud our folks for doing that and really getting the details put together well in advance of the end of the fiscal year for the U.S. government. It is a process and you want to be sure that you've got your ask in well in advance of when they've got to make decisions. The government is a big group and you've got a lot of paperwork to work through, but we sure appreciate them as our customer, I can tell you that.
That's great. Okay. Thank you. That's excellent color. Thank you, guys. I appreciate it. I'll jump out now.
Okay, Richard.
Thank you.
Our next question comes from Jonathan Reeder from Wells Fargo. Please go ahead.
Hi, Bob and Eva. I'll just, I guess, continue with the ASUS questions, since that's where we seem to be headed. Previously, Bob, you said for ASUS, you kind of expected 2015 to look similar to 2014, on an ongoing basis, the $0.26. I guess if we exclude the $0.05 of the retroactive booked in Q3 of this year, it looks like kind of right on pace with that. Is that still the expectations for the full year?
Yeah. Including the $0.05, we're looking to close out the year in sort of this $0.26-$0.28 a share range, including the $0.05.
Okay. Is it too soon to kind of ask what 2016 looks like based on the $50 million of awards? It seems like quite the step up from what you had the previous period. Just wondering if you could kind of shed some light on how that's going to impact.
Be happy to. Recognizing that it's months away, but in order to project for 2016, we will need to determine the amount of capital work that we are going to complete within that calendar year. That really gets worked out between the company contracting officer over the contract and the public works group at the respective bases. As we did talk about the $50 million funding, we believe we will have a higher level of construction in 2016 than we have had in 2015. Though we do not expect any retroactive revenues in 2016 like we had in 2015, we do think ASUS earnings for 2016 could still be in sort of this $0.24-$0.28 per share.
Okay, great. That is really helpful. I guess just in general for kind of Q4, when we look at Q4 2015 versus Q4 of 2014, what do you think the big drivers are that would impact the comparability of the corridors? Do they look similar year-over-year? I know Eva was mentioning about the RAM balance and whether or not you will be able to recognize some of those revenues. That could be a little iffy, but if you could discuss that a little.
Sure. I think that whether we have to defer revenue is probably potentially an item that would distinguish maybe the fourth quarter of 2015 versus fourth quarter of 2014. But Eva, you can sort of add to that.
Yeah, Jonathan. Since we are implementing the RAM in late 2008, we have not had to defer revenues from the accounting standpoint, since most of our ratemaking areas has been able to collect the RAM on the collection within the 24 months following the year end. 2015 has been a unique year, as everybody knows. Because of the new mandate on consumption, the 2015 RAM has been larger than in any prior years, given the special circumstances. During our pending rate case, there was acknowledgement from those at the CPUC involving our proceeding of this unprecedented drought situation and the effect of the RAM. In fact, there have been a discussion about possible recovering separately over a shorter period of time, the RAM related effect from the drought, which we believe would cover the period beginning in June when we implement our drought response actions and forward.
If that was the case, we will be able to recover the WRAM balances over the required 24 months as required by the accounting guidance. However, this all depends on the CPUC's decision, and we require them to issue the decision, including this kind of a provision in the decision, allowing for a shorter amortization period for the portion of our 2015 WRAM balances. At this time, it's really hard to predict if the collectibility period for 2015 WRAM balances will exceed the 24 months and whether we'll be required to defer the revenue in the fourth quarter. We're hoping the final decision from the PUC will address that as they talk about in the hearings.
Okay. Just to make sure I understand correctly, the GRC final decision, whenever you get that, you do expect the commission to address perhaps the WRAM recoverability related to the drought separately, that could be within that GRC decision?
Yeah, we'll hope to receive that. It was discussed during our hearing process with the judge.
It was actually brought up by the judge.
Yeah, by the judge.
It's a good sign.
We're hoping he will put that language in the decision.
Yes. It's interesting, there were two judges on our case, which you seldom see, because one of the judges was retiring. It was the retiring judge, I believe, that brought it up. We're keeping good thoughts on hoping, A, that we get the right decision here, and B, that it comes within time before we have to issue our fourth quarter financials.
Yes.
Sure. Okay.
The other thing.
Go ahead.
Yeah, the other thing that we should point out is we do expect some higher legal fees in the fourth quarter on our condemnation activities than we've had. I'm not sure what it was for the last year's fourth quarter, but we do expect those to be higher than they were in the third quarter, let's say.
Okay. Do you know what the trailing 12-month ROE was at Golden State Water? I know the utility was earning above the 943 authorized the past couple of years, and it looks like the utility earnings are up pretty decent year to date versus 2014. Is it safe to assume you're still earning kind of that elevated level?
Yeah. I think we're doing pretty well there. We believe it's a bit above the authorized level. Yes, continues to be a bit above the authorized level. We've done, what I would consider, is a great job on controlling our expenses. That's one of the reasons why we're able to achieve a higher than authorized ROE.
Sure. Are those new expense levels, are those reflected in the pending rate case?
Generally, yes. That's how it works is, if you can get to lower levels, it does benefit the shareholders temporarily, then it all goes back to customers, in the new rate case, which is, that's a good thing too. It sort of works for them as well. We were pretty focused in our rate case on making sure we didn't have an increase in our revenue requirement, because we understand what's going on with our customers in terms of how difficult things are. Now, maybe monthly bills don't go up, we do understand that usage is going down and the revenue requirement isn't, or isn't going down as fast because not all of our costs are variable, as you know.
Okay, two more quick ones and then I'll hop out. The current stock repurchase plan, you're over 75% kind of done. Do you expect to complete that during this year? I know it goes through June 2017. Any comments on the timing to complete?
Yeah. We have an algorithm in place that decides when we purchase stock. It's a bit of a function of how the stock has traded over the last many days. Probably we'll get there, I think, before year-end. Don't you think, Eva?
I think so.
Yeah. We don't have that far to go, so, only got about 250,000 shares left to go.
Then the last question on the incremental drought-related costs that you're tracking, those are being expensed right now, correct? That's reflected in your results and, I guess, are they significant?
No, Jonathan, they're not. In session today, we only spent about $700,000. Year to date, around $600,000. We use a lot of internal resources to focus on the efforts, a lot of costs was incurred due to our postage and printout notification communication with customers to help them to reach the goals.
Okay, great. Thanks, Eva. Thanks so much for taking the time for my questions.
Thank you.
Thank you, Jonathan.
Again, if you have a question, please press star then one. Our next question will come from Ryan Connors from Boenning & Scattergood. Please go ahead.
Great. Hi, Bob. Hi, Eva. Thanks for taking my call.
Hi, Ryan.
Hi, Ryan.
I wanted to query you on the WRAM issue from a bigger picture perspective. Obviously, hopefully, it's an issue of timing, as you call it, Eva, but the PUC has clearly been making some noise lately, conceding that there are some issues with the WRAM system as it's currently constituted. I understand there was actually a three-day workshop just a few weeks ago on water rate making, where this was a really prominent topic, and there have been some different proposals thrown out, the straw proposal and so forth, by the PUC. My question is: Is there a likelihood that there's going to be some change made to the decoupling or WRAM system as we know it today as an outcome of what's happening here with the drought and with your potential issue in the fourth quarter being a symptom of that?
Yeah, it's hard to say, Ryan. The straw proposal that you're referring to really was in the context of an ongoing rulemaking by the commission. This particular rulemaking started in November 2011, actually, and it was a rulemaking initiated by the commission to address issues associated with the commission's Water Action Plan and the overarching objective of setting rates that balance investment, conservation, and affordability. This straw proposal and this rulemaking is really part of the normal rate-making process in California. As you know.
Okay
The commission periodically reviews its processes to see if changes are necessary or warranted. In this particular situation, the commission, and in particular, the Commissioner, Catherine Sandoval, and Catherine Sandoval is taking the lead in this rulemaking. She set a schedule for discussing really the rate-making process. One of the motivating factors sort of in this recent straw proposal is the drought and how it may affect consumption patterns long term. That's why the commission set a schedule to hold these workshops to discuss rate making. The commission encouraged the utilities to think boldly and attach the straw proposal to the ruling as an example of bold and creative thinking. I think it just inspired discussion.
Yep.
At this point, I don't think we can draw any conclusions from the proposal itself.
Okay. It does seem that one of the things that's in there is they talk about how, whereas in theory, the WRAM system, you'd over-collect one year and under-collect another year, that for seven years running, basically, you and all of your peers have been perennially under-collecting, so there appears to be a one-sided nature to it. It did seem to me like there was some read in there that they do think that this is a kind of unique situation that needs to be addressed. I guess forecasting is one of the main issues, and I did read something where.
Yeah
They are thinking about some kind of an ability to adjust the forecasting in between rate cases or setting some kind of automatic adjustment of forecasting in between rate cases. Can you comment on that?
Yeah. Sort of this annual true-up on your sales forecast to try to keep the WRAM balances from getting to be too large.
Yeah. In fact, Ryan, we have that in our current settlement with ORA, that each year, we look at our consumption level. If it's going over a certain percentage, as Bob mentioned, we can adjust our consumption 50% of that for the following year. You won't build up your WRAM balance as we have been in the past. I think a lot of California Water Utilities have that right now, so it will be helpful to control the balance there.
Okay. Just so I understand, that's in the current case where you're awaiting your decision. You have that in there.
Yes
already.
In our settlement.
Yes.
The commission, again, has to.
Rule on that
they have to approve the settlement, generally, if you get an agreement with ORA, it's not guaranteed. It's
Likely
more likely than not that you're going to get that in the final decision, we're hoping.
Yeah. Also for our next three years, 2016 through 2018, Ryan, this consumption level each year for that rate case cycle also reflects the governor-mandated consumption level for each of our customer service areas. It's already set at a level pretty matched with our goals right now.
Right. Just to amplify that point, we had to do the filing for the case in July of 2014. What's happened since 2014 is the 25% reduction got put in place, at the judge's urging, we went back and redid the forecast to include the mandated reductions. That too will help to mitigate growing WRAM balances.
Got it. Well, that's very helpful. Thanks for your time today.
Thank you, Ryan.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Robert Sprowls for any closing remarks.
Thank you, Allison. Again, I just want to thank everyone for your participation today and for your continued interest and investment in American States Water Company. Everyone have a good day.
This concludes today's American States Water Company conference call.