Our Four-pronged Strategy For 2007 And Beyond

1. Intense Focus on Regulatory Matters

The Water Action Plan is truly a milestone for our industry, because it sets the course for future water regulation and formally establishes the California Public Utilities Commission's commitment to fair and balanced policy-making. Supporting four key principles -- safe, high-quality water; highly reliable water supplies; efficient use of water; and reasonable rates and viable water utilities -- the Plan reflects the best practices of utilities commissions across the country. More importantly, in 2006, the Commission made several decisions that clearly demonstrated its commitment to implementing the Plan:

• The Commission repealed W-1, the decision that precluded California water utilities from recovering certain prudently incurred expenses in rates.
• It issued the “Order Instituting Rulemaking on the General Rate Case Plan,” the goal of which is to streamline the process and reduce regulatory lag. As a result, we plan to file General Rate Cases for all 24 California districts as well as the Company headquarters in 2007, which, if approved, will allow company-wide expense increases to be recovered in all service areas more quickly than they would if they were phased-in in three-year rate case cycles.
• It accepted our application for a Revenue Adjustment Mechanism. If approved, it will enable us to promote water conservation more effectively and lessen the short-term impacts of conservation and weather on our revenue.
• It approved a Rate Support Fund and a Low-Income Ratepayer Assistance program to soften the impact of necessary water system improvement costs on certain vulnerable customers.

Considering these positive developments, and the timely conclusion of the eight General Rate Cases filed in 2005 and approved in 2006, we are optimistic that regulation in California will continue to improve. Going forward, we will continue to work diligently to seek innovative solutions in support of the Commission's stated purpose of protecting customers' best interests while ensuring the financial viability of the water utilities that serve them.

Our strategy has been, and will continue to be, predicated on the notion that the two goals are not mutually exclusive; that is, we believe that we can and should achieve excellence in customer service and provide value to our stockholders.