1. Financing “Greenfield” Developments An Overview of Financing Options for a combined Water System Presentation to NARUC Water Committee July 2007 By Keith Switzer, Golden State Water Company Peter Johnson, Sun Cal Companies

2. Golden State Water Company GSWC is a subsidiary of American States Water Company (NYSE: AWR) GSWC is a subsidiary of American States Water Company (NYSE: AWR) GSWC provides water and electric utility service in California GSWC provides water and electric utility service in California GSWC is regulated by the California Public Utility Commission (CPUC) GSWC is regulated by the California Public Utility Commission (CPUC) GSWC was incorporated in 1929. GSWC was incorporated in 1929.

3. Golden State Water Company GSWC operates 40 separate water systems GSWC operates 40 separate water systems GSWC serves 75 communities in 10 counties in the State of California GSWC serves 75 communities in 10 counties in the State of California GSWC provides water service to over 1 million people, or 1 out of 30 Californians GSWC provides water service to over 1 million people, or 1 out of 30 Californians GSWC has an annual water revenue of approximately $219 million GSWC has an annual water revenue of approximately $219 million

4. Water Issues in California Increasing Demand for water Increasing Demand for water Availability / Cost of Supply Availability / Cost of Supply Reliability Reliability Water Quality Water Quality Infrastructure Infrastructure

5. California Public Utilities Commission – Water Action Plan Issued in December 2005 Issued in December 2005 Identifies policy objectives of the CPUC Identifies policy objectives of the CPUC Highlights actions to meet objectives. Highlights actions to meet objectives. “In light of increasing statewide concerns about water quality and supply, the Commission will explore innovative solutions to water problems…”

6. California Public Utilities Commission – Water Action Plan Four Key Principles Underlying the CPUC Regulatory Policy Four Key Principles Underlying the CPUC Regulatory Policy –Safe, high quality water –Highly reliable water supplies –Efficient use of water –Reasonable rates and viable utilities

7. California Public Utilities Commission – Water Action Plan Six Objectives Six Objectives –Maintain Highest Standards of Water Quality –Strengthen Water Conservation Programs to a Level Comparable to those of Energy Utilities –Promote Water Infrastructure Investment –Assist Low Income Ratepayers –Streamline CPUC Regulatory Decision-making –Set Rates Balancing Investment, Conservation, and Affordability

8. SunCal Companies Privately held development company Privately held development company Residential Development since 1940’s Residential Development since 1940’s Specialize in large master plan projects Specialize in large master plan projects Sell graded lots to national builders Sell graded lots to national builders Over 160,000 residential lots in California Over 160,000 residential lots in California A further 100,000 in NV, AZ, TX and NM A further 100,000 in NV, AZ, TX and NM

9. Intuitive Water Conservation Water exists on earth in a finite amount Water exists on earth in a finite amount Any new project creates new demand for water Any new project creates new demand for water We should reduce demand as much as practicable We should reduce demand as much as practicable We should then do our best to get the most use out of the water we do have (i.e. by using it twice) We should then do our best to get the most use out of the water we do have (i.e. by using it twice)

10. Water Demand Management Xeriscape landscape and irrigation Xeriscape landscape and irrigation Limitations on turf or “thirsty” areas Limitations on turf or “thirsty” areas Computerized central irrigation controllers Computerized central irrigation controllers “Smart” irrigation controllers on all homes “Smart” irrigation controllers on all homes Remote reading “smart” utility meters Remote reading “smart” utility meters

11. Water Supply Management Only 40% of total demand need be potable quality water Only 40% of total demand need be potable quality water Treat and reuse all of that 40% Treat and reuse all of that 40% Large projects facilitate new treatment techniques because of their size Large projects facilitate new treatment techniques because of their size Locate alternative existing sources for recycled water (most are currently underutilized) Locate alternative existing sources for recycled water (most are currently underutilized) Storage facility (lake) doubles for recreation Storage facility (lake) doubles for recreation

12. Bundled Utility Opportunity There is no current provider of utility service to the project area There is no current provider of utility service to the project area We can design the water, recycled water, and sewer systems to be optimally operated by a single entity We can design the water, recycled water, and sewer systems to be optimally operated by a single entity This implies multiple economies in operation and administration particularly in timing of energy demand across all three utilities and maintenance operations This implies multiple economies in operation and administration particularly in timing of energy demand across all three utilities and maintenance operations

13. Summary of Project Benefits Project water needs are reduced by 60% Project water needs are reduced by 60% No conveyance cost and reduced energy demand for onsite reuse No conveyance cost and reduced energy demand for onsite reuse Much increased reliability of recycled water vs. other sources Much increased reliability of recycled water vs. other sources Smart meters save both labor and vehicle trips Smart meters save both labor and vehicle trips Bundled utility management is more efficient resulting in long term savings to ratepayers Bundled utility management is more efficient resulting in long term savings to ratepayers

14. Why isn’t everyone doing it? Additional capital costs are considerable Additional capital costs are considerable Many existing municipal utilities will not contemplate the bundled utility concept Many existing municipal utilities will not contemplate the bundled utility concept Most projects are not large enough to deliver all the needed components Most projects are not large enough to deliver all the needed components There is no real incentive for a developer to risk additional millions of dollars There is no real incentive for a developer to risk additional millions of dollars

15. What’s stopping us from doing it? We have a willing and qualified public utility We have a willing and qualified public utility We have a very large project that will deliver all of the infrastructure needed to accommodate recycled water We have a very large project that will deliver all of the infrastructure needed to accommodate recycled water But we cannot employ the normal financing tools available to municipal utility companies with taxing authority But we cannot employ the normal financing tools available to municipal utility companies with taxing authority Current rules do not allow SunCal to recapture the cost of infrastructure sufficiently quickly for there to be any incentive to invest Current rules do not allow SunCal to recapture the cost of infrastructure sufficiently quickly for there to be any incentive to invest

16. Is this project consistent with the WAP objectives? Water Conservation Aspect Water Conservation Aspect Energy Conservation Energy Conservation Increased Reliability Increased Reliability Improved Life-cycle cost of facilities Improved Life-cycle cost of facilities

17. Underlying Economics Cost and Benefits of Dual System Cost and Benefits of Dual System –Capital cost of reclaimed system –Reduced cost of water Social Benefits Social Benefits –Reclaimed water reduces demand for potable water –Reduced energy usage –Reduction in greenhouse gases –Recreation benefit

18. Recycled Water System Annual Cost Savings Comparison –

19. Financing Options for “Greenfield” Development Utility Funds and Builds Infrastructure Utility Funds and Builds Infrastructure Special Assessment Special Assessment Developer Advance (CPUC Rule 15) Developer Advance (CPUC Rule 15) Another Option ???? Another Option ????

20. Goals of New Financing Approach Have integrated services provided by CPUC regulated utility Have integrated services provided by CPUC regulated utility Create a financing mechanism that can compete with the assessment district option Create a financing mechanism that can compete with the assessment district option Provide incentive to developer to “do the right thing”; re-use where cost is lowest Provide incentive to developer to “do the right thing”; re-use where cost is lowest Avoid the utility absorbing development risk Avoid the utility absorbing development risk Recognize the life-cycle savings as a means to finance the upfront cost of re-use Recognize the life-cycle savings as a means to finance the upfront cost of re-use