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American States Water Co. (AWR) announced the final decision by the California Public Utilities Commission (CPUC) on April 13, 2006 to approve the permanent lease of 5,000 acre ft of water rights to the city of Folsom by AWR's primary subsidiary, Golden State Water Company (GSWC). The CPUC also ordered that the revenues resulting from the lease will be tracked in an interest-bearing memorandum account and invested in water utility infrastructure or plant development in the Arden and Rancho Cordova service areas in Sacramento County. Lease revenues invested in water utility infrastructure within eight years of receipt will be included in the rate base upon which GSWC earns a rate of return. Any lease revenue proceeds not invested during this period will be allocated to customers.
As a result of this decision, GSWC transferred approximately $2.3 million of water right lease revenues received from the City during 2004 and 2005 from a regulatory liability account into pretax income in the first quarter of 2006. GSWC also recorded pretax income of $299,100, reflecting first quarter of 2006 lease revenues. Management believes that revenues from the city can be prudently invested in the water utility or plant as required by this decision.
GSWC entered into an agreement with the city in March of 1994 to lease up to 5,000 acre ft of water rights. The lease of water rights under this agreement is permanent unless the city decides to terminate the agreement by giving six months prior written notice to GSWC. Revenue for leasing the water rights to the city is approximately $1.2 million for 2006. According to the agreement, the lease price per acre ft is adjusted annually by the percentage increase in the Engineering News Record Construction Index.