Net periodic benefit costs for the pension and other postretirement plans for the years ending December 31, 2002, 2001 and 2000 included the follo wing components: Postretirement benefit expense recorded in 2002, 2001, and 2000 was $1,157,000, $885,000, and $781,000, respectively. $5,165,000, which is recov erable through future customer rates, is recorded as a regulatory asset.The Company intends to mak annual contributions to the plan up to the amount deductible for tax purposes. For 2002 measurement purposes, the Company assumed a 7% annual rate of increase in the per capita cost of covered benefits with the rate decreasing 1% per year to a long-term annual rate of 5% per year after two years.The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in assumed health car cost trends is estimated to have the following effect: 51 The Company has a stockholder-appro ved Long-Term Incentive Plan that allows granting of nonqualified stock options, performance shares and dividend units. Under the plan, a total of 1,500,000 com- mon shares are authorized for option grants. Options ar e granted at an exercise price that is not less than the per share common stock market price on the date of grant.The options vest at a 25% rate on their anniver- sary date over their first four years and are exercisab le over a ten-year period. At December 31, 2002, 36,750 options were exercisable at a weighted average price of $24.08. Certain key Dominguez executives par ticipated in the Dominguez 1997 Stock Incentive Plan that was terminated at the time Dominguez merged with the Company.The plan provided that in the event of a merger of Dominguez into another entity, granted b ut unexercised stock options issued became exercisable. Prior to the Merger, all outstanding Dominguez options were exercised and converted into Dominguez shares, and subsequently converted to 52,357 shares of Company common stock. The fair value of stoc options used to compute pro forma net income and earnings per share disclosures is the estimated fair value at grant date using the Black-Scholes option-pricing model with the fol- lowing assumptions: CALIFORNIA WA TER SERVICE GROUP 2002 2001 2000 Expected dividend 4.5% 4.3% 4.3% Expected volatility 27.7% 30.4% 22.0% Risk-free interest rate 3.25% 4.6% 4.9% Expected holding period in years 5.0 5.0 5.0 13 STOCK- BASED COMPENSATION PLANS 1-percentage 1-percentage In thousands Point Increase Point Decrease Effect on total service and interest costs $ 354 $ (279) Effect on accumulated postretirement benefit obligation $2,742 $(2,216) P ension Plan Other Benefits In thousands 2002 2001 2000 2002 2001 2000 Service cost $ 2,968 2,786 $ 2,846 $ 815 $ 625 $ 544 Interest cost 4,404 4,333 4,079 1,037 858 790 Expected return on plan assets (4,497) (4,946) (4,498) (216) (212) (152) Net amortization and deferral 1,166 855 486 500 363 357 Net periodic benefit cost $ 4,041 3,028 $ 2,913 $2,136 $1,634 $1,539