California’s normal weather pattern yields little precipitation between mid-spring and mid-fall. The Washington service areas receive precipitation in all seasons with the heaviest amounts during the winter. New Mexico’s rainfall is heaviest in the summer monsoon season.Water usage in all service areas is highest during the warm and dry summers and declines in the cool winter months. Rain and snow during the winter months replenish underground water basins and fill reservoirs providing the water supply for subsequent delivery to customers.To date, snow and rainfall accumulation during the 2002-2003 water year has been above average. Precipitation in the prior five years has been near normal levels.Water storage in California’s reservoirs at the end of 2002 was at historic average.The Company believes that its supply from underground aquifers and purchased sources should be adequate to meet customer demand during 2003.The Company also develops long-term water supply plans for each of its districts to help assure an adequate water source under various operating and supply conditions. The Company is subject to regulations of the United States Environmental Protection Agency (EPA), state health service departments and various local health departments concerning water quality mat- ters. It is also subject to the jurisdiction of various state and local regulatory agencies relating to environmental matters, including handling and disposal of hazardous materials.The Company strives for complete compli- ance with all requirements set forth by the various agencies. The Safe Drinking Water Act (SDWA) was amended in 1996 to provide a new process for the EPA to select and regulate waterborne contaminants. The EPA can now regulate only contaminants that are known or likely to occur at levels expected to pose a risk to public health when regulation would provide a meaningful opportunity to reduce a health risk. New drinking water regulations will be based primarily on risk assessment and measurement of cost/benefit considerations for minimizing overall health risk. The amended SDWA allows the EPA to require monitoring of up to 30 contaminants in any five-year cycle. Also, every five years the EPA must select at least five listed contaminants and determine if they should be regulated. The Company has an established water supply monitoring program to test for contaminants in accordance with SDWA requirements. Employees are provided training in water operations and water treat- ment procedures.Water pumped from underground sources is treated as necessary or required by regulations. The Company owns and operates three surface water treatment plants.The cost of existing treatment is being recovered in customer rates as authorized by the regulatory authorities.Water purchased from wholesale sup- pliers is treated before delivery to the Company’s systems. Enforcement of the EPA standards is the responsibility of individual states. The states can impose more stringent regulations than mandated by EPA. In addition to the EPA’s requirements, various regulatory agencies could require increased monitoring and possibly require additional treatment of water supplies. During 2001, EPA released a new, lower Maximum Contaminant Level (MCL) standard of  10 parts per billion for arsenic, a naturally-occurring element that is sometimes present in groundwater. Compliance with the new standard is required by January 2006. Of the Company’s 600 wells, 56 will require treatment to comply with the new MCL.The Company estimates the compliance cost at $61 million in capi- tal expenditures over the next three years and $10 million in additional annual operating costs.The State of California could establish a lower arsenic MCL standard. If the state were to set the standard at five parts per billion, the estimated capital expenditures necessary for compliance would be approximately $125 million. At this time, the Company is unable to predict if the state will adopt the EPA standard or require a lower MCL. The Company is participating in testing alternate arsenic treatment technologies in order to meet the stan- dard in the most cost-efficient manner.The required capital expenditures to meet the new standards and the increased operating costs associated with new treatment are expected to be recovered in customers’ future water rates. The Company anticipates that the EPA will issue other regulations that will require further monitoring and possible treatment for specific contaminants. Depending on the MCLs contained in the regula- tions, the cost of compliance with the new regulations could be significant in certain Company districts. The Company intends to request recovery for capital investments and additional treatment costs needed to remain in compliance with established health standards through the ratemaking process. CALIFORNIA WATER SERVICE GROUP 28 ENVIRONMENTAL MATTERS