EXHIBIT 10-B

Quarterly Water Supply Strategy and Budget Report

California-American Water, Water Distribution System: October – December 2006

September 18, 2006

1. Management Objectives

The District desires to maximize the long-term production potential and protect the environmental quality of the Carmel River and Seaside Groundwater Basins. In addition, the District desires to maximize the amount of water that can be diverted from the Carmel River Basin and injected into the Seaside Groundwater Basin while complying with the instream flow requirements recommended by the NMFS to protect the Carmel River steelhead population. To accomplish these goals, a water supply strategy and budget for production within the Cal-Am WDS is reviewed quarterly to determine the optimal strategy for operations, given the current hydrologic and system conditions.

2. Quarterly Water Supply Strategy: October - December 2006

On September 6, 2006, staff from the District, Cal-Am, NMFS, and CDFG discussed the proposed water supply strategy and related topics for the remainder of September 2006 and the October-December 2006 period. Currently, flow in the Carmel River is regulated and maintained by releases from Los Padres Reservoir. Los Padres Reservoir is at 73% capacity (1,071 AF) and Carmel River flow at the District gaging station at the Don Juan Bridge in Garland Park is approximately 11 cfs.

Carmel River Basin Given these conditions, it was agreed that Cal-Am would divert no surface water from its San Clemente Reservoir and would divert no more than 31 AF per month from its Russell Wells Nos. 2 and 4 in the Upper Carmel Valley. To meet customer demand, Cal-Am would operate its wells in the Lower Carmel Valley in a downstream-to-upstream sequence, as needed.

Seaside Groundwater Basin It was agreed that Cal-Am would maximize production from the Seaside Basin in September and would then progressively reduce its production during the October –December 2006 period. These levels of production will help protect aquatic habitat in the Carmel River Basin and ensure that Cal-Am complies with the production limit set in the Seaside Groundwater Basin adjudication decision. Lastly, it was assumed that no water would be diverted from the Carmel River Basin and injected into the Seaside Coastal Basin during the October – December 2006 period.

U:\staff\word\boardpacket\2006\2006boardpackets\20060918\PubHrgs\10\item10_exh10b.doc