EXHIBIT 10-B

Quarterly Water Supply Strategy and Budget Report

California American Water

Main Water Distribution System: October – December 2008

1. Management Objectives

The Monterey Peninsula Water Management District (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 National Marine Fisheries Service (NMFS) to protect the Carmel River steelhead population. To accomplish these goals, a water supply strategy and budget for production within the California American Water (CAW) main water distribution system is reviewed quarterly to determine the optimal strategy for operations, given the current hydrologic and system conditions.

2. Quarterly Water Supply Strategy: October - December 2008

On September 3, 2008, staff from the District, CAW, CDFG, and NMFS met and discussed the proposed water supply strategy and related topics for the remainder of September 2008 and the October-December 2008 period. Currently, flow in the Carmel River is fully regulated, with CAW’s San Clemente Reservoir being drawn down to comply with the Division of Safety of Dams’ requirements and Los Padres Reservoir below its spillway elevation. Rainfall during Water Year 2008 to date at San Clemente Dam in the upper watershed has totaled 19.6 inches or 92% of the long-term average at this site. More significantly, only 0.54 inches of rain have been recorded at the San Clemente Dam site between March and August 2008. This total is the third lowest during the 87-year period of record (WY 1922 – WY 2008) and is less than 10% of the average amount of rainfall expected between March and August (5.60 inches). At this time, based primarily on the lack of rainfall during the March through August period, inflow conditions in the Carmel River Basin are projected to be “critically-dry” for the beginning of the WY 2009.

Carmel River Basin Given these conditions, it was agreed that CAW would:

1. divert no surface water from its San Clemente Reservoir during the October through December 2008 period,

2. divert approximately 30 AF of groundwater from its wells in the Upper Carmel Valley per month during the October through December 2008 period, when low-flow conditions remain in effect, and

3. divert in a downstream-to-upstream sequence, as needed, approximately 860, 630, and 590 AF of groundwater from its wells in the Lower Carmel Valley during October, November, and December 2008, respectively.

Seaside Groundwater Basin It was also agreed that CAW would:

1. pump 450, 400, and 350 AF of naturally-occurring water from the Coastal Subareas of the Seaside Basin in October, November, and December 2008, respectively.

Phase 1 Aquifer Storage and Recovery (ASR) Project Lastly, it was agreed that:

1. CAW would divert no water from the Carmel River Basin during the October through December 2008 period for injection and storage in the Seaside Groundwater Basin, and

2. CAW would not recover any artificially-recharged water from the Seaside Basin for CAW customer use during the October through December 2008 period.

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