EXHIBIT 3-B

11. SECURITIZATION

11.1 Amount

California American Water agrees to finance a portion of the MPWSP with a tax exempt securitization, set at an amount that will allow California American Water to maintain a fixed equity investment equal to approximately 27.0% of the value of the total project costs for the desalination plant and the CAW-Only Facilities and which allows for collections from Surcharge 2 as defined below. Examples of calculations using this financing for both the 9.6 mgd and 6.4

mgd plant size are provided in Appendix 2.

11.2 California American Water shall have the opportunity to invest equity in the MPWSP such that it has the opportunity to earn its authorized rate of return. The Parties agree that California American Water will be taking on significant risk with the MPWSP and some equity investment serves the public interest. The securitization must allow California American Water to maintain a fixed equity investment equal to approximately 27% of the total cost of the MPWSP facilities upon completion of the financing. The proceeds from the securitization need to be received by California American Water in a manner such that State Revolving Funds (SRF) (or other long-term debt in the event SRF is not available and equity) can be used to balance the fixed equity investment to approximate as close as possible to the equity amount of 27% of the total costs for the desalination plant and CAW-Only Facilities. Further, SRF (or other long-term debt in the event SRF is not available and equity) used to pay off any short-term debt provided by California American Water during construction would also be available to balance the fixed equity investment target. Examples of the sources and uses of each component of financing is referenced in Section 15 and included as Appendix 3.

11.3 Criteria

The Parties agree that using securitization as a component of financing for the MPWSP costs is only reasonable if the following conditions are met:

(a) The securitization lowers the cost to customers. The Parties agree that as a reasonable benchmark to ensure that sufficient benefits accrue to customers, the estimated annual customer benefits must, at a minimum, exceed 1.0% of the total annual revenue requirement for the MPWSP facilities.

(b) The securitization does not adversely affect other California American Water customers within California American Water’s other service areas outside of the Monterey County District. Securitization shall only be used to finance the costs of the desalination plant and CAW-Only Facilities so long as it will not negatively impact the credit ratings of American Water or its affiliate American Water Capital Corporation, or in the event that California American Water is a stand-alone entity, then so long as the securitization will not negatively impact the credit ratings of California American Water, computed as a standalone entity. This will be determined by the letters from the ratings agencies provided for below.

(c) The securitization does not require a separate California American Water-specific credit rating.

(d) The securitization does not change California American Water’s debt to-equity ratio for the portion of the MPWSP costs not financed with securitized funds. Excluding the securitization amount and any equity related to California American Water’s investment in the Special Purpose Entity (“SPE”), California American Water will balance the remaining MPWSP costs with debt and equity at its authorized ratio. California American Water’s currently authorized debt-to-equity ratio is 47% to 53%.

(e) The securitization does not change California American Water’s authorized rate of return on equity. California American Water’s currently authorized rate of return on equity is 9.99%.

(f) The securitization does not materially delay the MPWSP. The securitization amount must be available in a manner to allow for SRF (or other long-term debt in the event SRF is not available and equity) to be used to balance the equity target as discussed in Section 11.2.

(g) The securitization does not create a taxable event for California American Water. The tax impacts of securitization must be considered as part of the customer benefit analysis determination and must be recoverable in rates. The Parties agree that there shall be no adverse tax implications that might accrue to the Monterey County District or other California American Water customers.

11.4 Implementation

(a) To implement the securitization, California American Water will establish a SPE, which will issue debt that will be purchased by the public agency, which in turn will issue financing. The public agency will issue the financing through “Water Rate Relief Bonds” and lend the proceeds to the SPE. California American Water will sell to the SPE a property right consisting of the right to impose, collect, and adjust from time to time a non-bypassable charge to California American Water customers. The sale of the property right by California American Water will be a true sale for bankruptcy purposes. The payment of principal and interest on the Water Rate Relief Bonds are provided for through the non-bypassable charge received by the SPE and remitted to the public agency for payment of principal and interest on the Water Rate Relief Bonds.

(b) The securitization will be non-recourse to California American Water and a default of the bonds will not be a default of California American Water.

(c) The securitization will be of a long-term nature (20-30 years), with a preference for 30 years.

(d) Under Rev. Proc. 2005-62, California American Water will be required to capitalize the SPE. California American Water will capitalize the SPE at the minimum amount that is required to have it accounted for as a legally distinct entity and to provide reserves as needed. The amount of capitalization is expected to be approximately 1% of the Water Rate Relief Bonds. California American Water will place this amount in rate base and will earn interest on the amount at California American Water’s then-authorized rate of return.

(e) Securitization will require authorization from the California legislature and a financing order from the Commission. The legislation will authorize the creation of the property right to impose, collect, and adjust from time to time the non-bypassable charge to California American Water customers sufficient to pay off the securitization. The legislation will authorize the Commission to issue a financing order to enable the financing.

(f) There shall be automatic true-up adjustments of the securitization surcharge, as necessary, to ensure sufficient funds for the timely payment of securitization principal, interest, and related costs. The Parties agree that such adjustments shall be done through a Tier 1 advice letter.

(g) The public agency will secure the legislation from the California legislature for the securitization. The public agency will structure the financing and obtain the necessary documentation. The public agency will obtain the rating for the financing and arrange for sale of the debt.

(h) The public agency will endeavor to structure the securitization in a manner that will permit California American Water to avoid significant cash management costs. The Parties shall pursue a system of cost management approach that satisfies the requirement of securitization without resulting in excessive costs.

(i) California American Water will file an application with the Commission for a financing order pursuant to the legislation. To the extent necessary, California American Water will establish any internal financial separation systems required for the securitization. Any costs that are necessary will be added to working cash and recovered as set forth below.

(j) In the course of having the bonds rated by Standard & Poors and Moody’s ratings agencies, the public agency will request a letter from each of the rating agencies that will affirm that the securitization will not negatively impact the credit of California American Water, as a stand-alone entity, or American Water.

(k) The public agency agrees to provide a legal opinion that the proposed securitization does not create a taxable event for California American Water.

11.5 Use of Proceeds and Recovery of Costs

(a) The proceeds of the securitization will be used for the following:

(i) Financing the MPWSP at the agreed-upon level.

(ii) Reimbursement of public agency fees and expenses associated with securitization.

(iii) California American Water will be reimbursed for all fees and expenses it incurs as a result of the securitization effort, including carrying cost on such fees and expenses at the actual cost incurred to fund such efforts (as referenced in Section 14.3). The reimbursement will occur at the time the securitization is funded.

(b) If the securitization is not successful, California American Water may recover all of its reasonably and prudently incurred costs related to the securitization from customers in the Monterey County District. California American Water will track its securitization costs as debit entries in a new subset of the Surcharge 1 memorandum account until such time as the Commission approves the Surcharge 2 project collection memorandum account, at which time the expenditures will be offset against the Surcharge 2 collection portion of the project construction cost memorandum account.

(c) If California American Water is shown to have been negatively impacted by the securitization at any time over the amortization period of the bonds, California American Water may seek a determination of the impact in the Cost of Capital or other applicable Commission proceeding and may recover the cost of the negative impact from the customers in the Monterey County District. If California American Water is shown to have been negatively impacted by the securitization at any time after the issuance of the bonds but over the life of the bonds, California American Water may seek a determination of the impact in the Cost of Capital or other applicable Commission proceeding and may recover the cost of the negative impact from the customers in the Monterey County District.

11.6 Contingency

(a) If the public agency is unsuccessful in obtaining a tax-exempt securitization, the public agency may pursue an alternative form of public agency contribution (Proposition 218 process) if such contribution is feasible, will result in lower costs to customers, and will be accomplished to meet all of the requirements of Section 11.1 through 11.5.

(b) However, understanding the urgency to finance, construct and bring the desalination project on line, California American Water stands ready to provide long-term debt financing (either through American Water Capital Corporation or the California Pollution Control Financing Authority, whichever is lowest cost to customers) and equity financing.

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