AGREEMENT BETWEEN KERN COUNTY WATER AGENCY AND THE CALIFORNIA WATER SERVICE COMPANY FOR A WATER SUPPLY

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Title: AGREEMENT BETWEEN KERN COUNTY WATER AGENCY AND THE CALIFORNIA WATER SERVICE COMPANY FOR A WATER SUPPLY
Date: 9/22/2005
Industry: Water Utilities Sector: Utilities

AGREEMENT BETWEEN KERN COUNTY WATER AGENCY

AND THE CALIFORNIA WATER SERVICE COMPANY

FOR A WATER SUPPLY

This agreement made this 21st day of September, 2005 (hereinafter

Agreement), is by and between the Kern County Water Agency, established by

chapter 1003 of the 1961 Statutes of the State of California, hereinafter

referred to as the "Agency" and the California Water Service Company, a

California corporation, duly organized and existing under and by virtue of the

laws of the State of California, hereinafter referred to as "Purveyor":

W I T N E S S E T H :

WHEREAS, the Agency and the State of California entered into an agreement

entitled "Water Supply Contract Between the State of California Department of

Water Resources and Kern County Water Agency" dated November 15, 1963, whereby

the State of California has and will furnish a water supply to the Agency; and

WHEREAS, the Agency has obtained an annual State Water Project Table A

Supply of 82,946 acre-feet per year, which is within the yield authorized for

Improvement District No. 4, which it will allocate to the Urban Bakersfield

Area; and

WHEREAS, by Resolution No. 17-71 adopted December 21, 1971, as amended, the

Agency formed Improvement District No. 4 of the Kern County Water Agency to

undertake the financing, construction, operation and maintenance of works to

provide a supplemental water supply for the Urban Bakersfield Area; and

WHEREAS, the lands and inhabitants of the Purveyor to be served by the

water provided hereby, all of which will be located in said Improvement District

No. 4 prior to service, are in need of surface water for beneficial uses; and

WHEREAS, the Agency has sold water to certain distribution agencies, and

desires to continue to sell water to distribution agencies as a method of

achieving the purposes of Improvement District No. 4; and

WHEREAS, in order to continue to meet the increasing demands of the

distribution agencies within Improvement District No. 4 which will exercise all

reasonable efforts to comply with federal, state and local laws regarding water

conservation, the Agency plans to expand its treated water supply to meet those

increased demands by expanding its facilities as illustrated on attached Exhibit

A, under terms and conditions which shall be fair and equitable to all such

water distributors and the inhabitants of Improvement District No. 4; and

WHEREAS, Purveyor desires to enter this Agreement with the Agency for a

water supply, and increase the amount of the supply, for the benefit of the

lands and inhabitants served by the Purveyor within the confines of Agency

Improvement District No. 4 and for which the Purveyor will make payments to the

Agency upon the terms and conditions hereinafter set forth, and Purveyor accepts

this Agreement as meeting the terms of its option for continued service under

its existing contract;

<PAGE>

NOW THEREFORE, IT IS HEREBY MUTUALLY AGREED by the parties hereto as follows:

Article 1. Definitions.

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When used in this Agreement, the following terms shall have the meanings

hereinafter set forth:

(A) "Agency Act " shall mean the Kern County Water Agency Act, being

Chapter 1003 of the 1961 Statutes of the State of California, as amended.

(B) "Annual Entitlement" shall mean the amounts of treated water, in

acre-feet, to be made available to each Customer each Year as shown on Exhibit

D, and in accordance with the option arrangement set forth in Article 8. The

maximum instantaneous flow capacities to be provided for each Customer in the

transmission facilities are shown on Exhibit C.

canal, Purification Plant, or other facility as measured over a short period

utilizing the full operational capability of the facility, and where referencing

the Purveyor's or other Customer's share of Capacity shall mean that share

allocated by this Agreement either textually or as specified in the incorporated

Exhibits.

(D) "Capital Costs" shall mean all costs incurred by the Agency which are

properly chargeable, in accordance with generally accepted accounting practices,

to the development of, construction of and the furnishing of equipment for the

various project facilities, including the costs of surveys, engineering studies,

exploratory work, designs, preparation of construction plans and specifications,

acquisitions, acquisition of lands, easements and rights-of-way, relocation

work, and essential legal, administrative and financial work in connection

therewith.

(E) "Capital Facilities Charge" shall mean that charge to Purveyor and

other Customers which repays the Expanded Capital Costs, including the interest

on financing of such costs, trustee fees, remarketing fees, credit enhancement

costs, arbitrage rebate, any amount required to replenish a debt service reserve

fund to its required amount, costs for financing or refunding, other ongoing

financing or re-financing costs, any payments required pursuant to Article 19

hereof, any amount necessary to comply with a debt service coverage covenant for

a financing, and other capital costs including, but not limited to, payments on

obligations issued on the Expanded Capital Costs.

(F) "Capital Facilities Account" shall mean a restricted account within the

ID4 Enterprise Fund to receive payments of Capital Facilities Charges and to

disburse payments to service the debt incurred for the Expanded Capital Costs

and other Capital Costs, including but not limited to, payments on Certificates

of Participation issued in 2000 and 2005, and in subsequent years as required to

finance the Expansion Project.

<PAGE>

(G) "Cross Valley Canal" shall mean the concrete lined canal approximately

17 miles in length extending from the California Aqueduct near Tupman easterly

to the Arvin-Edison Canal, together with the turnout from the California

Aqueduct, the pumping plants necessary to lift water through a static head of

approximately 84 feet and such road crossings, utility relocations, fences and

other facilities necessary for its construction and operation.

(H) "Customers" shall mean each of the following water distributors that

contract to buy treated water from the project including: North of the River

Municipal Water District, East Niles Community Services District, California

Water Service Company and the City of Bakersfield.

(I) "Distribution Component" means that portion of the Expansion Project

which is set forth in Article 5(B)(2).

(J) "Enterprise" means the Purveyor's Bakersfield District water system,

including all facilities, works, properties and structures of the Purveyor's

Bakersfield District for the treatment, transmission and distribution of water,

excluding wastewater and all facilities for the collection and treating of

wastewater, but including all contractual rights to water supplies, transmission

capacity, supply, easements, rights-of-way and other works, property or

structures necessary or convenient for such facilities, together with all

additions, betterments, extensions and improvements to such facilities or any

part thereof hereafter acquired or constructed.

(K) "Expanded Capital Costs" shall mean that subset of Capital Costs which

are due to the Expansion Project, exclusive of Cross Valley Canal expansion

capital costs and other capital costs.

(L) "Expansion Project" shall mean the project to be undertaken by the

Agency to increase treated water capacity and delivery capability more

particularly described in Article 5(B).

(M) "Extension" shall mean the lined and unlined canal reaches beginning at

the eastern terminus of the Cross Valley Canal at the afterbay of Pumping Plant

No. 6 and extending easterly approximately 4.5 miles to a point near the Henry

C. Garnett Water Purification Plant, which point is approximately 1240 feet

upstream from the Cawelo Water District's Pump Station "A," together with a

pumping plant necessary to lift water through a static head of approximately 30

feet and such road crossings, utility relocations, fences and other facilities

necessary for its construction and operation.

<PAGE>

(N) "Groundwater Charge" is the governmental exaction levied in Improvement

District No. 4 under the authority of the Kern County Water Agency Act

(Uncodified Act 99, West's Annotated California Water Code) and resolutions of

the Kern County Water Agency Board.

(O) "Improvement District No. 4" or "ID4" shall mean Improvement District

No. 4 of the Kern County Water Agency created by Resolution No. 17-71 of the

Board of Directors of the Kern County Water Agency adopted December 21, 1971, as

amended.

(P) "ID4 Enterprise Fund" is that fund created within the Agency for

accounting of revenues and expenses of the Improvement District No. 4

enterprise, including restricted accounts for the payment of the Expanded

Capital Costs.

(Q) "Maintenance and Operation Costs" of the Enterprise means the

reasonable and necessary costs and expenses paid by the Purveyor for maintaining

and operating the Enterprise, as determined in accordance with generally

accepted accounting principles (GAAP), including but not limited to (a) the

reasonable expenses of management and repair and other costs and expenses

necessary to maintain and preserve the Enterprise in good repair and working

order, (b) administrative costs of the Purveyor attributable to the Enterprise

and the financing thereof, and (c) amounts due Improvement District No. 4 under

the Agreement including, but not limited to, the Treated Water Charge and

Capital Facilities Charge; but excluding (x) depreciation, replacement and

obsolescence charges or reserves therefore, (y) in any Fiscal Year prior to

setting aside an amount equal to the Capital Facilities Charge for such Fiscal

Year, capital expenditures other than as set forth in subsection (A) above, and

(z) amortization of intangibles or other bookkeeping entries or a similar

nature.

(R) "Master Contract" shall mean that contract between the Agency and the

State of California entitled "Water Supply Contract Between the State of

California Department of Water Resources and the Kern County Water Agency" dated

November 15, 1963, as amended to date and any revisions or amendments hereafter

made.

(S) "New Customer" shall mean the City of Bakersfield.

(T) "New Entitlement" is that portion of the Annual Entitlement which

Customers have acquired through the execution of this Agreement and the

Expansion Project.

(U) "Operating Costs" shall mean all necessary costs, other than pumping

costs, for the operation, maintenance, repair, replacement and administration of

the various project facilities, including Expansion Project facilities.

(V) "Original Customers" shall mean Customers other than the City of

Bakersfield.

(W) "Original Entitlement" is that portion of the Annual Entitlement which

Customers held by pre-existing contract.

(X) "Original Project" shall mean the project previously undertaken by the

Agency for the benefit of Improvement District No. 4 and others as described in

said Resolution No. 17-71, including the features more particularly described in

Article 5(A) hereof.

<PAGE>

(Y) "Point of Delivery" means the physical location at which delivery of

the water from the Agency to Purveyor is deemed to occur which is the geometric

plane intersecting the lumen of the delivery structure as water moves from the

Agency pipeline to the delivery structure.

(Z) "Pumping Costs" shall mean all necessary energy and standby costs

incurred by the Agency for pumping water for the Original Project and Expansion

Project with the exception of such costs necessary to move water to the treated

water pump station.

(AA) "Purification Plant" shall mean the Henry C. Garnett Water

Purification Plant.

(BB) "Purification Plant Expansion Component" means that portion of the

Expansion Project defined at Article 5(B)(1).

(CC) "Purveyor Revenues" means all gross income and revenue received or

receivable by the Purveyor from the ownership and operation of the Enterprise,

calculated in accordance with GAAP, including all rates, fees and charges

(including connection fees to the degree permissible under Article XIII C and

XIII D of the California Constitution) received by the Purveyor for Water

Service and all other income and revenue howsoever derived by the Purveyor from

the Enterprise or arising from the Enterprise, together with all other legally

available funds from the Enterprise; provided, however, that (i) any specific

charges levied for the express purpose of reimbursing others for all or a

portion of the cost of the acquisition or construction of specific facilities,

or (ii) customers' deposits or any other deposits subject to refund until such

deposits have become the property of the Purveyor, are not Purveyor Revenues.

(DD) "State Project Water" shall mean water made available to the Agency

from the California Aqueduct, a portion of the State Water Resources Development

system.

(EE) "Treated Water Charge" is that charge established by Article 15 of the

Agreement, including any surcharges thereon established pursuant to Article 15.

(FF) "Water Service" means the service made available or provided by the

Enterprise.

(GG) "Year" shall mean the twelve (12) month period from July 1 of any year

to June 30 of the following year.

Article 2. Term.

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This Agreement shall become effective when all Customers have executed this

Agreement with the Agency and, except as provided for in Article 15(D), shall

remain in effect through January 1, 2035, or until the repayment in full of any

bonds or similar instruments issued for financing of the Expansion Project,

whichever is later. This Agreement supersedes the contract of June 13, 1974,

between the Agency and Purveyor.

<PAGE>

Article 3. Option for Continued Service.

-----------------------------

After the expiration of the term of this Agreement, Purveyor shall be

entitled to continued service under the following conditions unless otherwise

agreed to:

(A) Service of water in annual amounts equal to the Purveyor's total Annual

Entitlement.

(B) Service of water under the same physical conditions of service,

including time, place, amount and rate of delivery, as are provided hereunder.

conditions of the continued service shall be reasonable and equitable and shall

be mutually agreed upon. In the event that said terms and conditions provide for

continued service for a limited number of years only, the Purveyor shall have

the same option to receive continued service as provided here upon the

expiration of that and each succeeding period of continued service.

Article 4. Relationship to Master Contract.

--------------------------------

This Agreement is subject to the obligations and limitations imposed by the

Master Contract and is intended to be in conformance and harmony with it. The

Master Contract is hereby incorporated herein by this reference in all respects

as though set forth in full at this point. The Purveyor hereby expressly agrees

to the provisions of the Master Contract imposing obligations and limitations

upon it and further expressly agrees that nothing in this Agreement shall be

deemed to require the Agency to perform any obligation in conflict with the

Master Contract.

The Agency agrees it will not, without the prior approval of the Purveyor,

consent to any amendments to the Master Contract which would increase the price

of water to the Purveyor under this Agreement or substantially adversely affect

the Agency's ability to deliver the water provided for herein.

Article 5. Integration of Original Project and Expansion Project.

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(A) The following are the components of the Original Project:

(1) Cross Valley Canal Reach 1 which begins with a turnout on the

California Aqueduct near Tupman and extends northeasterly for approximately five

(5) miles to a turnout constructed near the NW 1/4 of the SW 1/4 of Section 2,

T30S, R25E, MDB&M. This reach includes two (2) pumping plants and a major

crossing under Interstate Highway 5 and is designed and constructed to have a

minimum instantaneous flow capacity of 922 cubic feet per second, of which

Improvement District No. 4 has a capacity of 184.36 cubic feet per second, with

a scheduled expansion not related to this Agreement to 1422 cubic feet per

second.

(2) Cross Valley Canal Reach 2 which begins at the terminus of Reach 1

and extends easterly approximately nine (9) miles to a point east of Pumping

Plant No. 5 (at the Rosedale-Rio Bravo Water Storage District Turnout No. 2).

This reach includes three (3) pumping plants and five (5) pipe siphons under the

Sunset Railway, two (2) gas pipelines, Stockdale Highway and Jerry Slough, and

is designed and constructed to have a minimum instantaneous flow capacity of 843

cubic feet per second, which Improvement District No. 4 has a capacity of 174.33

cubic feet per second, with a scheduled expansion unrelated to this Agreement to

1343 cubic feet per second.

<PAGE>

(3) Cross Valley Canal Reach 3 which begins at the terminus of Reach 2

and extends approximately two and three-quarters (2 3/4) miles to the terminus

of the Cross Valley Canal located near the southern terminus of the Friant-Kern

Canal. This reach includes one (1) pumping plant, designed and constructed to

have a minimum instantaneous flow capacity of 812 cubic feet per second, of

which Improvement District No. 4 has a capacity of 185.17 cubic feet per second,

with a scheduled expansion unrelated to this Agreement to 1312 cubic feet per

second.

(4) Cross Valley Canal Extension which has a minimum instantaneous flow

capacity of 342 cubic feet per second, of which Improvement District No. 4 has a

capacity of approximately 168.74 cubic feet per second. It includes a pumping

plant and pipe siphons under the Friant-Kern and Arvin-Edison Canals, the

Southern Pacific and Santa Fe railroads, State Highway 99 and other roads, and

turnouts into the Kern River and Calloway Canal. The Extension ends near the

Henry C. Garnett Water Purification Plant approximately 860 feet upstream of

Cawelo Water District's Pump Station "A."

(5) The original water Purification Plant with sufficient Capacity to

provide for the treatment to commonly accepted standards of potability of at

least 25,000 acre-feet of water annually from the Extension, and any existing

rights in other canal conveyance facilities that feed the Henry C. Garnett Water

Purification Plant.

(6) The North Pipeline and associated pumping plant and delivery

structures for the conveyance and delivery of water as described in Exhibit C

attached hereto and incorporated herein by reference.

(7) The East Pipeline and associated pumping plants and delivery

structures for the conveyance and delivery of water as described in said Exhibit

(8) Facilities for spreading and percolating water for recharging the

underground in Improvement District No. 4, including three (3) Cross Valley

Canal turnouts to the Kern River and one (1) Calloway Canal turnout.

(9) The Improvement District No. 4 share of Pioneer Project facilities

and rights as shown and described on attached Exhibit B attached hereto and

incorporated herein by reference.

(10) The Improvement District No. 4 share of Kern Water Bank Authority

facilities and rights as shown and described on attached Exhibit B.

(11) Other district facilities as specified on Exhibit B, including but

not limited to rights in the City of Bakersfield 2800-Acre Recharge Facility.

(B) The following are the components of the Expansion Project:

(1) Expansion of the Henry C. Garnett Water Purification Plant from a

maximum instantaneous flow Capacity of 38 MGD to 71.9 MGD (the "Purification

Plant Expansion Component"). Such expansion shall also incorporate

modifications, replacements and repairs to original facilities to ensure

continued reliability and operation.

<PAGE>

(2) The "Distribution Component" of the Expansion Project consists of

the following:

(a) Construction of a Northwest Pump Station and Pipeline designed

to convey up to 32.0 MGD to the northwest portion of Improvement District No. 4.

(b) Expansion of the East Pipeline which will include improvements

to the existing pipeline necessary to increase the delivery Capacity from 21.7

MGD to 28.8 MGD.

improvements to the existing pipeline necessary to increase the delivery

Capacity from 11.4 MGD to 22.1 MGD.

are intended to operate as an integrated project except as specifically set

forth herein in other Articles. When reference is made herein to costs or

revenues that are not specifically identified as belonging to the Original

Project or Expansion Project, then the reference shall be presumed to be to the

integrated composite of the two.

Article 6. Allocation of Capital and Operating Costs of Project Features.

--------------------------------------------------------------

(A) The Cross Valley Canal reaches and Extension are joint use facilities

financed in respective part by the following Cross Valley Canal participants,

including Improvement District No. 4, as identified for each reach and the

Extension. The Improvement District No. 4 share of such costs is specified in

Agency policy on allocation of costs to Improvement District No. 4 and

Purveyor's Agreement:

(1) Reach 1: Improvement District No. 4, Arvin-Edison Water Storage

District (Arvin-Edison), Cawelo Water District (Cawelo), Rag Gulch Water

District (Rag Gulch), Rosedale-Rio Bravo Water Storage District (Rosedale),

Kern-Tulare Water District (Kern-Tulare), Kern County Water Agency (KCWA), Kern

Delta Water District (Kern Delta) and the Fresno-Tulare Group, which consists of

the Hills Valley Irrigation District, Tri-Valley Irrigation District, Pixley

Irrigation District, Lower-Tule River Irrigation District, County of Tulare, and

the County of Fresno.

(2) Reach 2: Improvement District No. 4, Arvin-Edison, Cawelo, Rag

Gulch, Rosedale, Kern-Tulare, KCWA, Kern Delta and the Fresno-Tulare Group.

(3) Reach 3: Improvement District No. 4, Arvin-Edison, Cawelo, Rag

Gulch, Rosedale, Kern-Tulare, KCWA, Kern Delta and the Fresno-Tulare Group.

(4) Extension: Improvement District No. 4 and Cawelo.

(5) The Improvement District No. 4 share of the capital, operating and

other costs of the Cross Valley Canal facilities specified in subdivision (A) of

this Article shall be paid from the ID4 Enterprise Fund.

<PAGE>

(B) A summary of the allocation of estimated Capital Costs among the

Customers for the Expansion Project, exclusive of CVC and Extension expansion

costs, is shown on attached Exhibit E. Exhibit A, attached hereto and

incorporated herein by reference, reflects the resulting percentage allocations

and Capacities. Exhibit F, attached hereto and incorporated herein by reference,

sets forth the description and an initial estimate of the amount of each fee and

cost that Purveyor will be required to pay under this Agreement and a reference

to the Article and section of this Agreement that provides for such cost or fee.

Exhibits A, E and F shall be adjusted to reflect actual costs and Capacities

when known. Expanded Capital Costs, other than those paid directly or financed

by Improvement District No. 4 for its reserved Capacity, shall be financed by

the Customers, including Purveyor, by payment of a Capital Facilities Charge

which shall be accounted for in the Capital Facilities Account designated for

payment of the Expanded Capital Costs. Capital costs allocated to Improvement

District No. 4 for Cross Valley Canal and Extension facilities, including but

not limited to costs related to Improvement District No. 4's share of the

expansion of Cross Valley Canal facilities, are to be paid for out of the ID4

Enterprise Fund described herein.

District No. 4 share of the Pioneer Project (as set forth in the Pioneer Project

Participation Agreement) and Kern Water Bank Authority (as set forth in the

Joint Powers Agreement for the Kern Water Bank Authority) are to be paid for out

of the ID4 Enterprise Fund described herein.

(D) Improvement District No. 4, through the ID4 Enterprise Fund, will pay

for the following costs incurred by Agency prior to execution of this Agreement

in developing the Expansion Project, and the following additional costs

associated with design of conveyance facilities:

(1) Costs associated with financing of the Expansion Project as

estimated, subject to revision to actuals, as identified in Exhibit E.

(2) Costs associated with the engineering and design of the Northwest

Feeder Project as identified in Exhibit E.

(3) Costs associated with the engineering and design of the North

Pipeline expansion as identified in Exhibit E.

(4) Costs associated with the engineering and design of the East

Pipeline expansion as identified in Exhibit E.

(E) Charges for capital costs of delivery structures, operating and other

costs of conveyance are set forth in Article 9.

(F) Charges for the cost of water, including treatment costs.

(G) Prior to the acceptance of bids on contracts for construction or the

issuance of financing instruments for the Distribution Component, of the

Expansion Project, as defined in Article 5 (whichever shall occur first) and

prior to the acceptance of bids on construction contracts or the issuance of

financing instruments for the Purification Plant Expansion Component of the

Expansion Project, if the projected costs are more than one hundred and

twenty-five percent (125%) of those estimated herein, Purveyor shall have the

option of withdrawing from either component of the Expansion Project by

providing written notice hand-delivered to the Agency General Manager and to

each other Customer within twenty (20) days of the opening of construction bids,

for the specified component of the Expansion Project. In the event of

withdrawal, Purveyor shall pay all fees and other payments specified herein

<PAGE>

based upon the allocation formulas specified herein utilizing Purveyor's

currently existing Capacity and entitlement, if any, for the component from

which Purveyor has withdrawn, and shall be entitled only to benefits and rights

based upon Purveyor's currently existing Capacity and entitlement, if any, for

the component from which Purveyor has withdrawn. In the event of the withdrawal

hereunder of any other Customer, Purveyor shall pay based upon the recalculated

amounts after the withdrawal of Customers electing not to participate in an

Expansion Project component and shall be entitled to a share, based on such

recalculation, of the withdrawing Customer's Capacity, entitlement and other

rights and privileges under the Agreement from which such Customer is

withdrawing. Agency and Purveyor shall take all actions and execute all

documents reasonably required to evidence the foregoing changes in Purveyor's

entitlement, rights and obligations. If a withdrawal occurs, the Agency shall

require a renegotiation of contract terms, and may reject all bids or delay

financing.

Article 7. Completion of Expansion Project.

--------------------------------

Water and distribution conveyance Capacity are currently available to

Original Customers from the Original Project. The estimated completion and

start-up date for the Expansion Project is July 1, 2008. Subject to the

availability of funds, the Agency shall make all reasonable efforts consistent

with sound fiscal policies, reasonable construction schedules and proper

operating procedures to complete the Expansion Project in such a manner and in

such a time that some water from a component of the Expansion Project will be

available to Purveyor by July 31, 2007. To the extent practicable, the Agency

shall notify the Purveyor of any change in this estimate.

Article 8. Contract Entitlement.

---------------------

(A) Each Year after the Expansion Project is completed, the Agency shall

make available for delivery to the Purveyor the Purveyor's Annual Entitlement to

water as shown on Exhibit D, as provided in Article 10, and as described by the

terms and conditions of this Agreement. During the Year in which the Expansion

Project is completed, the Agency shall make available for delivery to the

Purveyor that percentage of New Entitlement of the Purveyor that is equal to the

percentage of the Year remaining after the date of completion (in addition to

the Original Entitlement as provided in paragraph (B) below).

(B) Each Year of this Agreement through the Year of completion of the

Expansion Project, the Agency shall make available for delivery to the Purveyor,

the Purveyors' Original Entitlement to water. Each year of this Agreement

through the Year of completion of the Expansion Project or if the Expansion

Project is not substantially completed, the Agency shall make available for

delivery to the Customers that water that may be available in the judgment of

the Agency in addition to that which is contracted for by Original Customers

from the Original Project. Allocation of this additional available water is in

proportion to the Customers' Annual Entitlement. The additional water from the

Original Project may be transported through Capacity available in the Original

Project available to Purveyor, or such share of new Capacity as may be

constructed at the time, subject to proration among other Customers with the

need for transportation Capacity.

completed, and each Year thereafter for the term of this Agreement, the Agency

shall make available, for delivery to the Purveyor, the Purveyors' Annual

Entitlement as defined by the terms and conditions of this Agreement.

<PAGE>

(D) If an option for increased service is specified for Purveyor in Exhibit

D, Purveyor shall provide to Agency in writing a commitment to add the specified

option amount to its Annual Entitlement within six (6) months of the execution

date of this Agreement, and subsequently all amounts specified herein shall be

determined based on Purveyor's Annual Entitlement as increased by the option

amount. If Purveyor has not provided the commitment in writing within the six

(6) month period, Purveyor shall be deemed to have rejected the offer for

additional entitlement and all determinations shall be made upon the Annual

Entitlement specified without including the option amount. All Exhibits, cost

allocations, and other formulas may be adjusted by the Agency to match the final

amounts of increased service accepted by Purveyor and other Customers.

Article 9. District Facilities and the Costs Thereof.

------------------------------------------

(A) Delivery Structures, Conveyance Facilities, Measuring Devices and Cost

Thereof:

All water to be furnished pursuant to this Agreement will be delivered to

the Purveyor through facilities of the Original Project and Expansion Project,

and delivery structures to be provided by Purveyor as follows:

(1) Capital Costs of Distribution Component. All necessary connections

to these facilities are to be constructed with funds provided by the Purveyor

proportional to Purveyor's Capacity in the facility. The turnouts to be

constructed with Purveyor funds shall include the tee, the gate valve and any

other facilities requested and needed by Purveyor for delivery of the Purveyor's

water from Improvement District No. 4 facilities. If the Purveyor desires to

change its point or points of delivery or install additional points of delivery,

it may do so either by furnishing all funds to cover any Agency expenses

involved, or by undertaking the construction at its own expense; provided, the

Purveyor shall not undertake any such construction until it has first obtained

Agency approval of the plans and specifications for such work. Upon receipt of a

request for such a change in place of delivery or installation of additional

places and the deposit of the required funds, the Agency shall diligently

proceed to make such a change or installation. Upon completion of the

construction of any delivery structures, the Agency shall refund any monies

deposited by the Purveyor not expended for such construction.

(2) Capital Costs of Distribution Component Facilities. The Purveyor

has requested that the Northwest Feeder Pipeline described in Exhibit C hereof

be constructed with Capacity for the Purveyor of 23.2 cubic feet per second

requiring a diameter of approximately 42 inches, the size being based on

Purveyor's estimates of required Capacity. Purveyor shall be responsible for its

proportionate share of the pipeline Capital Costs (prorated according to

Purveyor's Capacity stated herein in relation to total Purveyor requested

Capacity of 32.5 cubic feet per second) regardless of whether the Capacity

therein is actually required for delivery of Purveyor's water. Such

proportionate share shall be included in Purveyor's Capital Facilities Charge.

Such amounts shall be paid at the time set forth in Article 16 hereof. Capacity

shall be for use within Improvement District No. 4, including areas which have

been annexed to Improvement District No. 4 in accordance with Article 25, during

the term of the Agreement. The Purveyor shall also pay its proportionate share

of improvements to the Oswell Reservoir and Booster Pumping Facility, based upon

its current contracted capacity, as shown on Exhibit E. The Agency shall have

the right to construct incremental Capacity and future connections to any of the

facilities described herein for use within Improvement District No. 4.

(3) Operating Costs of Conveyance Facilities. The annual Operating

Costs, other than pumping costs, of each pipeline, pumping plant and delivery

structure used in delivering water from the Purification Plant to the Purveyor

shall be borne by the Purveyor and any other Customers taking water through such

conveyance facilities in proportion to the annual quantities of water delivered

to each Customer through each such facility. On or before June 1 of each Year,

the Agency shall notify the Purveyor in writing of the estimated amount of

operating costs it must pay for the next succeeding Year for each conveyance

facility to be used by it. The Purveyor shall pay one-fourth (1/4) of such

estimated costs on or before each of the following dates during the succeeding

Year: July 1, October 1, January 1 and April 1.

<PAGE>

(4) Recalculation and Adjustment of Operating Costs of Conveyance

Facilities. At the end of each Year, each Customer's share of Operating Costs

for that Year shall be recalculated as soon as possible by substituting the

actual costs incurred by the Agency and the actual quantities of water delivered

to each Customer. Any adjustments in the Purveyor's payments required to reflect

this recalculation shall be made in Purveyor's next quarterly operating cost

payment due after the recalculation.

(5) Pumping Costs for Delivering Water. The monthly and annual pumping

costs for each pumping plant used in delivering water from the Purification

Plant shall be borne by the Purveyor and any other Customers taking water

through the pumping plant in proportion to the quantities of water delivered to

each Customer through the pumping plant during the month and the Year, as the

case may be. As soon as possible after the close of each month, the Agency shall

notify the Purveyor in writing of the amount of pumping costs it must pay for

the preceding month. The Purveyor shall pay this amount within thirty (30) days

after receiving such statement of charges from the Agency.

(6) Recalculation and Adjustment of Pumping Costs. As soon as possible

after the end of each Year, the pumping costs for each pumping plant shall be

recalculated by dividing the actual pumping costs incurred by the Agency for

that Year for all water delivered through that pumping plant by the actual

quantities of water delivered through the pumping plant and multiplying the

resulting acre-foot rate by the total quantity of water delivered during the

Year through that pumping plant to each Customer. Any adjustments in the

Purveyor's payments required to reflect this recalculation shall be made in the

Purveyor's first monthly pumping cost payment due after the recalculation.

(7) Measuring Devices. All water furnished pursuant to this Agreement

shall be measured by the Agency at mutually agreed upon points with equipment

satisfactory to the Agency and the Purveyor. All such equipment shall be

installed and maintained by the Agency at the expense of Purveyor. All new

meters shall conform to American Water Works Association standards (or the

standards of the successor organization) for meter design and accuracy and shall

be equipped with a digital readout, which records flow in Million Gallons per

Day (MGD) and totals in MG. All determinations relative to the measuring of

water shall be made by the Agency, and upon request by the Purveyor, the

accuracy of such measurements shall be investigated by the Agency. Any errors

appearing thereon will be adjusted. The Purveyor may inspect such measuring

equipment for the purpose of determining the accuracy thereof.

(B) Purification Plant Expansion Component and other Facilities and the

Costs Thereof.

(1) Purification Plant Expansion Component Capital. The Capital Costs

of the Purification Plant Expansion Component, and other costs attributable to

the Capital Facilities Account, shall be paid by Purveyor through the Capital

Facilities Charge as set forth in Article 16, and through other provisions set

forth herein.

<PAGE>

(2) Improvement District No. 4 Banking Facilities. All costs of

Improvement District No. 4 water banking facilities including, but not limited

to the Pioneer Project, shall be paid by Improvement District No. 4 with costs

to be paid by the ID4 Enterprise Fund when used for the general benefit to

Improvement District No. 4. Customers benefiting from such facilities shall pay

for costs related to the provision of specific benefits for a Customer, subject

to mutual agreement between participating Customers and the Agency.

(3) Purification Plant Operation and Maintenance and Costs of Other

Facilities. All costs of Improvement District No. 4 other than as specified

above shall be payable from the ID4 Enterprise Fund, as set forth in Article 15.

Article 10. Delivery Schedules.

-------------------

The amounts, times, and rates of delivery of water to the Purveyor during

any Year shall be in accordance with a water delivery schedule determined in the

following manner:

(A) On or before August 1 of each Year, the Purveyor shall submit in

writing to the Agency a preliminary water delivery schedule indicating the

amounts of water, in acre-feet, desired by the Purveyor during each month of the

succeeding six (6) years.

(B) On or before December 1 of each Year, the Purveyor shall submit in

writing to the Agency a water balance demonstrating, subject to the approval of

the Agency which shall not be unreasonably withheld, that the current demand for

Purveyor's contracted entitlement within its service area in Improvement

District No. 4 is greater than or equal to Purveyor's current contracted

entitlement deliveries.

after consulting with the Purveyor, shall make such modifications as are

necessary to ensure that the amounts, times and rates of delivery to the

Purveyor will be consistent with the available supply of water from the

treatment facilities, considering each Customer's Annual Entitlement and

Capacity, and the then current delivery schedules of all other Customers. On or

before December 31 of each Year, the Agency shall determine and furnish to the

Purveyor a water delivery schedule for the next succeeding year which shall show

the amounts of water to be delivered to the Purveyor during each month of that

year.

(D) A water delivery schedule may be amended by the Agency upon the

Purveyor's written request. Proposed amendments shall be submitted by the

Purveyor within sixty (60) days before the desired change is to become

effective, and shall be subject to review and modification by the Agency in like

manner as the schedule itself, provided that, Purveyor shall provide the Agency

one (1) year's notice for any increase in deliveries above the previous level of

Annual Entitlement and peaking stated herein to reach its available Annual

Entitlement and peaking Capacity subject to associated increases in operations

and maintenance and pumping costs through the charges specified herein.

(E) In no event shall the Agency be obligated to deliver water to the

Purveyor in any month in excess of the Purveyor's demand for that month as set

forth in the approved delivery schedule, as specified in Exhibit D, or the

amount of water that can be delivered within the Purveyor's contracted peaking

Capacity, as specified in Exhibit C, during the month, whichever is the lesser.

Agency, at its sole discretion, may deliver water in excess of the obligation

specified herein.

<PAGE>

(F) In no event shall the Agency be obligated to deliver water to the

Purveyor in excess of Purveyor's Capacities for facilities and Annual

Entitlement as specified herein.

(G) If the Agency determines there is excess or unused Capacity and the

Customers request such Capacity, the Agency may allocate any excess or unused

Capacity to the Customers based upon their percentage of the then contracted

Capacity through the Purification Plant.

Article 11. Responsibilities for Delivery and Distribution of Water.

--------------------------------------------------------

Neither the Agency nor its officers, agents, or employees shall be liable

for the control, carriage, handling, use, disposal, or distribution of water

supplied to the Purveyor pursuant to this Agreement after such water has passed

the points of delivery established in accordance with Article 9; nor for claim

of damages of any nature whatsoever including but not limited to property

damage, personal injury, or death, arising out of or connected with the

treatment, control, carriage, handling, use, disposal, or distribution of such

water beyond said delivery structures; and the Purveyor shall indemnify and hold

harmless the Agency and its officers, agents, and employees, from any such

damages or claims of damages. The foregoing shall not apply to any claims,

damages, or liabilities to the extent arising out of the failure of water

delivered by the Agency to the Point of Delivery to meet applicable federal,

State of California and Kern County minimum drinking standards.

Neither the Purveyor nor its officers, agents, or employees shall be liable

for the control, carriage, handling, use, treatment, disposal, or distribution

of water supplied to the Purveyor by the Agency pursuant to this Agreement

before such water has passed the Points of Delivery established in accordance

with Article 9; nor for claim of damages of any nature whatsoever including but

not limited to property damage, personal injury, or death, arising out of or

connected with the control, carriage, handling, use, treatment, disposal, or

distribution of such water before said delivery structures or the failure of

such water to meet applicable federal, State of California and Kern County

minimum drinking water standards before it reaches the Point of Delivery; and

the Agency shall indemnify and hold harmless the Purveyor and its officers,

agents and employees, from any such damages or claims of damages. The amounts to

satisfy any of the foregoing liabilities of the Agency set forth in this Article

11 shall first be paid from proceeds of the insurance described below and

thereafter, or to the extent the claim is not covered by such insurance, from

the ID4 Enterprise Fund and Purveyor shall remain responsible for its allotted

share of payments for such fund. The Agency shall obtain insurance from an

insurer or insurers having a Best's rating of A or higher, or participate in the

Association of California Water Agencies Joint Powers Indemnity Association, or

similar joint self-insurance entity, to protect Purveyor, other Customers and

the ID4 Enterprise Fund with commercially reasonable coverage limits, and the

cost of such insurance or joint indemnification agreements shall be reimbursable

as an Operations and Maintenance expense for each facility

Article 12. Water Shortage.

---------------

(A) At times there may occur a shortage during any year in the quantity of

water available for delivery to the Purveyor by the Agency pursuant to this

Agreement. However, if the Agency can prevent or diminish a shortage in treated

water by temporarily halting or curtailing its spreading of water for recharging

the underground in Improvement District No. 4, it may do so at its discretion.

The Agency may use Improvement District No. 4 groundwater banking projects or

in-district wells for reducing shortages subject to a separate agreement with

the Purveyor.

(B) To eliminate or reduce shortages, Customers may secure and deliver

non-Improvement District No. 4 surface water to the Henry C. Garnett Water

Purification Plant for treatment under the following terms:

<PAGE>

(1) A request for delivery and subsequent treatment of any

non-Improvement District No. 4 surface water shall require Agency approval.

(2) A request to deliver non-Improvement District No. 4 water shall be

submitted in writing to the Agency for review ninety (90) days prior to the

expected date of delivery. Such request shall include information as to the

quantity, quality and origin of the source water. Requesting Customer shall

provide all information pertaining to the source as requested by Agency.

(3) Improvement District No. 4 shall be responsible for the scheduling

of all non-Improvement District No. 4 surface water and shall coordinate the

delivery of non-Improvement District No. 4 surface water with Customer. The

point of delivery for any non-Improvement District No. 4 surface water shall be

the headworks of the Henry C. Garnett Water Purification Plant or any other

point of delivery available to Customer and Improvement District No. 4 which is

mutually agreeable.

agents, or employees for any damage, direct or indirect, arising from a shortage

on account of drought or other unavoidable causes. In any year in which such a

shortage may occur for any cause so that the total quantity of water available

to the Agency for distribution to the Purveyor and other Customers taking water

from the treatment facilities is less than the total of all quantities

contracted for by the Purveyor and other Customers, the Agency shall apportion

the available treated water among the Customers in proportion to their Total

Annual Entitlements, for the current year, as set forth in Exhibit D and

pursuant to Articles 8 and 10.

(D) The Agency shall give the Purveyor written notice as far in advance as

reasonably possible of any such reduction in delivery to it.

Article 13. Curtailment of Delivery for Maintenance Purposes.

-------------------------------------------------

The State of California or the Agency may temporarily discontinue or reduce

the amount of water to be furnished the Purveyor for the purposes of

maintaining, repairing, replacing, investigating or inspecting any of the

facilities necessary for furnishing of water to the Purveyor. Insofar as it is

feasible, the Agency will give the Purveyor due notice in advance of any such

temporary discontinuance or reductions, except in the case of emergency, in

which case no notice need be given. In the event of such discontinuance or

reduction, the Agency will, upon resumption of service, deliver, as nearly as

may be feasible after consultation with the Purveyor, and to the extent water is

furnished to it by the State of California, or other sources, the quantity of

water which would have been furnished to the Purveyor in the absence of such

discontinuance or reduction. The Agency shall attempt to schedule its routine

maintenance on Project Facilities so that whenever possible, any such

discontinuance or reductions in delivery will occur during periods of reduced

demand.

Article 14. Water Quality.

--------------

(A) The Agency shall use all reasonable efforts to ensure that all water

delivered by the Agency from the Purification Plant into the distribution

pipelines described in Exhibit C hereof shall meet all applicable federal, State

of California and Kern County minimum drinking water quality requirements.

(B) In the future, the Purveyor may use the distribution pipelines to

deliver water from its wells, as well as for delivering water from the

Purification Plant. Any request by the Purveyor for the use of the distribution

pipelines for conveyance of water, other than that originating from the Henry C.

Garnett Water Purification Plant, shall be made by providing written notice

ninety (90) days prior to the requested date of use, provided that such notice

period may be shortened upon a finding of an emergency by the Agency. The Agency

reserves the right to approve or deny any request received, provided that all

costs and risks associated with, or arising from, the delivery of such water

shall be borne by Purveyor in accord with a supplementary written agreement

between Agency and Purveyor.

<PAGE>

Garnett Water Purification Plant in the distribution pipelines, the Agency will

be absolved of responsibility for the quality and quantity of any water

delivered to the Purveyor after it leaves the Purification Plant, unless the

liability results from the quality of water leaving the Purification Plant

failing to meet federal, State of California or Kern County minimum drinking

water quality requirements. The burden of proof that such water fails to meet

such requirements shall rest with Purveyor, provided that Agency shall permit

all reasonable testing and review of the Agency's records reasonably necessary

to meet such burden of proof. When the Purveyor ceases to put wat

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