10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]

Total Number of Pages - 32
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............to....................
Commission file No. 1-13883

CALIFORNIA WATER SERVICE GROUP
(Exact name of registrant as specified in its charter)

California 77-0448994
(State or other jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)

1720 North First Street San Jose, California 95112
(Address of Principal Executive Offices) (Zip Code)
1-408-367-8200
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, No Par Value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock, Par Value, $25
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

The aggregate market value of the voting stock held by non-
affiliates of the Registrant - $380,152,000 at February 27, 1998.

Common stock outstanding at February 27, 1998 - 12,619,140
shares.



EXHIBIT INDEX
The exhibit index to this Form 10-K is on page 28

DOCUMENTS INCORPORATED BY REFERENCE

Designated portions of Registrant's Annual Report to
Shareholders for the calendar year ended December 31, 1997 ("1997
Annual Report") are incorporated by reference in Part I (Item 1),
Part II (Items 5, 6, 7 and 8) and in Part IV (Item 14(a)(1)).

Designated portions of the Registrant's Proxy Statement of
California Water Service Group ("Proxy Statement"), dated March
11, 1998, relating to the 1998 annual meeting of shareholders are
incorporated by reference in Part III (Items 10, 11 and 12) as of
the date the Proxy Statement was filed with the Securities and
Exchange Commission. The Proxy Statement was filed under EDGAR on
March 9, 1998.






TABLE OF CONTENTS


Page
PART I
Item 1. Business............................ 5
a. General Development of Business..... 5
Rates and Regulation.............. 6
b. Financial Information about
Industry Segments................. 9
c. Narrative Description of Business... 9
Geographical Service Areas
and Number of Customers at
year-end.......................... 10
Water Supply........................ 11
Nonregulated Operations............ 14
Utility Plant Construction Program
and Acquisitions.................. 15
Quality of Supplies................. 16
Competition and Condemnation........ 16
Environmental Matters .............. 17
Human Resources..................... 17

d. Financial Information about
Foreign and Domestic Operations
and Export Sales ................. 18

Item 2. Properties ......................... 18

Item 3. Legal Proceedings................... 18

Item 4. Submission of Matters to a Vote of
Security Holders.................. 19

Executive Officers of the Registrant......... 20

PART II

Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.... 21

Item 6. Selected Financial Data............. 21

Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 22

Item 8. Financial Statements and
Supplementary Data................ 22

Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............. 22



PART III

Item 10. Directors and Executive Officers
of the Registrant................. 22

Item 11. Executive Compensation.............. 22

Item 12. Security Ownership of Certain
Beneficial Owners and Management.. 23

Item 13. Certain Relationships and Related
Transactions...................... 23


PART IV

Item 14. Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K.......................... 23

Signatures........................................ 24

Independent Auditors' Report...................... 26

Schedules......................................... 27

Exhibit Index..................................... 28




PART I

Item 1 Business.

Forward Looking Statements
Certain information presented in this report contains forward
looking statements. Such statements are inherently based on
currently available information and expectations, estimates,
assumptions and projections, and management's judgment about
the California Water Service Group and subsidiaries ("Group"),
the water utility industry and general economic conditions.
Words such as expects, intends, plans, believes, estimates,
anticipates or variations of such words or similar
expressions are intended to identify forward looking
statements. The forward looking statements are not
guarantees of future performance. Actual results may vary
materially from what is contained in a forward looking
statement. Factors which may cause a result different than
expected include regulatory decisions, legislation and the
impact of weather on operating results. The Group assumes no
obligation to provide public updates of forward looking
statements.

a. General Development of Business.

California Water Service Company (the "Company") was formed
in 1926. In April 1997, shareholders of California Water
Service Company voted to approve a holding company structure.
After receiving final regulatory approval, California Water
Service Group (the "Group") was formed on December 31, 1997.
As a result of the holding company structure, the Company
became one of the Group's two wholly-owned, operating
subsidiaries. The Company will continue to operate as a
regulated utility subject to the jurisdiction of the
California Public Utilities Commission ("Commission or PUC").
Its assets and operating revenues comprise virtually all of
the Group's assets and operating revenues.

The second subsidiary, CWS Utility Services ("Utility
Services"), is a new entity that will provide nonregulated
water operations and related services. Existing nonregulated
contracts, currently performed by the Company, will be
transferred to Utility Services as the contracts are renewed
or at such time as agreed upon between the contracting
parties. New nonregulated contracts will be conducted by
Utility Services.

In conjunction with the formation of the holding company
structure, each share of Company common stock was exchanged
on a two-for-one basis for Group common stock. Per share
data has been restated where necessary to reflect the
effective two-for-one stock split. Each share of Company
preferred stock was converted into one share of Group
preferred stock. To maintain its relative voting strength,
the number of votes to which each preferred share is entitled
was doubled from eight to sixteen.

The Group's mailing address and principal executive offices
are located at 1720 North First Street, San Jose, California;
telephone number: 1-408-367-8200. The Company maintains a
web site which can be accessed via the Internet at
http://www.calwater.com.

During the year ended December 31, 1997, there were no
significant changes in the kind of products produced or
services rendered by the Group or its operating subsidiaries,
or in its markets or methods of distribution.

The Company is the largest investor-owned water company in
California and the third largest in the United States. It
was incorporated under the laws of the State of California on
December 21, 1926. It is a public water utility providing
water service to approximately 379,500 residential,
commercial and industrial customers in 57 California cities
and communities through 21 separate water systems or
districts. In the Group's 20 regulated systems, which serve
373,500 customers, rates and operations are subject to the
jurisdiction of the Commission. An additional 6,000
customers receive service through a long-term lease of the
City of Hawthorne water system, which is not subject to
Commission regulation. The Company also has contracts with
various municipalities and private entities to operate water
systems and provide billing services to 35,500 other
customers. These operations are described in more detail in
section Item 1.c., "Narrative Description of the Business -
Nonregulated Operations."


Rates and Regulations
Rates, service and other matters for the regulated business
of the Company are subject to the jurisdiction of the
Commission. The Commission's decisions and the timing of
those decisions can have an important impact on operations
and results of operations.

The Company's 20 regulated systems, each of which is within
the State of California, are operated as 20 separate
districts. The systems are not integrated with one another.
Except for allocation of general office expenses and the
determination of cost of capital, the expenses and revenues
of individual districts are not affected by operations in
other districts. Cost of capital (i.e. return on debt and
equity) is determined on a company-wide basis. Otherwise,
the Commission requires that each district be considered a
separate and distinct entity for ratemaking purposes.

The Commission requires that water rates for each operating
district be determined independently. The Company's
districts are on varying rate case cycles, each of which is
for not less than three years. General rate case
applications are filed annually for a portion of the
districts. Thus, the number of customers affected by each
filing, varies from year to year. For example, the 1995 rate
filings covered 47 percent of the customer base, while the
1996 filing were for 11 percent and the 1997 filing for 7
percent. The decision to file a general rate case
application for a particular district depends on various
factors including the time since the last general rate case
was filed, the rate of return being earned in each district,
expected future returns, estimated future expenses and the
need for plant additions.

According to the commission's rate case processing procedures for
water utilities, the Company is scheduled to make its general rate
case filings in July of each year. The Commission attempts
to issue decisions within eight months of acceptance of the
general rate case applications. Rates are set prospectively,
generally for a three-year period, with a provision for annual step
increases, which are designed to maintain the authorized rate
of return between general rate case filings. Offset rate
adjustments are allowed as required for changes in the costs
of purchased water, power and pump taxes.

1998 Rate Application Filings

In 1998, 14 districts, representing about 80% of the
regulated customer base, are eligible for general rate
filings. Earnings levels in those districts will be reviewed
and applications for additional rate consideration will be
filed as deemed appropriate. The filings are expected to be
made in July. Additionally, a rate increase will be
initiated by the Company for the City of Hawthorne system.
This application will be prepared and presented to the City
in a manner similar to that by which the Company makes its
Commission filings.

1997 Rate Application Filings

In July 1997, general rate increase applications were
filed for four districts representing 27,900 customers or 7
percent of regulated customers. The applications requested
additional first year annual revenue of $650,000 and step
rate increases of $240,000 in each year 1999 through 2001.
The Company's proposal also included continuation of the
current rate of return on common equity ("ROE") at 10.35 percent.
For the Oroville and Selma districts,
the application proposed that rate increases for the
succeeding five years be based on the increase in the
Consumer Price Index ("CPI")for water/sewerage. The CPI
based increases were requested to cover future operating
expenses and plant investments.
In January 1998, agreement was reached with the Commission
staff regarding the 1997 rate applications. The agreement
recommends retaining the ROE at the current 10.35 percent.
Assuming PUC approval, 1998 revenue is estimated to increase
$300,000 based on the agreement. Step rate increases
effective January 1, 1999 are expected to add $305,000. Rate
changes after 1998 in the Oroville and Selma districts are
expected be based on a hybrid CPI. The CPI arrangement,
which will cover increased expenses and capital improvements,
will be effective for five-years.

1996 Rate Application Filings
In July 1996, general rate cases were filed for two
districts representing 11 percent of the regulated customers.
An ROE of 12.05 percent was requested, while the Commission
staff recommended 10.1 percent. In January 1997, the Company
and Commission staff stipulated to an ROE of 10.35 percent.
In February 1997, hearings before the Commission regarding
the 1996 general rate applications were completed. The
Commission's decision was issued in April. The decision,
which authorized a 10.35 percent return on common equity, was
estimated to increase 1997 revenue by about $1.2 million.
Additionally, step rate increases will become effective in
each of the following three years.

1995 Rate Application Filings
General rate case applications, which had been filed with
the Commission during 1995 for five districts serving 47
percent of the Company's regulated customers, were finalized
by the Commission in 1996. The applications requested an
ROE of 12.1 percent and additional revenue of $26.7 million
over a three-year period. The Commission staff recommended
a rate of return of 9.9 percent, however, a stipulation
agreement was reached with the staff for a 10.3 percent ROE
in January 1996. The Commission's decision for this rate
case series was issued in June 1996. During the first full
year, the decision provided $5.4 million of added revenue,
including $1.2 million in step rate increases which were
effective at the start of 1996. Over a four-year period,
the decision is expected to provide about $10.6 million
in new revenue. The decision includes a provision to
accelerate the recovery of the utility plant
investment, resulting in an increase in the annualized
depreciation rate for these districts of 2.6 percent compared
to a 2.4 percent rate experienced in preceding years.

Second Amended Contract - Stockton East Water District
In January 1995, a consultant retained by the
Commission's Organization of Ratepayer Advocates completed a
report on the reasonableness of the Second Amended Contract.
Parties to the contract are the Company, Stockton-East Water
District, the City of Stockton and San Joaquin County. The
contract pertains to the sale and delivery of water to the
Company's Stockton District by the Stockton-East Water
District. The report alleges that the Company was required
to receive Commission approval prior to entering into the
Second Amended Contract and furthermore challenges the
reasonableness of the Second Amended Contract for ratemaking
purposes. However, the report does not include specific
ratemaking recommendations. It is difficult to assess the
potential impact on the Company if the report were to be
adopted by the Commission. If there is any adverse financial
impact as a result of the report, such impact is expected to
be prospective, affecting only future rates for the Stockton
district. Hearings have not yet been scheduled to address
the report. Following hearings at which the Company intends
to present evidence to rebut the report, the assigned
administrative law judge will render a proposed decision for
comment and eventual Commission consideration. Management
intends to vigorously defend its position that the Second
Amended Contract did not require prior Commission approval
and is reasonable for ratemaking purposes.

b. Financial Information about Industry Segments.

The Group has only one business segment.

c. Narrative Description of Business.

The Group is the sole shareholder of its two operating
subsidiaries, California Water Service Company and CWS
Utility Services.

The Group's business, which is carried on through it
operating subsidiaries, consists of the production, purchase,
storage, purification, distribution and sale of water for
domestic, industrial, public and irrigation uses, and for
fire protection. The water business fluctuates according to
the demand for water, which is partially dictated by seasonal
conditions, such as summer temperatures or the amount and
timing of precipitation during the year. Franchises and
permits are held in the cities and communities where water
service is provided to the extent judged necessary to operate
and maintain facilities in the public streets. Water is
distributed to customers in accordance with accepted water
utility methods.

The City of Hawthorne water system is operated under a 15-
year lease which commenced in February 1996. Under other
contracts, three municipally owned water systems and two
reclaimed water distribution systems are operated. Billing
services are also provided to other municipalities. These
operations are discussed in more detail in a following
section titled "Nonregulated Operations."

The Group intends to continue to explore opportunities to
expand operating and other revenue sources. The
opportunities could include system acquisitions, contracts
similar to the City of Hawthorne arrangement, operating
contracts, billing contracts and other utility related
services. The Group believes that a holding company
structure, as discussed above, will make the Company more
competitive in providing nonregulated utility services, which
would not be subject to Commission jurisdiction. The Group
will be investigating new business opportunities outside of
California. It will also assess the potential risk and
return from business opportunities in Central and South
America. There can be no assurance, however, that the Group
will be able to expand operating and other revenue sources or
that the Group will be able to consummate any transactions
arising from any such opportunities.

Geographical Service Areas and Number of Customers at Year-end
The principal markets for the Group's products are users of water
within the Company's service areas. The Group's geographical
service areas or districts for both the regulated and
nonregulated operations and the approximate number of customers
served in each district at December 31, 1997, are listed below.

SAN FRANCISCO BAY AREA

Mid-Peninsula (comprised of San Mateo and San Carlos) 35,600
South San Francisco (including Colma and Broadmoor) 15,700
Bear Gulch (serving Menlo Park, Atherton,
Woodside and Portola Valley) 17,400
Los Altos (including portions of Cupertino,
Los Altos Hills, Mountain View and Sunnyvale) 18,100
Livermore 16,000
102,800

SACRAMENTO VALLEY

Chico (including Hamilton City) 21,600
Oroville 3,500
Marysville 3,700
Dixon 2,800
Willows 2,300
33,900

SALINAS VALLEY

Salinas 24,300
King City 2,100
26,400

SAN JOAQUIN VALLEY

Bakersfield 55,300
Stockton 41,100
Visalia 27,500
Selma 5,000
128,900

LOS ANGELES AREA
East Los Angeles (including portions of
the cities of Commerce and Montebello) 26,200
Hermosa Beach and Redondo Beach (including
a portion of Torrance) 25,000
Palos Verdes (including Palos Verdes
Estates, Rancho Palos Verdes, Rolling
Hills Estates and Rolling Hills) 23,500
Westlake (a portion of Thousand Oaks) 6,800
Hawthorne (leased municipal system) 6,000
87,500

TOTAL 379,500

Water Supply
The Company's water supply for its 21 operating districts is
obtained from wells, surface runoff or diversion, and by purchase
from public agencies and other wholesale suppliers. The effects
of the six-year California drought, which ended with the 1992-93
winter, and 1996-97 winter rains are discussed below. The
Company's supply has been adequate to meet consumption demands,
however, during periods of drought, some districts have required
water rationing.

California's rainy season usually begins in November and
continues through March with December, January and February
receiving the most rainfall. During winter months reservoirs and
underground aquifers are replenished by rainfall. Snow
accumulated in the mountains provides an additional water source
when spring and summer temperatures melt the snowpack producing
runoff into streams and reservoirs, and also replenishing
underground aquifers.

During years in which precipitation is especially heavy or
extends beyond the spring into the early summer, customer demand
can decrease from historic normal levels, generally due to
reduced outdoor water usage. This was the case during 1995, when
winter rains continued well into the spring along with cooler
than normal temperatures. Likewise, an early start to the rainy
season during the fall can cause a decline in customer usage and
have a negative impact on revenue.

The Company's water business is seasonal in nature and weather
conditions can have a pronounced effect on customer usage and
thus operating revenues and net income. Customer demand for
water generally is less during the normally cooler and rainy
winter months, increasing in the spring when warmer weather
gradually returns to California and the rains end. Temperatures
are warm during the generally dry summer months, resulting in
increased demand. Water usage declines during the fall as
temperatures decrease and the rainy season approaches.

During years of less than normal rainfall, customer demand can
increase as outdoor water usage continues. When rainfall is
below average for consecutive years, drought conditions can
result and certain customers may be required to reduce
consumption to preserve existing water reserves. California
experienced a six- year drought which ended with the winter of
1992-93. During that six-year period some districts had water
rationing requirements imposed on customers. In certain
districts, penalties were collected from customers who exceeded
allotments. During past drought periods, the Commission has
allowed modifications to consumer billings which provided for
recovery of a portion of revenue that was deemed lost due to
conservation measures.

Historically, about half of the water supply is purchased from
wholesale suppliers with the balance pumped from wells. A small
portion of the supply is received from surface runoff. During
1997, 110 billion gallons were delivered to customers.
Approximately 52 percent of the supply was obtained from wells
and 48 percent was purchased from the wholesale
suppliers. The following table shows the 1997 source of supply
for each operating district.

Supply
District Purchased Wholesale Supplier

SAN FRANCISCO BAY AREA

Mid-Peninsula 100% San Francisco Water Department

South San Francisco 92% San Francisco Water Department

Bear Gulch 90% San Francisco Water Department

Los Altos 73% Santa Clara Valley Water
District

Livermore 65% Alameda County Flood Control
and Water Conservation District

SACRAMENTO VALLEY

Oroville 77% Pacific Gas and Electric Co.
4% County of Butte

SAN JOAQUIN VALLEY

Bakersfield 19% Kern County Water Agency

Stockton 63% Stockton-East Water District

LOS ANGELES AREA

East Los Angeles 80% Central Basin Municipal
Water District

Hawthorne 95% West Basin Municipal
Water District

Hermosa Beach and 97% West Basin Municipal
Redondo Beach Water District

Palos Verdes 100% West Basin Municipal
Water District

Westlake 100% Russell Valley Municipal
Water District

The balance of the required supply for the above districts was
obtained from wells, except for Bear Gulch where the balance is
obtained from surface runoff from the local watershed and
processed through the Company's treatment plant before being
delivered to the distribution system.

Historically, groundwater has yielded 10 to 15 percent of the
Hermosa-Redondo district supply and 15 to 20 percent of the South
San Francisco district supply. During 1996, wells in those two
districts, were out of service while treatment facilities were
being installed. The treatment facilities were completed and
became operational during 1997. Thus well production in those
two districts increased during 1997. During 1998, it is
anticipated that a larger portion of the supply will be provided
by wells than in 1997. Water produced from wells is generally
less expensive than water purchased from wholesale suppliers.

The Chico, Marysville, Dixon and Willows districts in the
Sacramento Valley, the Salinas and King City districts in
the Salinas Valley, and the Selma and Visalia districts in
the San Joaquin Valley obtain their entire supply from wells.

Purchases for the Los Altos, Livermore, Oroville, Stockton
and Bakersfield districts are pursuant to long-term contracts
expiring on various dates after 2011. The purchased supplies for
the East Los Angeles, Hermosa-Redondo, Palos Verdes and Westlake
districts and the City of Hawthorne system are provided by public
agencies pursuant to an obligation of continued nonpreferential
service to persons within the agencies' boundaries.

Purchases for the South San Francisco, Mid-Peninsula and Bear
Gulch districts are pursuant to long-term contracts with the San
Francisco Water Department expiring June 30, 2009.

The price of wholesale water purchases are subject to pricing
changes imposed by the various wholesale suppliers. Price
changes are generally beyond the control of the Company. During
1997, two wholesale water suppliers refunded funds which had been
overcollected from wholesale water purchasers. The Company
received $2.5 million which was credited as a reduction to
purchased water expense.

California experienced above average rainfall in the 1996-97
measurement year. Rainfall to date for the 1997-98 season has
already exceeded the annual average. Groundwater levels in
underground aquifers which provide supply to districts served by
well water improved in 1997 due to the above average rainfall.
Most regions have recorded positive changes in groundwater levels
as compared to 1996. Regional groundwater management planning
continues throughout the State as required. Existing laws
provide a mechanism for local agencies to maintain control of
their groundwater supply. The Group continually updates long
range projections and works with local wholesale suppliers to
ensure an adequate future supply to meet customer needs.

The water supply outlook for 1998 is good, however, California
faces long-term water supply challenges. The Company is
actively working to meet the challenges by continuing to educate
customers on responsible water use practices, particularly
in the districts with conservation programs approved by the
Commission.

Progress has been made by Consolidated Irrigation District
(Selma) and Kaweah Delta Water Conservation District (Visalia)
towards the implementation of a water management plan. The Group
is participating in the formulation of these plans.

On an ongoing basis, the Group is actively participating with the
Salinas Valley water users and the Monterey County Water
Resources Agency (MCWRA) to address the seawater intrusion
concern to the water supply for the Salinas district. MCWRA
started construction on the Castroville Seawater Intrusion
Project in 1995 and deliveries are expected to commence in 1998.
When completed, this project will deliver up to 20,000 acre feet
of recycled water annually to agricultural users in the nearby
Castroville area and is designed to help mitigate seawater
intrusion into the region by reducing the need to pump
groundwater.

The Group is participating with the City and County of San
Francisco, and the cities of San Bruno and Daly City to prepare a
groundwater management plan for the Westside Basin from which the
South San Francisco district pumps a portion of its supply.
Additionally, the Group is working with the City of San Francisco
in their development of a long-range water supply master plan for
the entire area to which the San Francisco Water Department is
the wholesale water supplier. In addition to the South San
Francisco district, the Mid-Peninsula and Bear Gulch districts
are included in this service area.

Nonregulated Operations
Revenue from nonregulated water system operations is generally
determined on a per customer basis. With the exception of the
City of Hawthorne water system, revenue and expenses from
nonregulated operations is accounted for in other income on a
pretax basis. Revenue and expenses for the City of Hawthorne
lease are included in operating revenue and operating expenses
because the Group is entitled to retain all customer billings and
is responsible generally for all operating expenses.

Municipally owned water systems are operated under contract for
the cities of Bakersfield, Commerce and Montebello, and four
private water company systems in the Bakersfield, Livermore and
Salinas districts. The Company also operates under contract a
wastewater collection system in Livermore. The total number of
services operated under the contracts is about 29,500. With the
exception of the 15-year Hawthorne lease discussed below, the
terms of the operating agreements range from one-year to three-
year periods with provisions for renewals. The first operating
agreement was signed with the City of Bakersfield in 1977. Upon
expiration, each agreement has been renewed.

Recycled water distribution systems located in the Los Angeles
Basin are operated for the West Basin and Central Basin municipal
water districts. Some engineering department services are also
provided for these two recycled water systems.

The Company provides meter reading, billing and customer service
for the City of Menlo Park's 4,000 water customers.
Additionally, sewer and/or refuse billing services are provided
to six municipalities.

Since February 1996, the Group has leased the City of Hawthorne's
6,000 account water system under terms of a 15-year agreement.
The system which is near the Hermosa-Redondo district serves
about half of Hawthorne's population. Terms of the lease,
required an up-front $6.5 million lease payment to the City which
is being amortized over the lease term. Additionally, annual
lease payments to the City of $100,000 indexed to changes in
water rates are required. The Group is responsible for all
aspects of system operation and capital improvements, although
title to the system and system improvements resides with the
City. At the end of the lease, the Group will be reimbursed for
the unamortized value of capital improvements. In exchange, the
Group receives all system revenues which are about $4 million
annually.

During 1997, the Group signed an agreement with the Rural North
Vacaville Water District in Solano County to design and build a
water distribution system. The new system will initially provide
water to about 400 services. The Group also expects to enter an
agreement for future operation and maintenance of the system.

Various antenna sites are leased to telecommunication companies.
Individual lease payments range from $750 to $2,200 per month.
The antennas are used in cellular phone and personal
communication applications. Other leases are being negotiated
for similar uses. Currently there are 30 such leases.

The Group also provides laboratory services to San Jose Water
Company.

Utility Plant Construction Program and Acquisitions
The Group is continually extending, enlarging and replacing its
facilities as required to meet increasing demands and to maintain
its systems. Capital expenditures, including developer financed
projects, for additional facilities and for the replacement of
existing facilities amounted to approximately $32.9 million in
1997. Financing was provided by funds from operations and short-
term bank borrowings, advances for construction, and
contributions in aid of construction as set forth in the
"Statement of Cash Flows" on pages 44 and 45 of the Group's 1997
Annual Report which is incorporated herein by reference. Group
funded expenditures were $25.5 million. Developer payments
accounted for $7.4 million. Advances for construction of main
extensions are payments or facilities received from subdivision
developers under the Commission's rules. These advances are
refundable without interest over a period of 40 years.
Contributions in aid of construction consist of nonrefundable
cash deposits or facilities received from developers, primarily
for fire protection. The amount received from developers varies
from year to year as the level of development activity varies.
It is impacted by the demand for housing and commercial
development and general business conditions, including interest
rates.

The 1998 construction budget for additions and improvements to
facilities is approximately $31 million, exclusive of additions
and improvements financed through advances for construction and
contributions in aid of construction. Financing is expected to
be from internally generated funds, short-term borrowings and
long-term debt.

Quality of Supplies
Procedures are maintained to produce potable water in accordance
with accepted water utility practice. Water entering the
distribution systems from surface sources is treated in
compliance with Safe Drinking Water Act standards. Samples of
water from each water system are analyzed regularly by the
Group's state certified water quality laboratory.

In recent years, federal and state water quality regulations have
continued to increase. Changes in the federal Safe Drinking
Water Act, which the Group believes will bring treatment costs
more in line with the actual health threat posed by contaminants,
were enacted by Congress during 1996. The Group continues to
monitor water quality and upgrade its treatment capabilities to
maintain compliance with the various regulations. These
activities include:

- - maintaining a State approved compliance monitoring program
required by the Safe Drinking Water Act
- - upgrading laboratory equipment and enhancing analytical
testing capabilities
- - installation of disinfection treatment at all well sources
- - installation of and operating several granular activated
carbon (GAC) filtration systems for removal of hydrogen
sulfide or volatile organic chemicals
- - treatment systems at two Los Angeles Basin wells and wells at
the South San Francisco well field which have elevated levels
of iron and manganese; the treatment allowed the wells to be
returned to production during 1997; thus, less costly well
water, rather than purchased water supplies became available
- - construction of a new iron and manganese treatment plant in
the leased Hawthorne system; completion of this project is
scheduled for mid 1998
- - monitoring of all sources for MTBE, the gasoline additive
widely used throughout the State
- - completion of mandatory Information Collection Rule
monitoring for specified water systems

Competition and Condemnation
The Company is a public utility regulated by the Commission. The
Company provides service within filed service areas approved by
the Commission. Under the laws of the State of California, no
privately owned public utility may compete with the Company in
any territory already served by the Company without first
obtaining a certificate of public convenience and necessity from
the PUC. Under PUC practices, such certificate will be issued
only upon showing that the Company's service in such territory is
deficient.

California law also provides that whenever a public agency
constructs facilities to extend a utility system into the service
area of a privately owned public utility, such an act constitutes
the taking of property. For such taking the public utility is to
be paid just compensation. Under the constitution and statutes
of the State of California, municipalities, water districts and
other public agencies have been authorized to engage in the
ownership and operation of water systems. Such agencies are
empowered to condemn properties already operated by privately
owned public utilities upon payment of just compensation and are
further authorized to issue bonds, including revenue bonds, for
the purpose of acquiring or constructing water systems. To the
Group's knowledge, no municipality, water district or other
public agency has any pending action to acquire or condemn any of
the Group's systems.

The water industry is experiencing competitive changes and the
potential exists for new growth. The Group has in the past
participated in public/private partnerships, such as the lease of
a water system, system operation agreements, or billing service
contracts, and anticipates future opportunities for further
participation and development. The formation of the holding
company structure is expected to enhance financing, accounting
and operation of the nonregulated business activities.

Environmental Matters
The Group is subject to environmental regulation by various
governmental authorities. Compliance with federal, state and
local provisions which have been enacted or adopted regulating
the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had, as of
the date of filing of this Form 10-K, any material effect on the
Group's capital expenditures, earnings or competitive position.
The Group is unaware of any pending environmental matters which
will have a material effect on its operations. Refer to Item 3,
Legal Proceedings, for additional information.

The environmental affairs program is designed to provide
compliance with underground storage tank regulations, hazardous
materials management plans, air quality permitting requirements,
local and toxic discharge limitations, and employee safety issues
related to hazardous materials. The Company has been actively
involved in the formulation of air quality standards related to
water utilities. Also, the Company is proactive in looking to
alternative technologies in meeting environmental regulations and
continuing the traditional practices of water quality.

Human Resources
At December 31, 1997, the Company had 649 employees, of
whom 178 were executive, administrative and supervisory
employees, and 471 were members of unions. In December 1997,
two-year collective bargaining agreements, expiring December 31,
1999, were successfully negotiated with the Utility Workers Union
of America, AFL-CIO, representing the majority of the Company's
field and clerical union employees. In January 1998, a new two-
year collective bargaining agreement was negotiated with the
International Federation of Professional and Technical Engineers,
AFL-CIO, representing certain engineering department and water
quality laboratory employees. Both agreements were ratified by
the union members in January 1998. As in the past, the
agreements were successfully renewed without a labor
interruption.


d. Financial Information about Foreign and Domestic Operations
and Export Sales.

The Group makes no export sales.

Item 2. Properties.

The Group's physical properties consist of offices and water
systems to accomplish the production, storage, purification, and
distribution of water. These properties are located in or near
the Geographic Service Areas listed above under section Item 1.c.
entitled "Narrative Description of the Business." The Group's
general office, which houses accounting, engineering, information
systems, human resources, purchasing, rate making, water quality
and executive staffs are located in San Jose, California. All
properties are maintained in good operating condition.

All principal properties are held in fee simple title, subject to
the lien of the indenture securing the Company's first mortgage
bonds, of which $119,205,000 remained outstanding at December 31,
1997.

The Group owns 525 wells and operates six leased wells. There
were 290 storage tanks with a capacity of 216 million gallons and
one reservoir located in the Bear Gulch district with a 210
million gallon capacity. There are 4,615 miles of supply and
distribution mains in the various systems. There are two
treatment plants, one in the Bear Gulch district, the other in
Oroville. Both treatment plants are designed to process six
million gallons per day. During 1997, the average daily water
production was 301 million gallons, while the maximum production
on one day was 513 million gallons. By comparison, during 1996
the average daily water production was 283 million gallons, while
the maximum production on one day was 497 million gallons. In
1995, the average daily water production was 273 million gallons
and the maximum production on one day was 493 million gallons.
The trend of increasing customer consumption reflects the impact
of weather patterns during the past three years on customer
usage.

In the leased systems or in systems which are operated under
contract for municipalities or private companies, title to the
various properties is held exclusively by the municipality or
private company.


Item 3. Legal Proceedings.

The State of California's Department of Toxic Substances Control
(DTSC) alleges that the Company is a potential responsible party
for cleanup of a toxic contamination in the Chico groundwater.
The DTSC has prepared a draft report titled "Preliminary
Nonbinding Allocation of Financial Responsibility" for the
cleanup which asserts that the Company's share should be 10
percent. The DTSC estimates the total cleanup cost to be $8.69
million. The toxic spill occurred when cleaning solvents, which
were discharged into the city's sewer system by local dry
cleaners, leaked into the underground water supply due to breaks
in sewer pipes. The DTSC contends that the Company's
responsibility stems from the Company's operation of wells in the
surrounding vicinity which caused the contamination plume to
spread. The Company denies any responsibility for the
contamination or the resulting cleanup and intends to vigorously
resist any action which may be brought against it. The Company
believes that it has insurance coverage for this claim and that
if it were ultimately held responsible for a portion of the
cleanup costs, there would not be a material adverse effect on
the Group's financial position or results of operations.

In December 1997, the Group along with the City of Stockton and
San Joaquin County ("the Contractors") filed a lawsuit against
the Stockton East Water District (SEWD). The Contractors are
SEWD's sole customers for wholesale potable water. SEWD also
serves raw water to agricultural customers. To enable SEWD to
meet its financial obligations, the Contractors agreed to
specific Base Monthly Payments which as of June 30, 1997 had
generated $5.4 million in surplus funds. The Contractors contend
that a portion of the funds paid by the Contractors have been or
will be used for purposes other than to meet SEWD's agreed
financial obligations. Presently, all parties to the lawsuit
have entered into a Stipulated Preliminary Injunction. A
favorable settlement is anticipated.

The Group is not a party to any other legal matters, other than
those which are incidental to its business.


Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders in
the fourth quarter of year 1997.

Executive Officers of the Registrant

Name Positions and Offices with the Group Age

Robert W. Foy Chairman of the Board since January 1, 1996. 61
(1) A Director since 1977. Formerly President
and Chief Executive Officer of Pacific Storage
Company, Stockton, Modesto, Sacramento and
San Jose, California, a diversified
transportation and warehousing company,
where he had been employed for 32 years.

Peter C. Nelson President and Chief Executive Officer since 50
(1) February 1, 1996. Formerly Vice President,
Division Operations (1994-1995) and Region
Vice President (1989-1994), Pacific Gas &
Electric Company, a gas and electric public
utility.

Gerald F. Feeney Vice President, Chief Financial Officer and 53
(1) Treasurer since November 1994; Controller,
Assistant Secretary and Assistant Treasurer
from 1976 to 1994. From 1970 to 1976, an audit
manager with Peat Marwick Mitchell & Co.

Calvin L. Breed Controller, Assistant Secretary and Assistant 42
(2) Treasurer since November 1994. Previously
Treasurer of TCI International, Inc.; from 1980
to 1983, a certified public accountant with
Arthur Andersen & Co.

Paul G. Ekstrom Corporate Secretary since August 1996; 45
(1) Operations Coordinator, 1993 to 1996;
District Manager, Livermore, 1988 to 1993;
previously served in various field management
positions since 1979; an employee since 1972.

(1) holds the same position with California Water Service Company
and CWS Utility Services

(2) holds the same position with California Water Service Company


Name Positions and Offices with the Company Age

Francis S. Vice President, Regulatory Matters since August 48
Ferraro 1989. Employed by the California Public
Utilities Commission for 15 years, from 1985
through 1989, as an administrative law judge.

James L. Good Vice President, Corporate Communications 34
(1) and Marketing since January 1995. Previously
Director of Congressional Relations for the
National Association of Water Companies from
1991 to 1994.

Robert R. Vice President, Engineering and Water Quality 44
Guzzetta since August 1996; Chief Engineer, 1990 to 1996;
Assistant Chief Engineer, 1988 to 1990; various
engineering department positions since 1977.

Christine L. Vice President, Human Resources since August 51
McFarlane 1996; Director of Human Resources, 1991 to 1996;
Assistant Director of Personnel, 1989 to 1991;
an employee since 1969.

Raymond H. Taylor Vice President, Operations since April 1995; 52
Vice President and Director of Water Quality,
1990 to 1995; Director of Water Quality, 1986
to 1990; prior to 1982 an employee of the United
States Environmental Protection Agency.

Raymond L. Vice President, Chief Information Officer since 58
Worrell August 1996; Director of Information Systems,
1991 to 1996; Assistant Manager of Data Processing,
1970 to 1991; Data Processing Supervisor, 1967 to
1970.

John S. Simpson Assistant Secretary, Manager of New Business 53
since 1991; Manager of New Business development
for the past thirteen years; served in various
management positions since 1967.

(1) Also, Vice President, Marketing with CWS Utility Services.

No officer or director has any family relationship to any other
executive officer or director. No executive officer is appointed
for any set term. There are no agreements or understandings
between any executive officer and any other person pursuant to
which he was selected as an executive officer, other than those
with directors or officers of the Group acting solely in their
capacities as such.

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.

The information required by this item is contained in the
Section captioned "Quarterly Financial and Common Stock Market
Data" on pages 58 and 59 of the Group's 1997 Annual Report and is
incorporated herein by reference. The number of shareholders
listed in such section includes the Group's record shareholders
and an estimate of shareholders who hold stock in street name.


Item 6. Selected Financial Data.

The information required by this item is contained in the section
captioned "Ten Year Financial Review" on pages 26, 27 and 28 of
the Group's 1997 Annual Report and is incorporated herein by
reference.


Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

The information required by this item is contained in the section
captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations," on pages 30 through 38 of
the Company's 1997 Annual Report and is incorporated herein by
reference.


Item 8. Financial Statements and Supplementary Data.

The information required by this item is contained in the sections
captioned "Consolidated Balance Sheet", "Consolidated Statement of
Income", "Consolidated Statement of Common Shareholders' Equity",
"Consolidated Statement of Cash Flows", "Notes to Consolidated
Financial Statements" and "Independent Auditors' Report" on pages
40 through 60 of the Group's 1997 Annual Report and is
incorporated herein by reference.


Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.

None.


PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required by this item as to directors of the
Group is contained in the sections captioned "Election of
Directors", "Nominees for Directors" and "Board Committees" on
pages 5 through 8 of the 1998 Proxy Statement and is incorporated
herein by reference. Information regarding executive officers of
the Group is included in a separate item captioned "Executive
Officers of the Registrant" contained in Part I of this report.


Item 11. Executive Compensation.

The information required by this item as to directors of the Group
is included under the caption "Compensation of Non-employee
Directors" on page 9 of the 1998 Proxy Statement and is
incorporated herein by reference. The information required by
this item as to compensation of executive officers, including
officers who are directors, is included under the caption
"Compensation of Executive Officers" on page 12 through 15 of the
1998 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and
Management.

The information required by this item is contained in the sections
captioned "Beneficial Ownership of Director-Nominees" and
"Security Ownership of Management" on pages 10 and 16,
respectively, of the 1998 Proxy Statement and is incorporated
herein by reference.


Item 13. Certain Relationships and Related Transactions.

None.


PART IV

Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.

(a) (1) Financial Statements:

Consolidated Balance Sheet as of December 31, 1997 and 1996.

Consolidated Statement of Income for the years ended
December 31, 1997, 1996, and 1995.

Consolidated Statement of Common Shareholders' Equity for the
years ended December 31, 1997, 1996, and 1995.

Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996, and 1995.

Notes to Consolidated Financial Statements, December 31,
1997, 1996, and 1995

The above financial statements are contained in sections
bearing the same captions on pages 40 through 60 of the
Group's 1997 Annual Report and are incorporated herein by
reference.

(2) Financial Statement Schedule:

Schedule Number

Independent Auditors' Report dated January 23, 1998.

II Valuation and Qualifying Accounts and Reserves--years ending
December 31, 1997, 1996, and 1995.

All other schedules are omitted as the required
information is inapplicable or the information is
presented in the financial statements or related notes.



(3) Exhibits required to be filed by Item 601 of Regulation S-K.

See Exhibit Index on page 28 of this document which is
incorporated herein by reference.

The exhibits filed herewith are attached hereto (except as
noted) and those indicated on the Exhibit Index which are not
filed herewith were previously filed with the Securities and
Exchange Commission as indicated. Except where stated
otherwise, such exhibits are hereby incorporated by
reference.


(B) Report on Form 8-K.

Form 8-K filed January 2, 1998 to report a Change in Control
of Registrant pursuant to the formation on December 31, 1997
of the holding company, California Water Service Group, of
which California Water Service Company became a wholly owned
operating subsidiary. Refer to page 5 for a discussion
concerning the Group's second subsidairy. In conjunction
with the formation of the holding company, the Company common
stock was exchanged for Group common stock on a two-for-one
basis.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


CALIFORNIA WATER SERVICE GROUP


Date: March 25, 1998 By /s/ Peter C. Nelson
PETER C. NELSON, President and
Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:

Date: March 25, 1998 /s/ Robert W. Foy
ROBERT W. FOY, Chairman,
Board of Directors

Date: March 25, 1998 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D., Member,
Board of Directors

Date: March 25, 1998 /s/ Robert K. Jaedicke
ROBERT K. JAEDICKE, Member,
Board of Directors

Date: March 25, 1998 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON, Member,
Board of Directors

Date: March 25, 1998 /s/ Linda R. Meier
LINDA R. MEIER, Member,
Board of Directors

Date: March 25, 1998 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Member, Board of Directors

Date: March 25, 1998 /s/ C. H. Stump
C. H. STUMP, Member,
Board of Directors

Date: March 25, 1998
GEORGE A. VERA, Member
Board of Directors

Date: March 25, 1998 /s/ J. W. Weinhardt
J. W. WEINHARDT, Member,
Board of Directors

Date: March 25, 1998 /s/ Gerald F. Feeney
GERALD F. FEENEY,
Vice President, Chief Financial
Officer and Treasurer;
Principal Financial Officer

Date: March 25, 1998 /s/ Calvin L. Breed
CALVIN L. BREED, Controller,
Assistant Secretary and Assistant
Treasurer;
Principal Accounting Officer


Independent Auditors' Report

Shareholders and Board of Directors
California Water Service Group:

Under date of January 23, 1998, we reported on the consolidated balance
sheet of California Water Service Group as of December 31, 1997 and
1996, and the related consolidated statements of income, common
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, as contained in the 1997
annual report to shareholders. These financial statements and our
report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1997. In connection with our audits of the
aforementioned financial statements, we also audited the related
consolidated financial statement schedule as listed in the index
appearing under Item 14(a)(2). This financial statement schedule is
the responsibility of the Group's management. Our responsibility is to
express an opinion on this financial statement schedule based on our
audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.


San Jose, California /s/ KPMG Peat Marwick LLP
January 23, 1998