<PAGE>   1

                                                                   EXHIBIT 10.17


               AMERICAN STATES WATER COMPANY ANNUAL INCENTIVE PLAN


<PAGE>   2

                          AMERICAN STATES WATER COMPANY
                              ANNUAL INCENTIVE PLAN


<PAGE>   3

                          AMERICAN STATES WATER COMPANY
                              ANNUAL INCENTIVE PLAN
                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                            <C>
ARTICLE I         THE PLAN...............................................................        I-1
         1.1      Purpose................................................................        I-1
         1.2      Definitions............................................................        I-1
         1.3      Administration and Authorization; Power and Procedure..................        I-3
         1.4      Payment/Grant of Awards................................................        I-4
         1.5      Non-Transferability....................................................        I-4
         1.6      Beneficiary Designation................................................        I-4

ARTICLE II        AWARDS.................................................................       II-1
         2.1      Award Determination....................................................       II-1
         2.2      Vesting................................................................       II-2
         2.3      Award Payment..........................................................       II-2
         2.4      Acceleration of Awards upon Change in Control..........................       II-2

ARTICLE III       OTHER PROVISIONS.......................................................      III-1
         3.1      Rights of Eligible Employees, Participants and Beneficiaries...........      III-1
         3.2      Compliance with Laws...................................................      III-1
         3.3      Withholding; Payroll Taxes.............................................      III-1
         3.4      Plan Amendment, Termination and Suspension.............................      III-1
         3.5      Effective Date of the Plan.............................................      III-1
         3.6      Governing Law..........................................................      III-1
         3.7      Captions...............................................................      III-2
         3.8      Terms..................................................................      III-2
         3.9      Non-Exclusivity of Plan................................................      III-2
</TABLE>


<PAGE>   4

                          AMERICAN STATES WATER COMPANY
                              ANNUAL INCENTIVE PLAN

I.      THE PLAN

        1.1  Purpose: The purpose of this Plan is to promote the success of the
             Company by contributing to a team culture, focusing attention on
             increasing shareholder value, and creating an incentive program
             that will support future growth.

        1.2  Definitions: For purposes of this Plan, the following terms shall
             have the meanings indicated below:

             (a)  "Actual Return on Rate Base" shall mean the Company's actual
                  annual rate of return on net assets included in the Company's
                  rate filings.

             (b)  "Authorized Return on Rate Base" shall mean the composite
                  annual rate of return on equity authorized for the Company
                  during the Plan Year by the California Public Utilities
                  Commission. The Authorized Rate of Return shall be calculated
                  by the Company in accordance with the rules and/or examples
                  approved by the Committee, and will be reviewed by the
                  Company's external auditors.

             (c)  "Award" shall mean an award of a specified amount of cash or
                  restricted stock to a Participant under the Plan.

             (d)  "Base Compensation" shall mean the salary and hourly wages,
                  exclusive of overtime and bonuses, paid to an Eligible
                  Employee during the calendar year proceeding the Determination
                  Date.

             (e)  "Board" shall mean the Board of Directors of the Company.

             (f)  "Change in Control Event": Shall have the meaning given such
                  term in the Company's 2000 Stock Incentive Plan.

             (g)  "Class A Managers" shall mean the managers of the Company, or
                  a Subsidiary, designated as Class A Managers by the Chief
                  Executive Officer.

             (h)  "Class B Managers" shall mean the managers of the Company, or
                  a Subsidiary, designated as Class B Managers by the Chief
                  Executive Officer.

             (i)  "Code" shall mean the Internal Revenue Code of 1986, as
                  amended from time to time.

             (j)  "Committee" shall mean the Compensation Committee of the Board
                  of Directors.



                                      I-1
<PAGE>   5

             (k)  "Company" shall mean American States Water Company.

             (l)  "Consolidated Total Operating Revenues" shall be as set forth
                  in the Company's audited consolidated financial statements.

             (m)  "Determination Date" shall mean the last day of each Plan
                  Year.

             (n)  "Eligible Employee" shall mean an employee of the Company, or
                  a Subsidiary, designated by the Committee at the beginning of
                  a Plan Year as eligible to receive an Award under this Plan.

             (o)  "Employer" shall mean the Company, or a Subsidiary of the
                  Company which directly employs an Eligible Employee.

             (p)  "Financial Performance" shall mean the Company's Actual Return
                  on Rate Base as a percentage of its Authorized Return on Rate
                  Base.

             (q)  "Individual Adjustment" shall be the adjustment determined in
                  accordance with section 2.1(a)(iv) of this document.

             (r)  "Increase in Total Operating Revenues from Acquisition" shall
                  mean the projected increase in Consolidated Total Operating
                  Revenues from the Company's acquisition of another firm during
                  the Plan Year.

             (s)  "Maintenance Adjustment" shall be calculated in accordance
                  with section 2.1(a)(ii) of this document.

             (t)  "Participant" shall mean an Eligible Employee whose last
                  performance appraisal was satisfactory.

             (u)  "Personal Representative" shall mean the person or persons
                  who, upon the Total Disability or incompetence of a
                  Participant, shall have acquired on behalf of the Participant,
                  by legal proceeding or otherwise, the power to exercise the
                  rights or receive benefits under this Plan and who shall have
                  become the legal representative of the Participant.

             (v)  "Plan" shall mean this Annual Incentive Plan.

             (w)  "Plan Year" shall mean the calendar year.

             (x)  "Restricted Stock" shall mean shares of the common stock of
                  the Company that are non-transferable and subject to
                  forfeiture upon termination of employment within a specified
                  period of time following the date of grant.



                                      I-2
<PAGE>   6

             (y)  "Strategic Adjustment" shall be a factor based on Company
                  performance. At the beginning of each plan year the Committee
                  will establish performance criteria reflecting progress
                  towards the Company's strategic goals. The Committee will, at
                  that time, also establish the amount of the adjustment (no
                  more than 50% in total) to be made to Awards otherwise payable
                  under the Plan based on the achievement of these criteria.

             (z)  "Subsidiary" shall mean any corporation or other entity a
                  majority of whose outstanding voting stock or voting power is
                  beneficially owned directly or indirectly by the Company.

             (aa) "Target Award" shall mean the amount equal to a Participant's
                  Base Compensation multiplied by a percentage determined at the
                  beginning of each Plan Year by the Committee.

        1.3  Administration and Authorization; Power and Procedure:

             (a)  Committee: This Plan shall be administered by, and all
                  granting of Awards to Eligible Employees shall be authorized
                  by, the Committee. Action with respect to the administration
                  of this Plan shall be the sole and absolute discretion and
                  responsibility of the Committee.

             (b)  Plan Awards; Interpretation; Powers of Committee: Subject to
                  the express provisions of this Plan, the Committee shall have
                  the sole and absolute authority:

                  (i)   to determine which employees are eligible to participate
                        in the Plan for a Plan Year;

                  (ii)  to determine the amount of the Award payable to each
                        Participant for a Plan Year;

                  (iii) to construe and interpret this Plan and any agreements
                        defining the rights and obligations of the Company and
                        Participants under this Plan, further define the terms
                        used in this Plan, and prescribe, amend and rescind
                        rules and regulations relating to the administration of
                        this Plan;

                  (iv)  to make all other determinations and take such other
                        action as contemplated by this Plan or as may be
                        necessary or advisable for the administration of this
                        Plan and the effectuation of its purposes.

             (c)  Binding Determinations: The Committee shall have full
                  discretion to construe and interpret the terms and provisions
                  of the Plan, which interpretation or construction shall be
                  final and binding on all parties, including but not limited to
                  the Company, any Subsidiary and any Participants or
                  Beneficiaries. Any action taken by, or inaction of, the



                                      I-3
<PAGE>   7

                  Company, or the Committee relating or pursuant to this Plan
                  shall be within the absolute discretion of that entity or body
                  and shall be conclusive and binding upon all persons. No
                  member of the Committee, or officer of the Company, shall be
                  liable for any such action or inaction of the entity or body,
                  of another person or, except in circumstances involving bad
                  faith, of himself or herself.

             (d)  Reliance on Experts: In making any determination or in taking
                  or not taking any action under this Plan, the Committee may
                  obtain and may rely upon the advice of experts, including
                  professional advisors to the Company.

             (e)  Delegation: The Committee may delegate ministerial,
                  non-discretionary functions to individuals who are officers or
                  employees of the Company or a Subsidiary.

             (f)  Absence of Liability; Indemnity: No member of the Committee,
                  director, officer or agent of the Company shall be liable for
                  any action or determination taken, made or omitted in good
                  faith. To the extent permitted under applicable state law, the
                  Company shall indemnify and hold harmless the members of the
                  Committee and any delegate against any and all claims, loss,
                  damage, expense or liability arising from any action or
                  failure to act with respect to this Plan, except in the case
                  of gross negligence or willful misconduct.

        1.4  Payment/Grant of Awards: Subject to the express provisions of this
             Plan, the Committee shall determine the amount of each Award.

        1.5  Non-Transferability: Neither a Participant nor any other person
             shall have the right to commute, sell, assign, transfer, pledge,
             anticipate, mortgage or otherwise encumber, transfer, hypothecate
             or convey in advance of actual receipt of the amounts, if any,
             payable hereunder, or any part thereof, part thereof, which are,
             and all rights to which are, expressly declared to be unassignable
             and non-transferable. No part of the amounts payable shall, prior
             to actual payment, be subject to seizure or sequestration for the
             payment of any debts, judgments, alimony or separate maintenance
             owed by a Participant or any other person, nor be transferable by
             operation of law in the event of a Participant's or any other
             person's bankruptcy or insolvency.

        1.6  Beneficiary Designation:

             (a)  "Beneficiary" or "Beneficiaries" shall mean the person or
                  persons, including a trustee, Personal Representative or other
                  fiduciary, last designated in writing by a Participant in
                  accordance with procedures established by the Committee to
                  receive the benefits, if any, specified hereunder in the event
                  of the Participant's death. No beneficiary designation shall
                  become effective



                                      I-4
<PAGE>   8

                  until it is filed with the Committee, and no Beneficiary
                  designation of someone other than the Participant's spouse
                  shall be effective unless such designation is consented to by
                  the Participant's spouse on a form provided by and in
                  accordance with procedures established by the Committee. If
                  there is no valid Beneficiary designation in effect, or if
                  there is no surviving designated Beneficiary, then the
                  Participant's surviving spouse shall be the Beneficiary. If
                  there is no surviving spouse to receive any benefits payable
                  in accordance with the preceding sentence, the duly appointed
                  and currently acting personal representative of the
                  Participant's estate (which shall include either the
                  Participant's probate estate or living trust) shall be the
                  Beneficiary. In any case where there is no such personal
                  representative of the Participant's estate duly appointed and
                  acting in that capacity within 90 days after the Participant's
                  death (or such extended period as the Committee determines is
                  reasonably necessary to allow such personal representative to
                  be appointed but not to exceed 180 days after the
                  Participant's death), then Beneficiary shall mean the person
                  or persons who can verify by affidavit or court order to the
                  satisfaction of the Committee that they are legally entitled
                  to receive the benefits specified hereunder. In the event any
                  amount is payable under the Plan to a minor, payment shall not
                  be made to the minor, but instead be paid (a) to that person's
                  living parent(s) to act as custodian, (b) if that person's
                  parents are then divorced, and one parent is the sole
                  custodial parent, to such custodial parent, or (c) if no
                  parent of that person is then living, to a custodian selected
                  by the Committee to hold the funds for the minor under the
                  Uniform Transfers of Gifts to Minors Act in effect in the
                  jurisdiction in which the minor resides. If no parent is
                  living and the Committee decides not to select another
                  custodian to hold the funds for the minor, then payment shall
                  be made to the duly appointed and currently acting guardian of
                  the estate for the minor or, if no guardian of the estate for
                  the minor is duly appointed and currently acting within 60
                  days after the date the amount becomes payable, payment shall
                  be deposited with the court having jurisdiction over the
                  estate of the minor.

             (b)  Effect of Payment: The payment to the Beneficiary or deemed
                  Beneficiary, in accordance with the provisions of this Plan,
                  shall completely discharge all obligations under this Plan of
                  the Committee, the Company and any Subsidiary.



                                      I-5
<PAGE>   9

II.     AWARDS

        2.1  Award Determination:

             (a)  Performance Evaluation:

                  (i)  Financial Performance: Performance shall first be
                       evaluated based on the Company's Actual Return on Rate
                       Base as a percentage of its Authorized Return on Rate
                       Base. In 2000, the following schedule shall apply:

<TABLE>
<CAPTION>
                         Actual/Authorized Return       Financial Performance Percentage
                         ------------------------       --------------------------------
<S>                                                     <C>
                            Greater than 100%                          120%
                                   98%                                 100%
                                   96%                                  85%
                                   94%                                  60%
                                   92%                                  25%
                              Less than 92%                              0%
</TABLE>

                         Note: Percentages will be interpolated for performance
                         between levels.

                  (ii) Maintenance Adjustment: If the Company's maintenance
                       costs are significantly less than estimated for rate base
                       purposes (more than .5% of the Authorized Return on Rate
                       Base), the Actual Return on Rate Base will be adjusted
                       downwards by the amount of the shortfall.

                  (iii)Strategic Adjustment: For Executives (Vice Presidents and
                       above) and Class A Managers, the Company's Financial
                       Performance shall be adjusted (up or down) based on
                       factors including the achievement of strategic goals such
                       as acquisitions of other firms. The maximum adjustment
                       for strategic performance in one year shall be capped at
                       50%. In 2000, the following schedule shall apply:

<TABLE>
<CAPTION>
                          Increase in Total Operating Revenues
                                    from Acquisition                  Strategic Adjustment
                         ---------------------------------------      --------------------
<S>                                                                   <C>
                                     Less than 10%                             0%
                                          10%                                 10%
                                          13%                                 12%
                                          16%                                 14%
                                          19%                                 16%
                                          22%                                 18%
                                          25%                                 20%
                                          28%                                 22%
                                          31%                                 24%
                                    Greater than 33%                          25%
</TABLE>



                                      II-1
<PAGE>   10

                  (iv) Individual Adjustment: For Class B Managers, the
                       Company's Financial Performance shall be adjusted based
                       on team/individual performance. The adjustment can
                       increase or decrease payout by 0% - 50%. The size of the
                       adjustment shall be based on the accomplishment of goals
                       that are established by the Employer at the beginning of
                       each Plan Year.

             (b)  Determination of Individual Awards: The Award to be paid to
                  any Participant will be equal to (i) the Financial Performance
                  times (ii) one hundred percent (100%) plus the Strategic
                  Adjustment or Individual Adjustment, whichever is applicable,
                  times the Target Award.

             (c)  Participant's Award: A Participant's Award shall be pro-rated
                  in the event he/she participates in the Plan for less than the
                  full year, moves into a position covered under a different
                  schedule of awards, and/or moves into or from a position not
                  currently included under this Plan. The pro-rated amount will
                  be calculated by multiplying the Award otherwise payable to
                  the Participant for the entire year by a fraction, the
                  numerator of which is the number months completed by the
                  Participant during the Plan Year, and the denominator of
                  which is 12.

        2.2  Vesting: There is no vested right to receive an Award and no Award
             is earned until paid. A Participant who terminates employment for
             any reason before the payment of the Awards shall forfeit any
             unpaid Awards, except in the cases of death or disability.

        2.3  Award Payment: Awards will be paid by the Employer following the
             completion of the audit of the financials, normally within 75 days
             of the end of the fiscal year. Payment shall be provided in cash
             and/or Restricted Stock. All payments less than 20% of Base
             Compensation shall be paid cash. Payments above 20% of Base
             Compensation may be paid, at the discretion of the Committee, in
             Restricted Stock issued in accordance with the provisions of the
             American States Water Company Long-Term Incentive Plan (the
             "Long-Term Incentive Plan"). The number of shares of Restricted
             Stock (if any) to be issued shall equal the difference between the
             amount of the Award and the amount paid in cash divided by the Fair
             Market Value (as defined in the Long-Term Incentive Plan) of a
             share of the Company common stock determined as of the
             Determination Date. Unless the Committee otherwise provides, the
             rights of a Participant with respect to Restricted Stock issued
             hereunder shall vest, and the applicable restrictions shall lapse,
             in a series of three successive equal annual installments
             commencing on the first anniversary of the Determination Date.

        2.4  Acceleration of Awards upon Change in Control: Notwithstanding the
             foregoing, unless prior to a Change in Control Event the Committee
             determines that, upon its



                                      II-2
<PAGE>   11

             occurrence, benefits under any or all Awards shall not be
             accelerated or determines that only certain or limited benefits
             under any or all Awards shall be accelerated and the extent to
             which they shall be accelerated, then upon the occurrence of a
             Change in Control Event, the Awards shall be vested and the
             Participant shall be entitled to the payment thereof within 75 days
             after the Change in Control Event. The Award to be paid to any
             Participant will be equal to (i) the Financial Performance for the
             12 month period preceding the Change in Control Event times (ii)
             one hundred percent (100%) plus the Strategic Adjustment or
             Individual Adjustment, whichever is applicable, for the 12 month
             period preceding the Change in Control Event, times the Target
             Award times (iii) a fraction, the numerator of which is the number
             of months completed by the Participant during the Plan Year, and
             the denominator of which is 12. Any discretion with respect to
             these events shall be limited to the extent required by applicable
             accounting requirements in the case of a transaction intended to be
             accounted for as a pooling of interests transaction. The Committee
             may override the limitations on acceleration and may accord any
             Participant the right to refuse any acceleration in such
             circumstances as the Committee may approve.



                                      II-3
<PAGE>   12

III.    OTHER PROVISIONS

        3.1  Rights of Eligible Employees, Participants and Beneficiaries:

             (a)  Employment Status: Status as an Eligible Employee shall not be
                  construed as a commitment that any Award will be made under
                  this Plan to an Eligible Employee or to Eligible Employees
                  generally.

             (b)  No Employment Contract: Nothing contained in this Plan (or in
                  any other documents related to this Plan or to any Award)
                  shall confer upon any Eligible Employee or Participant any
                  right to continue in the employ or other service of the
                  Company, or any Subsidiary, or constitute any contract or
                  agreement of employment or other service, nor shall interfere
                  in any way with the right of the Company, or any Subsidiary,
                  to change such person's compensation or other benefits or to
                  terminate the employment of such person, with or without
                  cause, but nothing contained in this Plan or any document
                  related hereto shall adversely affect any independent
                  contractual right of such person without his or her consent
                  thereto.

        3.2  Compliance with Laws: This Plan, the granting and vesting of Awards
             under this Plan and the payment of money under this Plan or under
             Awards granted hereunder are subject to compliance with all,
             applicable federal and state laws, rules and regulations and to
             such approvals by any listing, regulatory or governmental authority
             as may, in the opinion of counsel for the Company, be necessary or
             advisable in connection therewith.

        3.3  Withholding; Payroll Taxes: The Employer shall withhold from
             payments made hereunder any taxes required to be withheld from such
             payments under federal, state or local law.

        3.4  Plan Amendment, Termination and Suspension:

             (a)  Board Authorization: The Board may, at any time, terminate or,
                  from time to time, amend, modify or suspend this Plan, in
                  whole or in part. Any Restricted Stock outstanding at that
                  time will be governed by the terms of the American States
                  Water Company Long-Term Incentive Plan.

        3.5  Effective Date of the Plan: This Plan shall be effective as of
             January 1, 1999.

        3.6  Governing Law: Severability

             (a)  Choice of Law: This Plan shall be governed by, and construed
                  in accordance with the laws of the State of California
                  applicable to contracts made and performed within such State,
                  except as such laws may be preempted by the



                                     III-1
<PAGE>   13

                  laws of the United States of America, which laws shall then
                  govern its effect and its construction to the extent they
                  preempt California law.

             (b)  Severability: If any provision shall be held by a court of
                  competent jurisdiction to be invalid and unenforceable, the
                  remaining provisions of this Plan shall continue in effect.

        3.7  Captions: Captions and headings are given to the sections and
             subsections of this Plan solely as a convenience to facilitate
             reference. Such headings shall not be deemed in any way material or
             relevant to the construction or interpretation of the Plan or any
             provision thereof.

        3.8  Terms: Whenever any words are used herein in the masculine, they
             shall be construed as though they were used in the feminine in all
             cases where they would so apply; and wherever any words are used
             herein in the singular or plural, they shall be construed as though
             they were used in the plural or the singular, as the case may be,
             in all cases where they would so apply.

        3.9  Non-Exclusivity of Plan: Nothing in this Plan shall limit or be
             deemed to limit the authority of the Board or the Committee to
             grant awards or authorize any other compensation.



EXECUTED this ______ day of ____________________, 1999.



        AMERICAN STATES WATER COMPANY

        By:
           -------------------------------------

        Title:
              ----------------------------------


                                     III-2