The cost imperative for utilities

By Mark Uffhausen and Mike Granowski

The utility sector is entering a period of intense cost pressure, driven by rising electricity prices, escalating capital needs, and growing regulatory scrutiny. With operations and maintenance expenses increasing rapidly and structural cost drivers becoming entrenched, traditional cost‑cutting measures no longer suffice. To maintain affordability and preserve regulatory credibility, utilities must adopt a more strategic, structural approach to cost management – one capable of resetting their long‑term cost trajectory while still supporting essential grid investments

Affordability: From talking point to battleground

Affordability is no longer a policy abstraction – it is a regulatory flashpoint. Since 2020, U.S. electricity prices have outpaced general inflation at a widening margin, and regulators are responding.

EIA data shows average retail electricity prices climbed from 12.87¢/kWh in 2020 to 17.30¢/kWh in 2025 – a 32% increase in five years. This acceleration is significant and it is attracting scrutiny. Electricity prices have outpaced general inflation, and regulators are taking notice.

Investment is not slowing

Capital demands are intensifying. The Edison Electric Institute projects investor-owned utilities will invest $170–$200 billion annually in infrastructure through the mid-2020s. Princeton's Net-Zero America analysis estimates transmission expansion alone could exceed $70 billion per year by the late 2020s.

The drivers are well understood: electrification, data center load growth, wildfire mitigation, grid hardening, and aging infrastructure replacement. These are not discretionary programs – they are system imperatives.

Capital intensity will remain elevated. Ratepayer tolerance will not.

Opex: The controllable lever

In most vertically integrated utilities, operations and maintenance (O&M) expense represents 30–45% of total revenue requirement – depending on capital structure and fuel mix. It is the most accessible lever available to management.

Unlike fuel costs, O&M is controllable. Unlike capital spending, it appears immediately in rates. And unlike storm recovery or fuel pass-throughs, O&M growth faces direct prudency scrutiny.

The sector's cost trajectory underscores the pressure. EIA data indicates electric utility O&M expenses rose from approximately $183 billion in 2020 to over $230 billion in 2023 – a 26% increase in three years. Labor escalation, contractor inflation, expanded vegetation programs, cybersecurity investment, and rising insurance costs are embedding structural expense into the system. This is not temporary inflation. It is a cost reset.

Why episodic cost cutting fails

Historically, utilities have responded to cost pressure with reactive measures: hiring freezes, overtime controls, contractor pullbacks, and across-the-board percentage reductions. These actions provide near-term relief but rarely alter structural cost curves.

The problem is not mismanagement – it is architecture. Compliance obligations, resilience mandates, and risk mitigation programs expand the base faster than incremental cuts can offset it. Without structural intervention, the cost curve resets higher after every reduction cycle.

A holistic approach to cost management

Sustainable cost management requires going beyond conventional cost-reduction programs. Three disciplines separate durable results from temporary relief: taking an unconstrained view of the business, addressing embedded and structural costs, and adopting mechanisms to keep cost out.

1. An unconstrained view of the business

Most cost programs optimize the business as it currently exists – a constrained view that accepts legacy structures and embedded assumptions as fixed. This approach limits ambition and produces incremental results (typically 3–5% reductions) rather than structural transformation (20–30%).

Utilities are more likely to lower costs and improve service when they step back and take an outside-in perspective and consider the “art of the possible”. Leadership teams must be willing to reimagine the business from first principles – questioning crew models, workforce structures, technology platforms, and operating assumptions that have persisted not because they are optimal, but because they are familiar. By expanding what leaders believe is achievable, organizations can drive significant gains in operational performance and associated cost.

Private equity offers a useful analogy: PE owners often strip costs to the absolute minimum required to maintain operations, then layer expenditures back in as a series of explicit investments evaluated on risk-adjusted return. The question is not "What can we cut?" – it is "What costs should we take on, and why?" This inversion of perspective is what enables teams to bend the entire cost curve rather than simply reposition themselves on it. The question shifts from "What can we cut?" to "What costs should we take on, and why?"

2. Addressing embedded and structural costs

Surface-level cost reduction of incurred costs addresses what is spent. Embedded and structural cost management addresses why it is spent. That requires examining the root causes of cost embedded in operating models and asset portfolios – crew configurations, spans and layers, dispatch centralization, maintenance intervals, contractor strategy, and governance structures.

Traditionally companies have focused the majority of their cost management efforts on incurred costs where potential value, while not insignificant, is limited to the way in which the business is currently being run. Roland Berger’s experience suggests that companies should also focus on embedded and structural root causes of cost to deliver maximum value and fundamentally reset the cost curve.

Reducing embedded and structural costs requires teams to challenge traditional priorities, activities, and long-standing cost structures. This means reassessing which capabilities are truly necessary, evaluating the value they deliver relative to their cost, and exploring alternative ways to achieve results – such as through digital solutions.

It also involves rethinking how utilities operate, especially decisions about where and how to invest. These choices should be guided by a combination of coherent asset strategies, service level needs, speed of innovation uptake, and the organization’s tolerance for operational risk.

Pursuing root cause cost management is not easy. Breaking corporate history and cultural inertia demands an unbiased fact base with granular visibility: activity-based costing, work-order analysis, asset-level reliability correlations, and contractor productivity measurement. Without this transparency, cost programs default to symbolic reductions rather than structural resets. With it, leaders can identify where cost is generated, challenge whether it is necessary, and redesign the operating model accordingly.

3. Mechanisms that keep cost out

Evidence suggests that approximately 50% of cost reductions reappear within three years when governance mechanisms are absent. The culprit is incremental budgeting – a process that accepts cost expansion as a baseline assumption rather than challenging it. Cost management is an ongoing capability that results in a virtuous circle that resets the cost curve and then limits value leakage.

Durable cost management requires embedding structural disciplines that prevent value leakage:

• Zero-based budgeting: requiring recurring risk/reward justification of expenditures rather than accepting baseline growth as inevitable
• Multi-year targets: maintaining pressure beyond the immediate budget cycle
• Executive accountability: tying leadership performance to cost outcomes
• Performance dashboards: correlating cost metrics with reliability and service delivery to surface trade-offs in real time

Absent these mechanisms, savings erode. With them, savings compound.

The compounding calculus

The stakes are significant in dollar terms. Consider a utility with a $1.5 billion O&M base:

• At 4% annual growth, cumulative cost expansion exceeds $300 million in additional annual expense over five years
• If structural discipline holds real growth near zero, that $300 million becomes available for capital redeployment – grid automation, resilience investment, cybersecurity hardening – without adding rate pressure

Compounding, not percentage points, defines the strategic impact. A 3% sustained differential in cost trajectory is worth more over a decade than a single 15% reduction that resets within three years.

The regulatory impact

The National Association of Regulatory Utility Commissioners has elevated affordability and energy burden as core policy concerns in recent proceedings. State commissions are examining O&M growth with increasing scrutiny – particularly where rate increases materially exceed inflation. In this environment, cost credibility has become a form of regulatory capital.

Utilities that demonstrate disciplined structural cost management strengthen prudency defenses, reduce disallowance risk, and improve the quality of rate case engagement. Equally important, structural O&M savings create space to invest in grid modernization, resilience, and customer programs without exacerbating rate shock – the very tension that regulators are most focused on resolving.

Cost discipline doesn't shrink the enterprise. It funds its growth.

A call to action

The utility sector has entered a capital-intensive growth cycle under heightened regulatory scrutiny. In this environment, episodic cost cutting is insufficient and incremental budgeting is inadequate. Utilities that treat Opex as strategy – not housekeeping – will be better positioned to shape their regulatory relationships and fund their infrastructure ambitions.

That requires a structural posture on cost management built on three commitments:

• Challenge fundamental operating assumptions rather than optimizing the current model
• Move beyond incurred costs to understand and address structural drivers of cost
• Install mechanisms that prevent cost re-expansion and compound savings over time

Affordability will define utility regulatory relationships for the next decade. The executives who treat cost discipline as a strategic capability – rather than a reactive one – will have a meaningful edge.