Water utilities: the case for structural cost management

By Bill Malarkey

The water utility sector is under mounting cost pressure. Rising rates, escalating capital needs, and growing regulatory scrutiny are converging – and traditional cost-cutting measures are no longer sufficient. To preserve affordability and regulatory credibility, water utilities must adopt a structural approach to cost management capable of resetting their long-term cost trajectory while still supporting essential system investments. While the accountability mechanisms differ between investor-owned utilities (IOUs) and large municipal systems, the strategic imperative is shared: structural cost management is no longer optional for either.

Affordability: From talking point to battleground

Affordability has become a regulatory flashpoint. Since 2020, U.S. water and wastewater rates have grown at a consistent CAGR of approximately 5% annually, persistently outpacing general inflation – with the exception of 2022. Since 2011, the average residential water rate has risen by around 50%, from USD 4.65 per unit to approximately USD 9.16 per unit today. Rates vary by city, but the trajectory has held across economic crises and inflationary cycles alike – reflecting structural cost pressures, not temporary market shocks.

Investment is not slowing

Capital demands are intensifying. Drinking water utilities currently invest an average of USD 33.6 billion per year on capital improvements – a fraction of the estimated USD 90.2 billion annual need. Over the next 25 years (2026–2050), infrastructure requirements are projected to exceed USD 2.1 trillion in 2025 pricing.

If communities were to rely exclusively on water bill revenue to close this funding gap, average annual household drinking water bills could rise by as much as 126% by 2050 – and that figure does not account for inflation. For ratepayers already absorbing a decade of above-inflation rate increases, that trajectory is simply unaffordable (American Waterworks Association).

The drivers are well understood: lead service line replacement, PFAS and emerging contaminant compliance, aging pipe rehabilitation, climate resilience, and wastewater treatment upgrades. These are not discretionary programs – they are system imperatives.

Capital intensity will remain elevated. Ratepayer tolerance will not.

Opex: The controllable lever

Operating expenditure (OpEx), or operations and maintenance (O&M), covers the day-to-day costs of running the system: energy and pumping, treatment chemicals, labor and benefits, contractor services, and biosolids management. Unlike capital expenditure, O&M flows directly into the annual revenue requirement – making it more immediately visible in rates and, critically, more actionable in the near term.

Key O&M cost categories – power, chemicals, and labor – frequently rise faster than the Consumer Price Index used to benchmark rate adjustments, meaning the baseline cost of delivering safe, reliable water service continues to grow structurally. (AWWA, Beyond the Repair Age)

The scale of O&M as a cost driver is visible at the utility level. Philadelphia Water's total operations expenses represent 66–69% of total revenue, with a 6% CAGR over the past three years – rising from USD 564 million to USD 638 million (City of Philadelphia). For investor-owned utilities, the structure differs but the directional pressure does not: American Water reports O&M at approximately 39–40% of total revenue, with total operations representing roughly 63% of its overall budget. Labor, chemicals, PFAS compliance, biosolids disposal, and rising insurance premiums are embedding structural expense into the system. This is not temporary inflation. It is a cost reset.

A holistic approach to cost management

Sustainable cost management requires going beyond conventional cost-reduction programs. Three disciplines separate durable results from temporary relief.

1. An unconstrained view of the business
   
   Most cost programs optimize the business as it currently exists – a constrained view that accepts legacy structures as fixed. This limits ambition and produces incremental results (typically 3–5% reductions) rather than structural transformation (20–30%).
   
   Water utilities are more likely to lower costs and improve service when leadership takes an outside-in perspective and considers the "art of the possible" – reimagining the business from first principles and questioning crew models, workforce structures, technology platforms, and operating assumptions that have persisted not because they are optimal, but because they are familiar. The question is not "what can we cut?" – it is "what costs should we take on, and why?"
   
2. Addressing embedded and structural costs
   
   Surface-level cost reduction addresses what is spent. Structural cost management addresses why it is spent – examining root causes embedded in operating models and asset portfolios: crew configurations, spans and layers, dispatch centralization, maintenance intervals, contractor strategy, and governance structures.
   
   This means reassessing which capabilities are truly necessary, evaluating the value they deliver relative to their cost, and exploring alternative delivery approaches – including smart water network technologies and digital solutions.
   
   Root-cause cost management demands an unbiased, granular fact base: 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.
   
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.

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 Philadelphia Water's approximately USD 600 million O&M base, or American Water's approximately USD 2 billion base – two different ownership models, the same underlying logic.

At 4% annual growth, cumulative cost expansion for American Water exceeds USD 300 million in additional annual expense over five years. If structural discipline holds real growth near zero, that USD 300 million becomes available for capital redeployment – water system modernization, resilience investment, PFAS compliance 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. This arithmetic holds regardless of ownership model.

The accountability impact

The mechanisms differ, but the outcome is the same: utilities that demonstrate disciplined structural cost management earn credibility with the bodies that scrutinize their spending – and create room to invest without triggering rate shock.

For investor-owned utilities (IOUs):

• Strengthens prudency defenses in rate cases
• Reduces disallowance risk on O&M submissions
• Creates room to support capital recovery without triggering affordability challenges at the PUC
• Demonstrates that rate increases are driven by capital need, not operating inefficiency

For large municipal utilities:

• Supports investment-grade bond ratings and favorable financing terms
• Frees capital for EPA compliance mandates, reducing regulatory exposure
• Builds credibility with boards, councils, and the public ahead of rate increase requests
• Demonstrates fiduciary responsibility in the absence of formal regulatory oversight

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

A call to action

The water utility sector has entered a capital-intensive growth cycle under heightened scrutiny from regulators, boards, and ratepayers alike. Episodic cost cutting is insufficient. Incremental budgeting is inadequate. Utilities that treat OpEx as strategy – not housekeeping – will be better positioned to shape their oversight 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 water utility accountability relationships for the next decade. The executives – whether managing an IOU rate case or a municipal capital plan – who treat cost discipline as a strategic capability rather than a reactive one will have a meaningful edge.

Mairead Helmes contributed to this article.

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