Network losses and returns are important issues for water resource manageme
nt, that are addressed in this paper by modeling the structure of productio
n for municipal water utilities with two outputs: water sold to final custo
mers and water network losses. We propose a measure of economies of scope t
o assess the benefit associated with joint production of water for final cu
stomers and water losses, and several measures of returns to evaluate poten
tial gains in exploiting technological flexibility of water networks. We es
timate the cost structure of water utilities using a GMM procedure with a T
ranslog cost function and panel data. Estimation results reveal a positive
degree of economies of scope, and short-run returns to production density a
nd returns to customer density that are not significantly different from 1.
Significant economies of scale indicate that local communities may benefit
from merging into water districts.