The paper quantifies the relative eficiencies of state water and sewage companies in Brazil during the 1996–2000 period. Relative eficiency scores obtainedby Data Envelopment Analysis-DEA indicate that sub-optimal performance is salient for some utilities. In order to control for regional heterogeneities, the complementary between DEA and econometric procedures is explored as one controls for network density and water loss factors. The procedure leads to distinct adjusted relative eficiency scores that are considered in the construction of a linear reimbursement rule that constitutes a yardstick mechanism. The comparison of actual costs and reimbursed values defined by the comparative eficiency analysis makes salient diferent patterns across the diferent utilities andthe possibility of important cost savings. The feasibility of the actual implementation is, however, constrainedby the current regulatory framework for the Brazilian water andsewage sector.