Utilities that were once insulated from the pressures ofcompetition, efficient operation and effective management now must contend with significant challenges including deregulation, privatization, and outsourcing. To that end, utilities need to emulate the corporate business model of minimizing the input of resources while maximizing the output of services provided. Consequently, many utilities face the daunting task of reevaluating operating costs, eliminating operational inefficiencies and enhancing competitiveness. In an emerging competitive environment, the real risk to many utilities is not so much the mushrooming of private service providers but the lack of understanding of their own competitive positioning in the industry. The Water Customer Services Division (CSD) of the City of Phoenix, Arizona, is a case in point. This paper provides a brief description of CSD and its proactive Continuous Improvement Process and discusses in depth CSD's success in using Activity Based Costing (ABC) as an effective management tool as part of its continuous improvement process efforts. Includes 3 references, tables, figures.