About 60 per cent of the treatment plants discharging into freshwater used waste stabilisation pond technology, which is relatively poor compared to modern technology.
The report said 82 per cent of the treatment plants requiring upgrading served populations of less than 5000.
The average cost of upgrading wastewater treatment plants would be $1138 per household over 25 years, but in communities of fewer than 500 people, the cost would increase to $3576, the report said.
Water New Zealand chief executive John Pfahlert said these costs are alarming because many councils currently failed to meet their existing discharge consents, let alone new freshwater management requirements.
"Improving the quality of wastewater to an acceptable standard will be even more costly than fixing our drinking water system," he said.
Pfahlert said there is a serious need to find an equitable ways to share the costs across communities, saying Water New Zealand would urge the Government to address the issue as part of its wider three waters reforms.
Local Government New Zealand president Dave Cull said small communities required help to pay for upgrades.
"We have long been calling for the Government to put in place targeted support for small communities struggling to pay for water infrastructure replacements, particularly as their ratings base shrinks due to ageing and urbanisation," Cull said.
